Author Topic: Case Study: What should I do?  (Read 2847 times)

m5mulli

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Case Study: What should I do?
« on: January 23, 2014, 05:25:16 PM »
Background: I have been working in a steady IT job for the last 7 years. I had the traditional though that retirement would never happen, but recently I have com across this and now I am curious what I could do to retire early, say by 40.  Also my wife is disabled and draws ssdi.

Family:
    Me: 28
    Her: 31
    Children: 7 yr old boy

Income:
    My Salary: $72,000
    Her Salary: $17,000 (SSDI)

    Total: $89,000

Assets:
    House: $119,000
    Previous employers 401k account: $32,000 - Changed jobs in November and I havent dont anything with it yet. Everything is set at default.
    Current employers 401k account: $0 - Company matches .50 up to 6%. Haven't setup due to researching options.

    Vehicles (no payments):
        2005 Sonata: $3,000
        1998 Ranger: $2,000
        1991 Mercedes: $4,000

    Total: $160,000

Loans:
    Mortgage: $110,000 @ 4% (Just refinanced down from 6% )
    Student Loans:
        Me: 13k @ 7%
        Her: 2k @ 7%

    Total: $125,000

Monthly costs: ( I have gotten rid of useless things like TV. But I am still working on reducing my food bills )
    Internet:   $75
    Cell:   $160
    POE:   $24
    Mortgage:   $725
    Electricity:   $90
    Food:   $600
    Water:   $50
    Misc Child:   $100
    Propane:   $50
    Gas:   $200
    Netflix:   $10
    Car Insurane:   $100
    Student Loan:   $221
    Medical:   $200

    Outgoing Total: $2,605
    Incoming Total: $5,200.00
    Left Over: $2,595

Specific Question(s):
What would be my best bet for investment? What debt should I get rid of first? Will it be achievable for me to retire by 40?
« Last Edit: January 23, 2014, 07:10:25 PM by m5mulli »

Heart of Tin

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Re: Case Study: What should I do?
« Reply #1 on: January 23, 2014, 05:40:13 PM »
Welcome to the forums!

Please post the rates on the student loans. You should pay off the highest interest debt first; that's likely to be one these two loans.

Have you read this post (http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/) from MMM yet? Are you sure your expenses are accurate? According to MMM's simple math you're about 15 years from retirement with a 57% savings rate at your currently state monthly expense level ($3,000/$5,200 = 57% savings rate). Cut your food budget in half, and you'll be at a 63% savings rate which means that you can retire before 40.

iamlindoro

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Re: Case Study: What should I do?
« Reply #2 on: January 23, 2014, 05:43:33 PM »
Places to cut costs:

Food: Your costs for three are way crazy insano high.  It should be closer to half this much.
Cell Phone: $30-40 per line from an MVNO, max.  Less if possible.  See the "SuperThread" on this topic, which can help you find the right MVNO to allow you to user your existing phone and get the best deal.
Car Insurance: Way, way too much here per month.  On such old cars you should be liability only.  It's costing you almost as much a year as the Ranger is worth!  Which brings me to my next point...
Too many cars: You have a car for every human in your house, including the 7 year old.  Sell one.  Ideally, sell two.

Where are your monthly fuel/gas costs on the three cars?

Investment:

You're both quite young.  If I were your age I would be investing very aggressively (I invest aggressively anyway) at nearly 100% total market index funds.  Best read on the topic:

http://jlcollinsnh.com/stock-series/

Debt payoff:

You didn't tell us the rates of your Student loans.  Start with whatever's highest, unless they're all extremely low (under 3%) in which case they're an inflation hedge and you should pour everything into investments.

m5mulli

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Re: Case Study: What should I do?
« Reply #3 on: January 23, 2014, 05:47:25 PM »
Sorry on not posting the student loan rate. They are both at 7%. Gas is usually 150 - 200 a month. I have a 17 mile commute to work, my wife stays home most days.
« Last Edit: January 23, 2014, 05:54:37 PM by m5mulli »

iamlindoro

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Re: Case Study: What should I do?
« Reply #4 on: January 23, 2014, 05:49:51 PM »
At 7% they're pretty much on the bubble versus the average long term market return of the total US market.  Since there's so little left and a decent excess, I personally might pay the student loans off completely, it should only take 6 months.  If you get really motivated and can take on a side hustle to make extra money, I bet you could do it in 4-5 or even less.

m5mulli

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Re: Case Study: What should I do?
« Reply #5 on: January 23, 2014, 05:58:24 PM »
Ok. What do you think I should do with my 401k from my previous employer?

Heart of Tin

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Re: Case Study: What should I do?
« Reply #6 on: January 23, 2014, 06:02:11 PM »
Gas is usually 150 - 200 a month.

That's a huge amount to have forgotten. I'll reiterate, are you sure that your expenses are accurate? Other budgetary categories to consider: clothing, car maintenance (like oil changes), medical copays/coinsurance, Christmas and birthday gifts, haircuts, household goods, personal care products (like razors and toothpaste), travel expenses, etc.

For your 401k, do you have any index funds available? If so, please give us details like the expense ratio and the benchmark for the fund.

iamlindoro

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Re: Case Study: What should I do?
« Reply #7 on: January 23, 2014, 06:04:18 PM »
Ok. What do you think I should do with my 401k from my previous employer?

It really depends on how the options are in the old account versus the new account.  If the old account has great, low fee total market funds (such as those from Vanguard or parallel funds like SWTSX from Schwab, FSTMX from Fidelity, etc.) you might opt to just leave it there.  If the new 401k has great options and the old one doesn't, you might roll into the new 401k.  If you're not 100% satisfied with either, you can open an IRA anywhere you like (most here would suggest Vanguard, once you read the jlcollins stock series you'll have a good understanding of why) and roll the old 401k in there.

What you absolutely SHOULD do, yesterday, is contribute however much you need to max out your employer match at your current company.  You're leaving free money on the table right now, and you lose more every day.

m5mulli

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Re: Case Study: What should I do?
« Reply #8 on: January 23, 2014, 07:02:42 PM »
I just finished setting up the 401k deductions. It is crazy how little I know about how to invest in 401k.

m5mulli

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Re: Case Study: What should I do?
« Reply #9 on: January 23, 2014, 07:14:01 PM »
I also updated my figures above to be more accurate. I never budgeted in things like clothes, because we hardly ever buy them. But I do have a bucket in there for miscellaneous things that go on with  my son (school, etc).

But lets say I have 2k at the end of every month. What should I do with it? Invest in a index fund? Push more pre-tax into my 401k?

iamlindoro

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Re: Case Study: What should I do?
« Reply #10 on: January 23, 2014, 07:45:49 PM »
Invest in a index fund? Push more pre-tax into my 401k?

They aren't mutually exclusive-- You should invest in a total US Market index fund *in* your 401k.  More or less the order of investment should go Max out employer match, max out 401k completely, Max out Roth IRA, max out HSA if available, then taxable accounts.

m5mulli

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Re: Case Study: What should I do?
« Reply #11 on: January 24, 2014, 06:29:59 AM »
Ok. Now if I dump all my money into these types of accounts, what do I do if there is an emergency? Will I have to pay a penalty to get my money out?

golfer44

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Re: Case Study: What should I do?
« Reply #12 on: January 24, 2014, 07:57:48 AM »
Ok. Now if I dump all my money into these types of accounts, what do I do if there is an emergency? Will I have to pay a penalty to get my money out?

401k yes, Roth IRA you can withdraw contributions penalty free.

Read up on emergency funds and decide what fits best for you, and what amount. Might be cash, Roth, money market, etc, and enough for 6 months, 9 months, 1 year...

Try to kick the debt out before you put too much in this emergency fund, IMO.
"I like turtles" -Jonathan

m5mulli

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Re: Case Study: What should I do?
« Reply #13 on: January 24, 2014, 10:38:05 AM »
Ok. I have a plan to pay off all my debt besides my mortgage. It should take me less than a year.

Based on that, I have run these calculations and I have some questions. Note: these calculations do not take annual wage increases into account.

Annual Spending   $24,216.00
Annual Savings   $25,224.00
Roth IRA contribution per yr   $5,500.00
401k contribution per yr w/em   $19,660.00
Annual Savings minus Roth   $19,724.00

Quesions:

1. What should I do with the extra $19k. I was thinking maybe invest at least 10k a year and reinvest the dividends until I reach retirement.
2. Since I want to retire early should I max out the 401k or just get employer match and invest the rest?
3. Should I bother with a Roth IRA?
4. Lets say I keep the 401k and Roth, what do I do with them when I want to retire early? Wont there be big penalties?


iamlindoro

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Re: Case Study: What should I do?
« Reply #14 on: January 24, 2014, 10:48:14 AM »
I'll say again-- read the JCollins Stock series.  It answers literally every one of these questions, in a very digestible format. 

1 + 2) If you want to retire early, max out your 401k, then your roth, in that order.
3) Yes!  It's more tax-sheltered money.  Why wouldn't you bother with it?  Any time you avoid taxation, it's *free money*
4) Read the JCollins stock series.  Also read the main MMM article on the strategies most here use/plan to use to get money out of 401(k)s without penalties (http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/).  In short, no, there won't be penalties if you use a strategy to avoid them, and if you're debt free at retirement your expenses should be lower, and thus the amount you need to pull out annually will be lower, and therefore your level of taxation on that "income" will be miniscule (or for some people, nonexistent).

Wanderer

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Re: Case Study: What should I do?
« Reply #15 on: January 24, 2014, 10:58:45 AM »
You don't have to decide instantly what to do with your surplus and old 401k, forever and ever, amen.  I think you might have some decision paralysis?  Like if you're not sure what to do right now, you don't do anything?  (Like not setting up your 401k right away.)  Most of the time there are intermediate steps you can take, or ways to dial back or change directions later. 

I don't see that you have your current cash balances listed?  Do you have any savings for emergencies?  I know a lot of people here prefer to rely on a Roth IRA, investments, and credit cards in case of a sudden huge expense or change in income, but I personally would prefer to start out with a pile of cash.  If you don't have any emergency savings I personally would not proceed to invest your entire surplus immediately because you could easily lose a huge chunk of it if the market takes a plunge.  If you need an emergency fund of $20k and you have $50k in your brokerage account already, that's fine, but if you need $20k, only have $20k, and put it all in your brokerage account and 2008 happens again at the same time you get laid off, that would be very bad. 

If you have no emergency fund I'd split your surplus between savings and paying down those loans, at least until you get enough cash on hand to cover a sudden big expense like a new roof, unexpected medical bills, or car replacement. 

I can't judge regarding the cars because we have three too (but we're not looking to retire early), but you might consider whether you need them around, especially if your wife doesn't have a commute and doesn't go out many days.  It might make sense to keep the Sonata and Ranger for commuting and carting stuff around in, respectively.  Does the Mercedes maybe have sentimental value? 

doyouknowwhy

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Re: Case Study: What should I do?
« Reply #16 on: January 24, 2014, 02:18:56 PM »
Where's property taxes and homeowners insurance?  No life insurance?

m5mulli

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Re: Case Study: What should I do?
« Reply #17 on: January 24, 2014, 03:36:59 PM »
Property taxes and insurance are included in the mortgage. I have company provided life insurance and I purchase an additional 300k through my employer. (This is on my list to research)


Mazzinator

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Re: Case Study: What should I do?
« Reply #18 on: January 24, 2014, 05:50:51 PM »
You can also fund a Roth ira for your wife, even if she doesn't work for a total of $11k/yr.

Great job so far!!!
"This is the life I chose or rather the life that chose me." - Jay-Z

m5mulli

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Re: Case Study: What should I do?
« Reply #19 on: January 25, 2014, 09:49:26 AM »
Ok, so I have made a little progress and now I cant decide what to do.

I have a short term plan to pay off all my debt (accept for mortgage) and save about 15k for emegency and 30k for investing. This should take me less than two years.

Now for the problem. I want to try and retire by 40, which leaves me 12 years minus the two to pay everything off so really only 10 years to invest. At the same time I am investing I will be making early payments on my house to have it payed off by the end of the 10 years.

Option 1:
  • Contribute enough to employer 401k to get full match. After the 12 years I will stop contributing and allow it to grow until I am 65 (should be about $635,058)
  • Pump 5.5K a year into a Roth IRA
  • Since I already have a emergency fund. Invest about 30k each year into VTSMX which should get me about 600k in the 10 years if I get 8% return

Option 2:
Everyone recommends dumping all I can into 401k and Roth IRA's. But I wont be able to withdraw anything from them until retirement age.
I have this plan defined, but it only leaves me 10k a year to invest. If I create a Roth for my wife as well, it will only leave 5.5K to invest

Are there more options? What would you guys do?

I know its early and I have to pay everything off still, but I would like to have my 12 year plan ready to go.

Also, I do plan to work a little during my early retirement. I was planning on working enough to max out a roth ira each year or for extra vacation money.

iamlindoro

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Re: Case Study: What should I do?
« Reply #20 on: January 25, 2014, 12:27:20 PM »
Everyone recommends dumping all I can into 401k and Roth IRA's. But I wont be able to withdraw anything from them until retirement age.
I have this plan defined, but it only leaves me 10k a year to invest. If I create a Roth for my wife as well, it will only leave 5.5K to invest

Man, I am begging you.  Please, please go read the JCollins Stock series, linked in my first response above.  It will take you like an hour to read every word, and you will have a better basic understanding of why what's being recommended works, and how each account type functions.  There, and several times in this thread, we've explained that you *can* access that money early using methods like the Roth IRA pipeline, or SEPP.  Also, Roth contributions can be taken out penalty free at any time.

You've gotta get your fundamental understanding squared away.  You can do it in one place, today.  MMM himself is in his 30s and lives partially from the money his 401k-- he can do it, countless people here on the forums do it, and so can you.

m5mulli

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Re: Case Study: What should I do?
« Reply #21 on: January 27, 2014, 12:07:26 PM »
Ok. All read up. Using the roth ira conversation ladder is a great idea. Are people actually doing this and paying no interest like the post says?

What is a safe gains percentage to use when forecasting my 401k and vanguard index fund investments. I have been using 8% for both. With a 4% conversion/withdraw rate each year after retirement.

iamlindoro

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Re: Case Study: What should I do?
« Reply #22 on: January 27, 2014, 02:42:55 PM »
Ok. All read up. Using the roth ira conversation ladder is a great idea. Are people actually doing this and paying no interest like the post says?

Paying no penalties, yes.  Lots of people here doing it.  Interest isn't something you pay on your own money :)

What is a safe gains percentage to use when forecasting my 401k and vanguard index fund investments. I have been using 8% for both. With a 4% conversion/withdraw rate each year after retirement.

This is a point of some debate, but the average annual gain from the inception of the market to today is somewhere around 11%, so it's 8% adjusted for inflation  Basically, if you project using 8% over a longish period, you can roughly approximate what amount you'd have in today's dollars.  Some years will be much worse, some will be much better.  Just because you have a bad year (like 2008) or an exceptionally good year (like 2013) doesn't mean you deviate-- you stay the course, because that figure is the average over the long time frame.

4% withdrawal rate means that you would effectively never touch the principal (and in fact, if the number above hold, would have more money every year).  It's also key to be flexible and be ready to turn down or up that amount as financial conditions require.
« Last Edit: January 27, 2014, 03:27:12 PM by iamlindoro »

m5mulli

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Re: Case Study: What should I do?
« Reply #23 on: January 27, 2014, 03:28:55 PM »
Sorry I meant taxes not interest, but penalties are also on my mind.

iamlindoro

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Re: Case Study: What should I do?
« Reply #24 on: January 27, 2014, 03:36:32 PM »
Sorry I meant taxes not interest, but penalties are also on my mind.

You will always pay income tax on anything you take from your 401k, whether you do it at 40 or 70.  The idea is to retire debt free such that you don't need that much income to maintain your quality of life, so your taxed income drops to negligible amounts (or potentially, to nothing).  The Roth IRA pipeline is what helps you avoid paying early withdrawal penalties (10%)

Think about it this way-- if you make 100k a year, you're taxed on 100k a year.  But if you're saving a huge portion of that and only need 25K a year to cover all your costs, you retire and only pull out 25K a year... now your taxable income is vastly smaller (and depending on your situation, you might owe the government nothing at all, qualify for healthcare subsidies, etc.).
« Last Edit: January 27, 2014, 03:41:43 PM by iamlindoro »

m5mulli

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Re: Case Study: What should I do?
« Reply #25 on: January 28, 2014, 05:42:43 PM »
Hopefully this is my last question. And thanks for all the help btw.

Ok so I retire at 40. I have no job. I have money in my roth to last me 5 years. So I draw out 14k from contributions. Then I go to roll over say 4% of my traditional ira into my roth ira so it will last indefinitely.

My question is. Would the 14k be counted as income and affect my trad ira to roth ira conversation?

iamlindoro

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Re: Case Study: What should I do?
« Reply #26 on: January 28, 2014, 05:51:15 PM »
Hopefully this is my last question. And thanks for all the help btw.

Ok so I retire at 40. I have no job. I have money in my roth to last me 5 years. So I draw out 14k from contributions. Then I go to roll over say 4% of my traditional ira into my roth ira so it will last indefinitely.

My question is. Would the 14k be counted as income and affect my trad ira to roth ira conversation?

You can always withdraw the contribution portion of a Roth IRA without penalty, and without taxation.  You paid the taxes on the Roth contributions when you earned the money, so the government doesn't tax you again on that amount.

m5mulli

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Re: Case Study: What should I do?
« Reply #27 on: January 28, 2014, 06:14:36 PM »
No I mean on the money I convert from an ira to roth ira. I am wondering how income tax is calculated when doing the conversion when I dont have a job.

iamlindoro

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Re: Case Study: What should I do?
« Reply #28 on: January 28, 2014, 06:17:52 PM »
No I mean on the money I convert from an ira to roth ira. I am wondering how income tax is calculated when doing the conversion when I dont have a job.

It's calculated like any other income.  If you roll over 14K for the year and live on money from the Roth, then your annual income is $14K.  If that's your income as a married couple for the year, you'd be in the bottom tax bracket and would likely end up owing little to nothing.