Case Study - FI Checkpoint

[jamesbond007]

IRS filing Status: MFJ
Dependents: 1 (age 6)
State: California


Annual Gross Salaries:
Me:
Salary: 185,000
Bonus: 37,000 (20% of base)


DW:
Salary: 12,000 (DW lost her job 6 months ago due to COVID. So I am not including her salary in any calculations until she finds another job or decides to DoorDash)


Total Annual Gross (incl. bonus): 227,000


Pre-tax deductions(Annual):
401K: 19,500
Medical/Dental/Vision: 4200


Adjusted Gross Income: 203,300

Taxes:
Total Taxes taken out of paychecks: 46,322 (Before any potential returns after filing)


Current Expenses per month:

Mortgage (P+I)   $1,605.00
HOA   $323.00
Property Tax   $508.00
Home Insurance   $42.00
PG&E   $55.00
Gas   $100.00 (Worst case scenario. Usually around $50)
Groceries   $400.00
Restaurant   $0.00
Phone bills   $35.00
Internet   $55.00
Trash Fees   $30.00
Laundry   $15.00
Netflix   $13.00
YouTube Premium   $15.00
Amazon Prime   $5.00 (Shared account)
Amazon Kindle Unlimited   $10.00
OneDrive   $9.00
Zwift   $15.00
DD Art Class   $70.00
DD Karate Class   $170.00
DD Kiwi Co   $15.00
Miscellaneous   $300.00
DD Budget    $200.00
Parents Support   $400.00 (Non-negotiable. Parents in an other country)
DW Life Insurance   $30.00 ($500K 30 yr term life)
Car Insurance   $200.00
Charity   $150.00
Travel        $200.00

Note: DD Budget and Miscellaneous budget is to cover for cloths, shopping, etc. Unused gets rolled over to next month. Been rolling this over for 8 months due to COVID. No expenses there. Same with Travel.

Total Monthly Expenses: $4,970


Assets:
Cash: 45,000 (33,000 Checking. 12,000 Savings)


Previous Employer 401k: 217, 610 (Invested in Vanguard Target 2050. Through Empower)
Current Employer 401K: 171, 250 (Invested 100% in FXAIX through Fidelity 401K)
Robinhood: 48,760
Wealthfront: 15,580
Vanguard (Me): 239,670 (100% VTSAX)
Vanguard (DW): 63,618 (100% VTSAX)
Vanguard Roth IRA (Me): 30,545 (100% VTSAX)
Vanguard Roth IRA (DW): 30,637 (100% VTSAX)


Total Invested: $817,670


Gold: 17,000 (approximate as of 8/20/2020)
House: 550,000 (According to Zillow and based on recent comp as of 8/30/2020)
Car 1: 12,000 (Estimate) - Paid off car
car 2: 52, 300 (Estimate) - Paid off car (I splurged here but don't regret this as I saved for this and paid it off in cash)


Total Approximate assets (If you call car an asset):  $631,300
Liabilities:
Mortgage Balance remaining: $321,344 (APR: 3.625%, 30 year fixed. Exactly 26 years remaining)  - In the process of refi with 2.625% for 30 yr fixed)
Current PITI+HOA: $2478 per month
PITI+HOA (After refi): $2178 per month (This will be the payment from October 2020)
Credit cards debt: $1,225 (This will be paid off in full every month)
No Student loans
No Other debts anywhere


I currently max out on backdoor Roth IRA for DW's and my account every year.

Questions:
1. Based off my calculations for 2.5% SWR, I am on track  to FI in about 12 years @ the current savings rate of about 60%. Am I thinking this straight? (Please note that I have not included DWs salary in this at all. She can bring in an additional $1000 per month pre-tax)
2. Are my monthly expenses too much?
3. I plan to pay off my house by FI date but included my mortgage payment as is to factor in for health insurance. Is this the right way to handle this?
4. According to SSA, I am eligible for about $3500 per month of social security but who am I kidding. Do you even consider this?
5. Anything else I am missing?
6. Any other comments?


Thank you.

[ixtap]

Could you please go back and fix the code on the table?

[jamesbond007]

Could you please go back and fix the code on the table?

Fixed. Sorry. Copying from my spreadsheet messed up the formatting.

[ixtap]

Your budget doesn't seem to include any sinking costs, like car maintenance or replacement, home maintenance, medical expenses...

The individual categories look pretty good; I think the only one that surprised me was DD's budget above and beyond activities. I am jealous of your PG&E, even though my bill keeps telling me I run a super efficient home.

Have you looked into health insurance costs? We know exactly what COBRA will be for us, for example. For us, that will be less than your mortgage payment.

We don't count SS. Neither of us expects to have more than 20 years of credits and if it is there, it will be a nice buffer. Moreover, DH has to get through at least 20 years before collecting, so we might as well have a plan that gets us by on life without it.

All in all, a 2.5% withdrawal rate puts a lot of bumpers in place for you. And 12 years is plenty of time to figure out your details.

[jamesbond007]

Your budget doesn't seem to include any sinking costs, like car maintenance or replacement, home maintenance, medical expenses...

The individual categories look pretty good; I think the only one that surprised me was DD's budget above and beyond activities. I am jealous of your PG&E, even though my bill keeps telling me I run a super efficient home.

Have you looked into health insurance costs? We know exactly what COBRA will be for us, for example. For us, that will be less than your mortgage payment.

We don't count SS. Neither of us expects to have more than 20 years of credits and if it is there, it will be a nice buffer. Moreover, DH has to get through at least 20 years before collecting, so we might as well have a plan that gets us by on life without it.

All in all, a 2.5% withdrawal rate puts a lot of bumpers in place for you. And 12 years is plenty of time to figure out your details.

DD Budget, I added in there to be more conservative. It usually doesn't get spent. This is me preparing for my worst case scenario. I don't plan to RE. I will work for another 13 years at most. DW and I plan to DoorDash to earn extra cash and DW job might bring in another $1000 per month which I did not factor in this.

I have a small house so my PGE bill is low.

About COBRA: How to check? I currently assumed $1600 for the 3 of us, which is my mortgage payment.

[ixtap]

Your budget doesn't seem to include any sinking costs, like car maintenance or replacement, home maintenance, medical expenses...

The individual categories look pretty good; I think the only one that surprised me was DD's budget above and beyond activities. I am jealous of your PG&E, even though my bill keeps telling me I run a super efficient home.

Have you looked into health insurance costs? We know exactly what COBRA will be for us, for example. For us, that will be less than your mortgage payment.

We don't count SS. Neither of us expects to have more than 20 years of credits and if it is there, it will be a nice buffer. Moreover, DH has to get through at least 20 years before collecting, so we might as well have a plan that gets us by on life without it.

All in all, a 2.5% withdrawal rate puts a lot of bumpers in place for you. And 12 years is plenty of time to figure out your details.

DD Budget, I added in there to be more conservative. It usually doesn't get spent. This is me preparing for my worst case scenario. I don't plan to RE. I will work for another 13 years at most. DW and I plan to DoorDash to earn extra cash and DW job might bring in another $1000 per month which I did not factor in this.

I have a small house so my PGE bill is low.

About COBRA: How to check? I currently assumed $1600 for the 3 of us, which is my mortgage payment.

DH's W2 has the imputed income for HI. Since Megacorp pays 100%, we just divide by 12. Frankly, that number is going to change so much over your time period, that your method is as good a place holder as any.

[MrThatsDifferent]

Questions:
1. Based off my calculations for 2.5% SWR, I am on track  to FI in about 12 years @ the current savings rate of about 60%. Am I thinking this straight? (Please note that I have not included DWs salary in this at all. She can bring in an additional $1000 per month pre-tax)
—I’m not sure why you’re doing 2.5% SWR, seems ultra-conservative. With a typical 4%, you’ll be FI in 10 years if you didn’t add a cent to your investments. Always your call though but you’ll easily be FI, though you’re going to keep working so, yeah, you’re fine here.
2. Are my monthly expenses too much?
—Subjective question. For many of us, yes, of course. However, you’ve got the money, you’re spending it on the things that matter to you, you’re not carrying debts and you don’t seem stressed. One thing to note is that many of these expenses will drop away, so you should create the budget of life 13 years from now to get a sense of what truly needs to be covered.
3. I plan to pay off my house by FI date but included my mortgage payment as is to factor in for health insurance. Is this the right way to handle this?
—always up to you, no right or wrong way here. Since you’re not rushing RE and your finances are solid, I guess your plan is fine.
4. According to SSA, I am eligible for about $3500 per month of social security but who am I kidding. Do you even consider this?
—I don’t depend on it, consider it bonus money. Many do though. You’re not going to “need” it, you’ll have plenty come 65.
5. Anything else I am missing?
—HSA?529? Are you using all the vehicles to get the most out of your money? Plan for DD’s future education ?
6. Any other comments?
—I get the sense you’re super conservative and plan for worst case scenarios. Is your job guaranteed for the next 13 years? What if something happened? What’s your plan? Also, what do want to do when you eventually retire? How does your DW feel about the plans?

[jamesbond007]

Questions:
1. Based off my calculations for 2.5% SWR, I am on track  to FI in about 12 years @ the current savings rate of about 60%. Am I thinking this straight? (Please note that I have not included DWs salary in this at all. She can bring in an additional $1000 per month pre-tax)
—I’m not sure why you’re doing 2.5% SWR, seems ultra-conservative. With a typical 4%, you’ll be FI in 10 years if you didn’t add a cent to your investments. Always your call though but you’ll easily be FI, though you’re going to keep working so, yeah, you’re fine here.
2. Are my monthly expenses too much?
—Subjective question. For many of us, yes, of course. However, you’ve got the money, you’re spending it on the things that matter to you, you’re not carrying debts and you don’t seem stressed. One thing to note is that many of these expenses will drop away, so you should create the budget of life 13 years from now to get a sense of what truly needs to be covered.
3. I plan to pay off my house by FI date but included my mortgage payment as is to factor in for health insurance. Is this the right way to handle this?
—always up to you, no right or wrong way here. Since you’re not rushing RE and your finances are solid, I guess your plan is fine.
4. According to SSA, I am eligible for about $3500 per month of social security but who am I kidding. Do you even consider this?
—I don’t depend on it, consider it bonus money. Many do though. You’re not going to “need” it, you’ll have plenty come 65.
5. Anything else I am missing?
—HSA?529? Are you using all the vehicles to get the most out of your money? Plan for DD’s future education ?
6. Any other comments?
—I get the sense you’re super conservative and plan for worst case scenarios. Is your job guaranteed for the next 13 years? What if something happened? What’s your plan? Also, what do want to do when you eventually retire? How does your DW feel about the plans?

1. If I don't feel comfortable contributing to HSA. It is a mental thing. Having a solid health insurance makes me feel safe. Besides the premium, I don't pay anything out of pocket.
2. I am in California, so 529 didn't make sense as I don't get any tax benefit. Money I am contributing to our Roth IRA is earmarked for DD's college.
3. DW is super onboard with the plan. We came up with this together. I don't want to "retire", as in sit around and do nothing. I want to work just enough to contribute to 401K or IRA and gain EITC, pay for health insurance. Effectively not paying any taxes. Same case with DW. Hopefully that money would be enough to cover our monthly expenses. We love to travel so we might spend some time traveling.

I planned this as a worst case scenario so went super conservative. You are right, most of these expenses drop-off after some time. Anything over this is going to be a bonus. At least, that's what I would like to think. Plus add in a job change every 4 years or so to get a pay bump would speed things up, hopefully. I work in Tech in Silicon Valley, so hopefully the market will be good for the next 10 years until I am self sufficient.

[ysette9]

I don’t want to derail this three entirely, but I have to add that I think 2.5% withdrawal rate is overly conservative. If you want to take the time to go through a very thorough and long analytical take on safe withdrawal rates with all sorts of factors under consideration, I highly recommend Big ERN’s safe withdrawal rate series of blog posts. https://earlyretirementnow.com/safe-withdrawal-rate-series/

The bottom line there is that 3.5% seems to be a sort of floor of safe withdrawal rates for early retirements based on all decent past history.

We all have to sleep soundly at night but personally I feel like 2.5% AND ignoring SS means you are guaranteeing yourself years of unnecessary work that you could instead be using in ways that might be more meaningful to you and your family. Just something to chew on.

[jamesbond007]

I don’t want to derail this three entirely, but I have to add that I think 2.5% withdrawal rate is overly conservative. If you want to take the time to go through a very thorough and long analytical take on safe withdrawal rates with all sorts of factors under consideration, I highly recommend Big ERN’s safe withdrawal rate series of blog posts. https://earlyretirementnow.com/safe-withdrawal-rate-series/

The bottom line there is that 3.5% seems to be a sort of floor of safe withdrawal rates for early retirements based on all decent past history.

We all have to sleep soundly at night but personally I feel like 2.5% AND ignoring SS means you are guaranteeing yourself years of unnecessary work that you could instead be using in ways that might be more meaningful to you and your family. Just something to chew on.

Thanks for the blog. Seems highly informative. I will read it tonight. You are right I am being overly conservative with a 2.5% I will model a 3% and 3.5% and see how that works. This is just me growing up in a low middle-class family in a third world country looking at this under a microscope. I don't want to go back to that life. Having said that, you have a good point that I may be wasting precious years in my life "working" instead of actually doing what I enjoy doing. Something I should think about very deeply.

[ysette9]

I don’t want to derail this three entirely, but I have to add that I think 2.5% withdrawal rate is overly conservative. If you want to take the time to go through a very thorough and long analytical take on safe withdrawal rates with all sorts of factors under consideration, I highly recommend Big ERN’s safe withdrawal rate series of blog posts. https://earlyretirementnow.com/safe-withdrawal-rate-series/

The bottom line there is that 3.5% seems to be a sort of floor of safe withdrawal rates for early retirements based on all decent past history.

We all have to sleep soundly at night but personally I feel like 2.5% AND ignoring SS means you are guaranteeing yourself years of unnecessary work that you could instead be using in ways that might be more meaningful to you and your family. Just something to chew on.

Thanks for the blog. Seems highly informative. I will read it tonight. You are right I am being overly conservative with a 2.5% I will model a 3% and 3.5% and see how that works. This is just me growing up in a low middle-class family in a third world country looking at this under a microscope. I don't want to go back to that life. Having said that, you have a good point that I may be wasting precious years in my life "working" instead of actually doing what I enjoy doing. Something I should think about very deeply.

I have spent a good amount of time on cfiresim.com modeling our situation and tweaking variables to see how it effects success rate of our portfolio. It is a bit of a nerdy interface if you haven’t used it before, but is pretty powerful. I found it helpful for me to get an intuitive feel for how, for example, being willing to be a little flexible in our spending during a down market, or following a reverse equity glide path after retirement improves the success rate of our portfolio. In our case a 4% withdrawal rate has a high probability of success even for a 50-year retirement once I add in a touch of SS for both of us and the factors I just mentioned.

You’ll probably get to it eventually in your reading, but I’d also like to point out that past market performance shows that your highest risk of portfolio failure due to sequence of returns risk in retirement is in the first ten years of retirement. So you can play it safer early on and then loosen up after you get out of the danger zone. You can also use this knowledge to just pay closer attention to your portfolio performance in the beginning and be willing to lower your spending if the first few years’ returns don’t go favorably. This is also the idea behind the reverse equity glide path. Here is some more reading on that: https://www.madfientist.com/safe-withdrawal-rate/