Austin and his wife are concerned about transitioning to a single-income household while raising two children. They are contemplating whether to improve their cash flow by paying off a car loan or to remain on their current path.
Paul, who has been retired for seven years, still feels anxious about not having sufficient funds. He wonders how he can determine if he has finally overcome the feared sequence of returns risk.
Jonathan aims to increase his taxable brokerage account but is struggling to let go of the tax advantages associated with a Roth IRA. He seeks advice on how to overcome his mental barriers.
In today's episode, former financial planner Joe Saul-Sehy and I address these three inquiries.
Austin asks (at 01:45 minutes): “We’re at a significant transition—it’s our second child's arrival, and we’re shifting to a single income. What are your thoughts on our strategy to enhance cash flow during this period? I'm 31, my wife is 29, and we have two children. Our single income will be $150,000, plus a $20,000 bonus. We currently hold $52,000 in emergency and sinking funds, with monthly expenses at $7,000. Our investments comprise $500,000 in retirement accounts, $150,000 in a taxable brokerage account, and $12,000 divided between two 529 plans. Our home is valued between $560,000 and $575,000, and we have a $390,000 mortgage at a 5.07 percent adjustable rate mortgage, which will not adjust until late 2029. Additionally, we owe $20,000 in federal student loans at 4 percent and a $16,000 car loan at 5.97 percent, with a monthly payment of $570. We are expecting a $5,000 windfall from vacation payouts and bonuses, which leads me to my question: Should we use that amount to pay off the car loan to enhance our monthly cash flow? The $570 would significantly aid us during this transition. The complication lies in the fact that we own another car, which is fully paid off and running well with 260,000 miles. I hope it lasts until 300,000 miles, but realistically, we will need to replace it soon and anticipate spending $18,000 to $27,000 on the next vehicle. Should we continue managing the current car loan while saving for the new vehicle or even consider cashing in taxable investments to settle this one? The idea of selling from our taxable brokerage account is the most daunting part. However, it seems unlikely to secure another used car loan below 6 percent in the current market. Would it be wiser to release the $570 now to start saving for the upcoming car purchase, or should we just maintain our current path?”
Paul asks (at 25:19 minutes): “We frequently discuss sequence of returns risk, but how can one discern when they have moved past it? I am 59 years old, and my wife is 52. I’ll reach 59½ this July, allowing me full access to my retirement accounts without penalties. Our total assets amount to $3.3 million: my traditional IRA is $1.6 million, my Roth IRA is $700,000, my wife’s Roth IRA contains $384,000, and her SEP IRA has $480,000. Additionally, we have $54,000 in a brokerage account, $61,000 in cash, and we own our home outright. I retired in 2018 at age 52 with $1.7 million in investments and cash, and my wife is also no longer working. Our annual expenses total $70,000. So, how can we identify when we’re no longer at risk from sequence of returns issues? When can we finally relax and be assured that we are financially secure?”
Jonathan asks (at 41:34 minutes): “How do I choose between making the more rational financial choice and the one that feels more comfortable psychologically? I have contributed sufficiently to my Roth and pre-tax retirement accounts that, according to growth predictions, I will not need to contribute more. This permits me to invest $7,000 annually for at least the next decade, aiming to access that money before I turn 59½. I have two core options: contribute to a Roth IRA and withdraw the contributions tax-free later, or invest in a taxable brokerage account, where the Roth appears to have the tax advantage. However, I know I will struggle with withdrawing money from the Roth, even if it's just contributions—it feels wrong to utilize those funds. Should I opt for the taxable account, accept the slightly larger tax bill, and bypass the psychological challenge, or should I use the Roth and shift my perspective on those dollars? How can I navigate this trade-off between mental ease and tax optimization?”
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Austin and his wife are concerned about transitioning to a single-income household while caring for two children. Should they increase their cash flow by settling their car loan, or should they tighten their budget and maintain their current situation?