Author Topic: Case Study: Please check my math: 5 years to go?  (Read 1087 times)

naiadanthers

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Case Study: Please check my math: 5 years to go?
« on: October 08, 2018, 12:54:55 PM »
Topic Title: Reader Case Study - your question here

Life Situation: Married filing jointly. No dependents. Relatively high-tax state.

Gross Salary/Wages: 72,500 (me); 65,000 (spouse)

Individual amounts of each Pre-tax deductions:

401k: 18,500 (me), 18,500 (spouse)
HSA: 3100 (me)
IRA: 5500 (me), 5500 (spouse)
Healthcare:  ~300/month (me), 0 (spouse)

Rental Income, Actual Expenses, and Depreciation:

Month-to-month rental of rooms in primary residence: ~$8000/year.
Expenses: $2000 / year (maintenance)

Adjusted Gross Income: $91,900

Taxes: Federal, state/local, and FICA: ~$18,000

Current expenses: What follows are my actual yearly expenses, averaged over the last three years, and rounded up to the nearest 10 dollars.

Yearly:

Auto (including gas, insurance, registration, maintenance): $2000
Discretionary Travel: $2500
Entertainment (including alcohol, homebrewing, events, movies, skiing, etc.): $1400
Dining Out: $500
Groceries: $2750
Healthcare (including fitness-related items, such as running shoes, and bike parts): $1250
Household goods (e.g., kitchen items, electronics, etc): $600
Rent and or Property Tax: $9000
(Expected) maintenance on house: $2000
Electric Utility: $500
Gas Utility: $670
Internet Service: $400
Cell Phones (x2, with data): $150
Dog (including food, vet visits): $500

Total Yearly: $25,220


Expected ER expenses: About the same? See below.

Assets:

Investments in VTSAX or equivalent:

Taxable Brokerage: $89,000
401ks: $76,000
IRAs: $86,000

Total Investments: $251,000


House: Paid off, purchased for $150k. Worth about the same, but very illiquid. Not counting value toward net worth in any FI plan.

Liabilities: Student loan: $11,200 @ 4.23%

Specific Question:

If you do the math, this leaves about $48k every year, after funding 401ks, IRAs, taxes, and living expenses, to invest. Right now, that money's just going into the taxable brokerage. Assuming our ER expenses never exceed an inflation-adjusted $30k, at a 3.5% SWR which is the spending ceiling I've set and the SWR I'm comfortable with, I have us as on-track for FI in about 5 years, assuming a conservative 4% nominal YOY ROI in the meantime. That seems really soon to me, but hey numbers are numbers, right? So, I guess  my main question is: Does that sound right?

marty998

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Re: Case Study: Please check my math: 5 years to go?
« Reply #1 on: October 08, 2018, 02:30:55 PM »
Do you really want roommates forever? Is your current house your "forever" house?

I think it will be touch and go in 5 years... 30k at 3.5% means you need a stash of $857k. And between your pre and post tax accounts you are supposably saving almost $100k a year. So yes you might get there...

reeshau

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Re: Case Study: Please check my math: 5 years to go?
« Reply #2 on: October 09, 2018, 08:26:29 AM »
Looking also at the cost side, you have an obvious gap in healthcare; it will be more expensive than your (any) employer plan.

I also don't see any sinking funds for your assets:  car replacement, major house repairs.  $2,000 per year probably covers an average year, but not the year where the roof or HVAC needs replacing.

These are compounded by investment points @marty998 mentioned.  You can get away without these plans in detail, but only if you have plenty of cushion in your 'stache.

MustacheAnxiety

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Re: Case Study: Please check my math: 5 years to go?
« Reply #3 on: October 09, 2018, 09:57:49 AM »
Congrats on maintaining such low expenses OP! Those 3 year averages are inspirational.

checking your math:
I am having trouble getting to an AGI of 91,900.
72500+65000+8000-18500-18500-3100-5500-5500=90,800
If you further subtract maintenance 90,800-2,000=88,800

Your expenses only total 24,220, but maybe you added $1K misc and just didn't list it.

When you are doing your calculations make everything inflation adjusted.

Other concerns:
what will your taxes be in retirement? Are you staying in your high tax state?  You should be able to avoid federal income taxes but many states have a flat tax?
I assume you don't plan to have kids.
You appear to assume perpetual access to healthcare subsidies.  In the current system you can get near free health insurance once retired, but it is a risk.
I assume you are in a state with expanded medicaid, since it is a high tax state.  If not your income may be too low to qualify for ACA subsidies and too high for medicaid.
Some of your expenses seem scary low to assume they will be available in perpetuity: 2 cell phones for $150 per year; another poster mentioned you don't seem to include large one time expenses (new cars, major home repairs).
Divorces can happen and it doesn't seem like your fire plan will survive supporting 2 households.

Areas for improvement/consideration:
Why not max out your HSA? Here is a post explaining why HSAs are awesome https://www.madfientist.com/ultimate-retirement-account/
Edit: 9,000 in taxes on a 150K house seems absurd (6% per year).  just curious what is going on here and if there might be a way to optimize here, especially if you want to ditch the roommates.

Even with the slightly lower savings numbers 5 years seems doable to get to a safe 30K withdrawal rate according to http://cfiresim.com/ especially if you assume some amount of social security.  I included 20000 in annual social security starting in 2053. I also assumed you keep your roommates for the next 10 years (5 working + 5 retirement). This gets you to 100% success rate after 51 years (any more time and the historically bad January 1966 scenario is removed). In the worst case historical scenario you still have 360K.

I would be too nervous that I would want to spend more money or that healthcare would eat up more than I assumed, but 5 years seems doable if you are the reasonably confident type and plan to make some retirement income.




« Last Edit: October 09, 2018, 01:07:03 PM by MustacheAnxiety »

naiadanthers

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Re: Case Study: Please check my math: 5 years to go?
« Reply #4 on: October 10, 2018, 06:25:28 AM »
Thanks, all.

Responses:

- I wasn't including maintenance in the AGI, but of course I should. Doesn't make that much of a difference to the tax situation.
- I added 1k misc to expenses and neglected to list it; it should be 25,220
- Taxes in retirement should be ~$1500/yr
- I am assuming ACA stays put, at least in the states I'd want to live in.
- Expenses will stay just as they are in retirement. Large one-time expenses are included -- that $2000 on auto includes a $500/year savings toward purchasing a new car every 10 years or so, which has been what I've done for the last two decades.
- Divorce won't happen.
- HSA is maxed out -- employer contributes 300. Forgot to include that.
- It's actually 6k in taxes on the house, but averaged over taxes OR rent (for the last three years), it's 9k. I plan to keep it around 9k either for taxes OR for renting somewhere comparable.
- See above on the car. Sinking funds are the 2000/year for maintenance. That's not an average year. So far, the average year has been $450, with the remainder being saved for future large-ticket repairs.
- Between pre- and post-tax we are saving about $100k. We make roughly 137. Government takes about 18k, leaving 119. Expenses take about 25k, leaving 94. We invest all of that.

People seem to be saying that there's not enough cushion here, since I'm failing to account for either (changes to) healthcare, repairs on durable goods, or changes in lifestyle. Is that about right?

MustacheAnxiety

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Re: Case Study: Please check my math: 5 years to go?
« Reply #5 on: October 10, 2018, 07:45:09 AM »
People seem to be saying that there's not enough cushion here, since I'm failing to account for either (changes to) healthcare, repairs on durable goods, or changes in lifestyle. Is that about right?

Pretty much.  All I can say is there isn't enough cushion for us.  But we spend about 50% more than you do, want to retire soon and plan for 3% withdrawal given current sky high valuations, and we are super nervous/anxious about health insurance--we are budgeting 20K per year for health care expenses even though they would be a few hundred bucks a year under the current rules. Also even though we have survived some trying times and still love each other a great deal, we haven't seen close to the worst times and the last thing I want to deal with is having to return to the work force in the midst of a divorce. But enough of our personal doom and gloom fears ...

It sounds like your current expenses are actually 25,220-3,000 (property taxes) - 2000 (car and maintenance savings) + 3,600 (health insurance) = 23,820. So 30K provides more buffer than it originally seemed to.  Shooting for 5 years seems reasonable, if on the less cautious side of the spectrum.  You have time to see what happens with health care.  We could be single payer in 5 years, who knows. I assume you will make a more detailed plan that accounts for income taxes and your latest expenses as you get closer to FIRE.

Re HSA: I assumed that your HSA plan covered you and your spouse so your limit was actually 6,900, but it sounds like that is not the case.  Now I am also jealous of your spouses totally free health insurance.

Good luck! Give us an update over the years.  Also stick around and give some advice.  It seems like you must have a ton of tips and tricks for keeping expenses low.  You have already given me some food for thought (even if the ACA blows up, we could move to a state like Massachusetts that still has a similar scheme).

reeshau

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Re: Case Study: Please check my math: 5 years to go?
« Reply #6 on: October 10, 2018, 07:48:26 AM »
People seem to be saying that there's not enough cushion here, since I'm failing to account for either (changes to) healthcare, repairs on durable goods, or changes in lifestyle. Is that about right?

Yes, those are two sides of the same coin:  either give yourself cushion for your needs to be able to move (up), or research those topics so you can build a detailed plan through your own lifecycle, to the point that you have a written plan for them, that you can then easily adjust as you continue to learn.