Recommendations For A Well-to-do Native?

[eaglewatch]

I have some new quandaries. My background:

I am early 30s, wife is almost late 20s. We have two kids under 7, and a newborn on the way.

We have $240,907.46 in the bank liquid cash (I'm planning on investing about 100K soon).

We have two homes paid in cash. One is worth approx. 500K, outside of Texas. The other is in Texas (where we live), and worth about 267K. We rent the outside of Texas home for $2,295/month. Of course, we pay quite a lot in expenses on that rental. Our CPA depreciates it every year.

We also have two cars paid in cash and zero debt. Great credit scores as well.

We have $460,350 in Vanguard. I only have $4,475 in a 529 education fund.

I take home about 15K a month net from tribal gaming proceeds. This is 1099 earnings and the statements do not show that Social Security is being paid into. I am guessing I will not be eligible for SS if I do not pay into it via regular employment. I stay very busy with non-profit hospice and other activities. I am planning a non-profit startup.

Two questions:

1) How much life insurance should I have? If I die, the tribal gaming proceeds go away. I already have a policy, obviously. I want my wife to live comfortably.

2) Should I be pumping money into the 529 for my three kids? I want them to go to University. I just wonder if it is the best use of investment money. Should I go aggressive with the portfolio through Vanguard?

Any other suggestions?
Thanks!

[kork13]

What is your average monthly (or annual) income? Anything beyond the $15k from the tribal proceeds, and $27.5k rental income (roughly $45k/year)? Does your wife earn any income? What are your total monthly (or annual) expenses? Those answers will guide your question about insurance. Life insurance is typically intended to pay off any debts like a mortgage, medical debts, etc. (don't seem to be a factor for you), potentially pay for college educations, then also provide your family with the means to provide for their needs without your income. Just based on the I think you would want to look at between $400k to $1 million of term life insurance coverage on yourself, and a similar (or possibly smaller) amount on your wife, depending on what you'd need to provide for your kids without her. The amount of either life insurance policy could be placed into a variety of investments and throw off sufficient income to make up for either your income or your wife's income (or her other contributions to the family, like childcare, home-making, etc) in the event of your untimely deaths.

As for the 529, I think you're in a good position right now to take advantage of an option to front-load your 529 contributions. Federal 529 laws allow you to make up to 5 years of 529 contributions all at once (max of $70k/person, so you & your wife could theoretically contribute up to $140k all at once), then your contributed money grows tax deferred. The trick is getting the money in upfront to give it more TIME to grow. Since you have a large cash position that you could probably easily afford to put toward your children's educations, you could take, say, $50k-$100k, and contribute it all at once to the 529 plan(s). This could then sit untouched for the next 10+ years, earn a reasonable 5-7% return, and even with no future contributions, you'd have $85k-$200k ready to go when your first child starts at university. That 529 plan could later be used for your 2 younger children as well. Obviously, future contributions would only increase that amount. You do want to be careful not to add TOO much, because there are penalties for not using that 529 money for education expenses. But with the prospect of 3 kids going to university, you shouldn't have TOO much trouble going through a healthy chunk of those savings.

Another consideration that you haven't really addressed is retirement savings for you and your wife. Especially with the expectation of being ineligible for SS benefits, you will have to provide exclusively for your own retirements. You do have a fantastic start with the $460k invested at Vanguard -- is that in a taxable investment account, or is it in an retirement account of some sort (Roth or Traditional IRA or 401k)? If you haven't already, you and your wife should absolutely open Roth IRAs and max them out every year for the foreseeable future. Especially at your ages, those accounts will have a significant amount of time to grow in a tax-advantaged account.

Bottom line, make use of tax-advantaged accounts as best you can, and keep saving! You really are doing great right now. Make some plans based on what you foresee your family's financial state & needs being in the future, and keep working toward those goals!

[eaglewatch]

What is your average monthly (or annual) income? Anything beyond the $15k from the tribal proceeds, and $27.5k rental income (roughly $45k/year)? Does your wife earn any income? What are your total monthly (or annual) expenses? Those answers will guide your question about insurance. Life insurance is typically intended to pay off any debts like a mortgage, medical debts, etc. (don't seem to be a factor for you), potentially pay for college educations, then also provide your family with the means to provide for their needs without your income. Just based on the I think you would want to look at between $400k to $1 million of term life insurance coverage on yourself, and a similar (or possibly smaller) amount on your wife, depending on what you'd need to provide for your kids without her. The amount of either life insurance policy could be placed into a variety of investments and throw off sufficient income to make up for either your income or your wife's income (or her other contributions to the family, like childcare, home-making, etc) in the event of your untimely deaths.

As for the 529, I think you're in a good position right now to take advantage of an option to front-load your 529 contributions. Federal 529 laws allow you to make up to 5 years of 529 contributions all at once (max of $70k/person, so you & your wife could theoretically contribute up to $140k all at once), then your contributed money grows tax deferred. The trick is getting the money in upfront to give it more TIME to grow. Since you have a large cash position that you could probably easily afford to put toward your children's educations, you could take, say, $50k-$100k, and contribute it all at once to the 529 plan(s). This could then sit untouched for the next 10+ years, earn a reasonable 5-7% return, and even with no future contributions, you'd have $85k-$200k ready to go when your first child starts at university. That 529 plan could later be used for your 2 younger children as well. Obviously, future contributions would only increase that amount. You do want to be careful not to add TOO much, because there are penalties for not using that 529 money for education expenses. But with the prospect of 3 kids going to university, you shouldn't have TOO much trouble going through a healthy chunk of those savings.

Another consideration that you haven't really addressed is retirement savings for you and your wife. Especially with the expectation of being ineligible for SS benefits, you will have to provide exclusively for your own retirements. You do have a fantastic start with the $460k invested at Vanguard -- is that in a taxable investment account, or is it in an retirement account of some sort (Roth or Traditional IRA or 401k)? If you haven't already, you and your wife should absolutely open Roth IRAs and max them out every year for the foreseeable future. Especially at your ages, those accounts will have a significant amount of time to grow in a tax-advantaged account.

Bottom line, make use of tax-advantaged accounts as best you can, and keep saving! You really are doing great right now. Make some plans based on what you foresee your family's financial state & needs being in the future, and keep working toward those goals!

The 15K/month is our family's only income. It is classified as 1099. It is not eligible for any IRA/401K because the IRS considers it "unearned income". I have met with a fee only advisor a number of years ago. She suggested a flat rate annuity through Jefferson National as pretty much the only way I can deffer taxes on this money. However, the problem is that the fees and risk for the Jefferson National annuity is not very appealing. If they go down, so does my annuity. Seems like my best and safest bet (especially considering fees), is a taxable Vanguard fund account (which I have).

I have had the single 529 plan open for a couple years, and only made one payment when I opened it of $3,000. Can I still "front load" the plan? Also, should I have a plan for each child?

Couldn't I roll the 529 plan to another extended family member?

Thanks for the advice!

[corn18]

For life insurance, try one of the online calculators. Find one that asks a lot of questions taking into account current and future expenses vs. current savings. I used the one that USAA offers (not sure if it's available for non-members) and it spit out $4M. I have that in term life right now but I have the term lengths staggered so it phases out over the next 30 years. This phase out takes into account my current savings plan, college expenses, home mortgage and my family's annual expenses should I die. I set it up so my wife never has to work if that's her desire.

Tom

[kork13]

The 15K/month is our family's only income. It is classified as 1099. It is not eligible for any IRA/401K because the IRS considers it "unearned income". I have met with a fee only advisor a number of years ago. She suggested a flat rate annuity through Jefferson National as pretty much the only way I can deffer taxes on this money. However, the problem is that the fees and risk for the Jefferson National annuity is not very appealing. If they go down, so does my annuity. Seems like my best and safest bet (especially considering fees), is a taxable Vanguard fund account (which I have).

I have had the single 529 plan open for a couple years, and only made one payment when I opened it of $3,000. Can I still "front load" the plan? Also, should I have a plan for each child?

Couldn't I roll the 529 plan to another extended family member?

Thanks for the advice!

Ah, I didn't realize it would be "unearned" income as a tribal gaming proceed... I'm pretty sure that the same "unearned income" classification applies to your rental income as well.... That's unfortunate, but manageable. Because other tax-advantaged accounts are not available to you, you'll want to basically use your taxable vanguard investment account, and just use it in the most tax-efficient manner that you can. Index mutual funds (and/or Index ETFs) tend to be fairly tax-efficient, in that they don't have alot of trading, turnover, and other major taxable events, so using those kind of investments for the stock portion of your portfolio will keep your taxes in check somewhat as your assets grow. As for the bond component to your portfolio, you'll likely want to use US treasury bills/notes/bonds (read up on the differences here: TreasuryDirect.gov, or municipal bonds. As government obligation bonds, they will have a variety of various tax benefits. Most of them are exempt from state & local income taxes, and some also give you a tax-deferred benefit. Some of those can be purchased through a brokerage account (like at Vanguard), others have to be purchased directly from the US gov't through the above website.

At this point in your life, getting any sort of annuity would be a tremendously expensive mistake. A fixed annuity CAN make sense for a retiree or as part of a special-needs trust... but those are just about the only cases in which I would ever suggest them. I'd strongly recommend that you not even consider an annuity as an option right now.

As for the 529, you can absolutely front-load the 529 at this point in time, and I think it's a great idea for you. If you max out your contributions upfront, you won't be able to add any additional contributions for the 5 years, but if you don't max it now, you can continue to add contributions as desired up to those limits. The question of whether to do one account for all of your kids or one for everyone depends somewhat. Personally, my plan is to use just one 529, then roll it over to younger children as needed...just for administrative simplicity. However, many families choose to keep a separate 529 for each child. Both methods are totally acceptable. One consideration is that the limits I keep talking about are per recipient. So if you wanted to front load a whole boat load of money for each child, it would be possible to have a cumulatively greater amount of contributions.

One more bit of advice... you might consider taking your situation & questions to a different/similar site, the Bogleheads forums. That is a larger site, and has alot of folks who are VERY smart on investments, and tax-efficiency is a constant consideration for them. With your special circumstances of having effectively no "earned income", they may be able to give you some more cogent recommendations for what you can do in your situation. We're happy to help you here (and some of us participate in both forums), but the Bogleheads are a great resource for questions specific to investments.