Author Topic: Reader Case Study - Need to set a FI date, need investment strategies  (Read 3752 times)

jamesbond007

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Fellow Mustachians,

Here is my case study request. Rip it apart to shreds as needed. I am open to criticism.

Life Situation:

IRS Filing Status: MFJ (His age: 33, Her age: 29.5)
Dependents:  1 (Age: 2 yrs)
State of Residence: California

Gross Salary/Wages: $14583 per month (35000 per year bonus split into 2 payments once in April and once in October. Only had this kind of income since May 2016) (Her: 0 - Wife is a stay at home mom)

Pre-tax deductions:

401k: $2625 per month (This will max out before the year end anyway)
HSA: 0 (Plan to sign up in HSA starting Jan 2017)
FSA: 0
IRA: 0
Insurance: $264 per month (Includes dental+Vision for the 3 of us) (If I take HSA, then I move to a HD plan so premiums will be very low)

Other Ordinary Income:0

Qualified Dividends & Long Term Capital Gains: 0

Rental Income, Actual Expenses, and Depreciation: 0

Adjusted Gross Income: $14611 per month

Taxes:
Federal, state/local, and FICA: $3800 per month (Close approximation)

Current expenses: All expenses per month

Mortgage (P+I): $1680.50
Property Tax: $440
HO Insurance: $40

HOA: $313

Car Lease: $123 (Leased an EV for commute). Lease ends May 2019
Auto Loan: $0 (no auto loan)
Credit card debt: $0
Internet: $50
Phone bill: $50 (2 cell phones on Project Fi)
Software: $10
Home Entertainment: $35 (HBO Now, Netflix, Sling TV to watch Spanish league Soccer)
Movies: $0 (We don't go to the cinema. Wait till they show up on Netflix or HBO)
Games: $20 (This is the high end. We play a lot of board games. So I buy a game every other month or so. But this is close to the monthly average)
Eating out: $110 (Includes my lunch at work of $2.86 20 days a month and us eating out. We don't eat out that much)
Child Expenses: $200 (I almost never hit this amount but put this aside anyway)
Child pre-school: $600 (My wife is a stay at home mom. But we plan to send the LO to pre-school starting August so she can socialize with other kids. We'll probably send for a year or so and the stop)
Electricity: $40
Gas: $40 (My other car that my wife drives needs filling up about once a month. $40 is on the high end)
Travel: $200 (We love traveling. We take one big road trip each year)
Parents: $400 (I take care of my parents. Not backing down on this one)
Groceries: $250
Trash Service: $23
Car insurance: $167 (For 2 cars and 2 drivers. I feel this is a bit high. What do you think? I am with AAA)

Monthly Investment: $1000 (each month in vanguard)

Funny Money: $200 (Worst case scenario)


Expected ER expenses: $2100 per month (I initially thought ER meant emergency so gave a different number :)) COrrected it now.

Assets:

Employer 401(k): $130,000 invested in vanguard index funds
Taxable investments: $10,600 in Wealthfront, $40,000 in Vanguard 500 Admiral
Townhome: $440,000 (Last appraised in Jan 2016) (Have 20% equity)

Liabilities:
Mortgage Principal: $352,000
Original term: 360 months
APR: 4%
Months left: 354 months

My expenses have been like this for the past 2.5 years or so. I used to pay rent and now I pay mortgage.

Specific Question(s):
1. What am I doing wrong here?
2. Do you see any room for optimization and improvement?
3. What should my investments look like? Any suggestions?
5. When can I be FI?
4. I may have more questions that I will ask as I get to them.

Thanks.
« Last Edit: July 01, 2016, 11:13:10 AM by jamesbond007 »

jamesbond007

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Bump.

shuffler

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You're not using all your tax-advantaged options.

Yes, HSA as soon as you can.
Plus Backdoor Roth IRA for you & your wife.  $11k/year in total.
Plus "Mega" Backdoor Roth 401k, if your plan supports it.

I attempted to add your expenses, and compare them to your income.  17500 income vs. 12680 of outgo.  Where's the other $5k/mo?

Platypuses

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You're in good shape. I think trying to avoid lifestyle creep is the best thing you can do, especially since you just got a large raise in May.
I would max out the HSA, if your daughter stays in preschool next year contribute up to the max in a dependent care FSA.
Does your company match for 401k? If so you want to check that they true up their match since you are maxing out early.
Now might be a good time to consider refinancing, you could probably get an interest rate in the mid-upper 2's.
Your car insurance does seem high. What type of vehicles do you have? I see one is a lease on a electric vehicle. I would say look at combining your home and auto if you currently are not, but your homeowners insurace is already incredibly low.

nereo

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Quote
Specific Question(s):
1. What am I doing wrong here?
2. Do you see any room for optimization and improvement?
3. What should my investments look like? Any suggestions?
5. When can I be FI?
4. I may have more questions that I will ask as I get to them.

1) as shuffler said, you could be taking better advantage of your tax-advantaged accounts by utilizing backdoor and mega-backdoor strategies, plus funding an HSA if available.

2)Nothing really jumps out at me - your expenses seem reasonable

3) I'm a bit confused as to where the rest of your money is going.  You list your post-tax take home pay at ~$11,000k/mo, yet you only listed roughly $4k in expenses including your mortgage.  Where is the other $6k/month going?

5) you listed your ER expenses as "none - but set aside $25k just in case".  I'm not sure what that means.  How much per year do you think you will spend in ER outside of your mortgage?  With the expenses you have listed it looks like you could live on <$20k/year excluding the mortgage, but I suspect this isn't the case.  Presently it looks like you are saving roughly $30,000/year of your salary (your 401(k) + $1,000/mo to Vanguard).  At this rate and with your current savings you will hit the $1MM in roughly 14 years (adjusted for inflation).  If you are saving considerably more this number could be considerably less.  Is $1MM enough for you?  No idea - it will give you $40k/year @4%.  That's seems to fit your spending, but again, I'm not sure where all of your money is going.

4) please help me understand your monthly expenses a bit better. 

ZiziPB

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3) I'm a bit confused as to where the rest of your money is going.  You list your post-tax take home pay at ~$11,000k/mo, yet you only listed roughly $4k in expenses including your mortgage.  Where is the other $6k/month going?

5) you listed your ER expenses as "none - but set aside $25k just in case".  I'm not sure what that means.  How much per year do you think you will spend in ER outside of your mortgage?  With the expenses you have listed it looks like you could live on <$20k/year excluding the mortgage, but I suspect this isn't the case.  Presently it looks like you are saving roughly $30,000/year of your salary (your 401(k) + $1,000/mo to Vanguard).  At this rate and with your current savings you will hit the $1MM in roughly 14 years (adjusted for inflation).  If you are saving considerably more this number could be considerably less.  Is $1MM enough for you?  No idea - it will give you $40k/year @4%.  That's seems to fit your spending, but again, I'm not sure where all of your money is going.

4) please help me understand your monthly expenses a bit better.

I think OP said that this level of income is new to him - only for the last month or 2, so I think that explains the difference between income and expenses in the original post.

I agree with everyone saying that the OP needs to take advantage of any and all tax advantaged savings vehicles.  And dump the rest into Vanguard.  The OP's expenses look pretty much optimized, I don't see anything I would change there.

Choices

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I agree with HSA, Roth, etc. above. Once you max out your 401K you'll also be able to invest the $2625 somewhere else or pay down your mortgage.

For car insurance, see if one of your relatives has USAA and can get you in via referral. It's the best deal we've found by far.

I'm a little surprised that no one has mentioned your leased vehicle. The monthly payment is low, but is there a balloon payment at some point? What's your long-term plan for transportation?

jamesbond007

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Thanks for responses. I updated my income. There was some confusion because I slit my bonus into 12 and added that to my monthly income. That's why the difference I guess. I changed it now.

jamesbond007

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I agree with HSA, Roth, etc. above. Once you max out your 401K you'll also be able to invest the $2625 somewhere else or pay down your mortgage.

For car insurance, see if one of your relatives has USAA and can get you in via referral. It's the best deal we've found by far.

I'm a little surprised that no one has mentioned your leased vehicle. The monthly payment is low, but is there a balloon payment at some point? What's your long-term plan for transportation?

I am with AAA for auto and home owners insurance. I used to pay $100 per month for my car for 2 drivers. But since I got my leased EV it went up significantly. I will try to lower it. I am not a US citizen or a permanent resident yet. I know a couple of coworkers that have USAA I will ask for referral. Thanks for the advice. Never thought about it.

jamesbond007

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Quote
Specific Question(s):
1. What am I doing wrong here?
2. Do you see any room for optimization and improvement?
3. What should my investments look like? Any suggestions?
5. When can I be FI?
4. I may have more questions that I will ask as I get to them.

1) as shuffler said, you could be taking better advantage of your tax-advantaged accounts by utilizing backdoor and mega-backdoor strategies, plus funding an HSA if available.

2)Nothing really jumps out at me - your expenses seem reasonable

3) I'm a bit confused as to where the rest of your money is going.  You list your post-tax take home pay at ~$11,000k/mo, yet you only listed roughly $4k in expenses including your mortgage.  Where is the other $6k/month going?

5) you listed your ER expenses as "none - but set aside $25k just in case".  I'm not sure what that means.  How much per year do you think you will spend in ER outside of your mortgage?  With the expenses you have listed it looks like you could live on <$20k/year excluding the mortgage, but I suspect this isn't the case.  Presently it looks like you are saving roughly $30,000/year of your salary (your 401(k) + $1,000/mo to Vanguard).  At this rate and with your current savings you will hit the $1MM in roughly 14 years (adjusted for inflation).  If you are saving considerably more this number could be considerably less.  Is $1MM enough for you?  No idea - it will give you $40k/year @4%.  That's seems to fit your spending, but again, I'm not sure where all of your money is going.

4) please help me understand your monthly expenses a bit better.

For the ER expenses I take care of my parents too and they are old. As far as our own expenses we don't anticipate any. So I just set aside 25K for worst case scenarios. I don't have any as of now. But I don't want to contribute anymore toward emergency expenses because 25K seems about right for my needs.

ZiziPB

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Re: Reader Case Study - Need to set a FI date, need investment strategies
« Reply #10 on: July 01, 2016, 10:52:55 AM »
Quote
Specific Question(s):
1. What am I doing wrong here?
2. Do you see any room for optimization and improvement?
3. What should my investments look like? Any suggestions?
5. When can I be FI?
4. I may have more questions that I will ask as I get to them.

1) as shuffler said, you could be taking better advantage of your tax-advantaged accounts by utilizing backdoor and mega-backdoor strategies, plus funding an HSA if available.

2)Nothing really jumps out at me - your expenses seem reasonable

3) I'm a bit confused as to where the rest of your money is going.  You list your post-tax take home pay at ~$11,000k/mo, yet you only listed roughly $4k in expenses including your mortgage.  Where is the other $6k/month going?

5) you listed your ER expenses as "none - but set aside $25k just in case".  I'm not sure what that means.  How much per year do you think you will spend in ER outside of your mortgage?  With the expenses you have listed it looks like you could live on <$20k/year excluding the mortgage, but I suspect this isn't the case.  Presently it looks like you are saving roughly $30,000/year of your salary (your 401(k) + $1,000/mo to Vanguard).  At this rate and with your current savings you will hit the $1MM in roughly 14 years (adjusted for inflation).  If you are saving considerably more this number could be considerably less.  Is $1MM enough for you?  No idea - it will give you $40k/year @4%.  That's seems to fit your spending, but again, I'm not sure where all of your money is going.

4) please help me understand your monthly expenses a bit better.

For the ER expenses I take care of my parents too and they are old. As far as our own expenses we don't anticipate any. So I just set aside 25K for worst case scenarios. I don't have any as of now. But I don't want to contribute anymore toward emergency expenses because 25K seems about right for my needs.

Oh, I think I understand.   You are reading ER as Emergency?  It stands for Early Retirement.  So basically the question is what your budget will look like if you are FIREd.

jamesbond007

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Re: Reader Case Study - Need to set a FI date, need investment strategies
« Reply #11 on: July 01, 2016, 11:11:50 AM »
Quote
Specific Question(s):
1. What am I doing wrong here?
2. Do you see any room for optimization and improvement?
3. What should my investments look like? Any suggestions?
5. When can I be FI?
4. I may have more questions that I will ask as I get to them.

1) as shuffler said, you could be taking better advantage of your tax-advantaged accounts by utilizing backdoor and mega-backdoor strategies, plus funding an HSA if available.

2)Nothing really jumps out at me - your expenses seem reasonable

3) I'm a bit confused as to where the rest of your money is going.  You list your post-tax take home pay at ~$11,000k/mo, yet you only listed roughly $4k in expenses including your mortgage.  Where is the other $6k/month going?

5) you listed your ER expenses as "none - but set aside $25k just in case".  I'm not sure what that means.  How much per year do you think you will spend in ER outside of your mortgage?  With the expenses you have listed it looks like you could live on <$20k/year excluding the mortgage, but I suspect this isn't the case.  Presently it looks like you are saving roughly $30,000/year of your salary (your 401(k) + $1,000/mo to Vanguard).  At this rate and with your current savings you will hit the $1MM in roughly 14 years (adjusted for inflation).  If you are saving considerably more this number could be considerably less.  Is $1MM enough for you?  No idea - it will give you $40k/year @4%.  That's seems to fit your spending, but again, I'm not sure where all of your money is going.

4) please help me understand your monthly expenses a bit better.

For the ER expenses I take care of my parents too and they are old. As far as our own expenses we don't anticipate any. So I just set aside 25K for worst case scenarios. I don't have any as of now. But I don't want to contribute anymore toward emergency expenses because 25K seems about right for my needs.

Oh, I think I understand.   You are reading ER as Emergency?  It stands for Early Retirement.  So basically the question is what your budget will look like if you are FIREd.

Ah, I see. I got confused. I still read ER as Emergency :)

So I've been on this budget roughly for about 2.5 years from now. So we got pretty used to it. I will just keep this budget as is when I FIRE'd. In fact my mortgage payments would go down to $0 then. I guess it will only be better.

nereo

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Re: Reader Case Study - Need to set a FI date, need investment strategies
« Reply #12 on: July 01, 2016, 12:12:02 PM »
got it!  Glad we are all on the same page now.

Ok, the short, short answer to #3 ("when can I be FI") is: Whenever you have enough investments to generate $2,100/mo ($25,200/year).  If we are going to use the common and conservative 4% WR, that's when your investment accounts hit $630,000.  Your numbers assume no mortgage (i believe) based on your expected expenses.

so: how long will it take to get there? Well that depends on how much you save and what kind of returns you get.  You are a bit new to this income level so it's still unclear to me how much you will sock away each month, but let's assume you keep your spending ~constant and aim to pay off your home at the same time you will hit FI (often not the best strategy, but these are broad assumptions here).
Currently you are contributing $30k to savings (a combination of Vanguard and your 401(k).  Keeping your expenses the same you can increase your mortgage payments and investments by just over $9k/month. 
If you increased your monthly savings by $2,333/mo and put the remainder towards your mortgage you will be FI and mortgage free in about 6 years.

THat's just a rough calculation, and assumes 6% returns, a constant salary, etc.  Taxes are likely to have a big impact as well. 

jamesbond007

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Re: Reader Case Study - Need to set a FI date, need investment strategies
« Reply #13 on: July 01, 2016, 12:37:11 PM »
got it!  Glad we are all on the same page now.

Ok, the short, short answer to #3 ("when can I be FI") is: Whenever you have enough investments to generate $2,100/mo ($25,200/year).  If we are going to use the common and conservative 4% WR, that's when your investment accounts hit $630,000.  Your numbers assume no mortgage (i believe) based on your expected expenses.

so: how long will it take to get there? Well that depends on how much you save and what kind of returns you get.  You are a bit new to this income level so it's still unclear to me how much you will sock away each month, but let's assume you keep your spending ~constant and aim to pay off your home at the same time you will hit FI (often not the best strategy, but these are broad assumptions here).
Currently you are contributing $30k to savings (a combination of Vanguard and your 401(k).  Keeping your expenses the same you can increase your mortgage payments and investments by just over $9k/month. 
If you increased your monthly savings by $2,333/mo and put the remainder towards your mortgage you will be FI and mortgage free in about 6 years.

THat's just a rough calculation, and assumes 6% returns, a constant salary, etc.  Taxes are likely to have a big impact as well.

Makes sense. My spending on an average is constant. If I spend more a certain I cut down the next month to compensate. I am planning to pay an extra $600 on mortgage starting August. So I would be mortgage free in about 20 years. I could certainly payoff more but I am on a Visa and don't have a green card yet. So if the worst happens I have to go back to where I came from. So I like to keep cash on hand. But I'll leave my 401K and other investments here so they grow. My daughter is a US Citizen so when she becomes 18, we can all move back here and I'd be ready to be FI. But again, that's the absolute worst thing that could happen.

tonysemail

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Re: Reader Case Study - Need to set a FI date, need investment strategies
« Reply #14 on: July 02, 2016, 08:20:27 AM »
College savings in a 529 plan may be worth a look.

Refinancing mortgage is good.  But it's worth asking if there is any penalty when doing so less than 12 months into your current mortgage.   Recently my refinances came with 12 month requirement

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Re: Reader Case Study - Need to set a FI date, need investment strategies
« Reply #15 on: July 02, 2016, 08:46:01 AM »
Ok, the short, short answer to #3 ("when can I be FI") is: Whenever you have enough investments to generate $2,100/mo ($25,200/year).  If we are going to use the common and conservative 4% WR, that's when your investment accounts hit $630,000.  Your numbers assume no mortgage (i believe) based on your expected expenses.
...

Don't forget to add in health insurance, which I assume now is through your employer.

ltt

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Re: Reader Case Study - Need to set a FI date, need investment strategies
« Reply #16 on: July 02, 2016, 10:37:01 AM »
I estimated about $7500 in expenses, yet around $11,000 or so in net income per month.  Where's the additional money going?