Sitting down and looking at my projected savings numbers for this year as I was doing my tax return last weekend, I started to realize a bit the enormity of how much I should be able to save this year. Assuming that I don’t get a raise, my RSUs vest at a medium stock price, and I don’t itemize my taxes, I should be able to increase my net worth by $100,000 this year. If you use the 52-week high stock price for my RSU vests and add in a 3% raise and itemizing, that’s looking at closer to $115,000. These numbers absolutely astound me considering that only three years ago, my *gross* income was less than what I am estimating to increase my net worth by this year and I bought a new car in cash that year, so my net worth didn’t go up by much despite my income (~$22,300). And a year before that? I was in college.
Some crazy part of me just wanted to throw every last cent at the mortgage. But then I started looking at the numbers. Here’s what my plan was to save this year:
- $17,500 Max out the Traditional 401(k)
- $2,000 Max out Health Savings Account for the plan year (rest of the $3,250 will go in next year, in 2014)
- ~$1,000 Roth IRA front door for 2012
- $5,400 Emergency fund aka cash savings
- $40,700 Five year mortgage pre-payment
- $6,000 Mortgage principal from regular payment
- $25,000 Extra savings (assuming no raise, RSUs vesting at a medium stock price and I take the standard deduction)
If I have $25,000 or so in extra savings room after accomplishing all of that, then maybe I should do the backdoor for the Roth IRA for 2012, since that’s giving up about ~$4,000 in tax-advantaged savings room, forever. I could end up working at a start-up with a bad retirement plan and wanting to roll over my old 401(k)s to a Vanguard Rollover IRA instead of into the new 401(k), so I might not have many years where I can do the backdoor Roth IRA contributions. That leaves me with $21,000 in extra savings. That’s still a lot of extra savings, so I started looking at my other options.
Buying Series I Savings Bonds from Treasury Direct is a bit of an appealing option when I see how much I’m paying in taxes now on the interest in my savings accounts and I could defer that interest until maturity (up to 30 years). The catch is that I don’t want to bunch up paying tax on their interest payments in a year with high income because then I could just be paying more in taxes than I would have to begin with. On the other hand, for now, they’re paying more in interest than my savings accounts are. I had been considering moving part of my emergency fund into CDs. One way to look at the i-bonds is that they’re a sort of 5 year CD with interest rates tied to inflation instead of stuck for 5 years.
I did a bunch of reading:
- Investing in I Bonds: An Intro to I Bonds for Young Investors
- September CPI up 0.6%: I Bonds Rate Announced
- The Finance Buff on I Bonds (link goes to his tag archive)
- Treasury Direct on I Savings Bonds (tons of good info on the official website!)
I’m also on the fence with my rewards checking account now that I have credit cards that have cashback/points. The rewards checking account was perfect back when it was paying me to do what I was already doing and even if I don’t make N debit card transactions per month, it’s not a bad checking account either since it has no fees. So my current plan is to buy $5,000 of i-bonds with the buffer I was keeping in my checking account, which doesn’t really affect the extra savings amount, come to think of it. I’m also going to give up on the rewards checking account starting in April – I’m already too far into it this month that I might as well keep going now. It’s going to be tight getting my N transactions in with my debit card by the end of the month, but I think I’ll make it by the end of the month. The cashback cards aren’t honestly that worthwhile either with how little I’m spending, but at least they’re rewarding me for what I would have been doing anyway.
These two changes have meant an adjustment in my asset allocations for the year. Very little, if any, of my 401(k) money will end up going to the Total International Stock Index fund. With the i-bond purchases, less of it needs to go to the stable value fund as well.
My target asset allocation at the end of 2013 will now be:
- 31% S&P 500 Index
- 6% Extended Market Index
- 37% International Stocks
- 26% Fixed Income (My age at the end of the year + the number of multiples of $100,000 I have in investments)
Based on this, let’s calculate my ideal portfolio at the end of 2013 and compare it to where my portfolio is now:
I’ve updated my 401(k) contribution allocation as follows:
- 74% Vanguard 500 Index fund
- 15% Vanguard Total International Stock Index Fund
- 11% Vanguard Retirement Savings Trust
Some more thoughts:
- I’ll hit the five year mortgage pre-payment amount by sometime in July.
- I’m going to wait until my last bonus of the year hits to make my non-deductible Traditional IRA contribution for 2013 and then I’ll convert the 2012 and 2013 amounts in one go. I’ve invested the 2012 amount in Vanguard Total International Stock Market Index Fund Investor Shares for now.
- I’m not sure whether I’ll buy my remaining $5,000 in I Bonds for the year out of my savings account (counting it as moving that money into a 5 year CD) or buy them out of cash flow.
- That still leaves another $20-35,000 in funds to save/invest.
- At that level of savings, there are so many good options to choose from. I’m hesitant to invest money that I could throw at the mortgage in a vehicle that is neither tax-advantaged nor guarantees the principal. So I’ll most likely throw the majority of that extra savings at the mortgage this year, even though another part of me doesn’t want to wait until the mortgage is fully paid off to invest in index funds outside of my retirement accounts. I estimate that if I only make extra principal payments on the mortgage through the end of this year, I will not see a cashflow impact when the mortgage rate resets in 2018 since it’s effectively a recast to a higher interest rate.
- One option I’m considering is to invest my Social Security tax break in the last half of the year (I’m estimating hitting the maximum income by July or August) and keep chugging along at the mortgage with the rest of my funds.
- I’ve also contemplated buying Series EE Bonds, but I’m hesitant about the 20 year wait to get the “good” interest gains from them. I’m only in my mid-twenties – I can’t see twenty years into the future!
Savings plans are always a work in progress and I’m sure this won’t be the last time that I fidget with mine this year!
Readers, how is your 2013 savings plan going so far? Have you made any adjustments?