Author Topic: Case study, version 2: so when are we FIRE'd?  (Read 1657 times)

meerkat

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Case study, version 2: so when are we FIRE'd?
« on: June 18, 2016, 05:50:14 PM »
This is a follow up to the case study I did in February and we started making changes in March. I'm using averages from the last six months since I think that data is more reliable than the last twelve months, even allowing for some exceptional events (replacing our roof, which I omitted, and a PICU hopsital stay and associated pediatrician visits, which are included).

CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$3,524$42,293
Salary/Wages for earner #2$3,600$43,202
Pretax Vision/Dental Ins.$5$65
Employer-sponsored HSA$430Room to increase?$5,160
FICA base salary/wages$6,689$80,270
Traditional IRA$458Room to increase?$5,500
Employer Match$124$1,494
Income subject to IRS tax$6,231$74,770
ESPP/After-tax 401k$160$1,917
Paycheck income before tax$6,071$72,854
Federal Total Income$6,231$74,770
Federal tax$5502015 rates, MFJ, stand. ded., 3 exempt.$6,603
State/City tax$0Guess, using 0.00% * Fed. Taxable$0
Soc. Sec.$415Assumes 2 earners paying$4,977
Medicare$97$1,164
Total income taxes$1,062$12,744
Income before other expenses  $5,009$60,110
Monthly Average Expenses:
Mortgage$643$7,721
Property Tax$45$541
Car Insurance$89$1,066
Car Maintenance, Registration, etc.$32$384
Charitable contributions$35$420
Child Misc (non childcare)$28$337
Childcare$748$8,980
Christmas/Holidays$20$240
Clothing/Shoes$32$384
Dining (Lunch/Dinner/Etc.)$280$3,362
Donations/Gifts$32$384
Electricity/water/natural gas$150$1,800
Entertainment$39$468
Fuel/Public Transport$44$528
Groceries$591$7,092
Groceries Alcohol$16$192
Household; Maintenance$85$1,025
Internet$73$876
Landscaping/Yard work$55$660
Life Insurance$46$552
Medical (Doctor, Hospital, etc.)$380$4,560
Medical Insurance$246$2,951
Medicine (OTC + Prescription)$135$1,620
Miscellaneous$9$108
Pets$47$560
Phone (cell)$121$1,450
Shopping$33$393
Travel/Vacation$180$2,160
Non-mortgage total$3,591$43,092
Total Expense$4,234$50,813
Total to invest$775$9,297
Additional Mortgage Principal$234$2,808
Additional Loan payments$212$2,543
Available for taxable investment:$329$3,946
Summary:
"Gross" income$7,125$85,495
Income taxes$1,062$12,744
After-tax income$6,063$72,751
IRA+401k/403b/TSP/457 (Savers' credit)$458$5,500
HSA$430$5,160
ESPP+529/other$160$1,917
Living expenses$4,240$50,878
After-tax investable$775$9,297
Time to FIRE?:
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments5.00%percent
Real, after tax, return on taxable investments4.25%percent
Current Savings
Tax-deferred (e.g. trad. IRA/401k)$42,338
Roth + HSA$101,000
Projected Savings at Retirement
Tax-deferred (e.g. trad. IRA/401k)$42,338
Roth + HSA$101,000
Total projected stash$143,338
Projected Expenses in Retirement
Non-loan, non-work expenses$43,092
Total$43,092
Total loan principal due at FI$97,428
Stash needed for retirement @4.0% SWR$1,174,728
Need $1,031,390 more.


Filing Status21=S, 2=MFJ, 3=HOH
# Exempt.3
Earner #1Earner #2
Ages3040
# of earners2
Total Income$74,770
Std. Deduct.$12,600
Act. Deduct.$12,600
Exemption$12,000
AGI$74,770
MAGI$80,270
Taxable$50,170
1040 Tax$6,603
Saver's credit$0
Tax after n-r credit$6,603
Child Tax Cred.$0
EIC$0
Net Tax$6,603
Monthly$550
Mtg. Int. (approx.)$4,642
Prop tax$541
Charity$420
Medical$3,523
Item. Deduct.$9,126
VersionV7.09

Loans:Orig. Prin.Orig. LengthCurr. Prin.Yrs leftRate
Mortgage$120,00030$93,971124.990%
Auto$10,0005$3,4564.51.750%


Notes:
Kid costs other than day care include formula (he's on cow's milk as of last week! HUZZAH!) diapers, sleep sacks, baby spoons, etc. I had been getting free second hand clothes from a coworker but they're no longer with the company so I'll have to figure something else out when my current stash runs out.

Medical/doctor artificially high due to PICU hospital stay. Hopefully this will not become a normalized expense! Ignoring the hospital stay it's more like $190 instead of $380. This is probably also artificially high because we'd usually make multiple trips to the pediatrician and try various treatments before the baby's symptoms got progressively worse and sent us to the hospital. (He's healthy and happy now thankfully.)

Shopping is kind of miscellaneous Target, Walmart but over the past couple months I've been keeping those receipts to break them out more specifically. They're probably stuff like new oven mitts to replace the ones that had holes, diapers, light bulbs, etc. Thankfully I was able to go back and fix any Amazon purchases for the last twelve months to be more accurate in the categorization.

HSA: Mine should be on track to max out, husband's is not. I don't feel like bugging him about this, I'd rather pick a different battle. Speaking of which...

I recently opened and fully funded my IRA for the year. Husband is not convinced so we have not yet opened and funded one for him. I'll keep bugging him about this. For my IRA I wasn't sure where to put it on the spreadsheet since I put the money in as one lump sum instead of a monthly contribution.

All that to say - I can't figure out how long till we're FIRE'd. I don't know exactly what our post-FIRE spending will be like, but for the sake of example I'm going to say our non-mortgage total expenses will stay the same. I don't know how to include Social Security, or if I even should. Husband, according to his most recent SS statement: $1,011/month if he claims it in 2038, $1,458 in 2043, or $1,809 in 2046. Me, according to most recent statement: $1,024 if I claim it in 2047, $1,455 in 2052, or $1,804 in 2055. Since we'd like to be FIRE'd long before 2038 I don't know how to factor this information in. All I know is if I leave it as zero in the spreadsheet it says our stash needs to grow by million dollars but if I add in $24,420 ($1,011+$1,024 times 12 months) then our stash only needs grow by $457k.

Feel free to chime in with any other thoughts or facepunches. Doing the first case study earlier this year was extremely helpful in getting us on the right track instead of flailing around and hoping for the best like we had been doing.
« Last Edit: June 19, 2016, 11:27:14 AM by meerkat »

MDM

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Re: Case study, version 2: so when are we FIRE'd?
« Reply #1 on: June 18, 2016, 08:38:11 PM »
CategoryMonthly
Comments
Annual
Medical Insurance$246$2,951
Medical insurance is post-tax but you get dental pre-tax?

Quote
Loans:
Auto$288$3,457
Double counting the extra car payments?  $5,000 financed for 5 years at 1.75% is only $87/mo.

Quote
Time to FIRE?:
Extra income after RE (pension, SS, etc.)34956/year
Here is where this spreadsheet is probably not as good as time-dependent retirement calculators (e.g., see Best and/or Recommended Retirement Calculator - Bogleheads.org): in what year would the $34,956 start?  Does the amount change depending on the start year?

Quote
Filing Status21=S, 2=MFJ, 3=HOH
# Exempt.1
Appears you are missing a spouse and a child. :)

Quote
For my IRA I wasn't sure where to put it on the spreadsheet since I put the money in as one lump sum instead of a monthly contribution.
The annual amounts are what matter for most of the spreadsheet calculations.  Using =5500/12 (or whatever the annual amount should be instead of 5500) for the monthly amount is fine.

Quote
All that to say - I can't figure out how long till we're FIRE'd. I don't know exactly what our post-FIRE spending will be like, but for the sake of example I'm going to say our non-mortgage total expenses will stay the same. I don't know how to include Social Security, or if I even should. Husband, according to his most recent SS statement: $1,011/month if he claims it in 2038, $1,458 in 2043, or $1,809 in 2046. Me, according to most recent statement: $1,024 if I claim it in 2047, $1,455 in 2052, or $1,804 in 2055. Since we'd like to be FIRE'd long before 2038 I don't know how to factor this information in. All I know is if I leave it as zero in the spreadsheet it says our stash needs to grow by million dollars but if I add in $24,420 ($1,011+$1,024 times 12 months) then our stash only needs grow by $457k.
This is where the cfiresims, i-iorps, etc. come in.

You could do something along the lines of (using the latest version from Case Study Spreadsheet updates):
cell B144: =IF(B145<22,0,IF(B145<27,1011,IF(B145<30,1458,IF(B145<31,1809,IF(B145<36,1809+1024,IF(B145<39,1809+1455,1809+1804))))))*12
cell B146: =IF(B145<22,5.5%,IF(B145<27,5.25%,IF(B145<30,5%,IF(B145<31,4.75%,IF(B145<36,4.5%,IF(B145<39,4.25%,4%))))))

Appears you will be in good shape when SS kicks in, but you need to get there.

Because you have very little in traditional accounts now, your expected retirement tax rate is very low.  Thus traditional contributions now are likely to work better for you than Roth.  See Traditional versus Roth - Bogleheads.

Good luck!  If any of the above is clear as mud, just ask.

meerkat

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Re: Case study, version 2: so when are we FIRE'd?
« Reply #2 on: June 19, 2016, 06:33:08 AM »
The $246 is for the baby through ACA because it's almost twice as much to put him on our (pre-tax) work plans. Dental for everyone is through work.

I think I fixed the auto loan now? We're only required to pay $288 but we pay $500.

The $34,956 does change depending on the start year, and in any case is a ways out from now.

Fixed the IRA line.

Appears you will be in good shape when SS kicks in, but you need to get there.

Because you have very little in traditional accounts now, your expected retirement tax rate is very low.  Thus traditional contributions now are likely to work better for you than Roth.  See Traditional versus Roth - Bogleheads.

Ooooh. We actually went to a tax guy this year and he said the same thing but we couldn't really wrap our minds around it even after he explained it, mostly because we were more worried about our 2015 taxes and making sure we had gotten other exceptional things right in the past so by the time we walked out of there we forgot why traditional was better.

So, what you're saying is if our post-retirement income level is, say, $40k/year we might as well just do traditional now? I think part of the issue is the psychological value of having all that money be mine, whereas if we do traditional and we have to pay taxes on it later then They are going to come take some of my money later. I started reading through the bogelheads link and by the time I got to the Taxes and Marginal Tax Rates sections I was lost. I think maybe it's the income vs taxable income parts that were throwing me off, but I did see the part that says "If your current marginal tax rate is 15% or less, prefer a Roth." Am I not in that marginal tax rate bracket? I thought I was.

MDM

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Re: Case study, version 2: so when are we FIRE'd?
« Reply #3 on: June 19, 2016, 09:36:56 AM »
I think I fixed the auto loan now? We're only required to pay $288 but we pay $500.
$288/mo is way more than a $5K, 5 year, 1.75% loan requires.  Do you have a larger loan amount, or shorter time to repay, or incredibly high interest rate?
If the loan interest is only 1.75%, you are likely better to pay only the minimum and invest the extra.

Quote
...I did see the part that says "If your current marginal tax rate is 15% or less, prefer a Roth." Am I not in that marginal tax rate bracket? I thought I was.
You are, but there is also this part: "The following guidelines are relevant for most investors, e.g., they assume a marginal withdrawal tax rate of 15% or more. See below for explanations, and remember to check your own situation."

For your situation, you won't meet the "withdrawal tax rate of 15%" assumption if everything goes into a Roth, because you won't be paying any federal tax at all (and it appears you have no state tax).

Even with your maximum total SS payments of ~$3600/mo when you are both >65, you could have another ~$19,000 in ordinary income (e.g., from tIRA withdrawals) before paying any tax at all.  At a 4% withdrawal rate, it would take $19,000/0.04 = $475,000 in your tIRA account to reach that amount.

Prior to taking SS (and assuming you are both <65) you can have $39,250 in ordinary income (e.g., from tIRA withdrawals) and still pay only 10% federal tax.

See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ for more about making traditional contributions now, then doing Roth conversions later.

Dicey

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Re: Case study, version 2: so when are we FIRE'd?
« Reply #4 on: June 19, 2016, 10:15:35 AM »
I waded through this mountain of data and was kind of put off by how far you actually are from FIRE. Hold on - it was the middle of the night and I had insomnia while DH slept like a baby, so I might have been a little cranky.

In the warm light of day, my thoughts are kinder, but still, I strongly believe that your energy may be better spent focusing on simplifying and reducing your expenses in order to amass savings at a higher, thus faster, rate. Save like hell now and the retirement BBOM (Big Ball O'Money) will come. Too much focus on the end result might not be as helpful as intense scrutiny of your current lifestyle.

Asking when you're FIRE at this point is kinda like asking dad to go the bathroom again half an hour after getting gas. Answer: it's gonna be a while, so distract yourselves by counting out-of-state license plates, er, saving as much money as possible.

I don't mean this post to be discouraging. My point is that a slight change of focus might lead to better results, which will actually get you "there" faster.

meerkat

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Re: Case study, version 2: so when are we FIRE'd?
« Reply #5 on: June 19, 2016, 11:18:24 AM »
Thanks for the explanation MDM. For the car loan, your comment made me dig back and look at the actual paperwork and it's a $10k loan, not $5k, so I feel rather dumb. We are still paying extra on it because it's our only non-mortgage debt so psychologically it'd be nice to have that go away, plus the idea of investing is still off putting to my husband (and still kind of to me, too, but I'm making an effort to figure it out) so paying off a loan faster is something that's easier to wrap our heads around.

Asking when you're FIRE at this point is kinda like asking dad to go the bathroom again half an hour after getting gas. Answer: it's gonna be a while, so distract yourselves by counting out-of-state license plates, er, saving as much money as possible.

Ha! One of my favorite things to do on road trips is to see how many out of state plates I can find. One time I was at an intersection and there were not one but two North Dakota vehicles in different lanes, and we were in the wrong time zone for North Dakota vehicles to be common.

You make a good point but part of why I was asking was because of how much the number varied depending on a small amount of data, but no matter what I know it's going to be a long, long time before we're at FIRE. I was just trying to figure out if it's more like 15 or 25 years (I completely made up those numbers, but you get the idea). We definitely need to save more, but we're working on it bit by bit.

As I went to edit my first post I realized the tone of the title doesn't come through. I meant it to be more like ".... uh, what?" rather than "are we there yet?"
« Last Edit: June 19, 2016, 11:28:16 AM by meerkat »