Author Topic: Case Study: Saving for College/FI  (Read 1238 times)

cobe1245

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Case Study: Saving for College/FI
« on: April 13, 2018, 01:16:30 PM »


Life Situation: Married (Me-47, Her-46, 2 teens(14,11)

Gross Salary/Wages:
My Salary-$120
My Possible Bonus - $10,00
Her - $0

Individual amounts of each Pre-tax deductions
Me-I was contributing 10% to 401k,  I get 100% match up to 3% contribution.
She-She was layoff last year.
Also, this year is the first year my company is allowing us to do a HSA account. I didn't know about it and only put in $1000. Should I put more?

Adjusted Gross Income:
My Bi-Monthly Paycheck Net - $3500

Current expenses:
Mortgage = 0
Electric $100
Heat $30
Water $50
Auto Payments $0
Auto Gas $200-$300
Auto Insurance $100
Grocery/House Hold $600
Dining Out $200
Cell Phones $100
Medical/Prescription$0
Netflix $14
kids activities (sport): $2000/year

Assets:
2011 Toyota Camry
2013 Toyota Highlander
me-401k $400K
she-401k - 65k
IRA-$30k

Primary Home - $180-220k
Savings - $40k emergency fund
Checking-$40k

Liabilities:
My wife went back to school after her layoff. We paid $4000 for last this past year.

Specific Question(s):   
Are we saving enough. My goal is to save half of our income. Where do I put it? I have been reading this website and thinking of opening a Vanguard account. Put all the money of checking into an investing account? VTSAX? Should I start an educational 529 account for the 11 and 14 years old?
I want to be FI. Is this possible?

Ben Kurtz

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Re: Case Study: Saving for College/FI
« Reply #1 on: April 13, 2018, 01:47:33 PM »
I'd normally grouse about the Highlander, being a somewhat inefficient and wasteful car, but in your case I can't be bothered. You spent all your surplus income paying off your mortgage in recent years, I take it?

For how to prioritize different sorts of savings, investment and retirement accounts, follow these instructions: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

For guidance on asset allocations and specific mutual funds to pick within your accounts, follow these instructions: https://www.bogleheads.org/wiki/How_to_build_a_lazy_portfolio

Keep saving half your income and you could easily retire within 5 years. If your earning and spending figures are remotely accurate you already have this figured out.

College tuition is a bit of a wildcard. But I would say that if you FIRE a couple years before your first kid applies to college, you could fill out a FAFSA showing virtually no income and no countable assets (retirement accounts and primary home are excluded), meaning your kids would probably get huge scholarships and financial aid packages.

You'd have to do a bit of extra planning around that, because some of the early retirement planning techniques used around here to ensure that 401k money is available before regular retirement age, like the "Roth pipeline" and 72t SEPP payments, generate "income" for tax purposes and therefore show up on your FAFSA. So you'd need to educate yourself on the various rules and qualifications to plan things out to get the best possible result, much like early retirees do now in order to make sure they don't accidentally "earn" too much money to qualify for good rates on the Obamacare exchanges, but you have plenty of options for keeping your affairs in just the right order for this purpose.

EDIT: I see your oldest is 14. That makes the FIRE timing a bit tight, in terms of getting 5 more years of earnings in and then minimizing your income in time to apply for financial aid. Would your older daughter fancy a gap year before starting college? That might help line the timing up better. Before I entered university, many years ago, I took a year to study languages abroad in a low-cost program and it was a terrific use of my time. Also worth keeping in mind: even if your financial aid application at freshman year shows you with a healthy income and limited "family need" (meaning you get stuck with a high tuition out of pocket cost), you can re-apply every year to highlight changed circumstances, which can cut your costs on subsequent years. Finally, there is plenty of discussion on the blog and in the forum about expensive college tuition in general: possibly worth it if the kid is going to Harvard or MIT or a real top-25 school that opens a lot of unique doors. But if the child's choices are paying $20,000 per year to attend Good State U vs.  $50,000 per year to attend Precious Little-Known Liberal Arts College, the advice around here will be to send your child to Good State U -- and make her take work-study and summer jobs so she can pay part of the cost of attendance out-of-pocket.   
« Last Edit: April 14, 2018, 01:04:34 PM by Ben Kurtz »

cobe1245

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Re: Case Study: Saving for College/FI
« Reply #2 on: April 14, 2018, 02:28:31 PM »
Thank for the reply Ben, so, I shouldn't think about a 529 for my younger one? Also, I have started a Roth IRA at Vanguard for both my wife and myself. She is currently not working, it would be under her name right? I am confused about that. Also, when I started the Roth IRA, it said I am qualify for 2017 and 2018. Should I go ahead and  do both years?

Should I rolled my wife's old 401k(currently at Fidelity) to Vanguard IRA? Would it count into the 2017 or 2018 $5500 max for each year?

cobe1245

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Re: Case Study: Saving for College/FI
« Reply #3 on: April 14, 2018, 02:42:54 PM »
Also, what kind of allocation to put in Vanguard with my Roth IRA and my wife's rolled over amount? Should I  just put it in VTSAX, VFIAX, or half-half? Too risky with our age (47 & 46)?

Also, since we have about 40K cash in the bank, should I go ahead and put all that money in a separate Vanguard account with the same allocation?

Ben Kurtz

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Re: Case Study: Saving for College/FI
« Reply #4 on: April 14, 2018, 05:06:52 PM »
If your state has an income tax deduction for 529 accounts, I'd contribute without hesitation as much as will earn the deduction before investing in a regular investment account -- most states limit this to $5,000 per wage earner per year or something, so you almost certainly won't be left with a 529 account that is too big relative to the amounts you would like to give your daughters for school, even if you swing a good financial aid package. If there is no tax deduction, I'd contemplate a few grand a year anyway, but only once you're absolutely maxed out all your other tax advantaged accounts. I'm pretty sure 529s these days are counted in the financial aid formula just the same as any other parent taxable account when determining ability to pay, so it shouldn't harm you there (but worth researching further if you have some idea of what schools your daughters are interested in). At one point in the past they were counted as student property, which the formula assumes you'll spend on education at a much faster rate -- increases the family's expected yearly contribution.

A 529 account set up with the parent as the owner and the oldest child as the beneficiary can be rolled to benefit the younger child if it is not used up when the older child is in college, so I would just open one account and treat is as a common pool. The parent as owner controls the account so your oldest daughter cannot withdraw cash on her own in excess of what you personally take out of the account for her tuition.

Regarding Roth IRAs, you have until close of business on Monday to make contributions in the name of tax year 2017, so get that done ASAP. Yes, one account in your name and one account in your wife's name, even though she does not work right now. Contribution limits are determined based on family income, but each account is titled in the name of one spouse. So $22,000 goes to Vanguard on Monday, $5,500 per person per tax year. You'll probably have to log into each account separately and order $11,000 transfers for each. There should be check-boxes on the on-line forms to make sure they credit the correct tax years.

Regarding the Fidelity 401k, I personally wouldn't roll it into an IRA unless the custodian is saying you must. Sometimes, if the balance is not above a certain threshold, the 401k custodian will kick out an account of someone who has left the employer -- but at $65,000 she should be well above Fidelity's usual threshold of $25,000 so I doubt this is happening. Check her investment options; Fidelity usually has some good low-cost index funds in their 401k plans (the "Spartan" funds), so if that's the case just make sure she's invested in those and leave it alone. Part of the issue is an IRA containing rollover 401k funds can block a Backdoor Roth strategy (if you ever need to execute one of those), another part is that 401k plans have better creditor protections in case you get sued or go bankrupt or something, relative to IRAs (which are protected, but not as well as 401ks). Both of these points are probably unlikely in your case, but if your 401k fees are decent then it's worth keeping the money there to keep these benefits. But note, if you do choose to roll over, it does not count against your contribution limits for the current year.

Regarding cash on hand and emergency funds -- you have $80,000 on hand, which is probably way more than enough. Even $40,000 is probably too much given your spending rate, by most people's definitions, but I won't argue with what helps you sleep at night. Let's say that $22,000 of that $40,000 goes into Roth IRAs tomorrow. The rest you should invest elsewhere. Perhaps $5,000 also goes into a 529 account if you get a tax break -- actually, perhaps $10,000 if you can get a 2017 tax break by contributing by close of business Monday. The remainder (after contributions to 529s, if any) can go in a standard taxable account.

Regarding asset allocation and positioning: There is a real personal element here, having to do with risk tolerance and ability to sleep at night. Most people around here are quite aggressive in their investment portfolios, because they need to grow and last a long time. This is offset by keeping about a year's worth of spending money in cash to avoid having to sell into a market crash, and really tight discipline over spending, especially fixed recurring obligations. But if seeing your portfolio zig and zag gives you heartburn, you might lean towards 60% stocks and 40% bonds. This would be considered fairly conservative around here, and the type of portfolio allocation on which the Trinity Study was based -- the one which found the 4% "Safe Withdrawal Rate" (look it up). Less stock than that and you run into the risk that the long-term growth of the portfolio undershoots your needs. As between tax protected and taxable accounts, people who really geek out on this stuff have suggested that bonds go in taxable, and use a tax free muni fund instead of a corporate bond fund if your tax rate is high enough to have the tax treatment of corporate bond interest annoy you.




Laura33

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Re: Case Study: Saving for College/FI
« Reply #5 on: April 16, 2018, 07:59:30 AM »
A more fundamental question for you:  Are you currently tracking your spending?  Because the round numbers + low amounts + missing categories (real estate taxes?  insurance?  home/car maintenance?)  leads me to think this is not everything.

FI is a function of both your assets and your needs.  You have listed about $1500/mo in expenses and another $2K/yr for sports; if this is what you are actually spending, you are largely FYI now ($20K/yr x 25 = $500K investable assets needed).  And if you are spending around $1700/mo and bringing home $7000, you are already saving well above the 50% threshold -- and you also shouldn't have any problems maxing out both your 401(k) and two Roths.  So what's missing? 

I agree with Ben Kurtz that your first order of business is to maximize your tax-favored options.  Max out your 401(k) and HSA, and max out the Roths for you and your wife (for both 2017 and 2018 if you can).  If you have money to save beyond that, any sort of regular investment account is fine.  You already have a huge leg up with a paid-for house, so if your expenses really are as low as you suggest, you are largely set.

cobe1245

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Re: Case Study: Saving for College/FI
« Reply #6 on: April 17, 2018, 03:05:23 PM »
We lived very frugal. We don't go out to eat much. We tried to save as much as we can.  We just started this IRA last year after reading this forum. My wife lost her job so, she can't max out her 401K a little more than a year ago.. We both max out on our Roth IRA this year and next year. I am just worried about tuition for colleges since I have 2 kids (14 and 11) heading there soon. This is the first year we have HSA. I have been reading about this and only put in $1000 like we did before with our other plan but that plan requires we use it or lose it. So definitely will put in the max for next year in HSA. With this HSA, should I used this funds whenever I go to the doctor for my family and I? I have been reading that people keep this fund untouched and use cash to pay for their doctors visit. This fund is ONLY for medical right? When do I use it? With both my kids playing in sports, I am afraid I will have to use it sooner than later.

Sorry, I used another user's template and they didn't have real estate taxes or insurance. We saved $7000 for real estate taxes/insurance and maintenances on house and cars every year. This money is funded mostly from bonus (~4000) and income taxes refund.
I need to track every penny on the spreadsheet often. Sometime, it takes too much time so, we just make sure we give ourselves each a budget for everything and then make sure we don't go over.

Thanks for all your inputs and suggestions!