Author Topic: Case Study: Looking towards the future, getting antsy  (Read 3627 times)

NerdStache

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Case Study: Looking towards the future, getting antsy
« on: May 29, 2017, 09:38:35 PM »
Found and filled out most of the Case Study spreadsheet, which was awesome. Figured I'd post my numbers here. I think I'm on track, but I fear that I'm going to get impatient before anything else.

Life Situation: 33M, divorced 1 year ago. Moved to a larger midwest city, just finished paying off debts from the sale of the house (woo!), related to the divorce. No more debt in my life, aside from one loan that still needs to be transferred out of my name and the regular monthly expenses which go onto a reward card.

If I'm being completely honest, it was transferring a huge chunk of my net worth from the divorce proceedings which really kicked my ass back into gear. I pushed and pushed for higher savings rates while married and that was a big source of stress (I've always been a saver, she was always a spender). That, coupled with a large gap in our earnings, saddled me with a lower net worth and a relatively high alimony.

A side note about the alimony: Yes, I know it's high, but it was also tied to negotiations around some other things in the divorce proceedings. It's unfortunate, but it's life.

So I'm effectively debt free, except for the alimony which ends in 2019. I am hoping for advice on how I can kick even more ass when that day comes. So let's take a look at expenses.


CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$9,375$112,500
401(k) / 403(b) / TSP / etc.$1,125$13,500
Employer Match$375$4,500
Income subject to IRS tax$8,250$99,000
Alimony-$2,560-$30,720
Federal Total Income$5,690$68,280
Federal tax$8512017 rates, S, stand. ded., 1 exempt.$10,209
State/City tax$307Guess, using 5.74% * (AGI - Exempt'n)$3,690
Soc. Sec.$581Assumes 1 earner paying$6,975
Medicare$136$1,631
Total income taxes$1,875$22,505
Income before other expenses  $3,815$45,775
Monthly Average Expenses:
Rent$1,410$16,920
Home/Rent Insurance$15$180
Beauty Shop$20$240
Bicycle Maintenance$8$100
Charitable contributions$60Input to Itemized Deductions$720
Clothing/Shoes$30$360
Dining (Lunch/Dinner/Etc.)$200$2,400
Electricity$30$360
Emergency Fund$1,000$12,000
Entertainment$100$1,200
Fuel/Public Transport$150$1,800
Gas/Oil for heating$60$720
Groceries$400$4,800
Medical (Doctor, Hospital, etc.)$20Input to Itemized Deductions$240
Pets$100$1,200
Subscriptions (paper/magazines/etc.)$25$300
Wine/Beer/Tobacco$150$1,800
Non-mortgage total$3,778$45,340
Total Expense$3,778$45,340
Total to invest$36$435
Summary:
"Gross" income$6,815$81,780
Income taxes$1,875$22,505
After-tax income$4,940$59,275
IRA+401k/403b/TSP/457$1,125$13,500
Living expenses$3,778$45,340
After-tax investable$36$435
Time to FI?:
Time to FIRE20years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments5.00%percent
Real, after tax, return on taxable investments4.25%percent
Current Savings
Tax-deferred (e.g. trad. IRA/401k)$100,000
Projected Savings at Retirement
Taxable$13,301
Tax-deferred (e.g. trad. IRA/401k)$860,517
Total projected stash$873,818
Projected Expenses in Retirement
Non-loan, non-work expenses$45,340

#ERROR!
#ERROR!
Total$52,091
Stash needed for retirement @4.0% SWR$1,302,264
Need $428,446 more.


Filing Status11=S, 2=MFJ, 3=HOH
# Exemptions1
Adult #1
Age33
# of earners1
Total Income$68,280
Std. Deduct.$6,350
Act. Deduct.$6,350
Exemption$4,050
AGI$68,280
MAGI$68,280
Taxable$57,880
1040 Tax$10,209
Tax after n-r credit$10,209
Net Tax$10,209
Monthly$851
State tax$3,6905.74%
Charity$720
Item. Deduct.$4,410
VersionV8.16




 
All of my healthcare is taken care of by my company, which is fantastic. No premium, $250 deductible which I already hit this year and generally I have low medical costs (got kind of sick earlier this year, which was unusual).

Assets: Some 401K mutual fund mishmash, but mostly VOO in my Rollover IRA. I am probably above a 90/10 split for my holdings, but regardless, I still have a high tolerance for risk. I sold a lot of my individual holdings in the divorce and have switched over to index ETFs for simplicity. I just don't pay attention to the market like I used to.

Another asset is an online business I have that I run part time. This is also partially why I have a higher alimony payment (it was a negotiation which left the business off the table during the split). It currently has about 3K revenue and 1K expenses per month, so I expect about 1K per month of savings rate (post tax, since I usually assume 50% tax rate on business cash).

Current Plans: Currently have about 12 months savings between personal and business accounts (post tax dollars for the business, could take as a distribution at any point). I would like to build that up to about 24 months cash while also upping my savings rate. I just went from a 6% 401K contribution to 12% (shown in the chart above, which is why I started using the spreadsheet). I'd also like to grow my online business to the point that the profit is covering my monthly expenses.

Specific Question(s): I suppose my main thing is that I'm getting antsy. I want to speed things up. I also want to know if there are things I could do better. I figure things like:

  • Lowering food/entertainment costs (getting back into the dating world ain't cheap though)
  • Lowering my housing costs (not sure I'm quite ready to get a roomie, but might consider it if the savings were high enough)
  • Waiting out alimony payments (it's kind of nuts thinking how much more I'll be making when that time comes).

I also realized recently how much of a child of 2008 I am. I have 1 year of expenses saved, maybe it's time I start putting those dollars to work? I just want to have savings on hand for if things go down. Or if I want to fly free in 2019 quit my current job, go out on my own.

Any other thoughts, tips or acceleration factors appreciated!

~NerdStache

Freedomin5

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Re: Case Study: Looking towards the future, getting antsy
« Reply #1 on: May 29, 2017, 10:20:09 PM »
Welcome!

First off, good job stashing $100K already.

Quote
Waiting out alimony payments (it's kind of nuts thinking how much more I'll be making saving/investing when that time comes).

Fixed that for you.

Also, absolutely you need to start considering ways to reduce food-related expenses. It looks like you're spending $750 per month on food/alcohol related expenses...for one person. That's how much we spend for a family of three. You could cut that by at least 1/3, if not 1/2. If a lot of your food related expenses are related to dating, consider free or low-cost activities, like cooking a dinner for your date at home, going on a picnic (pack your own picnic basket), going for a bike ride or a walk in the park, etc.

Housing is also quite expensive. It's more than 1/3 of your take-home pay after taxes and alimony. Is there any way to move to a cheaper apartment, if you're not up for living with a roomie?

Also, transportation is another area you can cut. You pay an average of $8 per month to maintain your bike. Is there any way to use that bike more often to ride to work or to run errands? This would cut down on fuel/public transport. I don't see anything in there for car-related expenses (car insurance, maintenance, etc.) so I'm assuming you don't have a car.

Doing all of the above could free up to $1000 per month ($12,000 per year!) to invest. Say you get a roomie and half your rent ($700 per month saved), cut your food/alcohol costs by one-third ($250 per month saved), and ride your bike more ($50 per month saved). That would almost double the amount you're investing per year (if I'm reading the chart correctly, you're currently investing $13,500 per year).

Finally, most people only recommend 6 months emergency fund.


MDM

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Re: Case Study: Looking towards the future, getting antsy
« Reply #2 on: May 29, 2017, 10:54:30 PM »
CategoryMonthly
Comments
Annual
Dining (Lunch/Dinner/Etc.)$200$2,400
Emergency Fund$1,000$12,000
Groceries$400$4,800
Wine/Beer/Tobacco$150$1,800
NerdStache, welcome to the forum.

The items above seem the sore thumbs.  $9K/yr on food and drink is very high for one person.  And, unless you either
- have a very specific short-term goal in mind, or
- are in plausible danger of losing your job without then being able to find other employment,
adding $1K/mo to an emergency fund already good for one year seems overly conservative.

Putting the full $18K/yr into the 401k, and $5500/yr into an IRA, seem (from an outsider's perspective) higher priorities than growing the e-fund - but that's your call.

The IRA should probably be Roth, because after adding the business income a traditional IRA is probably not deductible.

When the alimony stops, you may need to do a Backdoor Roth IRA.  Can you roll your tIRA into your current 401k?  See the backdoor Roth link for why this may be a good thing to do.

NerdStache

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Re: Case Study: Looking towards the future, getting antsy
« Reply #3 on: May 29, 2017, 10:57:46 PM »
Yep, all good points.

The $8/month is actually because I don't have my own bike. The flexibility of using a bike share is worth it to me; I'll ride somewhere and somtimes train or bus home. Overall, weaning me onto the bike-life has saved me a lot more in Uber/Lyft fares. That $150 is also "winter" numbers, I fully expect the numbers to drop in the summer.

Putting all those food/housing savings together makes it look pretty stark, eh? $1000/month is nothing to sneeze at! Perhaps I'll start browsing the craigslist ads...

NerdStache

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Re: Case Study: Looking towards the future, getting antsy
« Reply #4 on: May 29, 2017, 11:02:23 PM »
Unless you either
- have a very specific short-term goal in mind, or
- are in plausible danger of losing your job without then being able to find other employment,
adding $1K/mo to an emergency fund already good for one year seems overly conservative.

Yeah, might be. I suppose if I get to the point of maxing out the tax-deferred stuff the post-tax investment route would also be "liquid" in a sense (could always sell if needed), but like I said, I'm a product of 2008.

Putting the full $18K/yr into the 401k, and $5500/yr into an IRA, seem (from an outsider's perspective) higher priorities than growing the e-fund - but that's your call.

The IRA should probably be Roth, because after adding the business income a traditional IRA is probably not deductible.

When the alimony stops, you may need to do a Backdoor Roth IRA.  Can you roll your tIRA into your current 401k?  See the backdoor Roth link for why this may be a good thing to do.

Will definitely check out that link. I figured I'd want to keep (traditional?) tIRA funds as they are, simply because of the more flexible investment options (my 401k options are poor). But like i said, I have reading to do.

Thanks to you and Freedomin5!

Axecleaver

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Re: Case Study: Looking towards the future, getting antsy
« Reply #5 on: May 30, 2017, 11:42:57 AM »
Tax estimates appear too high while alimony is in effect. These payments must be declared by your ex as income, and you must declare them as a deduction on your 1040. You do not need to itemize to take advantage of this.

https://www.irs.gov/taxtopics/tc452.html

NerdStache

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Re: Case Study: Looking towards the future, getting antsy
« Reply #6 on: May 30, 2017, 11:47:38 AM »
Yes, I'm still working on adjusting my withholdings to account for that. Think I'm claiming an 8 right now, which isn't reflected in that spreadsheet. Every calculator I've found hasn't been that helpful. Know of any good resources for getting that squared away?

I think it ended up working out OK last year because I had underpaid on my schedule C (well, estimated payments) slightly and overpaid on my work withholdings. So my total tax bill was about $70 at the end of the day, which I was pretty happy with. I suppose it's better to figure out individual amounts I should be paying though. I always keep money in reserve for tax time though, especially last year where I was dealing with the sale of my house.

MDM

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Re: Case Study: Looking towards the future, getting antsy
« Reply #7 on: May 30, 2017, 12:05:16 PM »
Tax estimates appear too high while alimony is in effect. These payments must be declared by your ex as income, and you must declare them as a deduction on your 1040. You do not need to itemize to take advantage of this.

https://www.irs.gov/taxtopics/tc452.html

What appears too high - i.e., what might you expect the federal tax to be?  Seems the alimony has already been factored in, thus the federal tax estimate should be very close (other than the business income not shown).

Axecleaver

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Re: Case Study: Looking towards the future, getting antsy
« Reply #8 on: May 30, 2017, 12:33:27 PM »
I take that back - I saw "income subject to IRS" at 99k and thought that he was assuming he would pay the taxes on the alimony before it went to the ex. Upon further review I see that the tax rates appears about right for 68k income. Just keep an eye on your business income and up your withholding if you start making more on the side gig.

MDM

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Re: Case Study: Looking towards the future, getting antsy
« Reply #9 on: May 30, 2017, 12:55:32 PM »
I take that back - I saw "income subject to IRS" at 99k and thought that he was assuming he would pay the taxes on the alimony before it went to the ex. Upon further review I see that the tax rates appears about right for 68k income. Just keep an eye on your business income and up your withholding if you start making more on the side gig.
Yes, it does lose some context going from the spreadsheet input to the posting summary.  Spreadsheet starts with gross wage/salary income, subtracts things (e.g., employer-provided HSA) not subject to FICA, then subtracts pre-tax paycheck deductions such as 401k to get to "income subject to IRS tax."  But then it goes on to incorporate Schedule C and E income, SS income, alimony, etc. before doing the actual tax calculation.

MDM

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Re: Case Study: Looking towards the future, getting antsy
« Reply #10 on: May 30, 2017, 12:56:30 PM »
Yes, I'm still working on adjusting my withholdings to account for that. Think I'm claiming an 8 right now, which isn't reflected in that spreadsheet. Every calculator I've found hasn't been that helpful. Know of any good resources for getting that squared away?
Perhaps more than you wanted, but see
http://forum.mrmoneymustache.com/taxes/best-way-to-calculate-w-4-exemptions-for-2016/
http://forum.mrmoneymustache.com/taxes/would-you-rather-owe-or-get-a-refund/
http://forum.mrmoneymustache.com/taxes/am-i-witholding-too-much/
http://forum.mrmoneymustache.com/ask-a-mustachian/turbo-tax-vs-cpa/
http://forum.mrmoneymustache.com/taxes/best-paycheckwithholding-calculator(s)/
for some ideas. ;)

NerdStache

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Re: Case Study: Looking towards the future, getting antsy
« Reply #11 on: May 30, 2017, 12:58:59 PM »
Ah the ol' "Read the forum, silly"

Yep, message received :-D

MDM

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Re: Case Study: Looking towards the future, getting antsy
« Reply #12 on: May 30, 2017, 01:04:16 PM »
Ah the ol' "Read [It's somewhere in] the forum, silly"

Should be read as edited. ;)

Some of us have been around long enough to have certain links saved, because searching the forum isn't always productive.... :)

Heroes821

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Re: Case Study: Looking towards the future, getting antsy
« Reply #13 on: May 30, 2017, 01:51:42 PM »
Just one thing I noticed. You have your 401k with matching set to exactly $18,000 for the year.  $18k is YOUR limit BEFORE employer contributions. I think you have plenty of room to add $4,500 more to your 401k and then take all that free matching money on top.

Good Luck!

NerdStache

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Re: Case Study: Looking towards the future, getting antsy
« Reply #14 on: May 30, 2017, 02:10:24 PM »
Ah ha, I didn't realize that! Great to know, thank you!

NerdStache

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Re: Case Study: Looking towards the future, getting antsy
« Reply #15 on: July 21, 2017, 08:52:31 PM »
A bit of an update from me.

I decided to follow some advice, but not all...at least not for now.

After a lot of stressing over my situation, I decided to re-up my lease. I could have searched for another place, but I decided against it for a year. I will  take another hit in terms of cash saved, but it's important to me. I'm in a very connected area, which allows me to cut down on travel expenses. And I heavily considered getting or joining roommates, but my music and my recordings are my primary source of entertainment. So I decided that this place is good for now. As I said when I first moved here, "It's only a year". And my oh my does the time seem to be flying these days.

What I did take the advice on is the food and entertainment. I've been thinking more about it and looking at my life and decided to give sobriety a go. I don't think I had a particularly bad habit, but I know how drinking can get; I also have a history of alcoholism in my family (ah, to Scottish AND Polish). That, coupled with the weight I've gained and how alcohol has made me feel increasingly crappy as I get older...yeah, giving that a break for now. I'd like to continue this indefinitely, but I really don't want to jinx myself now. What I WILL say is that the past 2 weeks of sobriety have been a bit of a revelation on how much time and money I spend on drinking. So that will cut down the bills, improve my health and give me more time to spend on my side business and getting healthier. If I'm being honest about that restaurant number I put up before, I'm sure some portion of that is also alcohol. Amazing how fast a bill for just myself at a restaurant will jump from $20 to $50 when a couple cocktails are involved. Anyway, that's an ongoing experiment which I hope to maintain. I have a work trip coming up, including a conference in Vegas, so we'll see how all money and alcohol related things goes.

In terms of work, I ended up upping my contribution to 12%. I'm also hoping to set up a tax deferred account for my business profits in the future. Still planning on upping the contribution to the max like Heroes821 pointed out, just need to settle out my cash flow stuff first.

Still trying to feel better about only keeping 1 year of cash on-hand instead of 2. Either way, cash is getting stashed somewhere, just need to figure out which is best for growth and peace of mind.

Thanks for all the advice on the first go-round.

NerdStache

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Re: Case Study: Looking towards the future, getting antsy
« Reply #16 on: July 21, 2017, 09:07:34 PM »
Also, was re-reading MDM's post about Investment Order and I skipped step 4. Perhaps that's my next move. I think I'd be going towards traditional (plan to have much lower tax rate when I retire), but not sure.