Author Topic: How can I make a drastic change?  (Read 1354 times)

zenath

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How can I make a drastic change?
« on: November 08, 2018, 10:08:37 PM »
I am at a bit of crossroads in regards to how we will be deploying our income. I want to make a change, but am unsure where to begin. For now I'll give some financials.

Yearly Totals
I have three children (11, 7, 4) and my wife stays at home caring for the kids. What is shown below is my anticipated earning/taxes for 2019. I calculated this based on a few formulas I found of IRS and my state tax tables. I just received my raise and this roughly tracks what I see my deductions current are, but does have a small amount of error. Based on my calculations, I barely make the 22% federal income bracket when accounting for deductions and then my 401k contributions firmly put me in the 12% bracket.

LabelAmount
W2 Wages
134000
W2 Deductions
3450
W2 Medicare/SS Taxable
130550
W2 W2 401K
19000
FIT Taxable
111550
W2 Social Security Tax
7961
Medicare Tax
1943
Federal Income Tax
7191
State Income Tax
6590
Other Deduction
2040
Take Home
85425

Notes
  • Tax exempt deductions include Healthcare, Dental, and payroll bus fares. My work currently offers amazingly cheap plans with great coverage.
  • Other deduction is insurance and cafeteria food at work. The cafeteria is amazing and my wife often joins me once a week there instead of eating out. It's about a 50/50 split of insurance vs cafeteria.
  • My company matches 401k contributions at 50% for up to 6% of your income for up to $4500 match.

Monthly Budget
I've had some success with getting my wife to stick to a budget with me. It roughly breaks down as follows

LabelAmount
Income
7100
Mortgage
-2500
Groceries/Dining out
-1000
Gas and Car Maintenance
-350
Bills (phone, gas, electric, internet)
-325
Kids (gymnastics, fun activities)
-300
Wife Fun Money
-250
My Fun Money
-200
Other (Shopping/Date Night)
-425
IRA contribution x2
-1000
Remaining
750

Notes
  • Mortgage includes ~$580 of extra principle payment and $95 of PMI. Of the remaining mortgage, it is about $6k/year in taxes and $700/year insurance.
  • My IRA contributions are Roth and my wife's are traditional. I started to hit the traditional tax deduction limit and simplified my life by making all my IRA contributions Roth. I run or take the bus into work.

Assets and Liabilities
LabelAmount
Emergency Savings
18k
401k+IRAs
130k
Guessed House Value
325k
Mortgage
-254k

Notes
  • Bought the house at 295k with 15k down on a 30 year mortgage at 3.625%. Still paying PMI until the loan is down to 230k (thus the extra 500/month in principle). I could get the house appraised and possibly eliminate the PMI sooner since house prices have been rising in my neighborhood over the past two years, but I'd need to do some payoff analysis to see if that would be worth it. My guessed home value is taken off Zillow and subtracting a bit since I think Zillow over estimates the home value.
  • We also own a 2012 Honda Odyssey, but it is our only vehicle and we intend to drive it until it dies.

My Driving Questions
  • Should I continue to max out my retirement vehicles even though I have basically no after tax investments?
    While my savings rate is around 35%, this is mostly in retirement vehicles (~25%). Even then, a good chunk of the after tax cash is going to pay down the mortgage. I'll address the latter part of that in the next question, but I don't really have FU money. I only have a safety net. I have been growing weary of my current job. I have been reading up on stoicism to help even my emotional up and downs from wanting to quit right away to being acutely aware of how privileged I am to have all my needs and a substantial portion of wants taken care of.
     
  • Should I aggressively pay down my mortgage or do after-tax investing?
    I am aware that the mathematically correct decision is to invest, but the mortgage pay down is a guaranteed return. Additionally, this is my only debt and does provide me with some anxiety. I have mixed feelings about the house. I like our neighbors and neighborhood, but wish I would've waited longer to buy. I was influenced by the stories I heard of rising house prices (still true) and the fact that we move rentals 2 times over the 3 prior years to the purchase. I plan to make this the home we're raising our kids in, but actually plan to downsize by the time our youngest enter college or the workforce.
     
  • Do you think I should use a vanguard ETF, tax advantaged mutual fund, or regular mutual fund for taxable investments?
    One of the reasons I have waited so long for after tax investments, is the tax consequences from the investments. I realize that ETFs largely solve this, but Vanguard doesn't allow automatic investment if you use the brokerage and ETFs. They do allow it for their mutual funds, but it seems that while the tax advantaged mutual fund may have tax advantages, this is counteracted by the higher account minimums and the fact that they may have lower returns due to the tax minimization strategy. This has me stuck in analysis paralysis. I always operate best when I can automate investing so that it just happens and I can spend my energy on other important matters like making sure the 4 year old takes potty breaks instead of peeing on the floor!
     
  • What are your thoughts on 529 Plans or alternatives?
    I could contribute up to 3k/beneficiary for college, but trying to max that out would eat up all remaining after-tax money. I would only be getting about 7 cents on the dollar back for my contribution in state tax returns. We actually have ~$1k in the 529 funds, but I paused those contributions to eliminate car and student debt and never restarted it (this was before buying the house).
     
  • How much do you think I would need in my retirement account to just let it appreciate in value for when I am 60 (28 years from now)?
    This question is a roundabout way of expressing a thought I've been mulling over. Say I contribute enough in a retirement account such that by age 60 I have enough to retire, but stop contributing. I would then payoff the mortgage, save up FU money, and make a life transition. The real question is how much is that? A lot of my costs are inflated by the larger house we have for the kids and the other increased expenses (food, car, and kids own budget).

I know this is a lot for a case study. Thoughts/opinions on any of the questions are greatly appreciated.

MDM

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Re: How can I make a drastic change?
« Reply #1 on: November 08, 2018, 11:06:45 PM »
What is shown below is my anticipated earning/taxes for 2019. I calculated this based on a few formulas I found of IRS and my state tax tables.
You might compare your results with the case study spreadsheet.  That tool currently uses 2018 brackets/limits/etc., but perhaps that is what you are doing also?  Don't know how good the WI state calc'ns are, but the federal ones are usually very good.

Quote
My Driving Questions
  • Should I continue to max out my retirement vehicles even though I have basically no after tax investments?
    While my savings rate is around 35%, this is mostly in retirement vehicles (~25%). Even then, a good chunk of the after tax cash is going to pay down the mortgage. I'll address the latter part of that in the next question, but I don't really have FU money. I only have a safety net. I have been growing weary of my current job. I have been reading up on stoicism to help even my emotional up and downs from wanting to quit right away to being acutely aware of how privileged I am to have all my needs and a substantial portion of wants taken care of.
     
  • Should I aggressively pay down my mortgage or do after-tax investing?
    I am aware that the mathematically correct decision is to invest, but the mortgage pay down is a guaranteed return. Additionally, this is my only debt and does provide me with some anxiety. I have mixed feelings about the house. I like our neighbors and neighborhood, but wish I would've waited longer to buy. I was influenced by the stories I heard of rising house prices (still true) and the fact that we move rentals 2 times over the 3 prior years to the purchase. I plan to make this the home we're raising our kids in, but actually plan to downsize by the time our youngest enter college or the workforce.
     
  • Do you think I should use a vanguard ETF, tax advantaged mutual fund, or regular mutual fund for taxable investments?
    One of the reasons I have waited so long for after tax investments, is the tax consequences from the investments. I realize that ETFs largely solve this, but Vanguard doesn't allow automatic investment if you use the brokerage and ETFs. They do allow it for their mutual funds, but it seems that while the tax advantaged mutual fund may have tax advantages, this is counteracted by the higher account minimums and the fact that they may have lower returns due to the tax minimization strategy. This has me stuck in analysis paralysis. I always operate best when I can automate investing so that it just happens and I can spend my energy on other important matters like making sure the 4 year old takes potty breaks instead of peeing on the floor!
     
  • What are your thoughts on 529 Plans or alternatives?
    I could contribute up to 3k/beneficiary for college, but trying to max that out would eat up all remaining after-tax money. I would only be getting about 7 cents on the dollar back for my contribution in state tax returns. We actually have ~$1k in the 529 funds, but I paused those contributions to eliminate car and student debt and never restarted it (this was before buying the house).
     
  • How much do you think I would need in my retirement account to just let it appreciate in value for when I am 60 (28 years from now)?
    This question is a roundabout way of expressing a thought I've been mulling over. Say I contribute enough in a retirement account such that by age 60 I have enough to retire, but stop contributing. I would then payoff the mortgage, save up FU money, and make a life transition. The real question is how much is that? A lot of my costs are inflated by the larger house we have for the kids and the other increased expenses (food, car, and kids own budget).
1. Yes.  Do watch the tIRA deductibility limit, http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits. You might simply switch to Roth IRA contributions for both of you.  See also
- Investment Order and
- How to withdraw funds from your IRA and 401k without penalty before age 59.5

2. Depending on the PMI rate, it might be worth getting rid of that before doing taxable investing, then paying the monthly mortgage minimum and investing taxably after PMI is gone.

3. "Tax managed" funds often are worthwhile only when one is paying >30% federal, etc.  See ETFs vs mutual funds - Bogleheads for that part of the question.

4. I agree with the "put on your own oxygen mask first" philosophy here: get your own retirement finances in good shape first, then look at 529s if relevant.

5. Some back of the envelope calculations (see rows 48-69 on the 'Misc. calcs' tab of the case study spreadsheet to do your own):
Quick calculation of "Time to FI"
Planned Withdrawal RateWR4.0%
Annual Savings InvestedS$/yr
Annual Expenses in RetirementE50,000$/yr
Current Assets InvestedA320,000$
Investment returnr_5.0%
Time to FIt27.9yr
In other words, $320K growing at 5%/yr real would provide enough to spend $50K/yr if you wait 28 years. 

But contributing only $10K/yr (on top of the $320K start) drops the time to FI from 28 years to 21 years.  Would 7 years earlier retirement be worth $10K/yr between now and then to you?
 

Linda_Norway

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Re: How can I make a drastic change?
« Reply #2 on: November 10, 2018, 01:15:38 PM »
You spend 800 a month on fun. Can't you cut down on that, starting with yourself to give the good example for your wife?
For fun activities for the children, can you not try to find other types of activities that don't cost so much. For example something outdoorsy?
« Last Edit: November 11, 2018, 04:57:09 AM by Linda_Norway »

2Birds1Stone

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Re: How can I make a drastic change?
« Reply #3 on: November 10, 2018, 01:32:26 PM »
What Linda said.

If you add the "shopping/date night" it adds up to $1,175/month or $14,100/yr!

Groceries/dining out $12,000/yr......by cutting these two categories in half, you could literally retire a decade sooner. 

zenath

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Re: How can I make a drastic change?
« Reply #4 on: November 18, 2018, 12:39:00 PM »
@MDM:
Thanks for the reply. I've already done two analyses on what my time to FI would be under two scenarios: 1. Pay off mortgage then save enough, 2. Just save up enough cash. Option 1 was about 19 years and option 2 was 20 years. The only difference was the increased investment size vs. debt. I'm now contemplating option 3. Save up enough for retirement, payoff the mortgage, and find a less stressful job. My real goal really isn't FI, but enough FU money to feel confident in making a change.

I wrote this after a particularly stressful week, but a lot of the ideas I am still mulling over. I'll probably make a few of my own spreadsheets and figure it out.

@Linda_Norway:
You are correct that this category could go lower, but for my marriage I dare not lower my wife's budget. My budget should be around $50, but I'm saving up for some computer components that died. It makes it more apparent to everyone else how I use patience and saving to delay gratification. The kid's budget is 60% my daughter's gymnastics, but she is learning so much and love it a lot. Some things do just cost money. Frugality is finding the best value for your money. Being stingy is never spending any money.

@2Birds1Stone:
We probably could save more in the food department, but change comes slowly. We are actually about $100 less on dining out than before. I do encourage more vegetarian / bulk low cost meals, but change is slow.

DoNorth

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Re: How can I make a drastic change?
« Reply #5 on: November 19, 2018, 12:17:47 PM »
to what end are you trying to make the drastic change?

Retiring earlier?  Financial independence?

If you like your job and where you live, keep doing what you're doing and gradually trim expenses and invest more of the savings/raises you receive.  Chances are your wife will be happier and by default, so will you.

On #4, if you contribute $9300, you would receive ~$750 in tax savings.  The real value here is in tax free compounding of the 529 assets and not paying interest on large student loans/putting your kids in debt later on.

On #5, I'm not completely sure what you mean, but I'll share my example.  I'm 40, my retirement accounts = about $450K, I currently have about $63,000/year in passive income and am still working.  I plan on contributing about another $50K-$100K to retirement accounts over the next couple of years and then stopping contributions when I turn 42 and leaving it alone until I'm in my 60s.

Taxable investment withdrawals will supplement my passive income from 42 until I'm in my 60s, I might do some backdoor conversion and I my hope is that the retirement portfolio will grow to about $2M over 20 years with a $550K start point at 7% growth.

Is this the kind of thing you were referring to?