Best use for savings on road to being debt free and F.I.?

[Dr. J]

M.D. in early 30s, starting 4th yr as attending. Wife taking a few years off to stay home with kids. Goals: debt free by the time we are 40 (6 years) and be on our way to F.I. Considering this we are trying to decide if it would be better to put current (and future) savings to mortgage or invest to tax-efficient index funds?

The #s: Salary of $320k/yr. Maxing 401k/match, 457b, backdoor IRA, spouse IRA, HSA, 10k/yr to 529s x 2, and $500/mo to taxable brokerage account (more on that in a minute).  Recently refinanced mortgage to 15 yr at 3.25% with payment of $1900/mo and current balance $223k. Only other debt, my student loans, will forgiven in full through state grant in 15 mo (1/2019). Cars paid, toys paid.

The advisor and taxable account: Relatively new to the WCI world, so still have fiduciary financial advisor who we are paying $800/yr. He started our first taxable brokerage account 5 mo ago. Investing $500/mo to JP Morgan Tax Aware Fun, expense ratio of 1.47.

Question 1. We currently have approx $80k in savings from recently matured 1 yr CD. (In both scenarios we plan to to increase taxable investment to $2000/mo)

Should we?

A) Pay this to mortgage? Would save approx $24k interest v 15 yr payoff. With $800/mo increase in payment/mo, would be debt free in 6 years

B) Invest this taxable brokerage fund? Estimating 8% return, 2.9% inflation, and 15% tax would yield approx $30k/6 yrs. Would add $1800/mo extra mortgage payment to payoff in 6 years. This choice has potential ROI, but of course more risk.

C) Combination of the above?

Question 2. Regarding taxable investment account and future increased monthly investment, the more I learn about investing the more an expense ratio of 1.47 makes me cringe. I'm sure everyone reading this is screaming "Vanguard!" We should really pull the plug on JP Morgan account and change to something like Vanguard Tax-managed balanced fund (expense ratio of 0.9), right? Advisor didn't seem excited about this, promoting performance of this fund and tax advantaged. I've never started an investment account and am a bit nervous to do so now.

Should we?

A) Change all to Vanguard, its not that hard start and manage fund on your own

B) Contribute to both and keep learning/reading for the next year or so

C) Keep funding all to JP Morgan fund

Appreciate any thoughts and suggestions!!  8-) 

Dr. J.

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[Hatton]

Stop adding to the JP Morgan fund.  You will need to sell it at some point.  I would question the financial advisor who would suggest a fund with an Expense ratio that high.  Is your financial advisor truly a fee only fiduciary?  I wonder?  I would take the 80k plus the other taxable account money that you are dollar cost averaging and open up a taxable account at Vanguard (or Schwab or Fidelity).  You are young you have some time.  I would probably Do something like 80% VTSAX and 20% intermediate muni bond fund.  It is easy.  I would maybe pay an extra payment or two per year on the mortgage but focus on your retirement savings.  I think you can save $800/year too since look at the advice you got.  Feel free to ask questions.  This forum can help if you post specific info.  Start reading and do not get intimidated.  That tax managed fund is not what you want.  Just do Vanguard indexes.  Eventually You can add Vtiax which is international.

[cgossage]

Regarding Question #1: Your interest rate is attractive and your after-tax mortgage rate is probably closer to 2%.  I would suggest investing in a taxable account since you have a long term time horizon.  I think your expected market return numbers might be a little bullish based on where current market valuations are but not too far off.  Your capital gains taxes are also going to be 18.8% for now which will somewhat hurt your expected after-tax returns in your taxable account.  One thing to consider is keeping only equities in your taxable account and pay down your mortgage with whatever you were going to allocate to fixed income.  That way your taxable account is generating less interest income and you are able to pay down a chunk of your debt as well.

Regarding Question #2: Any of the typical Vanguard strategies are going to be very tax efficient.  If you feel comfortable managing your own 401k, 457, and IRA accounts I don't see why you can't manage your own brokerage account too.  I wouldn't recommend paying 1.5% for any US stock fund.  I can only think of a few International Funds I would pay 1.5% for and they are impossible to get into anyway.

[PhysicianOnFIRE]

Dr. J wrote:

Vanguard Tax-managed balanced fund (expense ratio of 0.9), right?

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It's 0.09% or better than 16 times cheaper than the JP Morgan fund.

Personally, I prefer bonds in tax-deferred and stocks in taxable. But if you want bonds in taxable, go with a muni bond fund. If Vanguard has one for your state specifically, that will save you state income tax on the dividends.

Regarding question 1, I'd probably opt for some combination of increased mortgage payments and investing more in taxable. The ratio is up to you.

Regarding question 2, Yes to Vanguard and DIY, as long as you're comfortable you're not going to panic and sell if the market tanks. If you're reading and posting here, I doubt you would.

Cheers!

-PoF

[Private Practice Dentist]

First, it sounds like you are doing all the right things with your tax-advanaged accounts.  Congratulations!

JP Morgan Tax Aware Fund is loaded with the A shares having a 3.75% front end load and the C shares having a 1:00 back-end load.  There are times when those fees are waived, but you should find out if your financial advisor got those fees or if he will when you sell.  That right there answers the question of if you want to work with him anymore, but you definitely don't want JP Morgan.

My husband and I also max out our tax-advantaged accounts then put an additional $4000 into a brokerage account.  We have about $600,000 15 year mortgage at 2.75%.  Emotionally, it feels good to pay off the mortgage, but from a mathematical point of view it doesn't make sense.  We decided to do a hybrid of paying off our mortgage vs investing in a taxable account.  We have designated the taxable account as our "Pay Off the Mortgage Fund."  We track it in our Goals on Mint.  The value of the "Pay Off the Mortgage Fund" is scheduled to pass the mortgage principle remaining on October 3, 2020. Emotionally, it feels right and mathematically it makes sense.  We keep it in low-cost index ETFs and mutual funds which are by their nature tax-efficient.

Let us all know what you decide to do!

[Peds]

Dr. J wrote:

The advisor and taxable account: Relatively new to the WCI world, so still have fiduciary financial advisor who we are paying $800/yr. He started our first taxable brokerage account 5 mo ago. Investing $500/mo to JP Morgan Tax Aware Fun, expense ratio of 1.47.

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!!!!

he is not a fiduciary. you need to cut and run. stop adding now.

start investing either fidelity or vanguard.

[StarTrekDoc]

Welcome!  Congrats on setting things up nicely.

Dump the agent.  As PPDentist mentioned, check your exit costs from the existing funds.

-529s:  If you don't have plans for the taxable - front load these.  Let the compounding work for you to the point where you're comfortable with the amounts then back off.

-You're an attending at ?Public institution, check if the institution does a post-tax Defined Contribution Plan that you may be able to distribute to a Roth IRA.

Q1:  No.  You're high earner and early on in career: establish separate "mortgage account" and invest whatever way you want as your 'payoff mortgage account'.   We are quite a bit more conservative on this account with a heavy TaxExempt Muni in there that easily outperforms the mortgage interest (even at a 100 TE allocation).  This allows to flexibility as both your EF and ability to hit that 'payoff' button in a few years if/when you want to -RE

Q2: Before you leave JPM, insist on Chase Private Client (CPC) status and make sure you have that setup for the waived fees and their cultural card ---  I would consider moving to BOA for their Rewards benefits and then your choice of broker - with total market index funds of either mutual or ETF.   Fees feed the broker unless you have a friend with the Midas touch.

 

[hightower]

Echoing what's already been said, but...

I see no reason to pay down that mortgage any quicker.  At 3.25% interest and with your income bracket, you're getting a big tax deduction with it.  You're probably paying less than 2% actual interest on that loan.  And it's a very small mortgage for what you make.  So, you're doing very well in the housing department right now.  You might as well keep the mortgage and focus on other goals.  You'll be on the road to FI a lot quicker by putting that extra cash into a taxable IMO.

Also, I see no reason why you would need a financial advisor.  You're doing everything right already.  You're saving plenty, you've got no debt to deal with once your student loans are forgiven (other than the mortgage).  And best of all, you're on WCI asking questions.  You can find all the investing advice you need here in my opinion.  That 1.47% expense ratio fund is a sign that your advisor is not truly a fiduciary IMO.  He must be getting some sort of kick back from selling you that.  Close that account.  Say thank you and goodbye to your advisor.  Open a Vanguard brokerage account.  Put all your taxable money there and invest it in VTI (Vanguard Total Stock Market Fund) or similar and pay an expense ratio of 0.04%.  And it's very tax efficient.

[adventure]

Dr. J wrote:

Question 1. We currently have approx $80k in savings from recently matured 1 yr CD. (In both scenarios we plan to to increase taxable investment to $2000/mo)

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Are you currently itemizing your tax return? If so, B. If not, C.

Dr. J wrote:

Question 2. Regarding taxable investment account and future increased monthly investment, the more I learn about investing the more an expense ratio of 1.47 makes me cringe. I’m sure everyone reading this is screaming “Vanguard!” We should really pull the plug on JP Morgan account and change to something like Vanguard Tax-managed balanced fund (expense ratio of 0.9), right? Advisor didn’t seem excited about this, promoting performance of this fund and tax advantaged. I’ve never started an investment account and am a bit nervous to do so now.

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A.

 

As others have said (@hightower), you know what you are doing. Opening the account isn't difficult, simply file the paperwork, and the funds move over. You can give a courtesy call, but I wouldn't. If there there account closing fees, trying to waive them (@startrekdoc) is ideal, but if not don't think twice about paying them. Move on. Happily! Also, I'd consider something like @hatton1 said, and use VTSAX, or similiar (ER 0.04). Sure, adding in some bonds, other funds, etc will grow that a little, but not .9, and not 1.way toomuch47.

[adventure]

Dr. J wrote:

so still have fiduciary financial advisor who we are paying $800/yr. He started our first taxable brokerage account 5 mo ago. Investing $500/mo to JP Morgan Tax Aware Fun, expense ratio of 1.47.

hatton1 wrote:

Is your financial advisor truly a fee only fiduciary?  I wonder?

Peds wrote:

Is your financial advisor truly a fee only fiduciary?  I wonder?

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You may want to spend some time reading about 12b-1 fees (specifically for JP), and see if you are paying any of them currently (implicitly, or explicitly). (You also might not want to!)

[docnews]

Q1: First the numbers:

Pay mortgage principal if in 28% tax bracket = Save 2.34%

Invest in low risk = Total Bond (BND) after tax returns = Make 3%

Invest in reasonable high risk = Total US Market (VTSAX) after tax returns = Make 5%

So is the risk worth making max 2.66%?

If on $80k over 6 years = $13k expected gain

Not chump change but not necessarily earth shattering.

Not sure there is a right answer. I internally debate personally whether losing this expected gain is worth going for the sure thing.

[This infers filling tax advantaged accounts as you are doing.]

 

Q2: Do the hard thing today: admit a mistake. (We all have; see the thread on our blunders) The quicker you do the more you save. Fire the advisor, sell the loads, and don't look back.

[Zaphod]

docnews wrote:

Q1: First the numbers:

Pay mortgage principal if in 28% tax bracket = Save 2.34%

Invest in low risk = Total Bond (BND) after tax returns = Make 3%

Invest in reasonable high risk = Total US Market (VTSAX) after tax returns = Make 5%

So is the risk worth making max 2.66%?

If on $80k over 6 years = $13k expected gain

Not chump change but not necessarily earth shattering.

Not sure there is a right answer. I internally debate personally whether losing this expected gain is worth going for the sure thing.

[This infers filling tax advantaged accounts as you are doing.]

 

Q2: Do the hard thing today: admit a mistake. (We all have; see the thread on our blunders) The quicker you do the more you save. Fire the advisor, sell the loads, and don’t look back.

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I wouldnt aggressively pay the mortgage either.

I would take whatever emergency amount out of the 80, and put the rest in taxable.

6 year time horizon is irrelevant.

Again, simple vs. compound interest and a long time horizon can turn seemingly similar nominal interests into insanely large differences.

[docnews]

I guess I agree with POF. You could do some to both to diversify your risk.

Best way to phrase it to the OP: would you want to invest in something with an illiquid guaranteed 2.34% rate? Might be able to beat that with EE bonds but only barely.

At what rate would you feel differently, Zaphod? Asking for me: my rate is 3% after deduction.