Author Topic: Case study: Cleared out debt, analyze saving and plan please!  (Read 1406 times)

austinwolv

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Case study: Cleared out debt, analyze saving and plan please!
« on: September 18, 2018, 09:28:35 AM »
Topic Title: Case study whats your opinion on next steps for investing/efficient money & tax placement and if Im missing opportunities?

Life Situation:
Married, filing joint, 2 children of age 11 and 8.  Reside in Texas.   Current age 41 & 40.  Desiring to retire from main career at 52-54, semi-interested in P/T work learning a trade.  Spouse is in similar mindset, possibly leave career earlier to pursue different P/T work & more family time.

Gross Salary/Wages: 
16,900/monthly

Individual amounts of each Pre-tax deductions 401k, HSA, FSA, IRA, insurance, etc.:
Medical plans - $286/mo
Dental - $17/mo
Vision $1.42/mo
401k $1541.67/mo (maxed over course of year)
403b 1541.67/mo (maxed over course of year)
HSA individual through work - $2.17/mo
Supplemental life ins through work - $35.53
FSA dependent care - $416.66/mo ($5000 per year)
Total: $3842.13

Other Ordinary Income:  Yearly bonus of 22% on one wage = gross $2016/month
Qualified Dividends & Long Term Capital Gains:  n/a
Rental Income, Actual Expenses, and Depreciation:  n/a

Taxes:
Fed withholding - $1592/mo
FICA - $1245/mo
No state tax.
Property tax $633/mo
Total: $3470

Current expenses:
Childcare - $803/mo
Gyms - $154/mo
Internet - $72/mo (Last I checked, there are only two 'net providers to our 'hood, I'll need to check on that again)
Streaming (Netflix, YTTV) - ~$51
Cellphones - $123/mo -> $90/mo shortly  (been researching other local options, local reviews of other services are discouraging)
HOA - $49.50/mo
Mortgage - $771/mo
Groceries/household supplies - $860/mo
Gas/tolls - $380/mo
Utilities - $322/mo
Medical - $100/mo
Auto Maintenance - $133/mo
Home maintenance - $83/mo
Clothing - $120/mo (need to study this one further)
Kids sports/lessons - $160/mo
Spouse/girls hair/hygiene - $175/mo (Spousal disagreement ongoing)
School supplies - $14/mo
Pets - $9/mo
Gifts year - $295/mo
Auto/life/home insurances - $309/mo
Yearly subscriptions - $48/mo
Vanguard investment - $1000/mo
529 plans - $625/mo
Travel/vacation fund - $500/mo
Home remodel fund - $600-$1000/mo
Special vacation fund - $70/mo
New cellphones fund - $33/mo
Dining out/entertainment - $275/mo
Babysitter - $50/mo
Hobby - $500/mo
Fun money - $150/mo
Total: $8832-9232

Expenses estimated in a couple years:
$8000-$8400/mo

Expenses estimated >2-3 years:
$7000-7500

Expenses estimated at retirement: (studying to reduce further)
$6250/mo

Assets:
Vanguard taxable brokerage - $6100 (currently all VTSMX)
Roth IRA spouse - $20k (US stock 83%, US bond 12%, other 3%)
Roth IRA - $27k (US stock 73%, US bond 12%, REIT 12%, other 3%)
Rollover IRA - $235k  (US stock 59%, US bond 12%, intl stock 20%, REIT 7%, other 2%)
401k $148k (US stock 50%, intl stock 28%, US bond 19%, other 3%)
403b - $207k (US stock 56%, Intl stock 24%, US bond 8%, intl bond 1%, REIT 8%, other 3%)
403b match - $46k (same as above)
529 plans $16,300
Cash emerg fund - $20, 500
Cash funds/bills - $31,000
Overall allocations:  US stock 58%, Intl stock 21%, US bond 11%, Intl bond 1%, alternatives 6%, cash 3%
Total: $756k

Liabilities:
Mortgage principal - $144k.  Original amount $168k at 3.875%, 21 years remaining IIRC.
Credit cards actively used, but no debt + paid off monthly in full + all spending tracked & backed by cash.  Balance is ~$5k.

Specific Question(s):
September 2017, we had CC debt, a car payment, a replacement wedding ring payment, and were basically paying bills from check to check.  Got sick of that, changed spending/expenses and mindset, got everything paid off.  Started saving more, planning more, and investing.  Teaching the kids about investing, opened UGMA accounts at VG that they are contributing to..
Been doing a lot of reading, but looking to learn more and optimize better still.  No, not mustachian yet, more like YNABian currently.
Not interested in real estate investing at this time.
Financial order plans:  Saving for home remodel.  Then used vehicle replacement in ~2-3 years + 20yr anniversary vacation.  Help/teach the kids to fund their VG accounts.

Currently maxing 401k/403b and then investing in Vanguard taxable brokerage (total stock market index fund) and the 529 plans monthly.   
  • Not contributing to Roth IRA due to income level, not contributing to rollover IRA (from a job change 10 years ago) since it isnt deductible, and have not done backdoor Roth with the rollover IRA due to concern about tax implication since the balance has been building up for so long.  When it was rolled over from the job change, it was ~$80k as I recall it.  Am I looking at that correctly?
  • Was thinking that directing investment money into taxable brokerage (index funds) at VG would allow for flexibility to access income as needed before age59.  Is that reasonable?
  • As the VG brokerage funds build up, Id reallocate the IRA and 401k/403b accounts to gradually increase the bond and REIT holdings for tax efficiency.  Yes/no?
  • I realize that cutting more expenses would free up considerably more.  Were working on that as a family, i.e. what we value, travel, etc.  Suggestions?
  • Do you see other opportunities Im missing?

Further edits:
Rollover IRA is being rolled into 401k.  Opening up T-IRA for backdoor Roth for Spouse1.
Opening up T-IRA for backdoor Roth for Spouse2.
HSA is being maxed by Spouse2.

Spouse2 does not have 457 plan available.
Spouse1 401k does not permit after-tax contributions.

Bargaining with gym for reduced rate.
Bargaining with 'net provider for rate reduction.
Reduced grocery/household fund and monitor.
Reduced clothing fund.
Reduced gifts/holidays fund.
« Last Edit: September 20, 2018, 10:50:57 AM by austinwolv »

ysette9

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #1 on: September 18, 2018, 10:39:09 AM »
Expenses that stick out to me include hair/hygiene, kids’ clothes, and groceries. Can you get those down? I buy pretty much all of my clothes and clothes for my kiddos on ThredUp which doesn’t cost much. Your internet also seems high. Can you call them up and threaten to cancel to see what better deals they can give you?

austinwolv

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #2 on: September 18, 2018, 12:06:45 PM »
Updated the post to be easier to read and add up totals.

Groceries - edited to include household supplies (cleaning, etc.).
Internet - yes, AT&T is stupid high around here.....last I knew, only one other provider served our neighborhoods, need to check up on that again.
Cellphones - that will drop another $33 in about a month, as we had a payment plan earlier since it was bought new (silly, I know......  Live and learn.....won't be doing that anymore).
Clothing +hair/hygiene - Ongoing debate with spouse.

Thanks for replying!

Unique User

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #3 on: September 18, 2018, 01:54:30 PM »
I would go through line by line and each month try to cut an item until it is uncomfortable.  Clothing, food, gym, hobby, girls hair/hygiene, fun money all could be cut down.  Check out whether the spouse with the 401k has access to a mega backdoor Roth.  My spouse has access to one and I'm kicking myself for not looking into it sooner.  His has a limit on percentage of earnings that can be contributed so we can't max it.  Does the spouse with the 403b also have access to a 457 plan?  If so I think you can put the max in both.  I find it easier to say no to luxuries the more we have taken out of our paychecks, we put around $7500 into savings every month and my income is slightly lower.  How much sooner do you hit freedom if you save more than the $37k annually you detailed below and is that important to you?  If you are okay with the 10 years, then stay the course, if not, ramp it up and see how quickly you can hit the number.  We're 18 months away, but I wish we could quit tomorrow.

MDM

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #4 on: September 18, 2018, 02:10:44 PM »
  • Not contributing to Roth IRA due to income level, not contributing to rollover IRA (from a job change 10 years ago) since it isnt deductible, and have not done backdoor Roth with the rollover IRA due to concern about tax implication since the balance has been building up for so long.  When it was rolled over from the job change, it was ~$80k as I recall it.  Am I looking at that correctly?
  • Was thinking that directing investment money into taxable brokerage (index funds) at VG would allow for flexibility to access income as needed before age59.  Is that reasonable?
  • As the VG brokerage funds build up, Id reallocate the IRA and 401k/403b accounts to gradually increase the bond and REIT holdings for tax efficiency.  Yes/no?
  • I realize that cutting more expenses would free up considerably more.  Were working on that as a family, i.e. what we value, travel, etc.  Suggestions?
  • Do you see other opportunities Im missing?
1. Roll the IRA into the 401k/403b, then do backdoor Roth.  If only one of you has money in a tIRA, the other can do a backdoor Roth now.
2. It's reasonable but so is the use of the backdoor Roth, contributions to which may also be withdrawn at any time without tax or penalty.
3. You can if you wish.  See Tax-efficient fund placement - Bogleheads.
4. Why only a pittance to the HSA?
5. See Investment Order for general suggestions.

For cash flow purposes, check that your withholding is ~correct.  In general, aim for ~$0 (plus/minus a few hundred is reasonable) owed/refunded when filing.

marty998

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #5 on: September 18, 2018, 03:23:32 PM »
I would go through line by line and each month try to cut an item until it is uncomfortable.  Clothing, food, gym, hobby, girls hair/hygiene, fun money all could be cut down.

I noticed this one too. Innocuously listed as $500 a month - that's $6,000 a year! If you're spending that much, it's probably time to look for a different hobby, because that requires a 'stache of $150,000 @ 4% in retirement to maintain.

megge6537

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #6 on: September 18, 2018, 06:28:38 PM »
$3500/yr in gifts?

austinwolv

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #7 on: September 18, 2018, 10:13:13 PM »
I would go through line by line and each month try to cut an item until it is uncomfortable.  Clothing, food, gym, hobby, girls hair/hygiene, fun money all could be cut down.

I noticed this one too. Innocuously listed as $500 a month - that's $6,000 a year! If you're spending that much, it's probably time to look for a different hobby, because that requires a 'stache of $150,000 @ 4% in retirement to maintain.

;)
Let's just say I'm involved in a competitive activity at a national level, i.e. I'm good at this particular activity.  You'll scoff, but that expense has already been pared back from past years.  I enjoy it greatly and it brings joy, friendships, travel, and memories to my life, so I'm going back and forth on how much value to place on it compared to later life.  That expense is tentatively accounted for in the post-retirement expense roll-up, so I know the number needed to sustain it, although participating in that hobby is physically not feasible/sustainable once hitting a certain age.

Quote
$3500/yr in gifts?
Yes, current snapshot in time that we're working on to change.

Quote
Does the spouse with the 403b also have access to a 457 plan?
No
Quote
Check out whether the spouse with the 401k has access to a mega backdoor Roth.
Double-checking with the 401k provider, thank you.

Quote
1. Roll the IRA into the 401k/403b, then do backdoor Roth.  If only one of you has money in a tIRA, the other can do a backdoor Roth now.
2. It's reasonable but so is the use of the backdoor Roth, contributions to which may also be withdrawn at any time without tax or penalty.
3. You can if you wish.  See Tax-efficient fund placement - Bogleheads.
4. Why only a pittance to the HSA?
5. See Investment Order for general suggestions.
1.  Good catch, thank you.  Pursuing both immediately.
2.  Thank you.  Got it, given the distro rules, ok.
4.  Will check with the plan, don't believe we've looked into it adequately due to not being eligible previously.
5.  Got it, thanks.

Quote
I buy pretty much all of my clothes and clothes for my kiddos on ThredUp which doesnt cost much
Interesting, thanks, will share with the family.
« Last Edit: September 18, 2018, 10:17:53 PM by austinwolv »

Finances_With_Purpose

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #8 on: September 18, 2018, 11:39:26 PM »
You ask questions at two levels here, big picture and little picture.  I'll start small.

With the little picture, you could lower many expenses.  The hobby (that's a lot, relatively speaking), gifts, vacations, clothes, and so on.  You realize you have a lot that you *could* trim.  The home remodel, for instance: do you *really* need it?  How long are you willing to work to have it? 

You could also max out the HSA: that's another free tax-advantaged account (arguably one of the best) that's sitting unused. 

As for big picture, I ran a few numbers.  With almost no fat for random things in life (like special assessments, etc.) you're running at around $109k/year expenses.   To maintain that, you'd need $3.12M at 3.5%, which is safer, or $2.73M at 4% SWR. 

And, I just realized, that's *without* accounting for taxes: $3.12M.  If we include taxes, you're looking at a good deal more than that to keep this lifestyle, closer to $4-5M.

Either way, you're a long way away from your goal without cutting expenses, and you're not on track to make it in 10-15 years.  You make enough that you can spend a lot and still feel like you're saving a lot, but it's worth considering how much life energy those expenses are worth, especially those you want to keep long-term. 

Kudos to you for killing your debts and moving the right way.  I don't want to discourage you as you're moving the right direction. 

If it were me, I would cut more on my lifestyle and live on less *now* - until reaching more financial goals - and *then* begin adding things back in over time, as I had more financial flexibility.  Or spread things out: do vacations, but farther apart (or less exotic) and so on.  At the very least, I would consider what future goals I'm trading in favor of what current spending. 

Unique User

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #9 on: September 19, 2018, 07:54:52 AM »
I would go through line by line and each month try to cut an item until it is uncomfortable.  Clothing, food, gym, hobby, girls hair/hygiene, fun money all could be cut down.

I noticed this one too. Innocuously listed as $500 a month - that's $6,000 a year! If you're spending that much, it's probably time to look for a different hobby, because that requires a 'stache of $150,000 @ 4% in retirement to maintain.

;)
Let's just say I'm involved in a competitive activity at a national level, i.e. I'm good at this particular activity.  You'll scoff, but that expense has already been pared back from past years.  I enjoy it greatly and it brings joy, friendships, travel, and memories to my life, so I'm going back and forth on how much value to place on it compared to later life.  That expense is tentatively accounted for in the post-retirement expense roll-up, so I know the number needed to sustain it, although participating in that hobby is physically not feasible/sustainable once hitting a certain age.

Then cut other expenses.  Check out http://fireagecalc.com/.  Just by putting in your current age, annual savings (is there more than just $37k, two 18.5k per year?), current spending rate and current savings, you are at 58-59 before you can retire.  To hit retiring at 52, you need to be saving $100k per year at your current spending rate. 

austinwolv

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #10 on: September 19, 2018, 02:58:44 PM »
You ask questions at two levels here, big picture and little picture.  I'll start small.

With the little picture, you could lower many expenses.  The hobby (that's a lot, relatively speaking), gifts, vacations, clothes, and so on.  You realize you have a lot that you *could* trim.  The home remodel, for instance: do you *really* need it?  How long are you willing to work to have it? 
You are correct, we are evaluating those items and ways to be more efficient cutting them.

You could also max out the HSA: that's another free tax-advantaged account (arguably one of the best) that's sitting unused. 
It will be maxed going forward; we did not have exposure to it in past work plans, but now that spouse's work does, so we'll max it.  Unfortunately that was overlooked as only being "active" with minimal funding to get a company deposit on the account.

As for big picture, I ran a few numbers.  With almost no fat for random things in life (like special assessments, etc.) you're running at around $109k/year expenses.   To maintain that, you'd need $3.12M at 3.5%, which is safer, or $2.73M at 4% SWR. 
I should have clarified above that the current expenses are NOT to be maintained.  With living very well down the road, expenses were estimated at $75k.  That is with little effort to trim further, which is easily doable upon looking at my spreadsheet again....will need to rework it.  In addition, some of the expenses are set to drop off as well in near future, such as childcare, hair/hygiene, clothing, remodel fund.......those dollars will be allocated to savings instead.

And, I just realized, that's *without* accounting for taxes: $3.12M.  If we include taxes, you're looking at a good deal more than that to keep this lifestyle, closer to $4-5M.
I will go study this more......

If it were me, I would cut more on my lifestyle and live on less *now* - until reaching more financial goals - and *then* begin adding things back in over time, as I had more financial flexibility.  Or spread things out: do vacations, but farther apart (or less exotic) and so on.  At the very least, I would consider what future goals I'm trading in favor of what current spending.

Yes, agree, need to sit down and sort out the next steps plan, as our starting milestones have been hit....

Above in italics, thanks for the feedback!
« Last Edit: September 19, 2018, 03:00:59 PM by austinwolv »

lhamo

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #11 on: September 19, 2018, 03:15:38 PM »
Wow -- if this is your spending AFTER paring down I shudder to think what it looked like before.

Agree that you can easily cut 2-3k/month off this level of spending and still live a very high quality life aligned with your values.  It just requires being a bit more mindful/disciplined.  Have you ever read Your Money or Your Life?  Calculating your Real Hourly Wage and doing the spending/values alignment exercise might help you focus in on the areas that can easily be cut more.

Your college savings seems a bit skimpy for your income/kids ages.  How much longer will you have the high childcare costs?  Maybe you can't add more now, but I would plan to shift at least some of that childcare spending to college savings as your kids get older.  The earlier you save the more time you have for it to compound, though.

austinwolv

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #12 on: September 20, 2018, 10:34:12 AM »
I would go through line by line and each month try to cut an item until it is uncomfortable.  Clothing, food, gym, hobby, girls hair/hygiene, fun money all could be cut down.

I noticed this one too. Innocuously listed as $500 a month - that's $6,000 a year! If you're spending that much, it's probably time to look for a different hobby, because that requires a 'stache of $150,000 @ 4% in retirement to maintain.

;)
Let's just say I'm involved in a competitive activity at a national level, i.e. I'm good at this particular activity.  You'll scoff, but that expense has already been pared back from past years.  I enjoy it greatly and it brings joy, friendships, travel, and memories to my life, so I'm going back and forth on how much value to place on it compared to later life.  That expense is tentatively accounted for in the post-retirement expense roll-up, so I know the number needed to sustain it, although participating in that hobby is physically not feasible/sustainable once hitting a certain age.

Then cut other expenses.  Check out http://fireagecalc.com/.
Thank you, I did and it shows age 53.36.  As someone pointed out above, I believe I need to sit down and dig through expected taxes in more detail.

annual savings (is there more than just $37k, two 18.5k per year?)
No, min of $49k per year on the *current* expenses list above.  That does not include additional $5k from FSA dependent care reimbursement.  In the next 2-4 years, that savings/investing amount will also be increased as the expenses being set aside for funds listed will be freed up to go to savings instead, unless we choose to not do remodel for example, which means that money would then get invested.....

current spending rate and current savings, you are at 58-59 before you can retire.
I edited info above and in the original post that the current spending rate will not be sustained.  My planning shows a $1k drop in monthly expense in 1.5 years, then down by $1800/mo by 3 years.


Hi, thanks for responding.  Please see italics above for my responses.

austinwolv

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Re: Case study: Cleared out debt, analyze saving and plan please!
« Reply #13 on: September 20, 2018, 10:48:07 AM »
Wow -- if this is your spending AFTER paring down I shudder to think what it looked like before.
If you are referring to my comment above about paring down the competitive hobby/sport in which I participate?  Yes, quite a bit but have further plans to reduce travel costs to the events which are a significant portion of that overall cost hit.  Other than that, as I said earlier, the sport/hobby is one that I've found much value and quality of life/people in, plus I'm proud of the work I've put in to obtain the skill level that I've achieved.  That being said, it is an expense upon which I sometimes get monetary ROI, but not enough to cover it, so I'm still working to reduce costs.  As I age, I'm anticipating that cost further being reduced since I doubt I'll be traveling as much to said events.

Have you ever read Your Money or Your Life?  Calculating your Real Hourly Wage and doing the spending/values alignment exercise might help you focus in on the areas that can easily be cut more.

Not yet.  It is on the list of books I maintain however.  Getting there.....

Your college savings seems a bit skimpy for your income/kids ages.  How much longer will you have the high childcare costs?
Hitting a school change next year, so depending on schedule & maturity of the oldest, likely another 1-2.5 years.

Maybe you can't add more now, but I would plan to shift at least some of that childcare spending to college savings as your kids get older.
Yes. 


Thanks for responding.  I've responded in italics above.