Author Topic: Help me build a seven-year plan  (Read 3446 times)

nkt0

  • Stubble
  • **
  • Posts: 178
Help me build a seven-year plan
« on: May 20, 2018, 08:36:36 PM »
Topic Title: Reader Case Study - 7-year plan

Life Situation: Iím a 42 year-old married man (filing jointly) with no kids living in Philadelphia. I work full-time as a software developer, which enables my wife to pursue her dream as an indie author full-time. Iíll get into what that means later.

Gross Salary/Wages: $84k plus $6k net from publishing business

Pre-tax deductions: 4% 401k w employer match

Other Ordinary Income: My wife has some irregular editing income, usually around $200-300/month on average.

Taxes: Taxes are a little complicated because of the publishing business. We pay an average of +$4k in federal taxes per year in addition to normal wage taxes based on profits from the business. State tax in PA is fixed at 3.07%. Local wage tax in Philly is 3.8907%.

Net income after taxes and deductions: $61,632 + ~$10k from wifeís stuff

Current expenses:
Mortgage P&I   $1,212
Mortgage T&I   $394
Student Loan   $1,300
Food & Dining   $700 Ė> can chop this in half, most likely
Misc.    $185
Travel/Transportation   $500 -> probably more like $350 after running the numbers
Entertainment   $300 -> can chop in half
Healthcare   $350 -> might be able to move this to the business
Utilities   $177
Gifts & Charities   $200
iTunes   $50 -> can get this down to $15-20
Life Insurance   $27
TOTAL   $5,395

Assets:
House $290k
401k $24k
403b $40k
Trad IRA $3k
savings $8k
wife IRAs $70k plus $4k savings

Liabilities:
Mortgage original amount $209k
Current principal $187k @ 3.75% with 17 years left
Student loans $16k @ 4.5% with 1 year left

Specific Question(s): Iím currently aggressively paying down my student loans with the goal of paying them off in full by the end of the calendar year (if my bonus happens) or mid 2019 (if no bonus). But Iíd like to up my MMM game and figure out a plan to FIRE in seven years (when I hit 50).

Wifeís books bring in about $2k/month gross, but only about $500 net. Publishing is expensive and volatile. Iím trying not to rely on that in these calculations in case the bottom falls out completely.

Our combined net worth is only about $40k right now and I estimate weíll need $500-700k for retirement. Seems impossible to get there in 7 years, but maybe with your help!
« Last Edit: May 29, 2018, 07:06:04 AM by nkt0 »

ysette9

  • Magnum Stache
  • ******
  • Posts: 3177
  • Location: Bay Area, CA
Re: Help me build a seven-year plan
« Reply #1 on: May 20, 2018, 09:20:02 PM »
Is your wife in the start-up phase of her business and can she expect to earn more in the future? That sounds like a lot of work for basically no profit. Does she see it more as a hobby?

nkt0

  • Stubble
  • **
  • Posts: 178
Re: Help me build a seven-year plan
« Reply #2 on: May 20, 2018, 09:25:19 PM »
Success as a fiction author is hard to come by, but itís her dream and after 10+ years of joe-jobs, we agreed she should go for it and just do it full-time, income be damned. I support her unconditionally but Iím also trying to develop a plan for us both to be free from the wage labor shackles.

She may break out and earn more over time, but the industry is also changing very rapidly, so thereís no guarantee.

Abe

  • Handlebar Stache
  • *****
  • Posts: 1055
Re: Help me build a seven-year plan
« Reply #3 on: May 20, 2018, 09:42:11 PM »
Here's some overall critiques on your budget:

Mortgage P&I   $1,212
Mortgage T&I   $394
Student Loan   $1,300
Food & Dining   $700  way too much for two people.
- Go to one of the food budget threads for suggestions to cut costs. Quick tip: beans & rice are cheap.[/b]
Misc.    $185
Travel   $500  is this for hotels or planes? Try homeaway or vrbo, and drive or take a train
Entertainment   $300 also too much. go find free activities in your area
Healthcare   $350
Utilities   $177
Gifts & Charities   $200
iTunes   $50 Isn't it $10/month for unlimited access? Not sure, but this seems like a lot
Life Insurance   $27
TOTAL   $5,395

Your savings rate is 8% (4% you, 4% employer into 401k). If you can halve your top 3 most expensive categories that is an extra $9k, which boosts you towards 20% savings and makes your goal much more feasible.
Refer to this quick calculator:
https://networthify.com/calculator/earlyretirement
« Last Edit: May 20, 2018, 09:47:23 PM by Abe »

nkt0

  • Stubble
  • **
  • Posts: 178
Re: Help me build a seven-year plan
« Reply #4 on: May 20, 2018, 10:05:15 PM »
Thanks Abe. Some follow up below.

Food & Dining   $700  way too much for two people.
Yeah, definitely starting here. This is a conservative estimate, but pretty sure we can easily cut it in half.

Travel   $500  is this for hotels or planes? Try homeaway or vrbo, and drive or take a train
This is for all transportation, including occasional airfare, car rental (we donít own a car), public transit, and bike share. We almost never stay in hotels; we only travel to camp or visit friends/family. I bike to work and we walk almost everywhere. But we do take several trips to visit family each year, who are scattered all over the country.

Entertainment   $300 also too much. go find free activities in your area
Definitely another area to cut from.

iTunes   $50 Isn't it $10/month for unlimited access? Not sure, but this seems like a lot
Occasionally buy ebooks, apps, and movie rental. Probably should use library more.

Student loan will be paid off in one year, so that will boost my annual savings by $15k. Then the question becomes: plow that money into paying down the mortgage or invest?
« Last Edit: May 20, 2018, 10:07:59 PM by nkt0 »

AccidentialMustache

  • Stubble
  • **
  • Posts: 128
Re: Help me build a seven-year plan
« Reply #5 on: May 20, 2018, 10:15:55 PM »
I don't know exactly where you are on the software developer end of things but 84k sounds like being seriously lowballed to me. Especially if you're some form of senior/staff/principal.

Not that you shouldn't cut expenses too, but if your pay is low by 50%... trimming $8400/year down by half is 10% of how much better off you'd be by getting your pay up to where it should be.

Assigned homework: go make sure you aren't being lowballed with glassdoor. Note that from my recruiter, I hear that she thinks glassdoor is 20-30% low by itself (people who report are people who leave, which are people who were probably underpaid and got recruited with more pay). YMMV, that may not apply to all markets.

... And then you should go back to saving that $4200/year by trimming the food down. :-)

fell-like-rain

  • 5 O'Clock Shadow
  • *
  • Posts: 26
Re: Help me build a seven-year plan
« Reply #6 on: May 21, 2018, 06:29:17 AM »
I don't know exactly where you are on the software developer end of things but 84k sounds like being seriously lowballed to me. Especially if you're some form of senior/staff/principal.

Second this. Philly salaries may be lower than Boston, but around here that's what a good junior dev might be making, and anyone senior is well into the six figures. How long have you been with your current company? It might be worth sending out a couple resumes, just to see what kind of offers are out there.

nkt0

  • Stubble
  • **
  • Posts: 178
Re: Help me build a seven-year plan
« Reply #7 on: May 21, 2018, 06:38:29 AM »
I don't know exactly where you are on the software developer end of things but 84k sounds like being seriously lowballed to me. Especially if you're some form of senior/staff/principal.

Second this. Philly salaries may be lower than Boston, but around here that's what a good junior dev might be making, and anyone senior is well into the six figures. How long have you been with your current company? It might be worth sending out a couple resumes, just to see what kind of offers are out there.

I really appreciate you all looking out for my income well-being! :D I am definitely under-salaried by industry standards, but there are many reasons for this. Plus i typically get a five-figure cash bonus at the end of the year; i just don't want to count on that because it's not guaranteed.

fell-like-rain

  • 5 O'Clock Shadow
  • *
  • Posts: 26
Re: Help me build a seven-year plan
« Reply #8 on: May 21, 2018, 07:03:16 AM »
(I figured I'd run the numbers and see if the 7 year plan is feasible)

It looks like your current assets, ignoring home equity, are about 160k, and you're currently saving ~$560/month, plus $280+match in the 401(k). Once the student loans are paid off, you'll have an extra $1300 to save monthly.

Current expenses are ~$5,400- after loans and mortgage are paid off, that drops to $2,900. Even before you include increased insurance/healthcare costs in retirement, that means you'd need at least $870,000 to sustain a 4% withdrawal rate.

Scenario A: Based on your current savings and spending, it'll take 14 years to reach a FIRE net worth (and you'd still have some mortgage left to pay off, so call it more like 15 or 16)

Scenario B: If you cut $500 of monthly spending, your savings rate goes up by that much and your post-mortgage spending drops to $2,400. In this scenario, you could reach your FIRE net worth in 10-11 years. Again, there's the remaining mortgage to consider, but I think you'd still shave off 3 years or so compared to if your spending remains constant.

Scenario C: If you cut that $500 of spending as well as boosting your earnings a ton (let's say an additional 20k post-tax), you could make it in under a decade, but definitely not 7 years.

So, the upshot is if nothing changes, you retire in 16 years. Cutting spending by $500 would shave off 3 years, and boosting income a fair bit would remove another 3. There's really no scenario where you retire in 7 years, unless y'all are willing to make pretty major lifestyle changes. (Also, this is all ignoring social security, healthcare, etc., and it's just what a guy on the internet is saying, so take it with a big grain of salt)
« Last Edit: May 21, 2018, 07:05:06 AM by fell-like-rain »

nkt0

  • Stubble
  • **
  • Posts: 178
Re: Help me build a seven-year plan
« Reply #9 on: May 21, 2018, 07:21:23 AM »
Scenario B: If you cut $500 of monthly spending, your savings rate goes up by that much and your post-mortgage spending drops to $2,400. In this scenario, you could reach your FIRE net worth in 10-11 years. Again, there's the remaining mortgage to consider, but I think you'd still shave off 3 years or so compared to if your spending remains constant.

Thanks, felt-like-rain! This is the scenario that i think is most likely. We are not extravagant spenders, we just need motivation to cut some areas where we weren't really paying attention before.

Question is: Once i get the student loans paid off, should i attack the mortgage or build savings?

fell-like-rain

  • 5 O'Clock Shadow
  • *
  • Posts: 26
Re: Help me build a seven-year plan
« Reply #10 on: May 21, 2018, 07:44:29 AM »
Scenario B: If you cut $500 of monthly spending, your savings rate goes up by that much and your post-mortgage spending drops to $2,400. In this scenario, you could reach your FIRE net worth in 10-11 years. Again, there's the remaining mortgage to consider, but I think you'd still shave off 3 years or so compared to if your spending remains constant.

Thanks, felt-like-rain! This is the scenario that i think is most likely. We are not extravagant spenders, we just need motivation to cut some areas where we weren't really paying attention before.

Question is: Once i get the student loans paid off, should i attack the mortgage or build savings?

There's a thread that has a good breakdown of investment order here: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

In your case, the best bet would be to put more money into your 401(k) or IRA- if you're invested in mainly stocks, the expected return is greater than the interest paid on your mortgage, and you have the additional benefit of the tax savings.

nkt0

  • Stubble
  • **
  • Posts: 178
Re: Help me build a seven-year plan
« Reply #11 on: May 21, 2018, 08:30:40 PM »
Another question I have: Do people count their primary residence among their assets, and if so, how do you unlock itís value in retirement without going into debt and defeating the purpose of financial independence?

mbl

  • Bristles
  • ***
  • Posts: 292
Re: Help me build a seven-year plan
« Reply #12 on: May 22, 2018, 07:23:38 AM »
Another question I have: Do people count their primary residence among their assets, and if so, how do you unlock itís value in retirement without going into debt and defeating the purpose of financial independence?

I don't count my home as an asset when doing a worst case evaluation,  as one usually requires a place to live.
Not an asset that would be tapped to provide income when not working(forget reverse mortgage scenario).
If you were to sell and move into something that would cost less going forward then yes, but for now,  in your position where
you need to ramp up your investing, I would exclude it.


« Last Edit: May 22, 2018, 08:11:53 AM by mbl »

jlcnuke

  • Pencil Stache
  • ****
  • Posts: 776
Re: Help me build a seven-year plan
« Reply #13 on: May 22, 2018, 09:50:26 AM »
Another question I have: Do people count their primary residence among their assets, and if so, how do you unlock itís value in retirement without going into debt and defeating the purpose of financial independence?

Net worth would include your equity in the home. Your portfolio, on the other hand, only includes those assets that you can actually use to generate cash flow. If you're going to sell your house and buy something smaller or in a cheaper location, then you would include the expected net return in your investment portfolio. The "value" of your home is irrelevant to your ability to generate cash flow though unless you do a reverse mortgage etc at some point in the future.

Laura33

  • Handlebar Stache
  • *****
  • Posts: 2072
  • Location: Mid-Atlantic
Re: Help me build a seven-year plan
« Reply #14 on: May 23, 2018, 07:22:12 AM »
First, for a very simple analysis, see this:  https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

If you want to retire in 7 years, that means a 75% savings rate.  You already have a couple of years' expenses saved, so you wouldn't need to go quite that high, but it would still require a very dramatic change in lifestyle.  So I agree that that is unlikely.  OTOH, you're currently spending all of the take-home income from your job and then some, so you can change your timeline to FIRE quite dramatically with more minor lifestyle changes.

You're already in a good spot with the student loan almost gone.  But your top priority at this point should be to shove as much as you can into tax-deferred retirement accounts, because that is where you will get the biggest bang for your buck long-term.  I mean, it's great to have a paid-off house, but you also need invested assets generating cash to cover all of those other expenses.*  And the power of compounding says that dollar that you put away today has far and away the most significant impact on the amount of cash you can generate in the future.**  In addition, the tax-deferred status of a 401(k) account allows you to put away even more of those dollars for the same hit to your budget.

I do think it would also be a good idea to pay off the mortgage by the time you retire (this is a personal preference, there are many here who would advocate maintaining the leverage permanently).  But you don't need that done now -- you need that done by your target retirement date.  So spend the next 5-10 years growing your retirement 'stache, until you reach the point where it will continue to grow on its own to the amount you need by your target FIRE date.  At that point, you can shift your extra cash to paying off the mortgage.***  When your mortgage is gone and your 'stache is at a level to support your now-mortgage-free expenses, boom, FIRE.

*Do not count your house in your "assets to FIRE with."  The 4% rule is based on your invested assets, so unless you're going to sell the house and invest the equity, it doesn't count.  Where it does help, though, is giving you a low-cost place to live once the mortgage is paid, which means your overall 'stache can be smaller.

**My standard example is that if you have $100K to invest today, the rule of 72 says that if you average a 7% return, you will have $200K in 10 years, $400K in 20, and $800K in 30.  But if you start 10 years later, you end up with only half that amount ($400K) -- same amount invested, same 30 years, because you lose an entire doubling

***Illustrated by the above scenario.  If you spend the first decade paying off the mortgage (say) instead of investing, you end up with a $400K 'stache that will support an annual spend of $16K.  But if you spend the first decade investing and THEN pay off the mortgage while you let that money ride, you end up with an $800K 'stache that will support an annual spend of $32K.****

**** This is obviously way too simplistic and doesn't account for the extra mortgage interest or the fact that no one actually has $100K to invest all at once.  It is just an illustration of why the timing can make such a big difference. 

nkt0

  • Stubble
  • **
  • Posts: 178
Re: Help me build a seven-year plan
« Reply #15 on: May 23, 2018, 12:59:37 PM »
I mean, it's great to have a paid-off house, but you also need invested assets generating cash to cover all of those other expenses.*  And the power of compounding says that dollar that you put away today has far and away the most significant impact on the amount of cash you can generate in the future.**  In addition, the tax-deferred status of a 401(k) account allows you to put away even more of those dollars for the same hit to your budget.

First of all, thank you so much for taking the time to reply with so much detail! Your arguments were very easy to follow. As i think about this more, paying off the mortgage now makes even less sense because of something i hadn't thought about until just nowÖ

Paying the mortgage doesn't make the house appreciate in value any faster, but investing savings does compound. So regardless of if i'm leveraged on the house or not, it will still appreciate at the same rate. And of course, that appreciation isn't unlocked as usable $$$ unless i sell and move somewhere cheaper (might happen) or do some other financial wizardry (reverse mortgage Ė no thanks).

Anyway, that's the long way of saying that I've been totally convinced to redirect my student loan payments to investments after i've finished paying off the debt.

Getting to 75% savings rate isn't quite possible without major, major lifestyle changes my SO probably isn't interested in. However, i think i can get to 50% relatively easily (even with the mortgage). And if we do decide to move somewhere cheaper in the future, we might be able to recoup some of the house value increment, too. I guess it all depends on how fed up i am with wage slavery in sevenish years. :D

Now to start planning where to invest all these savings!

nkt0

  • Stubble
  • **
  • Posts: 178
Re: Help me build a seven-year plan
« Reply #16 on: May 24, 2018, 09:44:49 AM »
As i'm researching investment strategies (pardon me for being such a noob), I think i'm starting to understand some of the basics.

One question i have: I'm assuming anything having to do with dividends or interest income is bad for me while i'm still working full-time. Is the general idea to potentially flip to high dividend investments after retirement so you can take advantage of the standard deduction? Should i be sticking with low dividend, high growth stocks for now while i amass my mini-fortune?

I suppose it doesn't matter in tax-deferred 401k and TIRAs. Or does dividend income count against your income for tax bracket calculation from those accounts, too?

Laura33

  • Handlebar Stache
  • *****
  • Posts: 2072
  • Location: Mid-Atlantic
Re: Help me build a seven-year plan
« Reply #17 on: May 24, 2018, 10:02:32 AM »
Paying the mortgage doesn't make the house appreciate in value any faster, but investing savings does compound. So regardless of if i'm leveraged on the house or not, it will still appreciate at the same rate. And of course, that appreciation isn't unlocked as usable $$$ unless i sell and move somewhere cheaper (might happen) or do some other financial wizardry (reverse mortgage Ė no thanks).

Exactly.  That's a lightbulb moment, isn't it?

Abe

  • Handlebar Stache
  • *****
  • Posts: 1055
Re: Help me build a seven-year plan
« Reply #18 on: May 29, 2018, 09:19:19 PM »
One question i have: I'm assuming anything having to do with dividends or interest income is bad for me while i'm still working full-time. Is the general idea to potentially flip to high dividend investments after retirement so you can take advantage of the standard deduction? Should i be sticking with low dividend, high growth stocks for now while i amass my mini-fortune?

I suppose it doesn't matter in tax-deferred 401k and TIRAs. Or does dividend income count against your income for tax bracket calculation from those accounts, too?

Don't pick individual stocks. That is a good way to do worse than expected. Stay with index funds that have low expenses.
It doesn't matter much for tax-deferred accounts other than the dividend is not taxed currently, but will be taxed as regular income when you withdraw it. Presumably the higher yield from fully investing the dividends (rather than dividends - marginal tax rate) will more than make up for the higher tax rate upon withdrawal.

For taxable accounts you do want to avoid excessive dividends since most are taxed at the income tax rate. However, broad-based index funds minimize these since most stocks give few, if any, dividends.  Right now on $300k of taxable investments with an 80/30 split I get <$5k a year in dividend income.


nkt0

  • Stubble
  • **
  • Posts: 178
Re: Help me build a seven-year plan
« Reply #19 on: August 21, 2018, 07:29:25 AM »
I calculated my current savings rate based on my latest numbers to the best of my ability:

Net income after taxes: $5136
401k contribution: $280
Total income: $5416

401k + match: $560
Student loan principal: $1250
Mortgage principal: $675
Total savings: $2485

Savings rate: 46%

Commentary: Once i get the student loan paid off, i can almost max out my 401k and TIRA accounts, which boosts my savings due to tax advantages. Very exciting! Here's an estimate of what that should look like:

Net income after taxes: $3836
TIRA contribution: $458
401k contribution: $1458
Total income: $5752

401k + match: $1738
TIRA: $458
Mortgage principal: $675
Total savings: $2871

Savings rate: 50%