Author Topic: Case Study - Looking to boost savings rate  (Read 790 times)

DadJokes

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Case Study - Looking to boost savings rate
« on: January 09, 2019, 09:35:18 AM »
I am 31 years old, a recent college graduate. Wife and I each make around $45,000/yr, though she will miss about two months' salary this year due to maternity leave. We just had our first child, and live in a suburb of Nashville.

Assets:
Emergency Fund- 15,500
Home- 325,000
Traditional 401(k)- 12,000
Roth- 7,300
HSA- 1,000

Liabilities:
Mortgage- 311,898

Average estimated monthly budget for 2019:

Traditional 401(k)- 346
Roth 401(k)- 31 (already funded in January, discontinuing going forward)
457(b)- 1,250
529 plan- 75

Health insurance- 90
HSA/FSA contributions- 243
Disability/Life/Dental insurance- 97

Mortgage principal- 435
Mortgage interest- 1,137
Mortgage escrow items- 260
Capital projects/home maintenance fund- 674

Utilities/HOA- 180
Phone/internet- 120

Baby daycare- 188
Baby misc items- 30

Fuel- 150
Car insurance- 120
Auto maintenance/replacement fund- 66

Groceries- 340
Eating out- 90

Grooming/food/vet for 2 dogs- 110

Vacation- 83
Christmas/other gifts- 41
Charitable giving- 50
My discretionary- 70
Wife discretionary- 100
Family discretionary- 85

I've read through a lot of the blogs and listened to the ChooseFI podcast, so I've pieced together ideas from those things. My investing plan is to use capital gains harvesting from 50-60, followed by a combination of using traditional and Roth 401(k)s in normal retirement throw as much as I can at 457 plans.

If I am understanding correctly, I believe my savings rate will only be about 32% in 2019, which is way lower than what I see on this board and elsewhere. My wife not getting paid for a couple months doesn't help, but I'm only estimating 45% in future years.

Right now, I am estimating that I will be FI in about 20 years, though I haven't taken into consideration social security or my wife's pension (don't know if she'll work long enough to get it or if they have partial payout for working less than 30 years). What suggestions do you guys have to help me boost that savings rate so that I can be FI sooner?

Edited to change Roth & taxable investments to go into the 457 accounts.
« Last Edit: January 10, 2019, 06:26:01 AM by DadJokes »

Mrs.MLM

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Re: Case Study - Looking to boost savings rate
« Reply #1 on: January 09, 2019, 09:55:36 AM »
Is that $1,000 a month for vacation correct or am I misreading it? $12,000 a year on vacation is a lot! Do you have family living abroad or something?

Also, do you work different schedules or something? $188 a month for daycare is amazing! $30 a month for baby misc. items seems low if that includes diapers and wipes.
« Last Edit: January 09, 2019, 09:57:26 AM by Mrs.MLM »

DadJokes

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Re: Case Study - Looking to boost savings rate
« Reply #2 on: January 09, 2019, 10:08:06 AM »
Is that $1,000 a month for vacation correct or am I misreading it? $12,000 a year on vacation is a lot! Do you have family living abroad or something?

Also, do you work different schedules or something? $188 a month for daycare is amazing! $30 a month for baby misc. items seems low if that includes diapers and wipes.

Oops, must have missed vacation budget when dividing by the month. It should be about 83/month.

Daycare won't start until March. Baby's grandmother is retired and will watch him 3 days/week for free, and we are paying a SAHM whose kids have grown up 25/day for the other 2 days per week.

We have a lot of Target gift cards from our baby showers. It's been a month, and we've already purchased a couple months' worth of diapers and wipes, and we haven't even used half of the gift cards. We also have a family member who works for a pediatrician and can get us all the free formula samples we want. Anything that exceeds the budget for this item will come out of grocery budget.

RWD

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Re: Case Study - Looking to boost savings rate
« Reply #3 on: January 09, 2019, 11:30:17 AM »
Capital projects/home maintenance fund- 674
Baby daycare- 188
Fuel- 150
Car insurance- 120
Eating out- 90
Grooming/food/vet for 2 dogs- 110
My discretionary- 70
Wife discretionary- 100
Family discretionary- 85

I cut down your list to a few (a bunch?) of categories you should be looking at. Let's walk through them one at a time.
- Capital projects/home maintenance: This seems really high. The general rule of thumb is 1% of the property value per year (probably $300-350/month for your house). So is the rest "capital projects"? I'm not really sure what that would be, is it a permanent ongoing expense?
- Daycare: This goes away eventually.
- Fuel: This is nearly triple what we spent last year. How long are your commutes and what vehicles do you drive?
- Car insurance: This is more than we're paying for two cars (including a Porsche). You may want to shop around.
- Eating out: Definitely room for improvement here.
- Pet expenses: How much grooming is required? Is it a significant part of this expense category?
- Discretionary: You have a ton of discretionary spending across multiple categories. $3,060 per year which is ~6% of your total expenses. You should either cut back on this or if it is necessary spending then split it out into appropriate categories for better tracking. I didn't see a clothes category, for example.

I don't think it should be hard to reduce your expenses by ~$500/month or more.

Ben Kurtz

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Re: Case Study - Looking to boost savings rate
« Reply #4 on: January 09, 2019, 12:07:13 PM »
Big picture, the real juice behind any push to FI/RE on your family's part will have to be earnings growth. Your numbers suggest a reasonably well-run middle class household -- no auto loans, no credit card debt, not even any student loans and a healthy savings rate. I agree with previous posters that there is probably a few hundred dollars in monthly cost reduction to be had, but probably not enough to massively move the the needle. But as a two-earner college graduate family, you should be able to grow your careers and earnings over time at a good rate. Control lifestyle inflation, and your 20 year timeline should rapidly shrink. Even just a $10,000 annual raise should boost your savings rate into the 40%+ range, after tax effects, if you are very disciplined about lifestyle inflation. That creates a big change in the timeline. You are doing very well. Don't be discouraged.

With a young child, I would also suggest you consider diverting some of your taxable savings to a 529 college savings account, to the extent there is any likelihood you will end up pitching in for college expenses. TN doesn't give state tax benefits for contributions, but the Roth style untaxed growth is a good benefit that compounds with time.

Finally, I would suggest maxing out tax advantagd retirement accounts before investing anything in taxable brokerage accounts. Keep contributing to deductible 401ks until those are fully maxed out, then (at your family income level) make all your IRA contributions in Roth format. Only when that is maxed out should you consider 529s and taxable accounts.

Don't worry too much about access to retirement account funds in early retirement. Read up on 72(t) SEPP withdrawals and Roth conversion ladders to understand the various ways you can get to your retirement funds without paying the 10% early withdrawal penalty. Avoiding tax drag on your investment growth for the next 30 years is well worth the effort.

DadJokes

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Re: Case Study - Looking to boost savings rate
« Reply #5 on: January 09, 2019, 12:44:17 PM »
- Capital projects/home maintenance: This seems really high. The general rule of thumb is 1% of the property value per year (probably $300-350/month for your house). So is the rest "capital projects"? I'm not really sure what that would be, is it a permanent ongoing expense?

We were planning to build a covered patio. I haven't worked out the costs yet, but I am estimating $10k, which I am expecting to spend a couple years saving for. However, the more I think about it, the more I would rather invest that money. As far as maintenance, it is new construction, so it might take a while before any major maintenance is needed that isn't covered by warranties.

Quote
- Fuel: This is nearly triple what we spent last year. How long are your commutes and what vehicles do you drive?

Wife and I each commute ~10 miles each way for work. She will also be dropping off/picking up our child at the babysitter, which adds another ~15 miles daily. Add 10 miles/week for errands, visiting her parents for dinner once per week (20 miles each way) and one trip per month to Nashville (25 miles each way). She has a crossover that probably gets 25 mpg, and I have a sedan that gets 30 mpg. Quick math puts us at about 1,450 miles per month at a cost of $117 (assuming $2.20/gallon). It does look like we can reduce this by about $30 per month, so I'm going to have to monitor our miles and see where the extra is coming from.

Edit: wife is a teacher and doesnít work in the summer, so I should also cut out her driving for the two months of summer.

Quote
- Car insurance: This is more than we're paying for two cars (including a Porsche). You may want to shop around.

I have started shopping it around. We have comprehensive & collision as well, since the cost/benefit of dropping them came to about a 10 year payback. I think it's likely enough that one of us will have an accident in a 10 year time frame that I'm not willing to drop those until our vehicles are less valuable.

I am also shopping around my life insurance, so hopefully I can reduce life, home, & auto insurance costs.

Quote
- Eating out: Definitely room for improvement here.

Agreed. While we both hate cooking, I think I am going to try to drop this to $60/month and make my wife use her discretionary money if she wants to eat out more.

Quote
- Pet expenses: How much grooming is required? Is it a significant part of this expense category?

$50/month. I'm not willing to groom my own dogs, so this is something I get value out of. Honestly though, I want to re-home one of the dogs, but there are definite moral considerations here.

Quote
- Discretionary: You have a ton of discretionary spending across multiple categories. $3,060 per year which is ~6% of your total expenses. You should either cut back on this or if it is necessary spending then split it out into appropriate categories for better tracking. I didn't see a clothes category, for example.

I have been working to gradually reduce the discretionary spending. It's a struggle though. I do keep good track of what is spent in those three categories through a budgeting app.

My wife's discretionary is largely spent on fast food. I have tried to fight this battle, but to no avail. It's something I just have to live with. I thought about showing her just how much she spent in 2018, but she thinks of my desire for early retirement as deprivation already. I don't want to push her too far.

I seldom spend all of my discretionary. Sometimes I get clothes, a haircut ($20 every other month- yes, I read the blog on doing it yourself), or an ice cream, but since my son has been born, I've been trying to save extra bits of this to add to his 529.

Family discretionary ranges from the occasional movie ticket to Amazon purchases that we decide add value to our lives (bought a board game this month), or to items that don't have a good spot in budgeting (like the fact that I'm planning to draft a will now that we have a child). One of our biggest expenses in this category is hockey games/memorabilia. I am actually planning to stop buying the memorabilia and sell quite a bit of what we already have, so I do hope to have lower expenses in this category than I am currently budgeting.
« Last Edit: January 09, 2019, 01:08:54 PM by DadJokes »

DadJokes

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Re: Case Study - Looking to boost savings rate
« Reply #6 on: January 09, 2019, 02:07:03 PM »
Finally, I would suggest maxing out tax advantagd retirement accounts before investing anything in taxable brokerage accounts. Keep contributing to deductible 401ks until those are fully maxed out, then (at your family income level) make all your IRA contributions in Roth format. Only when that is maxed out should you consider 529s and taxable accounts.

Don't worry too much about access to retirement account funds in early retirement. Read up on 72(t) SEPP withdrawals and Roth conversion ladders to understand the various ways you can get to your retirement funds without paying the 10% early withdrawal penalty. Avoiding tax drag on your investment growth for the next 30 years is well worth the effort.

I'm not as familiar with these things as I would like. I only started learning them a few weeks ago. However, I have been meaning to ask about this. From my math, it looks like putting the money in taxable accounts and taking advantage of capital gains harvesting will have a better result than using a Roth conversion ladder, largely because I would have to start the Roth conversion 5 years before I retire when I am likely to be in the 22-24% tax bracket. It's possible that I could contribute enough to a Roth IRA to cover the first five years, but that would be cutting it close.

However, my wife and I are both government employees (though I may only be one for a few years). I should have included that in the original post. After sitting down and doing the math, it does look like a 457 is going to result in the best net funds available.

MDM

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Re: Case Study - Looking to boost savings rate
« Reply #7 on: January 09, 2019, 04:09:32 PM »
I'm not as familiar with these things as I would like. I only started learning them a few weeks ago.
See
Investment Order
Getting started - Bogleheads
Stock Series
www.etf.com/docs/IfYouCan.pdf
for more reading material.

Good luck!

DadJokes

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Re: Case Study - Looking to boost savings rate
« Reply #8 on: January 09, 2019, 07:52:44 PM »
Yep, Iím in agreement on the 457. Iíll update the budget to reflect that.

The amount we are putting in the 529 is fairly minimum. I know that I didnít qualify for the FAFSA when I was in high school, and my parents were worse off financially than I am now, so Iím not sure he is going to qualify anyway. Also, community college is free in TN, so we are only funding two years.
« Last Edit: January 09, 2019, 07:59:30 PM by DadJokes »