Author Topic: Case study: Software engineer in LA  (Read 1526 times)

mustachemarine

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Case study: Software engineer in LA
« on: January 30, 2018, 08:25:12 PM »
Life Situation:
  • Me: 27, software engineer
  • DW: 28, works in education
  • We live in Los Angeles, CA. No kids. Married.

Gross Salary/Wages: 331K

Individual amounts of each Pre-tax deductions
  • 401K: 18K (+9K from employer)
  • HSA: 4,750 (+2K from employer)

Other Ordinary Income: None

Adjusted Gross Income: 308K

Taxes: 90K

Current expenses: (from greatest -> least) (unless qualified, figures are PER YEAR)
  • Taxable savings: 130K
  • Rent: 35.5K (2950 / month)
  • Roth IRA: 11K
  • Mad money: 10.8K (DW and I each receive 450 / month of mad money. Mad money is budget allocated to non-shared frivolous expenses.)
  • Groceries: 7.8K
  • Travel: 7.2K
  • Restaurants: 4.2K
  • Car payment 6K
  • Auto Insurance: 1.8K
  • Gas + oil changes: 1.5K
  • Entertainment: 1.2K
  • Internet/Phone: 0.72K
  • Total: 216K

Assets:
  • Taxable investment: 200K
  • 401K: 135K
  • Checking account: 50K (0% interest)
  • 2 cars: 20K
  • HSA: 17K
  • Vest company stock (that I havenít sold yet): 12K
  • Roth IRA: 11K
  • Total: 445K

Investment breakdown (includes taxable investments/401K/roth ira/hsa:
  • Total US stock: 217K
  • Total US bond: 80K
  • Total international stock: 55K
  • Total international bond: 11K
  • Total: 363K (25% bonds)

Liabilities: 7K car debt remaining at 1.5% interest rate. Originally a 3-year loan, almost in final year)

Specific Question(s): I'm looking for an overall critique. But in particular would like feedback on below:
  • Tax optimization: Are there any tax optimizations that I should be aware of? For example, I only found out about the backdoor roth this year.
  • Advice to reduce spending: Please tell me if any of my expenses are out-of-line. Face-punching welcome. :-)

Ideas on increasing savings next year:
  • Max out DW's 403b/457b. We didn't contribute to this in 2017 and this would allow to stash another 37K pre-tax.
  • Migrate from 0% interest checking to high-yield savings account. Moving to Ally (1.35% interest savings account) would give us ~$500 extra / year.
  • Consider mega-backdoor roth. My employer allows this. Would allow for another 27K/year in roth account.
  • Remove collision coverage from both vehicles (but need to pay off first). Should reduce insurance cost by ~750/year.

I feel like our lifestyle, while lean in comparison to a lot of people I know, still has a lot of waste that could be cut. We are hoping to have at least 1.5M saved by 35 so that we can stop working so much and spend more time with our future kids. While 1.5M isn't enough to sustain our current lifestyle, my DW plans to continue working part-time and I would be working on a software-based side-business (which would be up-and-running before I stop working).

Thank for so much in advance for reading this and providing any thoughts / suggestions you may have.
« Last Edit: January 30, 2018, 09:36:56 PM by mustachemarine »

Abe

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Re: Case study: Software engineer in LA
« Reply #1 on: January 30, 2018, 08:49:54 PM »
Hello fellow LA mustachian. If you're near Santa Monica let me know (can private message if you want).

I think you should max out the 403b/457b, you have plenty of savings that you won't need for a while. If the investment options are the same, the 457b should take priority since you can withdraw that early without the 10% penalty, just ordinary income tax. This will give you the $37k with only $18k penalized if withdrawn early (i.e. for down payment on a million-dollar shack in LA).

Next step would be the mega backdoor Roth. One reason is you won't be with the employer forever, and the next one may not offer this. You can always withdraw the contributions without penalty if needed. This will give you $54 - 9 - 18 = $27k in savings that can be withdrawn if needed. These two strategies will account for half your available savings.

For your remaining taxable savings, look for funds that have low dividend distributions. Vanguard has several. This will minimize potential ordinary income tax on certain dividends and push more of the earnings into capital gains, which is much more tax efficient at our income level. Some people suggest municipal bonds, but I think the federal taxes on the dividends and lower yields outweigh the state tax savings, even in California.

See if your employer offers a deferred compensation plan for you or your husband. If he works for the UC system, they have one. It may not be that helpful if you all are planning to leave the company in the next few years, but could be a consideration.

Moving to Ally and removing collision coverage for vehicles are good ideas. They are small pickings but no major downsides.

Your food and restaurant budget is too high. Look into grocery stores that sell food at a discount like Smart & Final.  We were spending the same amount until we switched stores and bought an Instapot. That halved our spending with minimal effort.


mustachemarine

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Re: Case study: Software engineer in LA
« Reply #2 on: January 30, 2018, 09:34:11 PM »
Thanks for the reply, Abe!

Quote
For your remaining taxable savings, look for funds that have low dividend distributions. Vanguard has several. This will minimize potential ordinary income tax on certain dividends and push more of the earnings into capital gains, which is much more tax efficient at our income level. Some people suggest municipal bonds, but I think the federal taxes on the dividends and lower yields outweigh the state tax savings, even in California.

Thanks, I wasn't aware of this! It looks like VTSAX has 95% qualified dividends so those be paid at capital gains IIUC. But fewer dividends would be even better tax-wise, so I'll need to look into lower dividend funds. I am wary of adding additional complexity though, managing bond/stock and US/international split is already a chore.

Quote
Your food and restaurant budget is too high. Look into grocery stores that sell food at a discount like Smart & Final.  We were spending the same amount until we switched stores and bought an Instapot. That halved our spending with minimal effort.

Agreed. Will need to check out Smart & Final and look into instapot!


Tabaxus

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Re: Case study: Software engineer in LA
« Reply #3 on: January 31, 2018, 08:34:54 PM »
The fact that you have access to a mega backdoor roth and are not taking advantage of it is criminal. 

Abe

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Re: Case study: Software engineer in LA
« Reply #4 on: January 31, 2018, 11:03:58 PM »
VTSAX is fine - you're right about the qualified dividends. That's what our non-retirement investing account is mostly in. I get a few hundred dollars in ordinary taxable dividends and the total tax on it is very low.


Villanelle

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Re: Case study: Software engineer in LA
« Reply #5 on: January 31, 2018, 11:40:55 PM »
Are those actual tracked expenses?

What about utilities?

What cars do you own, how much do you owe and at what rate?

mustachemarine

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Re: Case study: Software engineer in LA
« Reply #6 on: February 01, 2018, 11:06:38 PM »
Are those actual tracked expenses?

What about utilities?

What cars do you own, how much do you owe and at what rate?

I got them by extrapolating 1-month of actual expenses to a year. Too much work to do an entire year.

Utilities are ~700/year. Not sure how much I can influence that figure. We already have energy efficient appliances.

We own 2 cars, one is owned outright, other has 7K debt left at 1.5%. I've been thinking about paying it off early so that I can drop the collision insurance on it ($500/year).