Case Study: Seeking Advice

[JP386672]

Hi all, I am relatively new (6 months) to thinking about early retirement and I would like some help/critique.

Life Situation: 29/30 married couple w/ no dependents.  Plan to have one child fairly soon.  Low Cost of Living area.  Since changing out way of thinking we paid off about $15k in car loans and $5k in CC Debt (0%).  I'm looking for some critique of my plan going forward.

Gross Salary/Wages: Total of $125k ($71k wife & $54k me) I make about $6k extra in OT a year.  This is nearly guaranteed but I don't count on it just in case.  Also historically I have received about a $5k - $7k annual bonus.

Individual amounts of each Pre-tax deductions: Both us put 6% into 401k w/ full employer match. I receive an extra 3% on top of that from my employer.  Currently put $360 monthly into HSA.  Insurance/dental/vision is around $50 a month.

Take Home Pay: $7000 a month.

Current Monthly Expenses:
$1,525 - Mortgage ($182k @ 3.75%) - House valued at $200k
$1,200 - CC Payment ($7200 @ 0%) - used to install new floor and gutters.  Will be paid by end of year.
$1,000 - Student Loan ($45k @ 5.32%) - minimum payment is $400 but I've been paying $1,000.
$400 - Groceries
$200 - power/natural gas/water/trash
$125 - gas (also use this budget for oil changes)
$100 - car insurance ($600 pd every 6 months)
$50 - car registration ($300 pd every 6 months)
$135 - cell phone (paying for phones @ 0% which is done in December.  New bill will be closer to $70)
$100 - internet/spotify/nexflix/hulu
$100 - Household (pet food, hygiene, etc.)
$100 - home maintenance
$300 - other/discretionary spending

That leaves us with $1,800 every month.  This has been used to payoff our car loans and our other CC debt.  Once the renaming CC debt is paid this will become $3,000 but will also have to cover expenses related to a possible child in the future.

Assets:
House: $200k
2013 Rav 4: $15k
2014 Nissan Altima: $13k
HSA: $3k
Emergency Fund: $6k
Retirement: $56k total

Liabilities:
Mortgage $182k @ 3.75% 
CC: $7200 @ 0%
Student Loan: $45k @ 5.32%

Questions:
We have discussed purchasing a rental property.  Once I build my emergency fund up to about $15k - my plan was to start saving as much as possible for a down payment.  However, I also feel like I should kill as much of my taxable income as possible by contributing to our 401ks.  Thoughts?

We have goals to retire in 10-15 years.  I think it's possible if we can keep up with the changes we've made over the last half year.  We've never been bad with money (never paid interest on a CC, always had some savings) but were never exactly good with it either.  Recommendations on steps I can take to help us towards this goal?

Any other advice?  I've read so much and I feel like I have a good grasp on these concepts but experience tells me I'm missing a ton of stuff.

[PapaBear]

You might want to check the investment order here (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153). That might give you a good overview on a potential prioritization of investments.

WHAT           
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund mega backdoor Roth if applicable           
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account with any extra.

The rental unit would fall into the same category as the taxable account (#8). Thus, I would prioritize the 401k and any other tax-advantaged vehicles available to you.
BTW: The 10-year treasury note rate is currently at ~2.20%. Thus your student loan would be a borderline candidate for #7. Before investing in a rental unit, I would definitely pay down that student loan, since I think it is rather difficult for beginner landlords to net a yield of 5.3% with their rentals. 

[JP386672]

Thank you!  One thing about the student loan - the rate mentioned is a blended rate between 3 loans.  As I make my payments, the interest rate goes down as I pay the highest rate first.  And the interest is also deductible.

What interests me about the rental property is building a source of income for retirement.  A majority of our retirement would be in a 401k so we would need a source of income during our 5 year wait for the roth conversion ladder to become withdrawable.

[PapaBear]

If it is just about your 5 year waiting period, there is always the option of just saving money in taxable accounts and creating your own payout plan.
However, for the moment, with your current level of retirement savings, I would max out all the tax-advantaged vehicles you have at hand. Every year, your contribution limit is a once-in-a-lifetime opportunity to stash that money away, so don't miss it. Everything left over (if any) can go in a taxable account or CD first, and you can figure out your strategy for the 5 year waiting period later. What are 5 years compared to the big picture of 60-70 years? You can still worry about the 5-year transition phase when you have reached 50% or more of your planned retirement stache.

However, if you want to stick to the rental plan for the long term, I would suggest to start monitoring the market around you and try to calculate the net yield of a few properties that are listed. This might help you to get a grasp of your local market and if it is even worth it to invest in real estate compared to taxable accounts. Following the threads in the landlording sub-forum might also give you a feeling of what to expect as a landlord, both the positive and negative side.

[JP386672]

Thank you!  I really appreciate your advice, I think it makes a lot of sense.  I need to focus on the big picture and for now I agree that maxing out our tax-advantaged accounts is the way to go.

[JustGettingStarted1980]

Agree completely with Maxing out both 401K's (the immediate tax benefits are incredible), followed by paying off the 0% CC and Student Loans.

When I first did this a few years ago, it helped to calculate my initial federal income tax %, and then to calculate this same value AFTER contributing the max to 401K. My taxes dropped very nicely, and my retirement pot began a nice steep curve in the right direction.

JGS

[2Birds1Stone]

You make great money, which means that maxing both 401k's will boost your savings dramatically and lower your tax liability.

I would do that before you buy any rental properties.

Get rid of the non mortgage debt, max out the 401k/HSA, and then max out Roth's for both of you until your income disqualifies you.

If you start invest $36k, $6.5k, and $11k per annum in those vehicles you will see your net worth skyrocket and instead of paying interest, you will benefit from that same compounding working in your favor.

[JP386672]

I appreciate everyone's advice.  It seems like there is a clear consensus to max out the tax-advantaged accounts.  My new plan is to start doing that as soon as I have our emergency fund at $15k.  I'm really happy I posted as I was leaning a different way but see now this is clearly the best move.