Author Topic: Birthday Gift for my Wife - Please gift her (us) your wisdom.  (Read 1685 times)

peachfuzz2018november

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Birthday Gift for my Wife - Please gift her (us) your wisdom.
« on: October 27, 2018, 08:46:37 PM »
This is the first of a few gifts for my wife's birthday. We are fairly new to the FI community, and want to start smart.


Life Situation:
Momma Bear (MB)– 39 (Single Filing)
Papa BJJ (PB) - 37 (head of household filing status)
(the accountant we use puts a child on each filing)
2 dependents (3y/o, 8 months)
Live in Wisconsin

Gross Salary/Wages:
MB – $12k
PB – $97k

Total Monthly take home - $5400

Individual amounts of each Pre-tax deductions:
MB- Roth IRA - $100 per month. Was with New York Life Mutual Funds, in process of moving it over to Vanguard (not clear about this process yet either of moving it over)

PB- 401k – with John Hancock (I know)– maxing out contribution – currently have @19,954 (15.6k my contribution, 4.3k my employer contribution)
Currently have it in JH Multimanager Aggressive Lifestyle Portfolio, which has returned my me a whopping 3%!
Best options within JH appear to be:
Vanguard Mid-Cap Growth ETF (VOT) @ .73% Expense Ratio
Vanguard Growth Index Fund (LGI) @ .65%
500 Index Fund (IND) @ 64%

Flex Spending Account - ~$15 a paycheck


Rental Income, Actual Expenses, and Depreciation:
Condo in Florida –
Principal Balance - $96k
Monthly Payment - $1083 principal/tax, $372 association fee
Currently rented for $1700 monthly
Gross profit of $245 a month

Parking Spot in condo building - $50 a month

Adjusted Gross Income:
MB - $10k - 2017
PB – $80k – 2017
 

Taxes:
MB- no taxes withheld
PB - $5965 Federal
$4500 State

Current expenses:

Mortgage-
  – P&I: $481, T&I $320
Homeowners insurance- 78
Gas/electric - $135
Internet- $48
Water - $73
Groceries - $850
Dining out - $100
Entertainment - $20
Phones - $30
Gas/fuel - $120
Car insurance - $52
Contribute to Roth IRA- $100
Brazilian Jiu Jitsu - $120
Travel - $100
Miscellaneous - $250

Total - $2,877

Assets:
2010 Toyota Sienna – $10,500 
2012 Toyota Prius C - $7,500
House – owe $99k  at 3.75% interest rate, ($200k Zillow value)
Condo – owe $96k @ 3.375% interest rate, ($250k Zillow value)
Parking spot in condo – worth ~6k
Savings account -- $25,000

MB – Roth IRA  $29k
PB – 401k $20k


Liabilities:
PB - $112,000 in student loans @6.8% interest, currently in National Health Service Corp (NHSC) loan repayment program, and in process of enrolling in 10 year public student loan forgiveness program.
NHSC has given me 70k towards the loans to date. Plan to continue in the program until my loans are forgiven in ~7 years.

Specific Question(s):
1. We would like to reach FIRE in 7-8 years, what would you do if you were us to get there?
2. Which John Hancock plan should I put my funds?
3. What should we do with our $25k in bank? Max out roth IRA? Start one for PB? Thinking about picking up another rental property or Vanguard Index funds?
4. Any other suggestions/advice?

« Last Edit: October 27, 2018, 08:52:35 PM by peachfuzz2018november »

reeshau

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Re: Birthday Gift for my Wife - Please gift her (us) your wisdom.
« Reply #1 on: October 28, 2018, 06:34:49 AM »
You seem to have your current situation engineered to keep yourself eligible for loan forgiveness.  But, you need to accumulate significantly more in investments to FIRE so quickly--you have a good emergency fund, but relatively small retirement plans, and no other savings to tide you over until IRA eligibility or mega backdoor output.  You also have not really spelled out your retirement plans--do you assume no changes?  Do you expect significant changes?  Any answer depends on your plans after retirement, of course.

Some specifics:

My comment on qualification is around your tax filing.  I assume you mean married filing single, not just single, correct?  If so, you should revisit your tax plans with all the changes this year.  If MB makes $12k, she is fully covered by her personal exemption this year, and does not need to claim a child.  But, even so, that is getting you 10% savings, while you on the other hand are paying 22%.  It sounds like you have quite a complicated tax situation, but do you know it is worthwhile?  Have you specifically calculated taxes filing in a more traditional way, to know what it is getting you, if anything?  (Conventional wisdom says a large income disparity benefits from MFJ)

The condo in Florida is not grossing much, and probably is netting zero.  Does this feature into your retirement plans somehow?  I would say you would be better off from a FIRE perspective to sell it and invest,  but in either case I assume retirement gets you down to one property.  If you specifically are looking for rental property in retirement, I would review the profitability here, particularly factoring in long-term costs like repair / remodeling and a vacancy fund.

You have young children; what are your intentions for providing for their education?  You can make a big impact with actions you take now, since they are so young.

You are currently grossing $109k, and you listed expenses are under $35k.  So where is the rest going?  Maybe this is a recent development, but I would expect a lot more taxable savings.  (In particular, since you are not maxing Roths)

Chrissy

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Re: Birthday Gift for my Wife - Please gift her (us) your wisdom.
« Reply #2 on: October 28, 2018, 07:42:23 AM »
Get rid of the condo and follow the investment order: https://forum.mrmoneymustache.com/investor-alley/investment-order/.

peachfuzz2018november

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Re: Birthday Gift for my Wife - Please gift her (us) your wisdom.
« Reply #3 on: October 28, 2018, 08:57:34 AM »
Momma Bear is sad. Says that condo is in a prime and centrally located spot in Miami. Current tenant has been great, has signed 2 yr. leases each cycle. Momma bear is emotionally attached to condo, since she bought it thinking she'd live there the rest of her life.

reeshau

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Re: Birthday Gift for my Wife - Please gift her (us) your wisdom.
« Reply #4 on: October 28, 2018, 02:13:31 PM »
Life is about priorities.  You asked about FIRE, which is not about hanging on to real estate for sentimental reasons.  You can choose the other way, as well.

Gone_Hiking

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Re: Birthday Gift for my Wife - Please gift her (us) your wisdom.
« Reply #5 on: October 28, 2018, 03:22:31 PM »
In a nutshell: your goal is ambitions and if you are going to get there, you need to change your approach.

While your expenses seem reasonable, you list only MB's Roth IRA and your own IRA contribution as directed specifically towards savings.  That's less than 16% of your income.  Where is the rest of the money going?  While you are not starting at zero, in order to provide $3800 per month*, you will likely need around $1.2 million, which leaves you with $1.1 million gap to fill.

I'm not stating it can't be done, but it will not happen with your current savings rate.    What you need to do is take a realistic look at how much you can increase your savings and draft projections from there.  I agree with @Chrissy that the condo in Florida does not help FIRE cause.  Vacation rentals in remote locales are prone to instability in rents, taxes, and maintenance costs. If you sold it today, you could net a nice $150 K that would shrink the gap above to less than million dollars.  @reeshau asks valid questions about
 its primary purpose. 

*I took the opportunity to add future health insurance premiums; this is only an estimate, actual costs will depend on survival of Obamacare or a replacement

Freedomin5

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Re: Birthday Gift for my Wife - Please gift her (us) your wisdom.
« Reply #6 on: November 01, 2018, 05:10:35 AM »
Use FIREcalc to calculate how much you need to save and when you can retire.

Also, why has no one face punches you for spending ALMOST $1000 PER MONTH ON FOOD?!!?!

And finally, I’d put the 25k in index funds. It’s more “set it and leave it”. Rental properties require management which equals time.

tralfamadorian

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Re: Birthday Gift for my Wife - Please gift her (us) your wisdom.
« Reply #7 on: November 01, 2018, 10:31:15 AM »
Also, why has no one face punches you for spending ALMOST $1000 PER MONTH ON FOOD?!!?!

This. You also have lots of unaccounted for income that is not making it into savings unless the current expenses listed or the income level are new.

I also agree that the condo is an anchor. Do you plan on living in the condo with your two kids when you FIRE? If not, then it should go.

Peachtea

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Re: Birthday Gift for my Wife - Please gift her (us) your wisdom.
« Reply #8 on: November 04, 2018, 08:26:24 PM »
You should not rely on your accountant and should also look at your tax filing situation yourself. It’s a good practice in general, but also based on the info you’ve provided it doesn’t make any sense for you file separately in 2018 (and probably didn’t in 2017.) My back of the envelope maths (based on info provided) estimates you will pay over 4K more in taxes and SL payments by filing separately.

As shorthand, your wife’s expected gross income is 12k and the standard deduction is 12k, which effectively wipes out her income towards your AGI if filing jointly. You lose a lot of possible deductions by filing separately, including the $2500 SL deduction (which is an above the line deduction and lowers your AGI). That automatically makes your AGI lower by filing jointly. And SL income based payments are based on AGI. Plus they are based on #of family members, so having more people under your tax filing lowers your payments.

https://www.betterment.com/resources/married-filing-separately/

Also, your wife made 12k and I don’t see any deductions (like 401k) that would maker her MAGI below 10k. If you file separately and make more than 10k you cannot contribute to a Roth IRA. (Under 10k is phased out so you would want to check that as well, even if she gets below 10k MAGI). All the contributions are then counted as excess contributions and taxed every year you keep them in Roth IRA at 6%.

https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2018

What do you mean by enrolling in PSLF? There is no enrollment. Do you mean sending your employer cert form? Or switching to an income based plan? If you plan on consolidating loans be very careful about that, b/c it starts the clock over on PSLF. I’m not sure what it would do for NHSC, but you would want to make sure there were no negative consequences for that as well.

Cpa Cat

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Re: Birthday Gift for my Wife - Please gift her (us) your wisdom.
« Reply #9 on: November 05, 2018, 06:05:33 AM »
This is the first of a few gifts for my wife's birthday. We are fairly new to the FI community, and want to start smart.


Life Situation:
Momma Bear (MB)– 39 (Single Filing)
Papa BJJ (PB) - 37 (head of household filing status)
(the accountant we use puts a child on each filing)

This is not a defensible tax position if you're actually married and living together.

If you're using the term "wife" loosely and aren't actually considered married, then it's fine.

If you are legally married, but living separately for the last 6 months of the year, then it's fine.

But if you are considered married by your state (includes legally getting married and commonlaw) and you live together, then you can't file the way you're filing. Married Filing Jointly or Married Filing Separately are your only options. Married people do not have the option to choose Single or Head of Household in order to maximize tax benefits.

Unique User

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Re: Birthday Gift for my Wife - Please gift her (us) your wisdom.
« Reply #10 on: November 05, 2018, 08:58:01 AM »
I wouldn't invest any more in rentals, but I understand the emotions.  DH thought rental property was the answer, I disagreed, but we still have two (one bought as a rental and one our old primary house).  After this last hurricane, DH finally agrees with me to sell them.

I'd put money in a Roth or a traditional - you need to run the tax consequences.  Your income might be low enough to get the deduction.  I'm in the process of putting our cash emergency fund into our Roth month by month using DH's mega backdoor option.  Bonus, it can also be used for college. 

Your savings rate is really low and although most of your expenses look okay, your grocery/restaurants bill is out of control.  7-8 years is really optimistic especially given your low savings rate.  We plan to quit our corporate jobs in early 2020, just 11 years after starting and we had a positive net worth to start with.  Since 2010, we've lived on half our incomes (or less, we'll hit a 58% post tax savings rate this year) and socked the rest away.  At this point we could quit now, but DD starts college in 9 short months and I'm in OMY land.   

Edited to add some reading on the grocery bill, these are old, just google MMM forum and grocery spending for more:
http://www.mrmoneymustache.com/2012/03/29/killing-your-1000-grocery-bill/
https://forum.mrmoneymustache.com/ask-a-mustachian/how-do-you-guys-get-such-a-low-food-budget/
https://forum.mrmoneymustache.com/welcome-to-the-forum/how-do-you-keep-your-grocery-budget-low/

And if you want to join a challenge to reduce your grocery bill
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/reduce-your-grocery-spend-2018/150/
« Last Edit: November 05, 2018, 09:20:58 AM by Unique User »