Author Topic: Case study - Judge me please!  (Read 1756 times)

e34bb098

  • 5 O'Clock Shadow
  • *
  • Posts: 67
Case study - Judge me please!
« on: December 29, 2017, 12:19:47 PM »
Hi folks,

Long time lurker, first time poster.  I wanted to hang out my financial laundry for all to see, and get some feedback and/or advice.  I am late to the Mustachian game and trying to make up for lost time.

Current situation:  43yo, married, 3yo kid.  My wife and I split household expenses. Unfortunately she is kind of weird about money.  Sheís frugal by complainypants standards but not by Mustachian standards.  Efforts to encourage more frugality have been met with resistance and hurt feelings, to the point where I have given up in favor of domestic harmony.  She has no interest in retiring early Ė too scared of outliving her money.  But she doesnít care what I do or when I retire, as long as I contribute our agreed-upon amount to our household checking account.  My expenses are, for now, mostly fixed.  We have mutually agreed not to bother with a 529 or other college savings for the kid, on the grounds that college might be totally unrecognizable, unnecessary, free, etc. by the time she is of age to consider it.  (If itís not, and she wants a degree, then she can do community college and a state school on her own dime and/or student loans.)

Annual income: $51,000 plus bonuses.  Thatís after-tax.  The bonuses could be anywhere between $20k-$30k/year.  I just started this position so Iím not sure how much or how often theyíll come.

Annual expenses: $25,000.  This is my share of the household expenses, which I split with my wife, plus miscellaneous expenses for myself.  I could probably trim my own expenses by about $1000/year but as mentioned, the household expenses cannot be trimmed for now.  It covers all utilities, mortgage, groceries, insurance, etc.

Debt: Just a mortgage: 30-year fixed @3.75% with $201k left.  Credit card is paid off monthly, no car loan, student loans, etc.

Retirement accounts:
-   $33k of VTSAX in a Roth IRA.
-   $119k of VTSAX in a traditional IRAs and an old 401k.
-   $10k of VTIAX, also in the IRA.
-   $25k of VBTLX in a taxable brokerage account.

So thatís $188k total.  Going by the 4% rule, my FU money (ďFUMĒ henceforth) is 25x my annual expenses, or $625k.  Depending on bonuses, I should reach this somewhere between 5 and 10 years from now, or when Iím 48-53 years old.

Asset allocation is 14% bonds, 5% foreign, 81% domestic.

Contributions: $5500/year IRA contribution (maxing out).  I am not eligible for the company 401k until February.  They will match 50% on the dollar, up to 4% of my paycheck.  Thatís $2600/year into a 401k, plus a match of $1300, for a total of $3900/year if I stop at the match.

That leaves $18k to contribute.  My thoughts/concerns:

-   If I reach FUM when Iím 48, I will have 11 years until Iím 59.5 and can easily access the IRAs/401k.  If I reach it when Iím 53, I will have 6 years.

-   So either way it seems like Iíll need to have 5 years of expenses in my taxable account to live on while I do between 1-6 years of a Roth conversion.  Thatís $125k.

-   While I know market timing is a foolís errand, we are overdue for an economic dip.  This is, on one hand, fine (fire sale on stocks!) but Iíd like to mitigate at least a little of the risk, hence the VBTLX.  Is this silly?  Should I go 100% VTSAX?

-   Sequence of return risk: I am kind of thinking that I need about two yearsí worth of expenses ($50k) in bonds in my taxable, so I can draw that down instead of VTSAX in case the economy craters within the first couple years of retirement.  Two years seems to be about the general length of a longer recession.  Silly?  Smart?

-   The Bogleheads are really big on a 60/40 stock/bond split.  Most of the FIRE community is way heavier on stocks, 80/20 or more. Whatís the argument for this?  Whatís your ideal split during accumulation, and after retirement?

-   Foreign stocks.  VTIAX is cheap by most standards at 0.11%, but that is almost 3x as much compared to VTSAX's lovely 0.04%.  Do you hold a foreign index fund?  If so, what percentage of your portfolio is it?

-   How much of my leftover $18k should I put into my 401k versus my taxable account?  Should I funnel as much as possible into the 401k to lower my tax burden?  Or into my taxable account until I reach five years of expenses (will take about five years assuming a 7% return)?  Or a hybrid Ė put $18k/year into the taxable account, but any extra money from bonuses goes into the 401k?

Iím sure Iíll come up with more questions later.  Thanks for reading and for any feedback you can share.

Jrr85

  • Handlebar Stache
  • *****
  • Posts: 1065
Re: Case study - Judge me please!
« Reply #1 on: December 29, 2017, 01:16:43 PM »

-   The Bogleheads are really big on a 60/40 stock/bond split.  Most of the FIRE community is way heavier on stocks, 80/20 or more. Whatís the argument for this?  Whatís your ideal split during accumulation, and after retirement?


If you're looking at a traditional retirement and just focused on minimizing the chances that you run our of money, a 60/40 split probably reduces the likelihood of running out of money while also reducing the expected value of your nest egg at death.  Which makes sense.  You basically trade off some upside potential in exchange for limiting some of your downside risk, although it does come with a little less protection from inflation, but that's not a huge deal over 30 years. 

When you are talking about a potential 60 year retirement, the decrease in the expected returns and increased risk from inflation outweigh the benefits of reducing your downside risk from a stock correction.  Your better protection is being able to earn some money in the event there is a stock correction.  If you make it through the first ten years without running into sequence of returns problems, at that point, you should be in good enough shape that it won't matter if you run into a serious correction later on, even with a very heavy weight in stocks.   

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 2096
  • Age: 24
Re: Case study - Judge me please!
« Reply #2 on: December 29, 2017, 02:41:07 PM »
Quote
While I know market timing is a foolís errand, we are overdue for an economic dip
These statements are at odds with one another.  If you do know when the next "dip" is, would you mind lending me your crystal ball so I can make a lot of money?

Quote
How much of my leftover $18k should I put into my 401k versus my taxable account?  Should I funnel as much as possible into the 401k to lower my tax burden?
All of it.  The investment order ends with taxable. You should max all of your tax sheltered accounts first before considering a taxable.

Quote
Annual expenses: $25,000.  This is my share of the household expenses, which I split with my wife, plus miscellaneous expenses for myself.  I could probably trim my own expenses by about $1000/year but as mentioned, the household expenses cannot be trimmed for now.  It covers all utilities, mortgage, groceries, insurance, etc.
If you do write these itemized expenses out, we might be able to help you better.

Travis

  • Handlebar Stache
  • *****
  • Posts: 2233
  • Location: Arizona
Re: Case study - Judge me please!
« Reply #3 on: December 31, 2017, 12:40:09 AM »
Someone please correct me if I'm wrong, but I'm pretty sure his bonds should be in a tax-advantaged account somewhere.  Interest earned on Bonds is taxable, but if it's in a 401k or IRA they're safe. Also, setting yourself up to make your initial draw-down solely on bonds because you're afraid of a market crash seems completely backwards.  Bonds won't do much to cushion your portfolio's fall if you sell them all off right at the start.  If that's your concern, then set up some CDs to stagger and yank those if you need operating cash. 
My Journal: http://forum.mrmoneymustache.com/journals/will-i-or-won't-i-a-home-run-or-a-base-hit/

Unlike some other tech companies or skilled-labor industries, we're always hiring.

www.goarmy.com

RetiredAt63

  • Walrus Stache
  • *******
  • Posts: 8564
  • Location: Eastern Ontario, Canada
Re: Case study - Judge me please!
« Reply #4 on: December 31, 2017, 10:38:18 AM »
I understand your wife's concerns, since women have tended to outlive their husbands, and often end up poor because they really have outlived their financial resources.  The old saying was that a woman was one man (father, then husband) away from poverty.  You might have more productive conversations if you started with "where do we want to be in 5/10/20 years financially?".   And have you made your wills/PoTs, etc?  You have a kid, what if one or both of you die, what happens to the surviving spouse, or orphaned kid?  These are all financial issues that need to be addressed, if they haven't been already.

I know American marriage laws tend to be quite different from Canadian ones (we are mostly community property types) but what is the law in your state?  Can you really separate your finances this much when you are married?
The measure of civilization is how people treat one another.

http://forum.mrmoneymustache.com/meetups-and-social-events/ontario's-own-camp-mustache-2017/ - MEET US THERE!

MrsWolfeRN

  • Pencil Stache
  • ****
  • Posts: 682
Re: Case study - Judge me please!
« Reply #5 on: December 31, 2017, 12:28:49 PM »
Someone please correct me if I'm wrong, but I'm pretty sure his bonds should be in a tax-advantaged account somewhere.  Interest earned on Bonds is taxable, but if it's in a 401k or IRA they're safe. Also, setting yourself up to make your initial draw-down solely on bonds because you're afraid of a market crash seems completely backwards.  Bonds won't do much to cushion your portfolio's fall if you sell them all off right at the start.  If that's your concern, then set up some CDs to stagger and yank those if you need operating cash.

This is correct. Also I think the trinity study showed an increased risk of failure if the bond allocation was more than 30%.

To the OP: read J. Collins stock series if you haven't already. He explains everything much better than I can.