The OB Financial Plan
I get asked a fair amount what we do with our own finances so I figured I would provide a quick rundown. This is what's right for our family, at this particular time. Doesn’t mean it’s right for everyone.
Retirement
I currently contribute 16% of my pay into my 401(k) plan. 11% of that deduction is pre-tax, 5% is to the Roth. I don’t pretend to know what the tax code will look like decades into the future therefore want to maintain multiple options for my future distribution needs. Flexibility due to an uncertain future will remain a recurring theme throughout.
Years ago, I had a Rollover IRA and Roth IRA which were both invested in individual stocks and traded regularly. I got to the point where I no longer wanted to spend the time and resources researching and monitoring these investments on a day-to-day basis. In 2016, rolled the IRA into my 401(k) plan. The 401(k) is invested in mostly index funds, tilted to the international markets given their low valuations relative to the U.S. markets. Roth IRA’s cannot be rolled into a Roth 401(k), therefore was kept as is. The Roth IRA has exposure to a total stock market index fund.
Lauren contributes only $300 a month to a 403(b) plan. Several mistakes were made here. First, I didn’t vet her plan. Turns out, it was layered with expensive funds, record keeping fees and surrender schedules. I should have encouraged her to enroll in the 457(b). These plans are available to all municipal employees in a city/town/state. In Lauren's case, the 457(b) was a superior plan with decent funds, lower fees and no surrender schedule. We all know someone who teaches – make sure they’re aware of their eligibility for other plans outside of the 403(b).
Second, we have not regularly increased her contributions like we should have early on. Lauren was great about signing up on day one. I have not been great around encouraging her to increase them sooner and more frequently. We will be ratcheting those up in the fall.
Other Employer Benefits
We have two kids in school, so we fully fund the $5,000 Dependent Care Flex Spending Account (FSA.) It's saved in each paycheck and then distributed at the end of the year (hence, we're reimbursing ourselves.) If you're going to be paying for daycare / school, you might as well use pre-tax money.
We also both pay for Long-Term Disability Insurance (LTD.) LTD usually picks up where Short-Term Disability Insurance leaves off and will provide anywhere from 50-60% of your pay while you're out of work.
Lastly, we still have residual money in a health savings account (HSA) from when I was enrolled in a High Deductible Health Plan (HDHP.) This is used to reimburse us for trips to the doctor or hospital (co-pay's, deductible's etc.)
Liquid Money
We are kicking the tires on moving in the next year or so. Because of this, our priority is building up more liquidity (checking/savings) for increased cushion and as a potential resource for a down payment. We also have an unused (but available) line of credit on the house that’s accessible for anything, if necessary. For us, its another supplemental emergency fund.
College
We automatically invest $250 per month into the kids 529 plans. Massachusetts offers extremely limited tax benefits to use their plan, so we go out-of-state. We typically increase our recurring contributions by $10 or $20 every six months and also add to the accounts on a special occasion or birthday.
There are many ways to pay for college. Given that it’s a long way off and a lot can change between now and then, we don’t want all of our eggs in one basket. The closer a potential distribution date is, the more likely it is that we save less in a 529 and more in a taxable brokerage account. The brokerage account won’t provide the pure tax-free growth that a 529 will, but does allow for greater customization and flexibility. Zero-coupon municipal bonds can be a really nice fit here.
Life Insurance
Lauren and I each have a $1m 30-year term policy. I also have an additional $1m 10-year term policy that I took out when Noah (my second) was born. To give you an idea of the cost, I just paid my annual premium of $295. Pretty good for $1m of coverage.
For most of us, life insurance is a tool to solve a temporary problem. Therefore, in many cases, term insurance is appropriate given the cost and objective of what you need it to do.
The process of getting a life insurance has improved, but it still can be frustrating and time intensive. That said, it’s a critical component of a good financial plan.
Estate Plan
We put a plan together when Sean (my oldest) was about six months old. The plan included a will, power of attorney, healthcare proxy and family living trust. Much like life insurance, the procrastination of dealing with mortality was outweighed by our desire to provide for our family should anything happen to us. Our personal circumstances, values and the tax laws will change which will require us to review this on a regular basis moving forward.
Debt
My wife jokes with me that she inherited two things the day we got married - my student loans and my Buick. Fortunately, the Buick died shortly after our wedding. My student loans on the other hand, were just paid off this year. This was another mistake that I made – not allocating more cash flow to the loans early on, leading to more interest being accrued and a longer time frame for it to be paid off. I deferred my balance for six months after college, ignorant to the fact that the interest on the loan continued to accumulate.
We also have a small car loan carrying an interest rate of 0.9%.
Closing Points
The organization component of planning & investing is, in my opinion the least talked about and most underrated. All of the information that I touched on can be found on our very own personal website. Each account is linked and each important document is scanned into an online vault. Personally, this has been a game changer from a peace of mind standpoint. If you don’t currently use an account aggregation tool, I suggest looking into it.
As you can tell, we certainly haven’t been perfect. Mistakes were made – we learned from them and moved forward. Over time, I do truly believe that our habits have gotten better, and we’ve gotten more consistent implementing them. Automating our money decisions has been huge for us.
I want to close by saying how incredibly lucky we’ve been. Lauren and I have always had our health. We’ve had supportive families. We’ve never had extended absences from work as a result of any disability. I’m not naive to the fact that any bad luck probably changes where we’re at significantly.
That's a wrap - nothing complicated! Feel free to reach out with any questions.
