Prudent Financial Planning
Patrick Logue, CFP® professional, is a fee-only Financial Advisor and founder of Prudent Financial Planning LLC. He specializes in College Planning and has completed the Capstone College Partners Course in College Planning. Pat is passionate about helping families plan for college while working towards retirement. He is a member of the National College Advocacy Group (NCAG), XY Planning Network, and National Association of Personal Financial Advisors (NAPFA). With 20 years of experience in financial services, including 3 years in the Development Office at a non-profit, Pat is intimately familiar with Investments, Tax Planning, and Charitable Giving Strategies. Pat also provides expertise in Wealth Management, Inter-Generational Wealth Transfer, and Estate Planning. He enjoys hiking, running, coaching, and spending time with his wife, Erin, and their 2 children.
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This is an interesting scenario. It seems that your debt to income ratio is too high. How much is your home worth? Also, your assets to liabilities ratio is bit low as well (I assumed a home value of $500,000). It would be helpful to take a look at your monthly expenses and net income. What type of student loans do you have that are 12%? That seems quite high. Taking a loan from your 401(k) would not be my first option. Please read through your plan details to review their policy on loans. I have a few options that could potentially save your $17,000 in interest on your loans and could potentially help pay off your debts 71 months sooner. But, I would need more information before I can make an actual determination. This is just my best estimate using the information at hand, guessing a few numbers, and extrapolating.
I understand that you are paying .70 percent in fees (aka 70bps). I would be interested to know what type of yield you are currently earning on your cash.
You would probably benefit from moving your cash to a high yield savings account. You could start earning about 1.7% and you would not be paying .70% in fees. This could be a significant savings depending on your average daily cash balance. The downside of a savings account is that you are limited to a certain number of transactions per month.
This is a great question. This all depends on several factors. First of all, you will want to look at the interest rate you are paying on your mortgage. Then look at how your cash and other assets are invested. It would be helpful to know your rate of return. If you are earning a higher rate of return on your investments than you are paying on your mortgage, then you may want to consider leaving things as they are. If you are paying a higher interest rate on your mortgage than you are earning on your investments, then you might want to consider paying off the mortgage. From the information you provided, your assets:liabilities ratio is in great shape and your debt:income ratio looks great too. It would be helpful to sit down with a Financial Advisor and take a look at your entire Financial Picture.
You will need to take a look at your anticipated income and expenses in retirement. Then you can work backward from there to determine a safe withdrawal rate.
Great question. Front-load fees are not very common anymore. You really have to do your homework to compare how these funds perform in comparison to no-load mutual funds over time. For example, let's say you invest $100,000 in an front-load mutual fund with an upfront fee of 5% and that fund has an expense fee of .60bps. You will have $95,000 invested (you will have paid $5,000 in front-load fees) and you will be paying $570 annually in fees. Assuming 0% growth (just to simplify things), you will have paid $10,700 in fees after 10 years.
Alternatively, if you invest in a no-load, low-cost mutual fund, such as a Vanguard fund, you could invest $100,000 in a fund with an upfront fee of 0% and the fund might have an expense fee of .08bps. Therefore, you will have the full $100,000 invested and you will be paying $80 per year in fees. After 10 years, assuming 0% growth again, you will have paid only $800 in fees.
Next, you will have to compare the performance of these front-load funds vs. no-load funds over time period such as 3-year, 5-year, and 10-year. There are other factors to consider but this is a good start.
Congratulations! You are well ahead of the curve for retirement as far as total assets. But, it would benefit you to sit down with a CFP® and review your income, expenses, and asset allocation. Whoever you sit down with will review the holdings in your 401(k) and look at which stocks you own. This will enable them to make sure you are properly diversified. They should also look at the yield you are earning on your cash. The next step will be to assess your risk tolerance, time horizon, and goals. With this information, they will be able to align your investment allocations more effectively.
That is great news that you have no debt. It would be helpful to know your gross monthly income. That will be a factor in determining how well-positioned you are for the future. It is also good to hear that you could cut your expenses down to $7,000. You will need to dial in your current expenses as that will help you estimate your expenses in retirement. Typically, you can estimate your retirement expenses to be 80% of your current expenses.
One thing to consider for retirement is the ratio of your expenses to your total assets. In retirement, a 4% drawdown is usually a pretty safe assumption. Therefore, if you have $2,000,000 in assets at retirement, you could, theoretically, withdraw $80,000 per year. Currently, you are spending about $120,000 per year. Therefore, you might benefit from reducing your expenses to about $6,500 per month (if possible) in retirement.