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Should I Be Paying Myself First?

“Dear Paul,

Can I run my vanguard index fund assett allocation by you? Also planning to move and buy a more expensive home and would love some guidance there.

So, I’m still sort of polishing up the exact percentages, but contributing roughly $4-5k each month approaching $250k total in our Vanguard taxable investment account this year and $50k in the Roths. My goal AA is:
Domestic ETFs 40% ($120k)
–20% ($60k) will go to Total Stock Market (VTI).
–20% ($60k) will be Small Cap Value (VBR)
International ETFs 40% ($120k)
–20% ($60k) will be Total International (VXUS).
–20% ($60k) will be Small Cap International (VSS).
10% ($30k) will go into REITs (about $10k domestic in VNQ, and $20k Int’l in VNQI)…this is in Roth IRA account.
10% ($30k) will go into Total Bond Market BND…also in also in Roth IRA account.

I also have about $100k in the Government TSP with similar AA.

My AA is pretty aggressive, but that’s because I really believe we could live without it. I’ll have a pretty good pension by 2022 of about $5k/m with COLA (+ whatever’s left of Soc Sec). My wife’s parents already have some inheritance lined up for her (some rental properties already in her name in Mexico and other things in the future). They have repeatedly assured me that I really don’t have to worry about her AT ALL for retirement (although I do anyway). I’d plan to add about 5% more bonds every 5 years.

Currently I’m 40, wife’s 37, and we have a 6yo and 1yo. Hoping to retire by 60-65yo. I make about $200k/y, but since I’m active duty military only about $170k is taxable. Also have a couple of rental properties, but would estimate they’re worth about $800k total and we owe $700k and we’re quickly getting tired of them and may sell soon, so wouldn’t count that. Wife’s a homemaker.

We’re about to move and buy a more expensive house and after that’s all said and done I figure we could still put about $50k/y into our taxable Vanguard investments in addition to maxing the TSP contribution ($17k/y) and our Roth’s ($10k/y). I’d like to save about $20k/y more than that, but the wife is pretty adamant on upgrading our house!

I figure we’d probably be OK even if we just get to $1-2M by 65yo, but I have read that if one can accumulate around $3M by retirement that it’s probably safe to forego long-term care insurance (essentially self-insuring), so I really like the idea of $3M as a minimal goal for that reason.

Thanks for your advice, Paul.”

At first blush, you are winning the “battle” compared to most individuals on several fronts. First, you are paying yourself first by saving! Nice job. Second, you are allocating amongst several asset classes to achieve diversification. Again, nice job. Third, you are being wise about the internal costs of the investment instruments and keeping costs low. You guessed it, nice job! Fourth, you are leaving within your means. Fifth, you actually have a pension. Do you realize how rare this is? These days, and actually for some time now, most employers put the entire onus on the employee to fund their retirement. Sixth, your thesis about Social Security is likely correct – don’t plan on it. Seventh, your LTC assessment is spot on regarding self-insuring. Finally, you don’t need my help, as you appear to be doing everything right, Tobe.

I am impressed with your financial planning acumen and wish you nothing but the best!

Best regards,
Paul

Should I Be Paying Myself First?Mr. Bennett is a Certified Financial Planner™ professional (CFP®), Chartered Financial Consultant (ChFC®), Accredited Investment Fiduciary™ (AIF®) and Managing Partner of c5 Wealth Management, LLC. He holds a Master of Science in Finance (MSF) with Honors from Indiana University – Kelley School of Business and a BA from the University of Florida. He is currently pursuing his PhD in Economics from SMC University. Mr. Bennett has completed the Advest Institute’s advanced program on portfolio analytics and behavioral finance at Harvard University.

He was recently recognized by Washingtonian Magazine as a Top Financial Advisor and Kiplinger’s Personal Finance Magazine, the Journal of Accountancy and the American Bar Association Journal as Who’s Who of Virginia Certified Financial Planner™ professionals. In addition, he has also been recently selected by the Consumers’ Research Council of America as one of “America’s Best Financial Planners”. He is a current contributor to the Rydex Advisor Benchmarking Index. He is quoted often in the press, has been featured on CNNRadio.com and has contributed to various publications such as U.S. News and World Report, Boomerater.com, Advisor Today, Dow Jones News, Financial Advisor Magazine, Financial Planning Magazine, Investment News, The Washington Business Journal and The Washington Times.

If you have a questions about investing, financial planning, retirement, entrepreneurship, executive benefits and insurance (life, disability, long-term care, etc.) you’d like for Paul to answer, just use the online form. The help is free.


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