Bonnie Koo
Apologies for the hiatus. I was in Hawaii for CME and play. I also got engaged! The above quote is what M said to me (after he promised some other important things like love and happiness).
There are 3 major things in life to insure against – death, disability, and divorce a.k.a. (term) life insurance, disability insurance, and the pre-nuptial agreement AND making sure you and your partner are compatible, especially when it comes to money. Everyone agrees on the first two, but so many neglect the last. People simply think they won't get divorced – it's everyone else. Unfortunately, statistics show otherwise.
The internet has several articles on the leading causes of divorce, but let's look at this one from the Huffington Post. Finances is #7, but #4 “Not having a shared vision of success” includes financial goals too. In any case, I think everyone can agree that being on the same page money-wise is an area that couples need to agree on.
Love feels great, but ultimately a successful marriage is based on much more than that. The NY Times' questions to ask before marrying has finances as the second question:
“Do we have a clear idea of each other’s financial obligations and goals, and do our ideas about spending and saving mesh?”
Around the third month of dating M I asked him how much money he had saved for retirement and what debt he had. I divulged mine as well. We talked about our shared goals like to work in jobs we enjoy, take two big trips a year, live partially abroad in the future, etc. In fact, we drew up an IPS or Investment Policy Statement. OK, I drafted it and he approved it :).
And, I'll let you take a look at our first draft from a few months ago as an example. This document was the culmination of M and I discussing our goals as a couple. We have also discussed how we feel about financial obligations to our parents should that arise.
We recently hired a financial advisor in prep for combining our finances. I realize most of the finance blogs out there promote DIY and I was more than comfortable doing that for myself. I felt more was at stake with managing our finances. I'm also no spring chicken so we don't have much wiggle room for big mistakes – we have ambitious financial goals.
By the way, we did all of the questions in that NY Times article.
And finally, we have discussed the terms of a pre-nuptial agreement, stay tuned for that.
What do you think? How financially compatible are you with your partner? What questions did you wish you asked?
A great thing to do if you know you want kid(s) and are able to is to start funding their college account now.
Why? The cost of college tuition has been outpacing inflation at an astronomical rate. I started college in 1995 at Barnard College in NYC. Tuition at that time was ~ $20,000. 2016-2017 tuition is $48,614. That's over a 200% increase in tuition in about 20 years. I qualified for financial aid and only had $16,000 in loans when I graduated in 1999. Lucky indeed.
Of course, medical school was a different story and that tacked on another $150,000 in loans, but knowing how much other students graduate with now (> $300K !), I still consider myself quite lucky. I qualified for financial aid at Columbia and received a half tuition grant ($20K) and took out only Stafford loans and a private loan from Columbia funded by alumni.
The noose I feel around my neck from these loans is enough for me to want to not have this (entire) burden for my (future) kid(s). So much so that I started a 529 account NY in 2016. A 529 account is an account that you contribute post-tax dollars into that grows tax -free and can be withdrawn tax-free if used for qualified educational expenses. Kind of like a Roth IRA for education (which btw, you CAN use your Roth IRA for qualified educational expenses, but it should not be earmarked as such!) There are numerous 529 accounts and they are state sponsored.
NY is one of the states that allows a state income tax deduction on 529 plans (up to $5,000 per year). You can also benefit from this tax break even if you live outside of NY as long as you have NY income. So I am currently funding this account up to the state income tax max deduction per year. I expect that in about 5 years, I'll be able to increase that to $10,000 per year. I should have anywhere between $150,000-$250,000 in that account once said kid attends college. Time is on my side. Note that the annual limit to contribute to a 529 is limited to $14K per person or $28K per married couple to avoid possible gift taxes and for 529s, you can actually front load the account 5 years at a time.
I do not feel the need to fully fund their college education. Mainly because I may not be able to due to my late start at my own savings (as far as I know, there is no such thing as retirement loans) and I do want my kid to be grateful and have “skin in the game” for their education. I do not think most people appreciate things given to them for free. M and I also feel strongly that unless our kid gains acceptance to a top private school (aka Columbia, NOT Colgate) then they can go to state school.
Edit: You'll need to name yourself as the beneficiary until the kid is born.
Do you have a 529 account for your kid(s)? Are you planning on fully funding their college education?
First, a bit of (short) investing history.
I invested $1,000 into a Roth IRA during my third year of residency (2015). This account is at Vanguard and I initially invested all of it in their 2045 Target Retirement Fund. I had no idea how to invest my money but I knew that Vanguard was a good place to start.
My first (and current) attending job (started September 2015) gave me access to a 403(b) and a 457(b) plan. They have a limited fund list, but have some low cost Vanguard funds. Again, I still had no idea how to invest, but luckily, they automatically selected a Vanguard Target Fund based on your age. I managed to contribute close to $16K for 2015. I did not really understand what a 457(b) was and read some “bad” things about it, so I decided to figure that out later.
In 2016 I maxed contributions to the 403(b) ($18,000) and started receiving a generous employer match (about $16.5K in 2016). Takes time to fully vest but I am currently 20% vested. I almost maxed out the 457(b) plan as well – about 16.5K (more in an upcoming post about how and why I ultimately decided to use this). I also funded both my 2015 and 2016 Roth IRA via the backdoor, although I fell a little short for my 2015 contribution at $4,000.
I read more about index funds and how to create an asset allocation. After tinkering with things a few times, I finally “set it and forget it:”
- 55% US stocks:
- VIIIX: Vanguard Institutional Index Fund Institutional Plus Shares 0.02%
- VIEIX: Vanguard Extended Market Index Fund Institutional Shares 0.12%
- 20% International stocks:
- VFWSX: Vanguard FTSE All-World ex-US Index Fund Institutional Shares 0.11%
- 10% Small cap value:
- VISVX: Vanguard Small-Cap Value Index Fund 0.2%
- 8% REITs:
- VGSIX: Vanguard REIT Index Fund Investor Shares 0.26%
- 7% Bonds:
- VBMPX: Vanguard Total Bond Market Index Fund Institutional Plus Shares 0.05%
I hold the small cap value and REIT fund in the Roth IRA. The rest are in the 403(b) and 457(b). I have yet to open a regular old taxable account.
How did I do? Well, turns out it's not that easy to really know:
This is a screenshot from Personal Capital. I use this to get a nice “overview” of my investments and it has some nice graphics and tools to play around with. On the upper left you'll see the “You Index.” This is NOT the actual portfolio performance though, it's the performance if you had held your funds from the starting point of the graph. It's still useful as a rough guide though. You'll also notice that the S&P 500 finished at 9.54%, but this doesn't take into account dividends re-invested. The S&P 500 finished at 11.96% with dividends re-invested.
This is a screenshot from my 403(b) plan. 17.59% ! But I checked this on 1/9/16, so it's not exactly all of 2016 but close enough. My 457(b) returned 8.4%. My Vanguard account's return was 11.8%. My best guess is that overall, based on portfolio % (the bulk of my money is in my 403b), I clicked in around 14%. But the range is probably 13-15%. Not bad for a very new investor.
My allocation will likely change in 2017 (planning on getting rid of the bonds, for example) and I'm going to switch to ETFs in the Vanguard account.
