Reader Case Study – Am I on the right track

[kawaivf1]

Life Situation: Married filing Jointly, 1 child to be born September 2018, live in CT, own a home. Currently 29 years old.

We currently are in the process of paying off our mortgage we both like the idea of being debt free, and are using it as a savings vehicle because we want to move up in house within the next 2-3 years. While doing this we are only contributing $17,750 to our 401K per year (16% me / 8% her). Once when the house is paid off we will max out our 401K, then Roth, H.S.A., and what ever is left will go in a taxable account. I am planning on spending $250-$300K on our next home.

My wife has a chronic disease that was diagnosed a little over a year ago typically we have around $5,000 in out of pocket expenses since we are in an H.S.A. Our insurance options are not that great most of them are high deductible plans, or a plan with very high fixed premium costs. I had a H.S.A. for years so I had a good amount saved up that has been used to cover medical costs of the past year and a half. This medical cost will continue forever. My current employer contributes $1,800 per year towards my H.S.A. that is not included in my contribution amount below.


Gross Salary/Wages: 

Wife: $89,000 (typically no bonus)
Me: $66,443 (possible 7.5% bonus)
Total: $155,443 house hold (include bonus $160,426)

Individual amounts of each Pre-tax deductions 401k $17,750 , H.S.A $1,200, insurance $1,800

Other Ordinary Income: None

Qualified Dividends & Long Term Capital Gains: None
Rental Income, Actual Expenses, and Depreciation: None

Adjusted Gross Income: ~$135,000

Taxes: Approximately $33,000 Federal, state/local, and FICA. (I don’t have a break down right at this moment our taxes were a little messed up last year. We owed taxes for 2017 because we didn’t withhold additional amounts after getting married, and now with the new Trump taxes I think we will be taking the standard deduction rather than itemizing but taxes should be less this year so we will most likely get a refund, also we both got raises recently so our taxes are changing)

Take home Pay: ~$8,450 per month

Current expenses: Annual Costs $31,164 (doesn't include HSA/Insurance, includes $3000 vet bills), or $34,164 (includes HSA/Insurance)

o   Cell Phone: $660 (Cricket Wireless)
o   Life and Home owners Insurance: $1,200
o   Mortgage: $576 (P&I)
o   Property Tax: $4,214 (1000 sqft home, high tax area in CT, only ~5 miles to my work)
o   Water Bill: $600
o   Gas Heating: $1,128 (cold winters, and most of our appliances run on gas)
o   Electric: $1,224
o   Internet/cable: $1,176 (need internet for work from home, and not many options available)
o   Grocery: $3,840
o   Gas for car: $2,160 (this is probably a little high unless we go on a road trip)
o   Vehicle Insurance & taxes: $2,550
o   Gifts/Charity: $600
o   Dog food: $1,200 (3 dogs one has expensive prescription food)
o   Vet bills: averages between $1000-$3000 (Last year we spent around $3000 mainly due to a dog that has health issues)
o   Going out/entertainment/Misc: $6,600
o   Memberships/licenses: $436 (she has some RN licenses, BJs, Amazon, & AAA)
o   H.S.A: $1,200 (deducted from gross pay already included in take home I adjust it to our needs currently)
o   Medical/Dental: $1800 (deducted from gross pay already included in take home)
 
Expected ER expenses: I am thinking $35,000-$40,000 would be reasonable if we are debt fee. Also, I expect that we will not have so many dogs in retirement so this should reduce our vet bills and dog food expenses.

Assets:
•   401K: $95,770 (100% ETF’s a mixture of large, mid, small, and international stock ETF’s)
•   401K: $60,902 (100% large cap ETF)
•   Roth IRA: $14,358 (mostly BRK.B, and some other stocks)
•   Roth IRA: $4,909 (100% S&P 500 ETF)
•   H.S.A. $3,594 ($2500 in a cash account, and $1,094 invested in S&P 500)
•   Money Market Account: $10,095 (1.6% APR with Capital One)
•   Misc bank accounts/sinking funds: $8,500
•   Home: Purchased for $131,000 march 2011
•   Cars: 08 Audi A4 & 08 Subaru Impreza (KBB book values $6530 & $5,478)
 

Liabilities:  (all other student loans and car loans have been paid off)

•Mortgage: $58,878 (3.75% interest rate / monthly mortgage pmt $576) – Should be paid off in the next 12 months or less since we are paying extra towards principal


Specific Question(s):

• Our goal is for my wife to retire/or work per diem within the next 5 years. I plan on working until age 40 or FIRE which ever comes first, and then I will cutback to part time. I believe our FIRE number is around $1,000,000 but because of what I think will probably be higher expenses long term due to medical issues I want to continue working part time so we will have health insurance, and I can continue to max our H.S.A. and some retirement.
    o Do you think given my plan, time frame, savings rate, and expenses this is achievable?
    o Does any one have experience getting to FIRE and having medical issues? I fear we could be underestimating the long-term costs.
• We plan to max out our traditional 401K, then H.S.A., then a ROTH IRA, and lastly a taxable account. Is this the right order of operations?
• My wife really wants to pay cash for the next home, but the more I think about it I want to put a large down payment, and finance the rest with a shorter term mortgage that will be paid off by FIRE.  What recommendations do you have?
• We are due to have a baby in September. The costs are a huge unknown to me. We are planning on 2 days of day care a week that is about ~$180 per week. But besides that I have no clue on any other costs. We both want to foster a more conservative and frugal life for our little girl. So we are planning on breast feeding, making our own food, doing less expensive but more adventuress activities like going to national parks, camping, biking, and going to the library when she gets older. So I think overall it won’t break the bank, but I do think it will cause some areas of our budget to increase like medical expenses, school supplies, and food. What budget recommendations do you have for budgeting and having a baby?


**6/11/18 - Update**
I got my actual 2018 withholding (federal/state/SS/Medicare) we are currently withholding approximately $34,500 for 2018. I ran a tax calculator based on the updated tax code. I should be withholding around $33,800 based on current 401K and H.S.A. contributions assuming no other deductions/credits. Which I will most likely getting $2,000 for the child tax credit. I am currently in the 22% marginal tax bracket, with an average tax rate of approximately 11%.

I did a cash flow analysis after my wife retires (2024), and I wouldn't be able to afford to support our house hold expenses, and a mortgage payment. I assumed $1,200-1,500 monthly P,I,&T payment. This put my in a negative cash flow position even if I drop my 401K withholding to just the company match of 6%, but assuming we continue to max our the 401K.

I think the only way to get to FI, and allow my wife to retire by 2024 would be to have a paid for home then lower my 401K to get to a cash flow neutral position.

Using these assumptions I would have around a $600-700K liquid net worth by the time she retires, and then I would continue to work until 2028 or so. By then I think I could have a $1M net worth depending on how our investments perform. Also, this would give me time to build up a sizable H.S.A. balance.


** UPDATE 1/3/20**

• My wife got a new job Friday-Sunday that pays more per hour but was a pay cut although it allows us to not pay for childcare which was very expensive. I work from home 3+ days a week, and we have a family member to help on Friday's and when needed.
• We paid off our mortgage, and just use credit cards for points then pay it off immediately. My wife was admit we pay it off rather than invest, and it was satisfying to me to.
• We had significant medical bills between my daughter (allergies & birth) and wife (MS). We started paying for them out of pocket, and started investing our H.S.A. now that we have better cash flow with my wife back to work.
• We are planning on trying for another kid early 2020 which means we could have another birth this year.
• We still have a goal to move to a larger home by 2023, my wife will plan on working part-time, and I will continue to work full-time.
• My car just broke down, and either needs a motor swap or buy a new car.
• My company was just acquired by a much larger company. I didn't lose my job, but we have had turnover, and layoffs. Our benefits have changed, been cut, and my pay is likely to change (not sure if better or worse yet).

Gross Salary/Wages: 

Wife: $86,000 (typically no bonus)
Me: $73,000 (possible 7.5% bonus)
Total: $159,000 household (include bonus $164,475)

Take home Pay:  ~$6155 Avg. Per Month / $73,864 Annual Costs (includes maxing out both Roth 401Ks, Medical, dental, and maxing out H.S.A.)

Current expenses: ~$3450 Avg. Per Month $41,401 Annual Costs

Annual
Taxes (Home & Auto) $4,787
Insurance (HO, Auto, Life) $2,507   
Veh Gas $2,160
Electric (Eversource) $1,596   
Cable/Internet $696
Gas Heating (CNG) $1,148   
Water (MDC) $701
Cell Phone    $660
Down Payment (MMA) $20,466    
Roth IRA Investments $12,000
Medical Expense Savings $8,400   
Discretionary Spending $16,800 (Gifts/Groceries/Pets/Entertainment/Misc)
Gym Membership $1,500   
Other $446

Assets:
401K: $130,000
401K: $104,109
Roth IRA: $26,638
Roth IRA: $18,172
H.S.A. $ ($1000 in a cash account, and $2952 invested in S&P 500)
Money Market Account: $13,363
Misc bank accounts/sinking funds: $1,901
Home: Purchased for $131,000 march 2011
Cars: 08 Audi A4 & 08 Subaru Impreza (KBB book values $4500 & $4,000)
 
Liabilities: None / Mortgage: Paid off

Updated Questions:

• The market generated great returns this year and I think we are well on track to meet our FIRE goals. Any changes you would make? I do feel like we had a lack of cash on hand, and with the uncertainty of the market, my job, and the outlook of having a new baby I moved some stocks into bonds in my Roth IRA's.

• I feel like my job is relatively safe even with the merger (more so prior to the merger), but I am very luck to be in the position I am today rather than just out of college. I don't have a great relationship with anyone on my team. I do think my work ethic does help, and I am not the most senior person (not highest paid), but I do have +7 years experience in the same company/role. Would you look for a new job, stay in the same position, or look to a different department/role given the uncertainty?

• Any recommendations on a frugal larger vehicle for a growing family? We are likely to sell my car either salvaged or repaired. My wife has trouble with lower cars getting the kid in and out. She really wants a mini van (if that is the case I am leaning towards a 5-10 year old Mazada 5, but would appreciate any recommendations.. I really like the idea of a one family car, but I am not sure how feasible it is in the NE we get really cold winters, and with my wife working weekends I have no car at all.

• Projecting out I don't have a very clear path of how we are going to pay for our next house in cash. We have some vacations planned that are not factored into our budget, and very likely have to get a new car.
Any recommendations on good side hustles, or resourceful ideas to get more income or lower costs?

• We plan to fly to CO my friend lives in Longmont. We have 2 weeks off we will likely stay near them for a little while, and then go visiting Rocky Mountain national Park. Because we are flying, and have a 1 year old. We will likely stay inexpensive hotels or AirBnBs. I would like to camp but not sure that will happen.. Does anyone have any tips to keep costs low, and good ideas for fun things to do?

[Chrissy]

Yes, you're on the right track.  This is achievable.

You've got ~$200,000 stashed (not including house/cars) and you need to get to $1M.  Yes, I think you'll be able to do this in 10-11 years.  You should be able to save $80-$100k for the next 5 years, conservatively, and then, of course, there will be market gains as well.  It's very possible you'll be close to $1M by that point.

But, let's say you're only at $800k and you have a mortgage.  At that point, your wife retires completely (let's say) and you continue at $70k/yr.  Even if you never put away another dime, you should be over $1M in another 5 years from market gains alone.

The investment order is listed as a sticky on the Investment section of the forum, but you pretty much have it right.  Of course, you should be doing two 401ks and two ROTHs.

For the newer, bigger house, compromise with your wife and pay half.  Look into a 15yr mortgage.

Babies don't cost very much, and mine were/are awesome and easy.  Our biggest category is clothes, because my husband won't let me buy used stuff.  It's ~$100/mo.  You probably won't spend that much.  Next is diapers... probably $40-$60/mo for one baby.  But babies disappear in a year and turn into toddlers, and toddler are the devil.  Get an estimate on full time daycare, and build that into your budget, just in case.

[Laura33]

You are off to a good start.  In your case, I would be maxing out the HSA before everything else -- it is tax-free both now and upon withdrawal when used for health care expenses, and that is a return that you cannot get anywhere else.  Plus you are young, so the money will have time to grow and compound, so by the time you RE you will have a nice little tax-free slush fund to give you a cushion for your health-care worries.  I would max this out before anything else -- and then don't use it for your current health care costs, so it will be there for you in the future (again: tax-free) when you need it and don't have the same cash flow to cover those expenses.  It is important take advantage of these things while you can, because your contributions are limited each year, and so if you delay maxing it out now to pay off the mortgage, you can't just "make it up" by contributing more in future years.

I would also suggest you both max out your 401(k)s/IRAs before paying off the mortgage.  Again, use it or lose it -- every dollar that you don't get to put away tax-sheltered this year is $5 or $10 or $20 tax-sheltered dollars you lose in the long-term.  And the dollars you invest when you are the youngest are the dollars with the biggest long-term impact, because they have the most time to compound.  Added bonus is that the 401(k) investments come off the top of your paycheck before taxes, so the more you put away, the lower your taxes, and so you actually end up having more money left than if you put those dollars into post-tax investments (i.e., if you put $18K in your 401(k), you will have a lot more money left in your budget than if you put $18K into your mortgage). 

FYI, I just did a very basic tax calculator on the web, and it says that with a salary of $135K and the standard deduction, you'll owe around $15,700 in taxes.  OTOH, if you have a reportable income of $98K (two full 401(k) contributions), you owe about $7900 in taxes.  That means you can put $37K away for your future, and you still have an extra $7800 to throw at your mortgage.  Or, using your own numbers:  if you knock $17,750 off your $135K income, the calculator says that for 2018, you'd owe about $11,800 in taxes, as compared to the $7900 if you put $37K into the 401(k)s -- still almost $4K in savings. 

To illustrate, assume that you have a grand total of $37K to invest.  Right now, you are putting $17,250 of that to the 401(k)s and the remaining $19,750 to the house.  But if you put the entire $37K into the 401(k)s, you'd save another $3900 on taxes, which you could then throw at the mortgage.  So by prioritizing the 401(k), you actually give yourselves an extra $3900/yr to save than if you prioritize the mortgage.  By prioritizing the mortgage over the 401(k)s, you are literally giving away thousands of dollars every year to Uncle Sam that you could be putting to work for you. 

Mortgage rates are still cheap.  I guarantee you will be better off longer-term if you max out the HSAs and 401(k)s, even if it means you end up with a slightly larger mortgage on your next house.

[Chrissy]

What Laura33 said.  See also:  https://www.madfientist.com/ultimate-retirement-account/

[kawaivf1]

Taxes will be tricky we owed around $3,500 in taxes with itemized deductions of around $17,500. We paid off our all student loans last year, and our interest payments on our mortgage have been falling so I don't expect us to ever reach the new standard deduction. We also have the fun fact of a baby and an additional dependent so our tax situation probably won't smooth out until after 2018 taxes. 

The madfientist post is very good, and working at a health insurance company I caught on early especially with the investing inside an H.S.A. that gave us a cushion when the funds were needed.

We will be maxing out 2 retirement accounts, and 2 Roth IRA's, and family limit on an H.S.A.

I think at this point it is a balancing act between maxing my wife happy to be debt free, and optimizing perfectly. I personally cannot wait to start investing aggressively, but at the same time my short term out look for the stock market isn't the greatest (price and value go hand in hand). I wouldn't mind my aggressive investing to coincide with a large pull back in the market. Over the long term of 40 plus years, yes I assume even at these high prices stocks will probably do better than 3.75%.


 

[kpd905]

I would at least throw a total of $33,600 into your 401k's, as that will drop your income into the 12% bracket.  In the 22% bracket, you are paying about 28% tax including Connecticut state tax.  Defer this now, because based on your planned RE income you won't be anywhere near this tax bracket.  This move will get your investments rolling and also save you $9400 in tax.

I did this math based on your AGI, not your gross.  Max out both 401k's and two Roth IRAs.  It looks like even maxing 401ks you will be just above the threshold for any deductible traditional IRA contributions ($121,000 is the cutoff).

[MDM]

To reinforce suggestions made so far, you might enter your projected 2018 situation into the case study spreadsheet.  The 2018 federal tax calculations there should be very good for your situation, and the state tax calculations might not be too bad.  Assuming a $158K gross, with the pre-tax deductions you mention, it suggests a $32K 2018 tax bite.

See also the marginal tax saving rate chart in the spreadsheet.  You will likely be in the 22% federal bracket no matter how much you contribute to 401k plans, and maximizing those contributions seems a good idea.  You can pay off the house next year or the year after, but you can't go back and contribute to a previous year's unfilled 401k bucket.

Given a known base amount of medical costs, it might be worth putting your numbers into a couple of comparison tools, e.g., Health Savings Account (HSA) vs. Traditional Health Plan and the 'HDHP Analysis' tab of the case study spreadsheet to evaluate options.

Good luck!

[kawaivf1]

My employer doesn't offer many traditional health plans, and the options they do have are very expensive versus the HDHP. They even have $0 premium HDHP where they contribute $1,800 on top of that to the H.S.A.. So they really push us to the HDHP's. That calculator is nice though I am going to run it for my current options.

The other issue we are in an area with a terrible school system, so we are under a time crunch based on when our new baby will need to go to school. That is why we have opted to save for a new home rather than max our retirement accounts. it kills me to take the tax hit, but contributing an additional $19,000 per year to our 401K, and $11K to our Roth's would slow us down considerably.

I think it will only work if we will do in in stages so after the baby comes in September, and wife goes back to work in January. We will Max our H.S.A. and 401K's starting January 2019. This will slow down the payoff of our home slightly, but we will need to get a handle on our new expenses that comes with having a baby. We will have paid off our home mid-2019. Then we will max our our Roth IRA's, and start saving for our remaining down payment to buy the next home in cash. Finally when we are done with all that we will max out all our investments tax-advantaged & taxable so we can hit FIRE.

[Chrissy]

The other issue we are in an area with a terrible school system, so we are under a time crunch based on when our new baby will need to go to school. That is why we have opted to save for a new home rather than max our retirement accounts. it kills me to take the tax hit, but contributing an additional $19,000 per year to our 401K, and $11K to our Roth's would slow us down considerably.

It's your decision, of course, but I feel like I have to say:  you can ALWAYS move house without paying all cash, but you can NEVER reclaim the taxes. 

[kawaivf1]

That's a good recommendation. I feel like the taxes are high no matter where we move in the North East. Either the property tax is high or the income tax is high. You can never really win. I love the North East, but it is not friendly to the wallet.

I feel like the facts are stacking up that we might end up moving sooner than planned. Especially if we exceed our savings goals, or change our mind about having a small mortgage. The only thing holding us back from now is our family... Which is always difficult decision moving away from them.