Author Topic: Reader Case Study - 30 Next Month  (Read 1264 times)

ranchingretirement

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Reader Case Study - 30 Next Month
« on: February 04, 2018, 02:58:59 PM »
Life Situation: Married, no kids, living in California and turning 30 next month

Gross Salary/Wages: $125,000 for myself, and my spouse makes ~$20,000 gross running their own business

Individual amounts of each Pre-tax deductions:

- 401k: Max ($18,000), going to up to $18,500 this year
- S/E 401k: Max ($18,000), going to up to $18,500 this year
- HSA: Max ($6,700)

Adjusted Gross Income: Landed at just under $130,000 for 2017

Taxes: Nothing unusual here, roughly $20k federal and $7k state, S/E tax, etc.

Current expenses (2017):

- $30k/year in rent - ugh...painful to even type that. Know this is the single biggest area left to optimize
- $7k/year in groceries
- $5k/year in automotive (gas, maintenance, insurance, etc.) - both vehicles are paid off
- $2.5k/year in utilities
- $2k/year in restaurants, eating out, etc.
- $2k/year in general merchandise (Amazon.com, furniture, clothing, etc.)
- $1k/year in travel
- $1k/year in personal care
- $1k/year in medical
- $1k/year in life insurance
- $1k/year for streaming + internet bundle
- $600/year for cell phone
- $5k/year for other misc. - charitable giving, etc.

Expected ER expenses: $4-5k/month - will likely retire near family in Texas, lower cost-of-living, etc.

Assets:
- Corporate 401k: $100k - 100% stocks
- Primary Trad IRA (rolled over from my spouse's prior 401k): $50k - 100% stocks
- HSA: $25k
- Other Trad IRAs: total $12.5k
- Roth IRA: $2.5k
- Taxable investment account: $2.5k
- Cash: $10k

- Vehicles (I know these are not assets, just listing here as they are both paid for) - 2014 Hyundai Santa Fe & 2009 Toyota Camry


Liabilities:
- $11k in CC debt - all currently at 0% using balance transfer offers. Projecting to have this all paid off by August 2018.

Specific Question(s):
- Our AGI currently falls above the deduction limits for Trad IRAs. Once I've maxed out both 401(k)s and our HSA, what should I do with the remaining cash? Our expenses above have been steady for 2 consecutive years now, so we should have ~$10k remaining at the end of the year to either stick in a Roth IRA or boost cash reserves, potentially for a downpayment on a home in retirement?

- Are there any other recommendations you would have for someone in my situation?

Ben Kurtz

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Re: Reader Case Study - 30 Next Month
« Reply #1 on: February 07, 2018, 10:11:02 AM »
To your immediate question, I'd contribute spare cash to a Roth IRA. You can invest in something stable, like a bond fund, and always pull out principal without tax or penalty, so to the extent you eventually want to take it out for a house down payment there should be no problem.

Looking at your numbers, I'd say you run a reasonably tight ship and all your numbers are solid. Left on autopilot, you'll be within spitting distance of FIRE within 10 years. Compared to the average American you are a financial genius.

But this is the MMM forum, so I won't let you get away that easily.

There are a few reasonably low-hanging fruit you should act on right now, without having to think too deeply about life:

 -  The Hyundai Santa Fe is almost certainly more car than you need. Even though it is paid off, it is tying up capital that could be invested, and probably costing you more in gas and insurance than the car you should be owning. I'd suggest something similar to your current 9 year old Camry. Or, if you need a third row (i.e. you frequently take your entire bowling team out), look for an older (12+ years) minivan.
 -  Apartment rent is high, but that's true in many places in California. Optimization potential depends a lot on exactly where you live and work.
 -  Related to both of the above, monthly car expenses are high-ish for someone with no car loans. You haven't said much about your commute. Trading lower rent for a longer commute might eat up all your savings in the end (or it might be net positive -- you need to run the numbers); by contrast, continuing your high housing spending but making sure the location is as optimized as possible could save on your transportation costs -- lower the miles driven, or even drop down to a 1 car family.
 -  If you were up for a minor challenge you could probably cut $100 from your combined grocery + restaurant tab without too much trouble -- there appears to be a bit of fat in that area.
 -  Utilities come in a little high for a family of two, even in California, so it might pay to take a Sunday afternoon to energy audit your home.
 -  Your miscellaneous category is rather high and might be hiding a fair bit of waste. Try to keep track, categorize more carefully, and scrutinize your purchases.

The above suggestions are all basically things you can do without really making substantial lifestyle changes. You could probably add $20,000 to your retirement balances and save $300 in running costs per month and barely notice the difference.

Beyond this, what you do next depends on what you want out of life. The biggest question really is what are your family plans -- are you going to want children now that you're grown up and turning 30? That will have a massive effect on how things turn out. Are you and your spouse content to live and work in your current locations for the foreseeable future, or can you tell that a change will become necessary within the next 5 or so years?

If you've come to realize that you want financial independence more quickly than 10-odd years, or around that time but with children in tow, you have to think of a real lifestyle overhaul. Just wishing won't make it so; you'll need to radically cut your restaurant and grocery budget, get really good at economical home cooking (rice & beans, anybody?), sell both cars and replace them with an electric bicycle and a 12+ year old hatchback, get very lateral in your thinking about housing choices (including if it is possible to move to a lower cost region -- especially if kids are in your future) and ask your spouse to get a better job.

Finally, you mentioned making a down payment on home to live in once you early retire. There are differences of opinion, but most prominent early retirement writers who have actually gone ahead and early retired have paid off their primary homes, rather than sat on more investments with a mortgage. On paper, a stock and bond portfolio should return, long term, a rate of earnings higher than the interest rate on a home mortgage. So it would make sense to lever up and keep a larger portfolio in the markets. But many people who have actually lived through early retirement have placed a high subjective "peace of mind" value on having the smallest possible fixed expense base, to reduce worry about making the rent during times when the markets trade down. That has lead them to owning their homes without a mortgage. Of course, if "early retirement" at age 40 likely involves some kind of paid work (even if in a different field and at lower wages than what you do now), then it shouldn't be hard to feel a lot more relaxed about having a mortgage and a larger invested nest-egg.

Good luck!

ranchingretirement

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Re: Reader Case Study - 30 Next Month
« Reply #2 on: February 12, 2018, 08:08:52 PM »
Thank you for the very thoughtful response. I'll be sure to contribute spare cash at the end of each year to my Roth IRA.

We do eventually (3-5 years from now) want to start a family, and I would like to be able to semi-retire around the time the children head to school. Fortunately, I will likely have the opportunity to transfer to Texas with my current employer at some point this year. With my current salary, a move to Texas would immediately put $20,000/year back into our pockets (~$8,000 in state income tax + ~$12,000 in housing costs).

If the transfer does happen, I'll take the opportunity to move much closer to work, and would ideally look for a place from which I could commute via e-bike.

Thank you again for the time you spent in reading and responding to my case study!