Author Topic: Reader Case Study: Our situation  (Read 1948 times)

firedupready2go

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Reader Case Study: Our situation
« on: July 04, 2018, 08:11:52 PM »
Life Situation: Married couple (I am 25, husband is 37) - DINKs, no plans for kids - would like to retire myself around the time my husband is able to retire with his pension in 15 years, so not insanely early. Luckily, we both have jobs that we're passionate about and enjoy - but we also don't want to die in our offices. We live in a low cost midwestern city.

Gross Salary/Wages:
Me: $75,000
Husband: $64,500
Total Gross: $139,000 (total bonus between both of us is often around $9,500, but we don't count on this and I'm ignoring it for purposes of this case study)

Retirement Plans and Investments
Pretax: My 401k: Balance of $5,000, contributing $6,750/year including 3% match
Pretax: His 401k: Balance of $5,000, contributing $6,750/year (no match)

Post tax:Joint Brokerage Account: Balance of $10,000 - contributing $9,000/year

Extra Mortgage Payment: $1500 monthly (major question is whether we should continue this - goal was to make extra payments until PMI is eliminated once we hit $188,000 owed - and then begin investing this amount in our brokerage account - PMI is only $76.28/month so although I've done a few calculators that show a good return on paying this down early, I am interested in outside opinions)

Total Net after taxes and above investments: $5728.29

Current expenses (monthly):
Mortgage: $1436 (Owe $220,000 on home worth $240,000 - paid $235k - 4% on the mortgage, 30 year fixed, 29 years remaining)
Vehicles (two): $840 - one will be paid off in two years, the other in five
Car Insurance: $121.04
Electricity: $100
Gas: $65
Internet: $60
Water/Trash/etc: $108
Recurring Subscriptions: $47.96
Cell Phones: $145
Apple Upgrade Plan: $40.76
Food: $500
Vacation: $300 (approximately $3600/year)
Entertainment: $120
Clothing: $300
My Student Loan: $218.82 (1 year into 10 years of Public Service Loan Forgiveness...Owe $54,000 altogether for undergrad and graduate degree --- income based repayment will go up slightly next year)
Total: $4,402.58 ($52,830.96)

Emergency Fund/Checking Accounts (all earning 1.49%): $25,000

Expected ER expenses:
Husband's pension kicks in in 15 years. We would both like to retire at that point (he will be 52, I will be 40) without changing our lifestyle substantially. My student loan should be eliminated via PSLF by that point, we anticipate monthly expenses won't include two car payments or the extra mortgage payment either... Still, we would like to budget for increased travel and of course health care costs at that stage. We anticipate needing approximately $75,000 annually. His pension should cover $50,000 of this.

One other note: I also have a pension, which will not kick in until I turn 60 - if I quit working in 15 years, it will add about $24,000 to our income.

If you consider our extra mortgage payment part of our overall investment plan (which it is - and after PMI is eliminated, will go to our brokerage acct), we're investing $40,500/year. Just a quick investment return calculator shows me that with 6% returns, we should be approaching $1 million in 15 years (we invest bonuses as well - and incomes will likely increase slightly in that time frame as well).  So, I'm thinking - looking ahead, a 4% draw from that - along with his pension - should put us at around $90k/year. Ignoring, of course, things that will kick in further down the road like my pension and social security.

So a few questions:
1. Overall, are we on the right track to make this happen? Any recommendations? I know we could be more frugal - but we're not looking to retire asap, just at a specific point 15 years down the road.

2. Are we doing the right thing paying down the mortgage to eliminate PMI and THEN putting that money towards our investments?

3. Am I doing the right thing by counting on PSLF for my student loan and making the minimum payment for ten years? I plan to remain in eligible employment throughout that period...
« Last Edit: July 04, 2018, 08:38:05 PM by firedupready2go »

ysette9

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Re: Reader Case Study: Our situation
« Reply #1 on: July 04, 2018, 09:26:19 PM »
Things like recurring subscriptions, Apple upgrade (what is that?), and cell phones seem like easy pickings for reducing your spending. The biggest issue though is your massive car payments. I highly recommend dumping those suckers and buying something used, cheaper, in cash. Compared to your income and mortgage payment the amount you spend on cars is just astronomical.

I can’t speak on loan forgiveness personally though I have seen other people on the forums be concerned about the rules of the game being changed on people mid-stream with the current administration.

Have you tried the case study spreadsheet and/or cFIREsim.org for running your scenario?

gpyros85

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Re: Reader Case Study: Our situation
« Reply #2 on: July 04, 2018, 11:08:06 PM »
What is the debt owed on the vehicles? Is this interest rate higher than mortgage?

Also, why not taking advantage of ROTH IRA?

I would definitely pay down the mortgage enough to remove PMI, this is without question.

Then I would go start increasing the savings rate. What tax bracket are you in? What was your effective tax bracket? With dual incomes you can deduct $37,000/year from your current tax bracket and no kids you need this deduction.

As mentioned before;

Recurring Subscriptions: $47.96
Cell Phones: $145
Apple Upgrade Plan: $40.76
Clothing: $300


1. Overall, are we on the right track to make this happen? Any recommendations? I know we could be more frugal - but we're not looking to retire asap, just at a specific point 15 years down the road.
              You have 29 years left on mortgage, I would calculate the over-payment needed to be debt free from this in 15 years.


2. Are we doing the right thing paying down the mortgage to eliminate PMI and THEN putting that money towards our investments?
                         I agree with this, especially the way the market is now.

3. Am I doing the right thing by counting on PSLF for my student loan and making the minimum payment for ten years? I plan to remain in eligible employment throughout that period...
                                            Make sure your paperwork is good and you don't have any surprises at year 10.

gpyros85

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Re: Reader Case Study: Our situation
« Reply #3 on: July 04, 2018, 11:48:54 PM »

If you consider our extra mortgage payment part of our overall investment plan (which it is - and after PMI is eliminated, will go to our brokerage acct), we're investing $40,500/year. Just a quick investment return calculator shows me that with 6% returns, we should be approaching $1 million in 15 years (we invest bonuses as well - and incomes will likely increase slightly in that time frame as well).  So, I'm thinking - looking ahead, a 4% draw from that - along with his pension - should put us at around $90k/year. Ignoring, of course, things that will kick in further down the road like my pension and social security.



This is flawed statement. Your extra mortgage payments will NOT be getting the 6% returns. You are only saving $13,500/year (6,750 x 2)

Also, where are you calculating 40,500/year? I got 6750 + 6750 + 18000 = 31,500.

Are you calculating the natural pay-down of your mortgage savings also? It is saving money but it is not investment, you will not get a cash flow investment return from this. Other than the additional cash flow it will free up upon payment.

reeshau

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Re: Reader Case Study: Our situation
« Reply #4 on: July 05, 2018, 02:03:23 AM »
1. Overall, are we on the right track to make this happen? Any recommendations? I know we could be more frugal - but we're not looking to retire asap, just at a specific point 15 years down the road.
              You have 29 years left on mortgage, I would calculate the over-payment needed to be debt free from this in 15 years.

This is a very valid topic to think about, somewhat like the student loan forgiveness.  Mathematically, it may work out to slow roll them, but practically speaking, these are both inflexible, long-term obligations.  There is as much validity in the psychology as the financial calculation:  will you feel comfortable being retired, on a fixed income, and having these mandatory expenses?  For some people, it is worth the financial "loss" to have these paid off before taking the plunge, and living much more flexibly.

On the pension:  is the $50k expected payoff indexed for inflation?  With such a long retirement planned, a non-indexed pension will have its purchasing power erode greatly over that period.  Usually, the pension would have an option for a lower initial payment, but inflation adjustments for life.  I would look into that option, or possibly even a lump sum option them paid into an immediate annuity, of course inflation adjusted.  If you don't do this, then your investments have to carry the burden, and you will need to be planning less than the 4% rule to account for 3x the inflation growth for the full $75k instead of $25k.  Also, is this figure calculated across both your lifetimes, or just his?  Again, for a lower payment, you can make this joint lifetime.  It's often an issue for women, but particularly since you are quite a bit younger; the grim question is: what is your plan after he is gone?  You either need to ensure this cushion for both of you, or it could make sense to continue life insurance on him to replace the pension, if lost.
« Last Edit: July 05, 2018, 04:50:12 AM by reeshau »

MrsWolfeRN

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Re: Reader Case Study: Our situation
« Reply #5 on: July 05, 2018, 04:39:54 AM »
Hi, since this is MMM and not bogleheads, you get a couple of facepunches for having vehicle loans. Can you tell us what kind of vehicles they are, loan balance and interest rate, and how far is your commute? Then we can give better advice about whether to keep and pay off, or sell.

Second get rid of the apple shit, expensive phone contract, and all but one or two subscriptions. Someone besides you is making money off that iPhone replacement plan.

Why are you buying so many clothes? Is this a temporary situation?

Paying down the mortgage enough to get rid of PMI is a good plan, but what is your reasoning for investing in taxable instead of your 401ks? You are at a very high marginal tax rate right now, so you will have a lot more to invest if you put it in the 401ks. Play around with a payment modeling calculator to see how much more. No more taxable investment until you are putting the max amount in both 401ks and a traditional IRA for each of you.

Yes, I know you have high income, but getting your expenses down enough to live on one income and save the other is the best type of insurance. Right now you would be screwed if one of you lost your job or your husband became too ill to work until pension age.  You also mentioned enjoying travel, so if you cut the fat in some other areas that aren't bringing you happiness you could travel more and still retire early.

Some life insurance wouldn't be a bad idea, at least until you have a starter stash invested.

On the pslf, it seems like a gamble. Maybe play it safe and include enough in your FIRE number to pay off the balance in case something goes wrong. Or just pay it off, you are the one who borrowed it.


firedupready2go

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Re: Reader Case Study: Our situation
« Reply #7 on: July 05, 2018, 08:07:07 AM »

If you consider our extra mortgage payment part of our overall investment plan (which it is - and after PMI is eliminated, will go to our brokerage acct), we're investing $40,500/year. Just a quick investment return calculator shows me that with 6% returns, we should be approaching $1 million in 15 years (we invest bonuses as well - and incomes will likely increase slightly in that time frame as well).  So, I'm thinking - looking ahead, a 4% draw from that - along with his pension - should put us at around $90k/year. Ignoring, of course, things that will kick in further down the road like my pension and social security.


This is flawed statement. Your extra mortgage payments will NOT be getting the 6% returns. You are only saving $13,500/year (6,750 x 2)

Also, where are you calculating 40,500/year? I got 6750 + 6750 + 18000 = 31,500.

Are you calculating the natural pay-down of your mortgage savings also? It is saving money but it is not investment, you will not get a cash flow investment return from this. Other than the additional cash flow it will free up upon payment.

You're missing the $9000/year we put into our brokerage account.

Given that we have a guaranteed return on eliminating the PMI, we've been counting that as part of our overall annual investment pool of $40,500 - with an aim to move that money to our brokerage account once PMI is eliminated.

Thanks for the feedback, this is very helpful!

firedupready2go

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Re: Reader Case Study: Our situation
« Reply #8 on: July 05, 2018, 08:10:52 AM »
What is the debt owed on the vehicles? Is this interest rate higher than mortgage?

Also, why not taking advantage of ROTH IRA?

I would definitely pay down the mortgage enough to remove PMI, this is without question.

Then I would go start increasing the savings rate. What tax bracket are you in? What was your effective tax bracket? With dual incomes you can deduct $37,000/year from your current tax bracket and no kids you need this deduction.

As mentioned before;

Recurring Subscriptions: $47.96
Cell Phones: $145
Apple Upgrade Plan: $40.76
Clothing: $300


1. Overall, are we on the right track to make this happen? Any recommendations? I know we could be more frugal - but we're not looking to retire asap, just at a specific point 15 years down the road.
              You have 29 years left on mortgage, I would calculate the over-payment needed to be debt free from this in 15 years.


2. Are we doing the right thing paying down the mortgage to eliminate PMI and THEN putting that money towards our investments?
                         I agree with this, especially the way the market is now.

3. Am I doing the right thing by counting on PSLF for my student loan and making the minimum payment for ten years? I plan to remain in eligible employment throughout that period...
                                            Make sure your paperwork is good and you don't have any surprises at year 10.

So - as for Roth, neither of our employers offers the Roth so we haven't taken advantage of it up to this point. We could do a Roth in addition to our brokerage account outside of our employer plans, but we have been enjoying the tax benefit of the traditional 401ks up to this point.

Thanks for the feedback on our plan as far as PMI/the mortgage is concerned. Very helpful.

The interest rate on both cars is fairly low compared to the mortgage - mortgage is 4%, cars are both 3.9% roughly.

firedupready2go

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Re: Reader Case Study: Our situation
« Reply #9 on: July 05, 2018, 08:13:08 AM »
1. Overall, are we on the right track to make this happen? Any recommendations? I know we could be more frugal - but we're not looking to retire asap, just at a specific point 15 years down the road.
              You have 29 years left on mortgage, I would calculate the over-payment needed to be debt free from this in 15 years.

This is a very valid topic to think about, somewhat like the student loan forgiveness.  Mathematically, it may work out to slow roll them, but practically speaking, these are both inflexible, long-term obligations.  There is as much validity in the psychology as the financial calculation:  will you feel comfortable being retired, on a fixed income, and having these mandatory expenses?  For some people, it is worth the financial "loss" to have these paid off before taking the plunge, and living much more flexibly.

On the pension:  is the $50k expected payoff indexed for inflation?  With such a long retirement planned, a non-indexed pension will have its purchasing power erode greatly over that period.  Usually, the pension would have an option for a lower initial payment, but inflation adjustments for life.  I would look into that option, or possibly even a lump sum option them paid into an immediate annuity, of course inflation adjusted.  If you don't do this, then your investments have to carry the burden, and you will need to be planning less than the 4% rule to account for 3x the inflation growth for the full $75k instead of $25k.  Also, is this figure calculated across both your lifetimes, or just his?  Again, for a lower payment, you can make this joint lifetime.  It's often an issue for women, but particularly since you are quite a bit younger; the grim question is: what is your plan after he is gone?  You either need to ensure this cushion for both of you, or it could make sense to continue life insurance on him to replace the pension, if lost.

The good news on the pension front is that the number I included will be inflation adjusted over time --- and that is a joint annuitant figure, which will carry through his lifetime and mine.

As for the cars - since a few folks have asked - they're fairly new (I know, I know). One has 2 years to go and the other has 5. We owe about $25,000 on the latter... and about $8000 on the former. We have subcompact SUVs - Buick and Nissan. We both have 20 minute commutes, but we're not willing to downsize or downgrade so this is an area we're likely to just work to pay these off asap.
« Last Edit: July 05, 2018, 08:17:29 AM by firedupready2go »

reeshau

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Re: Reader Case Study: Our situation
« Reply #10 on: July 05, 2018, 08:50:22 AM »
The good news on the pension front is that the number I included will be inflation adjusted over time --- and that is a joint annuitant figure, which will carry through his lifetime and mine.

That is good news on the pension--good job investigating it and preparing.

As for the cars - since a few folks have asked - they're fairly new (I know, I know). One has 2 years to go and the other has 5. We owe about $25,000 on the latter... and about $8000 on the former. We have subcompact SUVs - Buick and Nissan. We both have 20 minute commutes, but we're not willing to downsize or downgrade so this is an area we're likely to just work to pay these off asap.

This one...not so good.  It's your life, and your choices.  But frankly, you are placing your cars ahead of your retirement.  By continuing to drive cars you can't afford to buy with cash, you are foregoing payments you could be making on your other debts, such as your student loan or the house.  It's important to understand this as an opportunity cost:  these loans are actually costing you your mortgage or student loan interest, not what is on the loan documents.

To tie things together:  If you applied your car payment to your mortgage, you could be mortgage-free by your retirement target.  With no other changes.  (sorry if this spoils your enjoyment of the cars)
« Last Edit: July 05, 2018, 12:09:45 PM by reeshau »

MrsWolfeRN

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Re: Reader Case Study: Our situation
« Reply #11 on: July 05, 2018, 03:31:20 PM »
Are your commutes in the same direction or opposite? And why do you need two SUVs? Do you live on a gravel road?

And why are you investing anything in taxable before maxing out your 401ks?

firedupready2go

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Re: Reader Case Study: Our situation
« Reply #12 on: July 05, 2018, 04:39:27 PM »
Opposite directions. We also live in a very car-centric area, so having two vehicles is basically essential to our lifestyles and maintaining our independence. The SUVs are primary for preference/comfort/space. We will aim to wear these out --- after paying them off. We don't aim to buy new cars everytime we pay one off.

The Fake Cheap

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Re: Reader Case Study: Our situation
« Reply #13 on: July 05, 2018, 06:41:30 PM »

Yeah, it's those car payments that are really killing you, they are really putting a dent into what would be investible money.

I mean you can also save $100-150/mth on subscriptions/apple/cellphones.  Travel also seems a bit high especially for someone in the US (assuming you are in the US).

I can't offer an option on the PMI since I'm not in the US, so not 100% how that works.

firedupready2go

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Re: Reader Case Study: Our situation
« Reply #14 on: July 05, 2018, 07:49:01 PM »
Agreed. We are on track to pay those off and not replace with new vehicles - asap. The budgeted payments are enough to shave some time off each of those vehicles. But I see your point - they're a suck on investable income.

We may be able to modify on subscriptions and cell phones, I'll look into our options for sure. Thank you.

As for travel --- that gets us to Europe or Central America at least 2x/year and some domestic travel as well. It is very important to us to travel now AND when we're older - so this is an area that we manage very frugally (we don't travel in the lap of luxury) - but aren't willing to give up.

gpyros85

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Re: Reader Case Study: Our situation
« Reply #15 on: July 05, 2018, 08:31:48 PM »

If you consider our extra mortgage payment part of our overall investment plan (which it is - and after PMI is eliminated, will go to our brokerage acct), we're investing $40,500/year. Just a quick investment return calculator shows me that with 6% returns, we should be approaching $1 million in 15 years (we invest bonuses as well - and incomes will likely increase slightly in that time frame as well).  So, I'm thinking - looking ahead, a 4% draw from that - along with his pension - should put us at around $90k/year. Ignoring, of course, things that will kick in further down the road like my pension and social security.


This is flawed statement. Your extra mortgage payments will NOT be getting the 6% returns. You are only saving $13,500/year (6,750 x 2)

Also, where are you calculating 40,500/year? I got 6750 + 6750 + 18000 = 31,500.

Are you calculating the natural pay-down of your mortgage savings also? It is saving money but it is not investment, you will not get a cash flow investment return from this. Other than the additional cash flow it will free up upon payment.

You're missing the $9000/year we put into our brokerage account.

Given that we have a guaranteed return on eliminating the PMI, we've been counting that as part of our overall annual investment pool of $40,500 - with an aim to move that money to our brokerage account once PMI is eliminated.

Thanks for the feedback, this is very helpful!


This $9,000/year should be put into a ROTH. Roth has all the freedoms of a brokerage but tax sheltered for life (starts at 55), you can still withdraw the principle paid in but just not the gains.

gpyros85

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Re: Reader Case Study: Our situation
« Reply #16 on: July 05, 2018, 08:34:43 PM »
Opposite directions. We also live in a very car-centric area, so having two vehicles is basically essential to our lifestyles and maintaining our independence. The SUVs are primary for preference/comfort/space. We will aim to wear these out --- after paying them off. We don't aim to buy new cars everytime we pay one off.


Good mindset, cars will last you 20+ years properly taken care for.

reeshau

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Re: Reader Case Study: Our situation
« Reply #17 on: July 06, 2018, 07:38:05 AM »
Opposite directions. We also live in a very car-centric area, so having two vehicles is basically essential to our lifestyles and maintaining our independence. The SUVs are primary for preference/comfort/space. We will aim to wear these out --- after paying them off. We don't aim to buy new cars everytime we pay one off.


Good mindset, cars will last you 20+ years properly taken care for.

Agreed--if you have treated yourselves, and these are the cars you will retire with, then so be it.   But beware if that itch comes around when the payments end, to find out what is new.  (by then, maybe it's autonomous?)  The car company will certainly miss you, and send you plenty of reminders that they want you back.