David is the founder of Magister Wealth and the visionary behind the firm’s unique approach to delivering holistic, integrated financial planning solutions. He is described by those who know him as a “fixer”, “life coach” and mentor who asks the hard questions many other advisors are afraid to ask. An avid student of the markets with a passion for economics, philosophy and psychology, David is a natural problem solver and accomplished teacher. He applies his keen analytical skills in an effort to deliver a truly comprehensive approach to solving his client’s most pressing financial challenges.
David’s financial advisory experience includes both client-facing and back office positions at award-winning independent advisory firms across the country. For Covenant Multifamily Offices, the leading San Antonio-based wealth management firm with $1.3 billion in client assets (as of May 2013), David served as an Advisory Strategist where he was responsible for developing and executing financial planning and investment research projects. Prior to joining Covenant, David was an Associate Portfolio Manager and Financial Planner for 1st Portfolio Wealth Advisors, a wealth management firm serving clients in the greater metropolitan Washington, DC area. At 1st Portfolio, David helped to monitor and trade over $100 million in client accounts, conducted investment research and developed comprehensive financial plans. He also managed and trained staff in the firm’s client service and data management best practices.
David graduated with a Bachelor of Science from George Mason University and completed his Certificate in Financial Planning from Boston University’s Institute of Finance. He is a CFA® charterholder and a CERTIFIED FINANCIAL PLANNER™ professional. David served as the 2017 Chairman and 2016 President of the Financial Planning Association (FPA) chapter of San Antonio and South Texas.
For over 20 years, David pursued his passion for music as an instrumentalist, conductor and educator. As a professional trombone player, he was a semi-finalist in major orchestra auditions. David’s students received scholarships to some of the best conservatories in the world including Juilliard and the New England Conservatories.
David enjoys bike riding and swimming. He resides in San Antonio with his wife Ellyn and daughters Sylvia and Emily.
Assets Under Management:
Congratulations on a great start to your career and retirement! Check your 401K plan fees, hopefully they are not excessive. Even with high relative fees, the match is worth doing up to 5%. Roth contributions are typically matched with regular 401K funds. You will pay on qualified withdrawals at 59.5 or later.
You don’t need a Roth IRA account. If you leave your employer and want to move the assets over, then you would create a Roth IRA and roll the Roth 401K into it. Roth IRA contributions income phase outs start at $120,000 for single tax filers with $5,500 max contributions. 401K’s have no income limits, but the total contribution limit is $18,500. (2018 information for those under 50.)
I would recommend the Roth in your scenario. Over time more detailed planning to optimize your retirement and tax efficiency could be highly valuable.
$12,350 Total Annual Savings. ($65,000 x 15% = $9,750 savings plus the match of $2,600= 4% x $65,000)
Only considering Federal taxes lets look at regular 401K contributions (tax deferred)
- Lowers your current taxable income.
- Given your $65,000 salary, your current 401K/IRA savings are lowering your income in the 22% tax bracket. (2018 tax brackets)
$9,750 only reduces your net income by $7,605.
- $2,145 less in Federal taxes ($9,750 x 22% tax bracket)
- $7,605 in lower total annual income ($9,750- $2,145 lower taxes)
Nice current tax benefit, but also consider future taxes.
Roth 401K(Roth IRA) contributions
- Do not lower your current income, but you never pay taxes on qualified withdrawals.
- Your $9,750 contribution lowers your net income by that amount.
- The $2,600 matching is regular 401K assets.
To illustrate what may occur let’s take a hypothetical $12,350 a year total savings forward 40 years to your early 60’s at 5%. With these assumptions over $1.49 Million. (A vast oversimplification, but it leaves out raises, and all sorts of other positive and negative things that may occur.) With this much tax deferred assets there begins to be a danger of paying higher tax rates in your retirement than you are paying now.
Roth versus regular 401K/IRA assets fall into the taxes now versus taxes later pools. As you progress in your career and get raises, your tax bracket will tend to go up and therefor the value of regular 401K contributions goes up as well. Coordinating current versus future tax rates, your total assets and spending, can provide lifetime tax savings and efficiencies. In the future consider having an expert run the numbers with your specific goals and information. Saving is the most important thing, but tax efficiencies can improve your net lifetime income.
Hope this helps please feel to reach out to me with questions!
David Nash, CFA, CFP®
Congratulations on a great start to your retirement! Paying off your loan has a lot of benefits. But does your plan offer a match on your contributions? At $6K you are likely getting any match, but make sure you understand the specifics going forward as you get raises and promotions. There are various formulas, but any match is essentially free money. Maximize your match first. Make sure you are considering any retirement plans your wife has access to. Consider your benefits collectively as well as independently.
Here are some other important reasons and related concepts that dig into your question, that may improve your financial health and retirement planning.
As your debt is paid off, mentally partition and budget those payment amounts towards retirement savings or long-term purchases on things such as a down payment on a home.
Paying off loans improves your debt to income ratio which can improve your credit scores and ability to get better home and auto loans and better rates on credit cards.
Paying off debt is like earning the loan rate with zero risk. For example, take a 4% loan making only minimum payments, but there is money for savings or larger payments. You could place the extra money into a CD, but it will be practically impossible to get a risk-free return of 4% or higher. Therefore, you earn less than the loan is charging in interest. If you place the extra money into the markets or other risky assets, you may make a higher total return or a lower return than 4%. These higher risks are hard to justify versus Zero Risk because you could have equivalently earned 4%. Your net risky assets earnings after interest accruing in the loan are only the return over 4%.
Make sure you have an emergency reserve. Early withdrawals on your 401K face income taxes and a 10% penalty. There are cases where you can take a loan from your 401K but is rarely wise to do so. 3 to 6 months of your monthly spending needs should be in reserves. Explore things like CD’s if you don’t like the cash in your checking or savings account to earn a bit more interest.
Does your 401K plan have a Roth option? If your tax bracket is relatively low, consider some or all of your contributions into a Roth. You lose the current tax reduction, but don’t pay taxes on future withdrawals. (Employer matches are still regular 401K.) Working with a Financial Planner who does ongoing tax analysis can be of great benefit because your tax efficiencies can change over time between saving on taxes now or later. A Comprehensive Financial Plan has a lot of other benefits as well.
Hope this helps you build a better future! Happy to answer any further questions.
David Nash, CFA,CFP®
More details are needed to answer your question, but at the heart of your question is making your mother more comfortable financially. I recommend a free consultation with a financial planner which may be enough to educate you or decide that it is worth an hourly or project fee. Without knowing anything specific about the loans and payments already made there are too many possibilities to offer sound advice.
To the heart of your question here are a few concepts that will affect your decisions and ability to improve your mother’s situation.
What time is remaining on payments? A 30-year fixed mortgage is going to be a lower payment per month at a higher interest rate than a 15 year fixed mortgage. You pay more in interest each month and over the life of the loan but get a lower monthly bill. If you are switching from a short duration loan to a longer duration loan that could help bring your monthly payment down.
What are the rates on the loans? If your rates are around 4% to 5% then you are not going to get a much lower rate in the current interest rate environment or enough to make a large difference in the monthly payment. (Assuming the loan repayment lengths being similar.) If the rates are relatively higher someone (other than a mortgage broker) needs to help you understand the math as to costs and benefits in refinancing.
Does either the $630 or $250 include real estate taxes or insurance? Most loans require an escrow payment that collects a monthly fee to cover these costs. If escrow is part of the payments you mention, they won't change due to a new loan. Escrow also covers paying PMI (Private Mortgage Insurance) if you have lower equity in the property.
Given your mother is not working and most of her income goes to these payments, she may not qualify for a new loan. Most lenders offering a competitive market rate will compare the debt to income of the loan applicant as well as look at their credit scores. You could so-sign a loan, but this may greatly affect your own credit and ability to get loans. A new loan may have significant closing costs which often can be added to the new loan, but an analysis is required to see if the tradeoffs are worthwhile.
Budgeting is important. Ideally your mother’s monthly payment would be a third or less of her income. After looking at all the specific details of the loans and your mother’s financial situation you may end up falling back on a reverse mortgage. I would only recommend this after looking at a lot of other financial tools with a Certified Financial Planner®. A comprehensive picture of your mother’s financial health can help you build a realistic plan to help her live a better life.
Hope this helps you find your way forward.
David Nash, CFA, CFP®
Congratulations on a well-paying position that you are excited about. Saving into a Roth IRA or (Roth 401k) is a great tool, but other factors may be more impactful to your retirement goal.
First check to make sure you don’t hit the income phase out limits for a Roth IRA. ($120,000 for single and $189,000 for married filing jointly.) If you are eligible you can do $5,500 plus an additional $1,000 for 2018 because you are 50 or older.
The 25% of salary and bonus that your employer contributes is a very nice benefit, but there are some important questions that you need to ask or potentially work with someone to double check and align with your goals. What will the short and long-term tax implications be of this account? How is it invested? What is the current value of the account? In ten years at $25,000 a year, at a 5% return you would have over $314,000 more in that account. But this is only one example. Your account may be much higher or lower in its return and risk.
Is the 401k that you rolled into an IRA from a previous employer? If your current employer has a 401K plan, it may have a Roth option that is not subject to income limits. For you $24,500 a year in Roth 401K savings. ($18,500 plus $6,000 because you are 50 or older.)
A tax analysis may guide you to the best way to save for your retirement. Think of three investment pools. (There are more complicated planning that I am not covering here.)
- Tax Deferred (IRA or 401K). Reduces your current taxable income and thus lower your current taxes but are fully taxed as ordinary income on qualified withdrawals.
- Tax Exempt (Roth IRA and 401K). Does not reduce your current income or lower current taxes, but you never pay taxes on qualified withdrawals.
- Taxable Account. No limits to savings. Taxes on interest and realized gains.
Aligning these savings types with your retirement incomes such as social security and things like pensions can increase your after-tax income from the same amount of savings.
Compare current versus future tax rates for example. If you save 25% taxes now from IRA/401k savings to pay 35% in the future, then you may be tax inefficient. There are lots of variables (and rules) that warrant working with a planner that does this as part of their practice and that works with your tax professional.
Happy to help with any further questions or clarifications!
Double checked your math and your calculation looks correct.
As far as reasonable the answer is no. The largest issue that your question raises is a 10% monthly market return. What kind of monthly investment can return over 10% per month? If you include compounding monthly 10% for a year the annual return would be over 200%.
(2.14 “=(1.10^12)-1”) in excel if you are curious.
Higher returns/rates generally equate to higher risk especially for something like a monthly investment. If you can find a higher return with the same risk, you earn what is called Alpha. Many investment professionals, DIY investors and even computer algorithms are constantly looking for Alpha which makes it harder to find.
If you are investing in individual small cap and micro-cap stocks you might be able to get a return like that over some short time period, but the risk is still there. These stocks may have higher expected returns over time, but some may lose even more value in down(volatile) markets. It is challenging even for professional investors to pick the right ones consistently. You would need extraordinary insight to come even close to 10% a month with any consistency.
If you are curious you can find various ways of learning about risk and reward and then I would recommend learning about diversification and correlation.
$500 a month savings can be very meaningful over time. Hope this helps you being a journey towards building your portfolio.
David Nash, CFA, CFP®