David Wattenbarger is the President at Drw Financial in Chattanooga, TN and has over 16 years of experience in the finance industry. He started DRW Financial as a fee-only financial advising and planning firm after working for twelve years “behind the scenes” in financial services, where he learned a great deal about how best to serve the needs of his clients.
David has found it valuable to continue learning, and earned his CFP® designation, as well as the Chartered Advisor in Philanthropy® designation, which aligns well with his desire to help clients align their financial lives with their own unique values. David's prior professional experience includes serving as a general principal, options principal, and municipal bond principal for an independent broker dealer, as well as extensive work with other financial professionals on a consultative basis.
David's personal values revolve around carving out quality time with his family and making the work he does worthwhile and valuable to his clients.
BA, College Scholars, University of Tennessee, Knoxville
Assets Under Management:
INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES PRODUCT, SERVICE, OR INVESTMENT STRATEGY. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER, TAX PROFESSIONAL, OR ATTORNEY BEFORE IMPLEMENTING ANY STRATEGY OR RECOMMENDATION DISCUSSED HEREIN
There are a several pieces of this scenario worth talking through.
As you describe it, your financial condition shows some planning and preparation. Having committed to saving a significant percentage of your income for retirement and having accumulated the emergency fund is commendable. Prior to taking on debt to buy a house, you may also want to consider your insurance coverages; even with "stable income", unexpected or outsized expenses related to illness, death, or disability can wreak havoc on an otherwise orderly financial plan.
Another consideration is the cost of your financing. In many cases, banks will require a 20% down payment (or 20% equity in the home) or they will require you to purchase "private mortgage insurance" (PMI); PMI could amount to ~ 1% of the cost of your home, annually. This obviously adds to your cost and should figure into your math. Independent of PMI, homeowners with higher amounts of equity in their home may enjoy a more robust buffer against economic downturns and have a greater degree of flexibility if they wish to later sell, refinance, or convert their home to an investment property. Also, in terms of financing cost and dependent on your credit score and the bank you choose for your mortgage, etc, your amount of down payment may impact the actual interest rate available for your loan. All other things being equal, a larger down payment makes you a better prospect for the bank and may get you a lower rate.
In regards to the prospect of rising rates: it is hard to say with a high degree of certainty if rates will rise, when, for how long, and by how much. While you may not be able to predict the future path of interest rates, you can know that having more cash to put down on the home purchase will mean a lower dollar amount financed, that you may avoid PMI, and that you look like a better credit risk to the bank.
Good luck, and keep up the good work!
These are great questions, and it is not uncommon at all for people just getting started with an employer sponsored retirement plan like your 401(k) to feel some confusion at first.
While the details of each plan can differ, it sounds like your employer is incentivizing you to save in the plan by offering a matching contribution subject to a cap. Let's use some example numbers to help clear up what this means in reality. Say your salary is $50,000, and you feel like you have room in your budget to contribute 10% (or $5000) to the 401(k) plan in the first year. Your employer has said they will match 25% of your contributions (yay!), so that works out to another $1250 (this is $5000 / 4). Then, the next year you want to step up your savings a good bit and decide to contribute $10,000 via your own contributions; 25% of that number would be $2500 from your employer, but this is where the 4% cap comes in -- 4% of your $50,000 is $2000, so your employer's match would "cap out" for that year at $2000.
The choice between investment options is a more complicated conversation, and the "best" choice for you will likely be influenced by your age, your likely career progression, your personal appetite for risk, your potential needs for liquidity, and a number of other variables. At the most generic level, you may wish to sort the available investment options by embedded cost (some mutual funds and Exchange Traded Funds cost more than others) and attempt to create a blend of stock and bond investments that suit your risk tolerance. Again, in very generic terms, "growth" funds tend to hold mostly stocks and are designed to target a larger increase in value over time, albeit with more risk and volatility along the way. "Income" funds or strategies tend to select more bonds or dividend paying stocks; these are generally considered less risky, and with less perceived upside potential.
In any case, you may find it very valuable to speak with a trained financial planner who can help you assess the actual investment options available in your plan and work out a strategy to optimize your use of that plan within the larger framework of your financial life.
There are things that "robo advisers" are good at: collecting inputs, running mathematical projections, perhaps even budget management via "account aggregation". However, robos are limited to their programming and cannot engage in any manner of "lateral thinking". Investors often have life circumstances that do not map cleanly onto the robo's options and could potentially benefit from having an experienced human planner or adviser offer some more nuanced advice. Consideration for "complicating factors" like marriage, divorce, a special needs child, abnormal tax concerns, self-employment, a retirement target date significantly earlier than "normal" -- these are all examples that may not be fully addressed by a robo.
In a financial planning context, life insurance is an important consideration. For many people, there are three basic questions to answer: do they need life insurance, how much do they need, and what kind of life insurance product is most supportive of their needs.
Let's take those three questions one at a time:
- Do you need life insurance? We don't know enough from what you've provided in the question to know for sure, so it is appropriate to ask a few more questions. Do you have dependents, like a spouse or children? If you were to die now, who would receive your life insurance benefit, and what would they do with it? It is worth noting that while life insurance is a very valuable provision for many people to have, not everyone has an explicit need for life insurance. One somewhat subjective consideration in the "need" category is that life insurance necessarily becomes more expensive as you age, and it is possible that you may become "uninsurable" through illness or other life changes. Starting a policy when you are young may help to address some of this concern; if this is your motivation, be sure to understand how / if / when your policy can be renewed or extended, and how your premiums may or may not rise over time.
- How much do you need? This question relates to the first one above. In my work, I like for a planning client's life insurance benefit to relate in some meaningful way to their financial condition; is the benefit chosen to support surviving family members by replacing your income for some number of years, or by paying off debt so as not to leave a "burden", or to fulfill a specific planning obligation like providing education money for a child? Tying the death benefit amount to specific planning considerations helps to dial that benefit in to a correct amount.
- What type of life insurance is most appropriate? This question gets closer to what you originally asked. Assuming that you have decided that life insurance is appropriate in your case, and you have a general idea of what death benefit meets your needs, the next step may be to consider among the available product types. Whole life, term life, universal life, etc. The different types of life insurance come with their own distinct qualities. Term policies generally offer the highest death benefit for dollar of premium expense, but in the base case those policies are designed to expire at the end of their term. Whole life, in contrast, tends to cost much more than term for the same amount of death benefit, but may be kept current for your "whole life", provided the premiums are paid.
Again, in my own practice, I tend to prefer term policies for my clients with straightforward insurance needs, and to separate out their insurance from their "investments". If the primary appeal of the whole life policy in your case is the potential for growth (and/or a potential tax benefit), it may be possible to accomplish the same or better with a more efficiently priced life insurance option, paired with a well designed investment approach.
In regards to the balance of your question, including the option to invest in an IRA or 401k: what we consider "best practice" in financial planning for our clients is to first secure what you have, then plan how to improve on that condition. So having an emergency fund in place is crucial, and having a core set of insurance policies in place (as appropriate and necessary) comes next. After that, it may make sense to start maximizing tax efficient savings and investing programs to meet your goals, including retirement. If you determine, in your specific case, that there is not a present need for life insurance, then it may make sense to move on to the other savings goals.
If this discussion raises more questions or concerns in your mind, it may be useful to meet with a financial planner or adviser for a "second opinion" on your available choices; having someone who is not incentivized to sell you a life insurance product look over your whole picture may provide you with more confidence that you are making an informed and appropriate decision.
Your need for a financial professional, and of what sort, depends largely on what services you are seeking. There is also an element of "fit", meaning that people in your situation tend to self-select into advisory relationships that suit your personality and particular needs.
When evaluating your options, you may wish to consider some of the following:
- Compensation style for the adviser. As you mentioned in the original question, some financial professionals are paid transactionally, while others may be paid a percentage of assets they manage, or in some other transparent manner (hourly, subscription, retainer, project based, etc). The manner in which the adviser gets paid may influence both the method and content of their advice
- Scope and depth of your engagement. Investment management may be limited to a specific goal like "retirement income", or may expand to encompass all investable assets in your household; similarly, financial planning can focus in on advice related to one narrow area of concern, or can be "comprehensive" and touch on taxes, estate planning, charitable giving, review of insurance coverages, etc. If your particular interest in advice incorporates a sufficiently wide or deep set of concerns, it may be valuable to pursue a more tailored and personal level of engagement.
- Standards of practice. There has been an uptick in conversation about the distinction between a "fiduciary" standard of care in financial advice, and the more broadly followed "suitability" standards. In very general terms, advisers acting in a fiduciary capacity are obligated to deliver advice they believe to be in the client's best interest, while under the suitability standard, the advice must be one option among suitable options, but not necessarily the "best".
- Level of experience and education. There are a number of designations, certifications, and titles available in the financial services industry; it may be worth understanding the different requirements and implications of these when evaluating your options for advice.
The following links may be useful in your search for more information:
- LetsMakeAPlan.org is the landing page for people who wish to learn more about financial planning and the Certified Financial Planner™ designation
- NAPFA.org is a resource devoted to connecting investors with fee-only financial planners