Currently my wife and I are both working with decent salaries. We currently max our our 401k and we max out contributions to our Roth IRA. We are pretty set in terms of saving for retirement. The only debt we currently have is our mortgage at 4.7%. We have been putting any additional savings into two managed funds, Blackrock and American Investments. I am OK with continuing putting additional savings into these accounts if it is the best strategy but I wanted to make sure there was not other/better options available that I should consider. My question then is what are some investment options after retirement savings is maxed out? Some things that we are also thinking about:

  • Start paying more of the principal down on our house
  • Start putting money into 529s for our future children

Please list pros and cons of the two strategies if you know, or please list pros and cons of other strategies that I am overlooking. Thanks for any advice.

  • 1
    Is income tax a factor in the state where you reside? Jun 28, 2011 at 8:48

3 Answers 3


4.7 is a pretty low rate, especially if you are deducting that from your taxes. If you reduce the number by your marginal tax rate to get the real cost of the money you end up with a number that isn't far off from inflation, and also represents a pretty low 'yield' in terms of paying off the loan early. (e.g. if your marginal tax rate is 28%, then the net you are paying in interest after the tax deduction is 4.7 * .72 = 3.384)

While I'm all for paying off loans with higher rates (since it's in effect the same as making that much risk free on the money) it doesn't make a lot of sense when you are down at 3.4 unless there is a strong 'security factor' (which really makes a difference to some folks) to be had that really helps you sleep at night. (to be realistic, for some folks close to retirement, there can be a lot to be said for the security of not having to worry about house payments, although you don't seem to be in that situation yet)

As others have said, first make sure you have enough liquid 'emergency money' in something like a money market account, or a ladder of short term CD's

If you are sure that the sprouts will be going to college, then there's a lot to be said for kicking a decent amount into a 529, Coverdell ESA (Educational Savings Account), uniform gift to minors account, or some combination of those. I'm not sure if any of those plans can be used for a kid that has not been born yet however. I'd recommend http://www.savingforcollege.com as a good starting point to get more information on your various options. As with retirement savings, money put in earlier has a lot more 'power' over the final balance due to compounding interest, so there's a lot to be said for starting early, although depending on what it takes to qualify for the plans there could be such a thing as too early ;-) ).

There's nothing wrong with Managed mutual funds as long as the fund objective and investing style is in alignment with your objectives and risk tolerance; The fund is giving you a good return relative to the market as a whole; You are not paying high fees or load charges; You are not losing a lot to taxes. I would always look at the return after expenses when comparing to other options, and if the money is not in a tax deferred account, also look at what sort of tax burden you will be faced with. A fund that trades a lot will generate more short term gains which means more taxes than compared to a more passive fund. Anything lost to taxes is money lost to you so needs to come out of the total return when you calculate that. Sometimes such funds are better off as a choice inside an IRA or 401K, and you can instead use more tax efficient vehicles for money where you have to pay the taxes every year on the gains.

The reason a lot of folks like index funds better is that:

  • The majority of managed funds don't manage to beat the indexes
  • Lots of good no-load and low expense options abound, including in ETF form.
  • The lack of short term trades means the tax burden is way lower, making them good for investments outside of a tax deferred accounts.
  • Once you subtract management fees and money paid out for taxes, even fewer managed funds yeild the same net return on investment that a low cost index fund does.

Given your described age, it's not appropriate now, but in the long run as you get closer to retirement, you may want to start looking at building up some investments that are geared more towards generating income, such as bonds, or depending on taxes where you live, Municipal bonds.

In any case, the more money you can set aside for retirement now, both inside and outside of tax deferred accounts, the sooner you will get to the point of the 'critical mass' you need to retire, at that point you can work because you want to, not because you have to.


You can't max out your retirement savings.

There are vehicles that aren't tax-advantaged that you can fund after you've exhausted the tax-advantaged ones. Consider how much you want to put into these vehicles. There are disadvantages as well as advantages. The rules on these can change at any time and can make it harder for you to get your money out.

How's your liquid (cash) emergency fund? It sounds like you're in a position to amass a good one. Don't miss this opportunity.

Save like crazy while you can. Kids make this harder.

Paying down your mortgage will save you interest, of course, but make sure you're not cash-poor as a result. If something happens to your income(s), the bank will still foreclose on you even if you only owe $15,000. A cash cushion buys you time.


Paying the mortgage down is no different than investing in a long term taxable fixed instrument. In this economy, 4.7% isn't bad, but longer term, the stock market should return higher.

When you have the kid(s), is your wife planing to work? If not, I'd first suggest going pre-tax on the IRAs, and when she's not working, convert to Roth. I'd advise against starting the 529 accounts until your child(ren) is actually born.

As far as managed funds are concerned, I hear "expenses." Why not learn about lower cost funds, index mutual funds or ETFs? I'd not do too much different aside from this, until the kids are born.

  • 3
    I'd think their first goal should be to get rid of the private jet. Planing to work is ridiculous. ;)
    – mbhunter
    Jun 27, 2011 at 1:43

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