Author Topic: Reader Case Study: Looking for a plan  (Read 1911 times)

alexb2746

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Reader Case Study: Looking for a plan
« on: September 21, 2016, 08:50:11 AM »
Life Situation:

I have always been decently frugal and good with finances im about to be 25; I got into MMM a few weeks ago and love it, my wife is slowly coming around, and we have no kids. The one unsettling thing right now is I am waiting on to see if I can get a better position within my company in a different state (Rent in Ohio now could be in North Carolina next year) this could also mean biking nearly year-round as well! My wife (A nurse so she can move anywhere age 24) & I are decently frugal on most things, currently renting (it’s too expensive but were stuck now unless I have the headache of breaking the lease for the new job) we are looking to buy a house next year. We both would like to retire early, she’s open to working part-time during this like teaching (something in nursing) at a local college or something. If I could move up into agile web development this could provide skills for remote part-time work as well for me, but of course all future speculation.

This will include both of us since we have everything together.

Gross Salary/Wages: 100k

Pre-tax deductions: Roth 401k – Currently at $4,200. $268 per paycheck (every two weeks 14% of pay) I get .80 cents for every dollar up to 5% of my pay. I will start my wife on this same plan as well once we buy a house, she doesn't get a match at her company until early next year.

Adjusted Gross Income: 72k ish without 401k

Current expenses:
Rent - $1026
Utilities: $95, includes water/sewer/trash and electricity
Phone - $35 for my wife and $10 for me on a family plan with my dad; I get $30 a month from my work for on-call rotation so essentially $15 
Car Insurance - $112/month – I turn 25 in a few weeks and with biking more I will be shopping soon for lower rates.
Health insurance: My wife is covered under her parents for 2 more years and I pay my dad $60 a month for mine until next year when I will have to get my own(age 26) 
Food - $400
Car tires – within a couple of months will need to spend probably around 600-700 from my research
Gas - $100 – I budgeted for 150 before but now biking everywhere I feel this should drop sharply until winter.
Internet - $40
Restaurants - $200 – This should be dropping to $80 I hope
Shopping - $20 – we usually do quite good here, I just bought jeans for $6 at goodwill
Misc costs: $150
Dog – could be potentially here within a year idk $40?

Total: 1758$ not including dog

Assets:
$5,000 emergency fund in the Ally money market account currently at 1%
Cash $3,000
Pension: $2200 – on average if I’m at my company for the next 10 years I will get about roughly $2000 grand a year in here. Though I don’t trust this is as private company pensions are quite rare, who knows if they will take this away?

I felt I should list these
Cars: 2010 ford fusion se 50k miles loan listed below.
2011 Chevy Silverado WT single cab long bed. 55k miles paid for in cash (got a great family deal on this) it’s been great to go kayaking and kayak fishing (nearly free activities) though after reading this blog I kind of regret it. I think I will wait till after we get a house before selling, since it could be very useful for cheap moving and if we get a fixer upper. I probably will drive less than 5k on this a year.

Liabilities:  We have one car loan that has 7k left at 209 a month payments, with most of the interest already paid and interest around 3% I don’t see a point in paying this off early.
Story: We got this towards the end of her college when I got a good job, as we needed a car for a long commute. This made sense at the time since living with parents was saving us a ton!

Specific Question(s):
How can we retire by 35 or 40? I basically want a solid plan here, the following are my ideas.
Looking at the $200,000 or less range for houses (also interested in fixer uppers since reading this blog) regardless at the end of our lease which ends July 31st 2017; we will have near a 20% down-payment (if less I’m sure we can get a loan with no PMI and quickly be up to 20% in equity) Plus if we want a house why rent any longer? So I want to get a 10 or 15 year mortgage.

I was really on board with paying this house of in about 4 years’ time even with our current incomes not rising. But now I wonder if I shouldn’t and invest that would be extra payments towards a vanguard index fund, while getting a 10 or 15 year mortgage?

I still want to put in the 14% of pay into my 401k along with my wife, by my calculations with a 3% raise annually we should each have a million when we are 60. This is if we put into it for 15 years with company matches being the same and at a 7% return.
So the above vanguard fund lasts till were 60, and beyond hopefully, along with part-time work. Then with a million in each 401k, that should easily last 40+ years if needed (I’m quite healthy and have had family members in the 90’s and 100’s.)

If we retired at 35, the 401ks together would be roughly 1.3 million (significantly lower) and we would have to contribute more to the vanguard fund or other things


My first time here I hope I didn't ramble too much and responses are definitely appreciated, thank you!
« Last Edit: September 21, 2016, 11:53:00 AM by alexb2746 »

nexus

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Re: Reader Case Study: Looking for a plan
« Reply #1 on: September 21, 2016, 05:05:44 PM »
Hey alexb2746,

I want a solid plan too! (26, single, M, SO and I have separate everything and don't live together)

Your annual expenses are $21,096 if you multiply your 1758 by 12. 25x that (4% rule) means you need a nest egg of $527,400 in order to be financially independent. Remember, average growth is 7%. 3% is eaten by inflation, which leaves 4% for the taking without ruffling any feathers. If either/both of you work PT, your nest egg can be smaller depending on how much more you need from investment income to make up the difference between work income and expenses.

First, slap yourself for lying to yourself. You have $150 going to Miscellaneous crap.  IDENTIFY THAT. Household items, car maintenance, whatever. Just have a better idea of what that goes towards. My Misc/variable category is eaten up by stuff that doesn't necessarily fit within my grocery list, like ...

Oh, wait, just saw that you ACTUALLY HAVE MORE BILL(S)!!
$209/month for car payment means puts you closer to $2,000/month in expenses or 24k/year.
Your new nest-egg target amount: $600k.

You mention a million bucks a couple different times in here, yet your annual expenses do not warrant needing that much of a nest egg at a 4% withdrawal rate.
if you had 1.3 million, a 4% withdrawal rate means annual income of $52k. Why do you need twice as much money in retirement as you are currently spending while working?
<scribble, scribble, scribble, crumple f** this starting over>

You need to...
1. Read more MMM articles and understand HOW MUCH YOU ACTUALLY NEED TO SAVE IN ORDER TO MEET YOUR CURRENT NEEDS/MAINTAIN YOUR STANDARD OF LIVING (Your target number. Again, Annual expenses x 12 = FI number)
2. SAVE AT LEAST HALF OF YOUR INCOME AND INVEST IT EACH MONTH, PAY PERIOD, WHATEVER
   2a.) There's a nifty FI calculator to show you how fast you can retire based on your savings rate. 50% savings rate means you're retired in about 10 years (or was it 8 years? I forget).
  2b.) The calculator provided by your 401k website calculates things THE CONSUMER SUKKA WAY, not the Mustachian way, which is why it tells you that you need way more money. The longer you work, the more they make off of you in fees.
3. READ ABOUT THE TRINITY STUDY AND ABSOLUTELY OWN THE 4% RULE.

Your cars are jokes. Its called a roof rack and a hatchback. Those two things can allow you to haul kayaks & any goodies you need to bring with them. But seriously, unless you have the hybrid Ford Fusion that gets close to 40mpg, you're wasting money. Two gas guzzlers, ew! You're in IT and your SO is a nurse. What use do you have for a truck? Also a MMM article on why AWD is not safer than FWD. #physicsbitch

Also face punch for still owing 7k on a car(or truck) that is 5 or 6 years old.

Also read MMM's rent vs buy article. Owning will most likely increase your annual expenses. Can't just call up the apartment office when something breaks.

Lastly, your nest egg shouldn't be all in your 401k. Most folks have their nest egg in a combination of :
- 401k(contributing up to the employer's match)
-Traditional or Roth IRA
- HSA
- Taxable Account

Then you have to do some rollovers (from 401k to IRA) and a conversion step ladder if you ever hope to touch this money before their required retirement thresholds. This is where I'm super fuzzy and need to do my own homework. I still have 5ish years to figure it out before I actually need to take action, so I'm not too worried about it yet. At this point, just start hoarding cash, invest with Vanguard, and do your homework.

TexasRunner

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Re: Reader Case Study: Looking for a plan
« Reply #2 on: September 21, 2016, 05:30:28 PM »




lol.

+1 to what nexus said.

Also, YOU NEED TO TRACK YOUR SPENDING.  This was key to me realizing where money was going and why.  Can I come over to your house, EVERY MONTH, take 150$ out of your wallet and burn it in front of you?...  I will seriously drive to Ohio from Texas to burn your money in front of you.  Every.  Single.  Month.

Mint.com, YNAB.com or something.  Just figure out a way to track it.

Did you binge-read the blogs hitting every post?  (Don't be ashamed- we all did it).  If so, go back and hit a few.  Especially the posts mentioned above.  Knoweldge is power.









Please note:  My usage of an Obama gif is in no way intended to derail this thread and is solely used for humorous and educational purposes.

MDM

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Re: Reader Case Study: Looking for a plan
« Reply #3 on: September 21, 2016, 10:07:16 PM »
alexb2746, welcome to the forum.  If we take your numbers at face value, you could be FI in ~10 years.  But first let's look at some details....

Gross Salary/Wages: 100k
Pre-tax deductions: Roth 401k – Currently at $4,200. $268 per paycheck (every two weeks 14% of pay) I get .80 cents for every dollar up to 5% of my pay. I will start my wife on this same plan as well once we buy a house, she doesn't get a match at her company until early next year.
Adjusted Gross Income: 72k ish without 401k
There are some inconsistencies here:
 - Roth 401k deductions are not pre-tax, they are after tax.
 - If you have no pre-tax deductions and no other income, your Adjusted Gross Income should be identical to your Gross Salary/Wages.

Quote
Health insurance: My wife is covered under her parents for 2 more years and I pay my dad $60 a month for mine until next year when I will have to get my own(age 26)
Well, this cost will be going up.  Any chance your wife's parents have an HDHP for their insurance?  If so, your wife may contribute the family maximum to her own HSA.

Quote
Specific Question(s):
How can we retire by 35 or 40? I basically want a solid plan here
You might start by estimating your likely expenses (in today's dollars) in retirement (e.g., medical will likely be higher), and putting your numbers in the case study spreadsheet.  For a more detailed estimate, then try one or more of Best and/or Recommended Retirement Calculator - Bogleheads.org.
 
Quote
Looking at the $200,000 or less range for houses (also interested in fixer uppers since reading this blog) regardless at the end of our lease which ends July 31st 2017; we will have near a 20% down-payment (if less I’m sure we can get a loan with no PMI and quickly be up to 20% in equity) Plus if we want a house why rent any longer? So I want to get a 10 or 15 year mortgage.

I was really on board with paying this house of in about 4 years’ time even with our current incomes not rising. But now I wonder if I shouldn’t and invest that would be extra payments towards a vanguard index fund, while getting a 10 or 15 year mortgage?
See Frequently Asked Questions under "Should I pay off my X% interest rate mortgage?"

Quote
I still want to put in the 14% of pay into my 401k along with my wife....
Why not $36K/yr into the 401ks and $11K/yr into IRAs?

alexb2746

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Re: Reader Case Study: Looking for a plan
« Reply #4 on: September 22, 2016, 10:12:23 AM »
Thanks everyone for the responses. I know do need a good kick in the a** for some stuff which I deserve.

I plan to hopefully change our vehicle situation early next year which I think can bring a lot more money towards a house; while simultaneously lowering our expenses. Your responses are really pushing me to do this. Honestly if we moved to a good location near my work and grocery store I wanted to go to a one car family. Lastly we definitely want a home, its just a better life for us v.s renting.

I have been budgeting a lot more closely this year and started doing every single transaction last month, so I am hoping to get the misc. expenses a little more under control. More specifically I like the post by MMM if its over $10 think on it and ask the significant other.

As far as housing after doing a little more research (thanks for the articles and FAQ links) I feel paying it off early makes me feel best and also gives a guaranteed return.

Based on all of this we should have a paid for house by the time I am 30 and SO at 29. By that time if we had a kid using MMM's article of a kid costing $300/month, our expenses should be 27000 a year (high estimate and obviously I hope to lower this). I love a big safety margin overestimating my expenses and under estimating my income.

Talking 401k/IRA I do not max it out, because I want to use more of my income toward the house then towards index funds and bonds for which we would retire on and maybe potentially one rental house if we try that route. Also to clarify what I meant by 401k calculator was just estimating what my stash would be, NOT what I need. But if we put in lets say 10% of our pre-tax income for 12 years with a starting balance of 4k, with company matches of 80% up to 5% of what we put in; we should have nearly 300k on a 7% return. If we left that there with a 7% return until we are 60 that would give us 1.3 million roughly. Why do I want this? For a big safety margin (Using a 2-3% safe withdrawal rate).

At this point there is a lot routes it seems we could go, like becoming landlords but below lets just assume investments like the vanguard fund MMM recommends.


Any extra any money from 30 to 37 would go into index funds and bonds to supply our early retirement from 37 to 60; which based on the above expenses we would need 625,000. At age 37 we would have 400,000 in them assuming a 7% return and this would reach that 625k number around the age 43 mark. As one or both us would probably be part-time covering nearly all of our expenses.

This all being hopefully conservative. I definitely hope to reduce are expenses as much as possible.

I hope this is a good future plan, I just wanted reinforcement from you more experienced and intelligent MMM members.

Thank you!

« Last Edit: September 22, 2016, 10:29:29 AM by alexb2746 »