Author Topic: Case Study: New College Graduate  (Read 1437 times)

EfficientEngineer

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Case Study: New College Graduate
« on: July 15, 2018, 07:11:54 AM »
Hi everyone, I'm eager to hear any advice you have for me!

Health is very important so I'm willing to splurge on groceries (plus I'm a large very active person).  These numbers reflect my data and best guesstimates.  Once I compile several months of expense data from Mint I can update them.

Single 22M recently graduated from University.  Wants to pursue FI as quickly and enjoyably as possible.  Possible mini retirement to travel in next 3-5 years (cheap domestic traveling, let investments compound).  Would like to be FI when having kids (6-8 years).  Perhaps work part time to not draw down investments in lieu of early retirement.

Income biweekly
: $2,400
After Fed, State, and FICA taken out
:$2,270
After 401k ($771) HSA ($144) Roth IRA ($230)
:$1,125
Income per month -> $2,250

     + Yearly bonus -> $2-4k assumed
     + 4% 401k Match -> $2,500

+ May look into side hustles, flipped things from CL before
+ Can work up to ~ 10 hours of extra time/week (want work life balance though)
 
Expenses:
Rent- $767.50
Utilities (Internet, Electricity, Trash) - $50
Groceries (Incl household supplies) - $400??
Gas - $75
Car insurance - $133 (keeping comprehensive since value of car is substantial compared to net worth)
Restaurants - $100 (variable and often less)
Phone bill - $40 (covered by family plan currently)
Gym membership - $23 (May be subsidized through work)
Netflix - $10 (covered by family sharing)
Vacation/Fun money/Dates - $100
Clothes/Shoes (thrift store) - $20
Car maintenance fund - low mileage, take from savings/cash flow it if repairs needed?
Health insurance - $40 (Subsidized through employer)
Dental insurance - $0  (Subsidized through employer)
Life insurance - Could purchase for $X, was   
                               thinking of getting when married
 ~~~$1,800/month -> $450/mo savings -> $5,400/yr

Assets:
Savings - $2,500 (parents/grandparents can provide temporary loans)
Taxable brokerage - $51,200
      - $42,100 of which is in ETFs and individual holdings, $5700 in VTSMX. 
      -$3,400 in Cryptocurrency
Roth IRA - $15250
      -Invested in individual securities, will put future contributions towards international stock market index fund.
401k
      -Will be invested 100% in S&P 500 fund, 0.04 ER
HSA
      -Will be invested 100% in S&P 500 fund, 0.04 ER

Liabilities:
None.  Paid off car (Newish car~45k miles, purchased for half the KBB value), renting living space.


Total:
Networth of liquid assets: $68,950
Invested assets needed to maintain $24k/yr expenses ($200/mo buffer) = $600k

Saving $27,450 per year (401k, HSA, Roth) -> 44% SR
+ $4500 from 401k match & bonus -> $31,950 - 51% SR
+ $5,400 general savings -> $37,350 - 59.8% SR

SR of 55% implies FI in 14.5 years (from 0)
SR of 70% implies FI in 8.5 years (from 0)

(https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/)

Further, plugging the numbers into a compound interest calculator gives 9 years until $600k is reached at a current principal of $66500, annual addition of $37350, and interest rate of 7%. 


Note the model assumes:
- I have zero increases in my income (highly unlikely given that it is a starting salary)
- Zero increases in my expenses (I intend to not let lifestyle inflation creep in but there may be a slight rise here over time)

The model does not include:
A significant other and their respective expenses.
Kids (grocery, clothes, sports, activities, healthcare)
        + Have insurance when pregnant**
Saving for kids college
Home (mortgage, maintenance, property tax)
Charity
Dog (healthcare, food)
Gifts
Post retirement - healthcare


Questions:
+ Should I do a traditional IRA instead of a Roth to decrease taxes further? (Next year)
+ I may be able to do after tax contribution to my 401k (mad fientist mega backdoor Roth), thoughts?
+ Just graduated this year and I'll have a taxable income of ~$15k ($36k base less 401k and HSA), anything you'd recommend doing now while in a lower tax bracket (consolidate individual holdings?)
+ Any other life hacks you can recommend?
+ Anything I am missing to speed up my FI journey?
« Last Edit: July 19, 2018, 09:27:08 PM by EfficientEngineer »

MDM

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Re: Case Study: New College Graduate
« Reply #1 on: July 15, 2018, 07:03:42 PM »
Questions:
+ Should I do a traditional IRA instead of a Roth to decrease taxes further? (Next year)
+ I may be able to do after tax contribution to my 401k (mad fientist mega backdoor Roth), thoughts?
+ Just graduated this year and I'll have a taxable income of ~$15k ($36k base less 401k and HSA), anything you'd recommend doing now while in a lower tax bracket (consolidate individual holdings?)
+ Any other life hacks you can recommend?
+ Anything I am missing to speed up my FI journey?
You might take a look at the Investment Order post for general ideas.  Do those seem applicable to you?

It might also be worthwhile to put your expected 2018 income into the case study spreadsheet to determine your marginal tax saving rates for 401k and/or IRA contributions.  Note that you aren't eligible for the saver's credit this year if you fit the definition of full time student given in https://www.irs.gov/publications/p571#en_US_201801_publink1000239785.

You can do a similar exercise in 2019.

gpyros85

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Re: Case Study: New College Graduate
« Reply #2 on: July 15, 2018, 07:24:12 PM »
Doing really good for your age!! Time is on your side!! Keep it up!

FI by 30 will all depend on the market, A lot that you hear from on here that are FI by 30 had 10 year bull run tailwind...

However, don't get discouraged, keep up this saving rate! Good things will happen.


Is home ownership in your future? It doesn't have to be, only positive from home ownership is the ability to reduce your expenses even further in FI through paid off home.

EfficientEngineer

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Re: Case Study: New College Graduate
« Reply #3 on: July 15, 2018, 08:42:42 PM »
You might take a look at the Investment Order post for general ideas.  Do those seem applicable to you?

It might also be worthwhile to put your expected 2018 income into the case study spreadsheet to determine your marginal tax saving rates for 401k and/or IRA contributions.  Note that you aren't eligible for the saver's credit this year if you fit the definition of full time student given in https://www.irs.gov/publications/p571#en_US_201801_publink1000239785.

You can do a similar exercise in 2019.

Thanks for the input!  I've seen that investment order post you made before, but its definitely worth a second look over.  Thanks for that second link too, I'll have to play around with that.

Doing really good for your age!! Time is on your side!! Keep it up!

FI by 30 will all depend on the market, A lot that you hear from on here that are FI by 30 had 10 year bull run tailwind...

However, don't get discouraged, keep up this saving rate! Good things will happen.


Is home ownership in your future? It doesn't have to be, only positive from home ownership is the ability to reduce your expenses even further in FI through paid off home.

Thank you!  That's very true, market conditions play a strong factor in these sorts of calculations.  Though a market crash right now would be the best thing for me long term - we'll see what happens.  Home ownership will likely be in the future, but not for 8+ years, renting makes more sense in my current locale.

Hirondelle

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Re: Case Study: New College Graduate
« Reply #4 on: July 16, 2018, 04:14:46 AM »
The things that stand out to me are you rent and grocery expenditures. Where do you live? For a single person spending over $800 on rent + utilities sounds like a lot to me unless you're in an extreme HCOL area. Do you have roommates? You're only 22 and no SO or kids so I wouldn't see why you wouldn't live with roommates for at least 1-2 years to save costs.

You also certainly don't need $400 on groceries to stay healthy. I'm a smallish but very active person spending about $100-150/month which includes unhealthy stuff like cookies and cakes or dinners organized for friends so even if you'll need to spend more than me you should be able to shave off $100 there.

Also, it's nice to have an idea on when to have kids, but do realize that if you don't even have a partner yet that's a pretty impossible target/goal. To be FI in 6-8 years is a great one though, so I'd totally encourage you to shoot for that!

merula

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Re: Case Study: New College Graduate
« Reply #5 on: July 16, 2018, 11:04:21 AM »
What's your car insurance deductible? Generally, I would agree that you should insure what you can't afford to replace, but you could afford to replace your vehicle with cash if needed. At the very least, make sure you have a high deductible (at least $1,000; $5,000 if you can), so that you're only insuring catastrophic damage and not minor accidents that you can easily cash-flow.

You've got a lot of space in your tax-advantaged accounts. I'd suggest immediately bumping up your 401k contributions so that you max out the $18,500 worth of space before the end of the year. I think you're a better candidate for tIRA than Roth, but either way that should be your secondary goal because you can continue to make 2018 contributions until April 2019.

Check your employer's rules about post-tax 401k contributions. Despite the fact that the IRS says that post-tax contributions aren't part of the $18,500 cap, that's the way my employer set it up. You should absolutely put more in traditional than Roth; your plans reflect 6-8 high-tax earning years and then the rest of your life of low-tax years, and Roth only makes sense if you expect future tax rates to be higher. (Plus, since you want to get married, that'll also lower your tax rate in the future.)

If your employer will allow post-tax 401k contributions over and above the $18,500 cap, AND will allow in-service withdrawals, AND has a good fund selection with low ERs, then I think a madfiendist-style mega backdoor Roth could make sense. Otherwise, I would plan to live off of taxable accounts while doing a 5-year Roth conversion ladder. You can also do an IRA withdrawal for a first-time house purchase, which may make sense if you're buying a house at FIRE and need to get money out of traditional accounts without penalty anyway.

FactorsOf2

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Re: Case Study: New College Graduate
« Reply #6 on: July 16, 2018, 03:04:35 PM »
What's your car insurance deductible? Generally, I would agree that you should insure what you can't afford to replace, but you could afford to replace your vehicle with cash if needed. At the very least, make sure you have a high deductible (at least $1,000; $5,000 if you can), so that you're only insuring catastrophic damage and not minor accidents that you can easily cash-flow.

+1 to reconsidering the comprehensive car insurance.

Insurance is a complicated issue, but generally it will cost what the company's best models predict they will have to pay out to you in claims PLUS their operating costs and profit margin. From that standpoint you can argue that it only makes sense to carry insurance when:

1) You know that you are a much bigger risk than the insurer realizes (information imbalance).

OR

2) You could not bear the costs incurred by the insured event without significant hardship. The classic example is someone living paycheck to paycheck with terrible credit and a job that they can't get to without their car. If this person totaled their car things could quickly spiral out of control and they could conceivably wind up homeless. Thus they need collision and not just liability insurance. Another example is health insurance where there is some probability for events / conditions that would bankrupt you many times over.

I guess I should also add:

3) You recognize that you are making a mathematically suboptimal decision but you still get some emotional comfort from having insurance. This is totally a legit reason IMO, we're not robots after all :)
« Last Edit: July 16, 2018, 03:06:34 PM by FactorsOf2 »

ginjaninja

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Re: Case Study: New College Graduate
« Reply #7 on: July 16, 2018, 04:07:27 PM »
Being on here as a college graduate is a huge first step.  I am in a similar situation! 

I would keep your IRA as Roth for now because you are in a low taxable bracket.  My life hacks include borrowing or sharing literally whenever is possible.  It has worked really well for me so far.

Additionally, I have alot of spendy friends, as I am sure you do from just graduating.  I try to make the plans so that I can control the cost.  I think the most successful life hack for me so far is when I want to buy something (impulsive, all of the cool people have it, ooo something shiny feeling) I put it on my list with a date.  Most of the things after 3 months can come off of the list.  But if I still want it as badly after 3 months I will buy it.

EfficientEngineer

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Re: Case Study: New College Graduate
« Reply #8 on: July 16, 2018, 06:36:04 PM »
The things that stand out to me are you rent and grocery expenditures. Where do you live? For a single person spending over $800 on rent + utilities sounds like a lot to me unless you're in an extreme HCOL area. Do you have roommates? You're only 22 and no SO or kids so I wouldn't see why you wouldn't live with roommates for at least 1-2 years to save costs.

You also certainly don't need $400 on groceries to stay healthy. I'm a smallish but very active person spending about $100-150/month which includes unhealthy stuff like cookies and cakes or dinners organized for friends so even if you'll need to spend more than me you should be able to shave off $100 there.

Also, it's nice to have an idea on when to have kids, but do realize that if you don't even have a partner yet that's a pretty impossible target/goal. To be FI in 6-8 years is a great one though, so I'd totally encourage you to shoot for that!

I live in a U.S. top 10 most expensive city and have 3 roommates in an apartment.  It's a pretty reasonable rate for the amenities that we have in this area.  I plan to continue living with roommates until I eventually get married.

You're very right, groceries is one of the most prime areas to cut some fat.  I'll have to see what my actual numbers are for it in the next few months after I review my data.  I tend towards meats and vegetables due to dietary restrictions so cheaper carbs tend to not be utilized often (rice, beans, lentils etc).  But I'll be looking at discount grocers and butchers soon to see if there are any deals I can stumble upon.  Any recommendations for meat?

Ah yes, I could've mentioned that I do have a SO and we've been together for some time now and both agree that 6-8 years is optimal before children enter the picture.

Thanks!


What's your car insurance deductible? Generally, I would agree that you should insure what you can't afford to replace, but you could afford to replace your vehicle with cash if needed. At the very least, make sure you have a high deductible (at least $1,000; $5,000 if you can), so that you're only insuring catastrophic damage and not minor accidents that you can easily cash-flow.

You've got a lot of space in your tax-advantaged accounts. I'd suggest immediately bumping up your 401k contributions so that you max out the $18,500 worth of space before the end of the year. I think you're a better candidate for tIRA than Roth, but either way that should be your secondary goal because you can continue to make 2018 contributions until April 2019.

Check your employer's rules about post-tax 401k contributions. Despite the fact that the IRS says that post-tax contributions aren't part of the $18,500 cap, that's the way my employer set it up. You should absolutely put more in traditional than Roth; your plans reflect 6-8 high-tax earning years and then the rest of your life of low-tax years, and Roth only makes sense if you expect future tax rates to be higher. (Plus, since you want to get married, that'll also lower your tax rate in the future.)

If your employer will allow post-tax 401k contributions over and above the $18,500 cap, AND will allow in-service withdrawals, AND has a good fund selection with low ERs, then I think a madfiendist-style mega backdoor Roth could make sense. Otherwise, I would plan to live off of taxable accounts while doing a 5-year Roth conversion ladder. You can also do an IRA withdrawal for a first-time house purchase, which may make sense if you're buying a house at FIRE and need to get money out of traditional accounts without penalty anyway.

Current deductible is $500 for comprehensive and $1000 for collision.  I'll bump thlse up the next time renewal comes around, thank you!

Yep I will definitely be contributing near the max I can per paycheck towards my 401(k).  I've been leaning towards the tIRA as well and may just go that route for 2019 (I've almost maxed my Roth already so its a bit late for that). 

I will talk with HR about the post-tax contributions and clear that up too, thanks for the reminder.  They do have an S&P 500 fund with a 0.04 ER which is great.

That withdrawal from the IRA for a first time home purpose is penalty and tax free yes?  Or just penalty free but income tax still needs to be paid?

+1 to reconsidering the comprehensive car insurance.


Thanks!  Yeah that's been on my mind for a bit. 

Being on here as a college graduate is a huge first step.  I am in a similar situation! 

I would keep your IRA as Roth for now because you are in a low taxable bracket.  My life hacks include borrowing or sharing literally whenever is possible.  It has worked really well for me so far.

Additionally, I have alot of spendy friends, as I am sure you do from just graduating.  I try to make the plans so that I can control the cost.  I think the most successful life hack for me so far is when I want to buy something (impulsive, all of the cool people have it, ooo something shiny feeling) I put it on my list with a date.  Most of the things after 3 months can come off of the list.  But if I still want it as badly after 3 months I will buy it.

Glad to see you here as well!  Those are very good recommendations thanks for posting them.  I'll have to make more of an effort to make the plans to control the cost too.
« Last Edit: July 16, 2018, 07:07:11 PM by EfficientEngineer »

Hirondelle

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Re: Case Study: New College Graduate
« Reply #9 on: July 17, 2018, 12:40:31 AM »
The things that stand out to me are you rent and grocery expenditures. Where do you live? For a single person spending over $800 on rent + utilities sounds like a lot to me unless you're in an extreme HCOL area. Do you have roommates? You're only 22 and no SO or kids so I wouldn't see why you wouldn't live with roommates for at least 1-2 years to save costs.

You also certainly don't need $400 on groceries to stay healthy. I'm a smallish but very active person spending about $100-150/month which includes unhealthy stuff like cookies and cakes or dinners organized for friends so even if you'll need to spend more than me you should be able to shave off $100 there.

Also, it's nice to have an idea on when to have kids, but do realize that if you don't even have a partner yet that's a pretty impossible target/goal. To be FI in 6-8 years is a great one though, so I'd totally encourage you to shoot for that!

I live in a U.S. top 10 most expensive city and have 3 roommates in an apartment.  It's a pretty reasonable rate for the amenities that we have in this area.  I plan to continue living with roommates until I eventually get married.

You're very right, groceries is one of the most prime areas to cut some fat.  I'll have to see what my actual numbers are for it in the next few months after I review my data.  I tend towards meats and vegetables due to dietary restrictions so cheaper carbs tend to not be utilized often (rice, beans, lentils etc).  But I'll be looking at discount grocers and butchers soon to see if there are any deals I can stumble upon.  Any recommendations for meat?

Ah yes, I could've mentioned that I do have a SO and we've been together for some time now and both agree that 6-8 years is optimal before children enter the picture.

Thanks!

Ah okay, yes I've lived in one of those too and that was the only time in my life I had to deal with $800 rents. Good to keep your rent reasonable!

I don't buy any meat so can't give you any recommendations there (will eat when others cook for me). If I want some cheap protein I usually go with eggs or canned fish. Health wise I'd be careful with red meat as high amounts (more than 1/2 lb per week) are known to massively increase your risk of several cancers (WHO recommendations, not some obscure health website). I don't know your dietary restrictions that don't allow you to eat beans, but for veggies I'd recommend you to get the cheapest ones for the bulk of your food (carrots, onions, cucumbers have been cheap at any location I've lived) and then use smaller amounts of "fancy" veggies. Also farmers markets are my best friend, so check if there's one in your are if you're not already going.

And I had assumed you were single as you stated "this plan doesn't include a potential SO" so thanks for clarifying.

merula

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Re: Case Study: New College Graduate
« Reply #10 on: July 17, 2018, 07:49:17 AM »
I tend towards meats and vegetables due to dietary restrictions so cheaper carbs tend to not be utilized often (rice, beans, lentils etc).  But I'll be looking at discount grocers and butchers soon to see if there are any deals I can stumble upon.  Any recommendations for meat?

For the record, beans and lentils are great sources of protein and fiber. They're starchier than plain meat, but I'd hardly call them "carbs". They're also really easy to cook once you've done it a few times.

Current deductible is $500 for comprehensive and $1000 for collision.  I'll bump thlse up the next time renewal comes around, thank you!

You don't have to wait; just call your agent or your carrier and ask them to change it. Not a big deal at all, tons of people do it.

Yep I will definitely be contributing near the max I can per paycheck towards my 401(k).  I've been leaning towards the tIRA as well and may just go that route for 2019 (I've almost maxed my Roth already so its a bit late for that). 

You can shift money between a Roth and tIRA in the year that you've made the contribution. It's called a recharacterization. Start here: https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions and here: https://investor.vanguard.com/ira/roth-recharacterization.

Note: if you start to research this, you'll find a lot of sources telling you this was eliminated with tax reform. That's partially true; the ability to roll funds from tIRA accounts to Roth several times over a year and then only keep the one that's most advantageous has been eliminated. However, the ability to recharacterize plain-vanilla IRA contributions is still around.

That withdrawal from the IRA for a first time home purpose is penalty and tax free yes?  Or just penalty free but income tax still needs to be paid?

All withdrawals from a tIRA will be counted as taxable income when withdrawn; Roth withdrawals will not. The first-time homebuyer rule is just an allowed withdrawal before retirement age.

Here's how it might work: 6-8 years from now, you and your SO are FIRE. You want to buy a house and start having kids. Your assets are primarily in traditional tax-advantaged accounts; you have enough assets in taxable accounts and Roth contributions to cover a 5-year Roth ladder, but not enough to cover a full house purchase AND 5 years of living expenses.

You and your spouse can each withdraw $10,000 from either a traditional IRA or from Roth earnings as first-time homebuyers without penalty. Traditional IRA withdrawals will be added to your taxable income, but if you're FIRE, your actual AGI is probably low enough that you can avoid most taxes on it.

BookLoverL

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Re: Case Study: New College Graduate
« Reply #11 on: July 18, 2018, 09:34:38 AM »
I don't have that many suggestions on the specific prices, not being in the US, but here are some things you could consider if you're serious about wanting the fastest possible FI timeline.

1) Are you in a location where you really need to keep the car? Car insurance + maintenance + fuel can be a pretty significant expense (for you without including maintenance it looks to be 1/9 of your monthly budget already), so if you're close enough to walk or cycle to work, the shops, and local social events, and you have at least one semi-close public transport link for long-distance travel, you may want to consider selling the car on.

2) Groceries: IDK what is actually high in dollars, but keep in mind that "most expensive" doesn't necessarily mean "healthiest". If you make sure you're getting your macros and vitamins and about the right amount of calories, and avoiding obvious junk, you should be ok. If you're willing to put in a bit of extra time on the cooking, you might be able to buy less popular cuts of meat that maybe take longer to cook or something for cheaper (i.e., get the beef that's good for stewing rather than the fillet steak). Also look into making meals that use the leftovers of previous meals (i.e., buying a whole chicken and then eating it for your dinner, your lunch, your dinner again... you get the idea), and into batch-cooking if you have freezer space available. For the vegetables, try to prioritise ones that are in season in your area, because they'll usually be cheaper.

3) Gym membership: do you find that the social aspect helps you stick with the exercise? Because if not, and if you don't usually use that much of the expensive equipment, you could either take up equipment-free exercise at home or in a public space (running, push ups and similar), or get some equipment that would let you do your work out at home for cheaper in the long run (especially if you could find some second-hand that somebody else had bought but never used or something). I think your numbers are monthly, right? $40 a month is $480 a year, so it's up to you if the benefits of the gym are worth that to you really. If you can find some exercise buddies willing to meet up outside of a gym, you could even get the social aspect.

I see that you already explained you are living with roommates, so I will assume it would be difficult for you to further decrease rent.

In general, you may be interested in checking out Early Retirement Extreme, if you haven't already, as the "typical" timeline given over there is 5 years (not much shorter than your 6-8 year window) rather than the 10-15 usual over here, and in general the book, blog, and forums have a lot of tips for how to save more money.

EfficientEngineer

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Re: Case Study: New College Graduate
« Reply #12 on: July 19, 2018, 09:26:12 PM »
Ah okay, yes I've lived in one of those too and that was the only time in my life I had to deal with $800 rents. Good to keep your rent reasonable!

I don't buy any meat so can't give you any recommendations there (will eat when others cook for me). If I want some cheap protein I usually go with eggs or canned fish. Health wise I'd be careful with red meat as high amounts (more than 1/2 lb per week) are known to massively increase your risk of several cancers (WHO recommendations, not some obscure health website). I don't know your dietary restrictions that don't allow you to eat beans, but for veggies I'd recommend you to get the cheapest ones for the bulk of your food (carrots, onions, cucumbers have been cheap at any location I've lived) and then use smaller amounts of "fancy" veggies. Also farmers markets are my best friend, so check if there's one in your are if you're not already going.

And I had assumed you were single as you stated "this plan doesn't include a potential SO" so thanks for clarifying.

I have been doing quite a few eggs lately, they're a pretty cheap and healthy food, so thanks for reaffirming that for me!  Have you found that farmers markets have reasonable prices?  I was under the impression that you could get better value out of places like Costco or Walmart/

Ah yes sorry about that, she has her own financial plan and I wanted to get a financial picture of just myself with this post.


I tend towards meats and vegetables due to dietary restrictions so cheaper carbs tend to not be utilized often (rice, beans, lentils etc).  But I'll be looking at discount grocers and butchers soon to see if there are any deals I can stumble upon.  Any recommendations for meat?

For the record, beans and lentils are great sources of protein and fiber. They're starchier than plain meat, but I'd hardly call them "carbs". They're also really easy to cook once you've done it a few times.

Current deductible is $500 for comprehensive and $1000 for collision.  I'll bump thlse up the next time renewal comes around, thank you!

You don't have to wait; just call your agent or your carrier and ask them to change it. Not a big deal at all, tons of people do it.

Yep I will definitely be contributing near the max I can per paycheck towards my 401(k).  I've been leaning towards the tIRA as well and may just go that route for 2019 (I've almost maxed my Roth already so its a bit late for that). 

You can shift money between a Roth and tIRA in the year that you've made the contribution. It's called a recharacterization. Start here: https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions and here: https://investor.vanguard.com/ira/roth-recharacterization.

Note: if you start to research this, you'll find a lot of sources telling you this was eliminated with tax reform. That's partially true; the ability to roll funds from tIRA accounts to Roth several times over a year and then only keep the one that's most advantageous has been eliminated. However, the ability to recharacterize plain-vanilla IRA contributions is still around.

That withdrawal from the IRA for a first time home purpose is penalty and tax free yes?  Or just penalty free but income tax still needs to be paid?

All withdrawals from a tIRA will be counted as taxable income when withdrawn; Roth withdrawals will not. The first-time homebuyer rule is just an allowed withdrawal before retirement age.

Here's how it might work: 6-8 years from now, you and your SO are FIRE. You want to buy a house and start having kids. Your assets are primarily in traditional tax-advantaged accounts; you have enough assets in taxable accounts and Roth contributions to cover a 5-year Roth ladder, but not enough to cover a full house purchase AND 5 years of living expenses.

You and your spouse can each withdraw $10,000 from either a traditional IRA or from Roth earnings as first-time homebuyers without penalty. Traditional IRA withdrawals will be added to your taxable income, but if you're FIRE, your actual AGI is probably low enough that you can avoid most taxes on it.


Yeah I've had beans a number of times, but perhaps I should soak them longer and use some baking soda to see if that helps with digestion.  Lentils I should experiment with.  I just added it to my grocery list - any tips that google won't tell me for them?

Thats good to know that about changing insurance deductibles, thank you!

I appreciate the other two comments too.

I don't have that many suggestions on the specific prices, not being in the US, but here are some things you could consider if you're serious about wanting the fastest possible FI timeline.

1) Are you in a location where you really need to keep the car? Car insurance + maintenance + fuel can be a pretty significant expense (for you without including maintenance it looks to be 1/9 of your monthly budget already), so if you're close enough to walk or cycle to work, the shops, and local social events, and you have at least one semi-close public transport link for long-distance travel, you may want to consider selling the car on.

2) Groceries: IDK what is actually high in dollars, but keep in mind that "most expensive" doesn't necessarily mean "healthiest". If you make sure you're getting your macros and vitamins and about the right amount of calories, and avoiding obvious junk, you should be ok. If you're willing to put in a bit of extra time on the cooking, you might be able to buy less popular cuts of meat that maybe take longer to cook or something for cheaper (i.e., get the beef that's good for stewing rather than the fillet steak). Also look into making meals that use the leftovers of previous meals (i.e., buying a whole chicken and then eating it for your dinner, your lunch, your dinner again... you get the idea), and into batch-cooking if you have freezer space available. For the vegetables, try to prioritise ones that are in season in your area, because they'll usually be cheaper.

3) Gym membership: do you find that the social aspect helps you stick with the exercise? Because if not, and if you don't usually use that much of the expensive equipment, you could either take up equipment-free exercise at home or in a public space (running, push ups and similar), or get some equipment that would let you do your work out at home for cheaper in the long run (especially if you could find some second-hand that somebody else had bought but never used or something). I think your numbers are monthly, right? $40 a month is $480 a year, so it's up to you if the benefits of the gym are worth that to you really. If you can find some exercise buddies willing to meet up outside of a gym, you could even get the social aspect.

I see that you already explained you are living with roommates, so I will assume it would be difficult for you to further decrease rent.

In general, you may be interested in checking out Early Retirement Extreme, if you haven't already, as the "typical" timeline given over there is 5 years (not much shorter than your 6-8 year window) rather than the 10-15 usual over here, and in general the book, blog, and forums have a lot of tips for how to save more money.

Thanks for the thought provoking comment!  I agree car expenses are a large part of my budget and in my ideal world I wouldn't need one - I'm keeping that in mind for future places I live especially.

Very true on the cooking!  I've been toying with the idea of buying bulk meat from Costco and crockpoting it up.  I probably should do that.  I've been batch cooking for a while and it works wonders.

I just picked up one the other day for $23/mo so just about half what I was expecting so thats great! I'm pretty big into weightlifting so having a gym with a variety of equipment is very nice + its less than a 10 minute drive for me.  I constructed my own home gym last summer and totally agree, if you have the space you can pick up used equipment off of craigslist for super cheap.

That is most certainly an interesting site that I haven't been to in a while, thanks for reminding me about it!

COEE

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Re: Case Study: New College Graduate
« Reply #13 on: July 19, 2018, 09:54:02 PM »
Questions:
+ Should I do a traditional IRA instead of a Roth to decrease taxes further? (Next year)
+ I may be able to do after tax contribution to my 401k (mad fientist mega backdoor Roth), thoughts?
+ Just graduated this year and I'll have a taxable income of ~$15k ($36k base less 401k and HSA), anything you'd recommend doing now while in a lower tax bracket (consolidate individual holdings?)

I would invest in as much into Roth as possible in your tax bracket (especially while tax brackets are even lower than normal).  Do you have a Roth 401k available?  When I was a wee engineer this was one of the best decisions I ever made.  Do this until you hit the 22% tax bracket and maybe even the 24%.

Don't buy life insurance.  You likely have enough insurance to be buried through work for free(ish).  That should be plenty without anyone depending on you.  Once you're married or have a mouth to feed then get a term-life policy that will supplement your income (4% rule) if you were to unexpectedly die at a young age.

Max out all of your retirement accounts ASAP.  It's okay that you're not there yet, just keep working on it, and you'll be there before long.  Get a 10% promotion... stash 7% and have a nice dinner on the other 3%.  Get a 3% bump, stash it.  Keep doing this until you FIRE.

I'd encourage you to move jobs often as a young engineer.  Gain experience in broad disciplines.  Love what you do.  You may find you don't want to quit!

Hirondelle

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Re: Case Study: New College Graduate
« Reply #14 on: July 20, 2018, 03:14:31 AM »
Ah okay, yes I've lived in one of those too and that was the only time in my life I had to deal with $800 rents. Good to keep your rent reasonable!

I don't buy any meat so can't give you any recommendations there (will eat when others cook for me). If I want some cheap protein I usually go with eggs or canned fish. Health wise I'd be careful with red meat as high amounts (more than 1/2 lb per week) are known to massively increase your risk of several cancers (WHO recommendations, not some obscure health website). I don't know your dietary restrictions that don't allow you to eat beans, but for veggies I'd recommend you to get the cheapest ones for the bulk of your food (carrots, onions, cucumbers have been cheap at any location I've lived) and then use smaller amounts of "fancy" veggies. Also farmers markets are my best friend, so check if there's one in your are if you're not already going.

And I had assumed you were single as you stated "this plan doesn't include a potential SO" so thanks for clarifying.

I have been doing quite a few eggs lately, they're a pretty cheap and healthy food, so thanks for reaffirming that for me!  Have you found that farmers markets have reasonable prices?  I was under the impression that you could get better value out of places like Costco or Walmart/

Ah yes sorry about that, she has her own financial plan and I wanted to get a financial picture of just myself with this post.


It might depend on your location I guess. I used to live in Boston, didn't have a car and was a single person so I literally had no way to get to Costco or Walmart in a way that made it worth the savings. There were none within biking distance and paying for public transit (didn't have a pass - biked/walked everywhere) would've offset the savings I could make with buying stuff over there, especially considering I wouldn't be able to carry too much. So as I was stuck with the city supermarkets, the farmers market in town was a bargain (got lots of berries for $1/box, cheaper veggies etc).

If you have a Walmart of Costco in your area it might be certainly worth it, but in my situation at the time it wasn't.