Author Topic: TheBeardedOfficial – Audit me, inc SavRate%, & help me shift from DR to FIRE  (Read 4181 times)

TheBeardedOfficial

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Topic Title: TheBeardedOfficial – Case Study – Audit me, help increase SavRate%, and shift from DR to FIRE. 

Life Situation: MFJ (Im 34, wife is 35), 3 kids (3, 2, & 3 months), live in TX (cheers for no state income tax).  Long time DR follower new to FIRE community as of late Dec 2017/early Jan 2018.  This discovery happened to coincide with our 3rd child being born, and me taking advantage of my company’s new paternity leave policy to take 8-weeks off for the birth…I feel like I got a little taste of early retirement and I REALLY LIKED IT!

Gross Salary/Wages: 112,600 paid twice/month (24 periods per year)

Individual amounts of each Pre-tax deductions
Pre-tax 401k – currently my pre-tax contribution is zero.  I contribute 6% Roth 401k option ($281.50/period or 6756/year).  Company match is pre-tax at 66% up to 6% (so net 4% match).  Match = $185.79/period or 4458.96/year
HSA – 200/period – 4800/year – Company also contributes $1000/year paid in first period of calendar.  So $5800 total per year into HSA currently.  However, our current DR based budget has this as our medical savings and we’ve been paying our 3k deductible out of the HSA for the last few years with having kids and stuff.

health insurance – 125.82/period -- $3,019.68/year – HDHP with 3k family deductible.
Dental insurance (me and spouse only right now) – 15.60/period – 374.40/year

After Tax deductions:
Life insurance - 1x salary is paid by company – 9x salary for me is 20.79/period or $498.96/year
Dependent life – 250k on spouse/15k on kids – 17.03/period or 408.72/year
Group LTD – 5.68/period or 136.32/year
Gym membership (I know…face punch away) – 13.52/period or 324.48/year
ESPP 10% (max allowed) – 469.17/period or 11,260.08/year - company buys shares at 15% discount from market price on May 1 and Nov 1.  In the past 6 years, I have typically sold these shares as soon as I could and reallocated to other savings (roth IRAs, taxable, etc)
My Roth IRA – direct draft – 229.16/period or 5499.84 (max annual contribution). 
Spouse Roth IRA – bank transfer (company wont let me do more than 2 separate direct deposits) – 110/period or 2640/year.  Usually shore this up with ESPP funds to get as close to max as possible each year for the last 2 years.

Other Ordinary Income: I work full-time as a Systems Development middle manager making 112k.  My wife works much harder than I do…and for terrible pay and benefits as homemaker with 3 kids 3 and under.

Qualified Dividends & Long Term Capital Gains: <shrug> - investment accounts are the Ron Popeill sytle – “set it and forget it”.  We meet with our advisor once or twice a year (just started with this broker about 18 months ago).  Details below in assets section. 

Rental Income, Actual Expenses, and Depreciation: not yet

Adjusted Gross Income: Last year AGI was 102k.  Estimating this year somewhere around 104k.  (One of the main questions I am trying to understand is the tax impact of using pre-tax 401k instead of Roth 401k…more on that below). 

Taxes:
FICA-OASDI (no idea what this means) -  269.89/period or $6477.36/year
Federal W/H Tax – 516.50/period or 12,369.00 per year
FICA-HI (also no idea) - $63.12/period or 1514.88/year


Current expenses: Provide breakdown and relevant details.  Aim to have “Miscellaneous” somewhere ~2.5%.  Much lower and you may be providing too much detail, much higher and you have an obvious problem of not understanding your spending.

               Period         Month      Year
Tithe    $        469.17     $     938.33     $ 11,260.00    Bank Xfer
Subtotal:    $        469.17     $     938.33     $ 11,260.00    
Running total:    $        469.17     $     938.33     $ 11,260.00    
            
Food, Clothing, Shelter, Utilities & Transportation            
Groceries    $        220.00     $     440.00     $    5,280.00    Cash
Clothing    $           40.00     $       80.00     $       960.00    Cash
Mortgage (P&I, I&T – breakdown below)    $        650.00     $ 1,300.00     $ 15,600.00    Bank Xfer
Utilities (electric, water, waste mgmt)    $        140.00     $     280.00     $    3,360.00    Cash
Transportation (Gas)    $        120.00     $     240.00     $    2,880.00    Cash
Restaurants    $           60.00     $     120.00     $    1,440.00    Cash
Entertainment    $           40.00     $       80.00     $       960.00    Cash
Subtotal:    $     1,270.00     $ 2,540.00     $ 30,480.00    
Running total:    $     1,739.17     $ 3,478.33     $ 41,740.00    
            
            
Kid Fund    $           70.00     $     140.00     $    1,680.00    Cash
Subtotal:    $           70.00     $     140.00     $    1,680.00    
Running total:    $     1,809.17     $ 3,618.33     $ 43,420.00    
            
            
Verizon    $           59.00     $     118.00     $    1,416.00    Cash
Netflix    $                  -       $              -       $                 -      Bank Xfer
Internet (TWC)    $           25.00     $       50.00     $       600.00    Cash
Pool    $           45.00     $       90.00     $    1,080.00    Cash
Auto Maintenance    $           40.00     $       80.00     $       960.00    Cash
ID Theft Protection    $             6.00     $       12.00     $       144.00    Cash
Car Ins / Registration    $           50.00     $     100.00     $    1,200.00    Cash
Subtotal:    $        225.00     $     450.00     $    5,400.00    
Running total:    $     2,034.17     $ 4,068.33     $ 48,820.00    
            
            
Household (including Toiletries)    $           40.00     $       80.00     $       960.00    Cash
Medical    $           50.00     $     100.00     $    1,200.00    Cash
Gifts    $           45.00     $       90.00     $    1,080.00    Cash
Blow - $50 ($100) each    $        100.00     $     200.00     $    2,400.00    Cash
Furniture/Appliances    $           40.00     $       80.00     $       960.00    Cash
Education/Homeschool Materials    $           30.00     $       60.00     $       720.00    Cash
         $              -       $                 -      
Subtotal:    $        305.00     $     610.00     $    7,320.00    
Running total:    $     2,339.17     $ 4,678.33     $ 56,140.00    
            
            
Savings for Taxable Investment account    $                  -       $              -       $                 -      Cash
Savings to non-company insurance    $                  -       $              -       $                 -      
Saving to My-Roth IRA    $        229.16     $     458.32     $    5,499.84    Direct Dep
Saving to Spouse-Roth IRA    $        110.00     $     220.00     $    2,640.00    Bank Xfer
Saving to 529 Plan    $                  -       $              -       $                 -      
Savings for Car Replacement    $                  -       $              -       $                 -      
Subtotal:    $        339.16     $     678.32     $    8,139.84    
Running total:    $     2,678.33     $ 5,356.65     $ 64,279.84    

Items listed as “Cash” are DR style envelope system / sinking funds for anticipated expenses.
Total expenses (although some of this includes sinking funds) – 64.2k / year

For mortgage payments, separate the P&I (which stop when the mortgage is paid) from the T&I (and anything else) which continue as long as you own the property.
Mortgage Payment Breakdown - $1300/mo –  breakdown in liabilities section

Expected ER expenses:  - I don’t really know.  Until very recently, I have thought of early retirement as something you need exponentially more assets to achieve than standard 62/65/67 retirement.  Thanks MMM for the simple math of SWR!  #mindblown


Assets: Amount & description - include current asset allocation plan if you have one
Definition of assets: Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property.
25k emergency fund – 5k earmarked for anticipated death of HVAC (currently 21 years old).
~4800 recent ESPP sale – looking for what to do next with these funds towards FIRE journey.
~3k in other cash savings across various sinking fund envelopes. (emergency funds for our emergency fund?  Did I say we bought into DR for a while?)
Total cash assets -  ~$33k
HSA Balance - ~$6000


2004 Honda Odyssey 150k miles – paid cash – worth around 3-4k KBB
2010 Hyundai Sonata – 130k miles - paid cash – worth around 4-5k KBB
Total car (depreciable) assets - ~$7-9k  (in total below, I use the low end of this range)

Primary residence 3br/2ba 1500 sq ft. – purchased for $147k – last year’s assessment was 170k. 
Total Real Estate - $147k (I calculate off of what we bought for).

My Roth IRA – 56k
Spouse Roth IRA – 19k
UTMA for oldest kid (we changed strategies after 2nd kid) – 4k
Taxable Account – 5k
Personal Capital total investment assets ~84k

401k balance (not accessible by personal capital) –
(unsure of how much is Roth vs. match) ~130k (currently contributions are $281.50/period to Roth 401k & 185.79/period company match to pre-tax).
Total investment assets ~214k

Total Assets – 33k + 6k + 7k + 147k + 214k = 407k


Liabilities: Description, original loan amount, rate, original length, and monthly payment (which should be consistent with a spreadsheet PMT calculation).  Add current balance and time remaining if close to final payment.
This is one place we diverged from DR…for the last few years we have basically put larger purchases that we could pay for with cash (car insurance 6 mo premium for example) on a 1.5% cash back card.  Pay off all cards as soon as charges post…we don’t wait till end of each month.  We have an envelope for CC deposits from other envelopes…nerdy..i know.    Just getting started on travel hacking with SW Chase cards using only normal spend to work towards companion pass….havent decided yet if only I will get CP or if we will try to get CP for my wife as well.
No debt other than home loan. 
Home loan – purchased Oct 2015 - original amt – 119k (purchase price 147k – 20% down, no PMI) – 15 yr fixed 3.5%
98k remaining on loan…excited to drop below the 100k mark late last year.
Mortgage Payment Breakdown - $1300/mo – 
Principle - 554.25/mo
Interest – 288.74/mo (last year, interest paid - $3588.71)
Escrow (Tax/Insurance) – 395.89/mo  (Last year – Taxes paid - $3970.57 / insurance paid - $1234.36)
This adds up to 1238.88/mo – for budgeting purposes, we round up to 1300 and pay an extra 61.12/mo against the principle.  Our thinking is that any future increases in T&I should be absorbed without change to monthly budget.

Total Liabilities – 98k



Specific Question(s): Providing a detailed breakdown is important, so is asking for specific information so we know what kind of help/advice you are looking for.

--
   I would like help with calculating a savings rate that is actually meaningful.  At a glance, 102k AGI minus 64k in expenses (although some is sinking funds) seems like not a lot of saving happening...especially after taxes.  I've tried the MMM formula and got like 90% which doesn’t seem right.  Also tried a couple three formulas from earlyretirementnow.com….just struggling to understand what is actually meaningful for our situation.

   Order of operations for retirement savings – DR would say: 401k up to match, then max roth IRA, then come back to 401k to max, and then do taxable.  Considering our situation, please advise on how to best allocate now so we can take advantage of Roth conversion ladder, backdoor roth, etc to best accelerate ER.


   Help me understand the tax impacts of roth 401k vs. pre-tax 401k.  I understand implicitly that a pre-tax dollar is worth less than an after-tax dollar…but Id like to get a more concrete understanding of exactly how much difference there actually is.

   My company just started offering an after-tax (non-roth) 401k contribution up to 10k/year.  I know this is what is used for the Mega Backdoor Roth, but not sure how to best incorporate that into our plan.  Somewhat related to order of operations. 

   Suggestions for what to do with ESPP proceeds when I sell the shares after the grant.  Currently contribution 10% of salary each pay period (after tax) and company buys shares at a 15% discount from the market price twice a year (May 1, and Nov 1).  I can sell the shares I think 3-5 days later.  I usually sell them as soon as I can, but don’t want to lose this savings to consumption if I can be more intentional about where to allocate it.  So far we have treated it like DR’s concept of irregular income.

   Tips for freeing up cash flow to pay medical deductibles / expenses out of pocket rather than tapping our HSA.  We currently have about $6000 in our HSA.  Typically we have used the HSA to pay our 3k annual deductible and any medical expenses.  We have had a baby in 2014, 2016, and 2017 and we have an expected surgery later this year so we have been hitting our deductible pretty consistently.  Havent played with investing inside the HSA to-date, but in my FIRE reading, it sounds like the 1st option account for a lot of people.


   That’s all for now!  Thanks everyone for taking the time to read my novel here and I look forward to hearing some advice from those who have been in and around the FIRE community.  Beat me up and help me get this beast fine-tuned.  My goal would be to FIRE by age 45 (10.5 years for me)…my kids will be getting into high school at that point.



UPDATE 1: 
Thanks for the detailed breakdown...reading through these and trying to synthesize the actionable steps.
As the saying goes, the best way to get the right answer on the internet is not to ask a question; it's to post the wrong answer.

Post the result of the synthesis, and....  :)

Synthesis summary:  Make changes to savings allocations in an attempt to minimize tax burden, and maximize savings contributions with minimal impacts to net take home pay.

Actionable steps:  Looking to execute on these by 1/25:
1) increase W-4 exemptions from 3 to 10.  The calculator from my company indicates this will reduce withholdings by approx $247 per period. 
Background:  last year (tax year 2016) I had approx 11.6k withheld, and ended up with a refund of 4750. (I know...facepunch).   
With $247 * 24 = 5928     Assuming ceteris paribus, I calculate approx ~1200 shortfall in tax withholdings. (keep in mind, this is based off of 2016 tax year, as I havent done 2017 taxes yet).   Move on to step 2.

2) Increase pre-tax 401k from 0% to 16% ($750/pay period or approx 18k).  Funded as follows:
-- Stop Roth 401k (-$281.50 per period - reduction of $6756/yr after tax)
-- reduce ESPP from 10% to 5% (down from ~469/period to ~234/period)   - (reduction of approx 5630/year after tax).

Total after tax reduction of $12,386.  According to my company's payroll calculator, this should be within $10/pay period of the $18k pre-tax 401k contribution.  (please check this math).   Can anyone give me an easy way or tool to calculate if this reduction in taxable income will be sufficient to reduce the tax burden to balance out the $1200 shortfall created by increasing exemptions/decreasing witholdings in step #1?

This allows me to shift 401k contributions from Roth to pre-tax, reduce ESPP, but retain my Roth IRA at max funding ($5500/year). 

Next step for future additional savings would be to continue trying to max my spouse's Roth IRA. 


In doing this synthesis, I (FINALLY) found the breakdown for my 401k balance (currently approx 131k).
Your Contributions & Earnings
Before-Tax   $20,758.79   16%   100% vested
Roth   $60,304.46   46%   100% vested

Company Contributions & Earnings
Discretionary Profit Sharing   $7,395.23   6%   100% vested
Match   $43,172.29   32%   100% vested

100% of the company contributions are, by law, pre-tax.  Of the 60k Roth balance, only 39k are considered non-taxable contributions. (if I am reading the company tool correctly.).  Does this mean they can be withdrawn to fund the 5-year Roth Conversion Ladder gap?

Not sure if it makes a difference on the original case study as to the breakdown of current retirement savings between Roth/traditional, but I provide it here in case someone smarter than me has insight.

Thanks again everyone! 
« Last Edit: January 22, 2018, 04:06:43 PM by TheBeardedOfficial »

MDM

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   I would like help with calculating a savings rate that is actually meaningful.  At a glance, 102k AGI minus 64k in expenses (although some is sinking funds) seems like not a lot of saving happening...especially after taxes.  I've tried the MMM formula and got like 90% which doesn’t seem right.  Also tried a couple three formulas from earlyretirementnow.com….just struggling to understand what is actually meaningful for our situation.
You may ignore savings rate calculations.  As you have found, they can be more confusing that helpful.

Quote
   Order of operations for retirement savings – DR would say: 401k up to match, then max roth IRA, then come back to 401k to max, and then do taxable.  Considering our situation, please advise on how to best allocate now so we can take advantage of Roth conversion ladder, backdoor roth, etc to best accelerate ER.

   My company just started offering an after-tax (non-roth) 401k contribution up to 10k/year.  I know this is what is used for the Mega Backdoor Roth, but not sure how to best incorporate that into our plan.  Somewhat related to order of operations. 
Investment Order is the usual advice.

Quote
   Help me understand the tax impacts of roth 401k vs. pre-tax 401k.  I understand implicitly that a pre-tax dollar is worth less than an after-tax dollar…but Id like to get a more concrete understanding of exactly how much difference there actually is.
You will almost certainly (e.g., no mention of a pension) be better with traditional than Roth.  See the discussion and links in the Investment Order post for reasons.

Quote
   Suggestions for what to do with ESPP proceeds when I sell the shares after the grant.  Currently contribution 10% of salary each pay period (after tax) and company buys shares at a 15% discount from the market price twice a year (May 1, and Nov 1).  I can sell the shares I think 3-5 days later.  I usually sell them as soon as I can, but don’t want to lose this savings to consumption if I can be more intentional about where to allocate it.  So far we have treated it like DR’s concept of irregular income.
Putting the proceeds into some version of a Three-fund portfolio would be reasonable.

Quote
   Tips for freeing up cash flow to pay medical deductibles / expenses out of pocket rather than tapping our HSA.  We currently have about $6000 in our HSA.  Typically we have used the HSA to pay our 3k annual deductible and any medical expenses.  We have had a baby in 2014, 2016, and 2017 and we have an expected surgery later this year so we have been hitting our deductible pretty consistently.  Havent played with investing inside the HSA to-date, but in my FIRE reading, it sounds like the 1st option account for a lot of people.
Are your withholding amounts set correctly?  If you get a big "refund" (aka return of the interest free loan you have the IRS) when filing, change your withholding to have more income during the year.

Good luck - both in general and with the new baby!

KungfuRabbit

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What he said mostly, one note though.

For ESPPs if you sell right away that 15% discount is counted as traditional income, if you hold at least 2 years it is counted as capital gains - a lower tax rate.

I didn't do detailed calculations but it's somewhere around $250 less taxes, but the risk is you have a lot of single company stock as opposed to broad market funds.

So it depends on your risk tolerance and volatility of your company I guess. No matter what though sell after two years and diversify.

oldmannickels

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   Tips for freeing up cash flow to pay medical deductibles / expenses out of pocket rather than tapping our HSA.  We currently have about $6000 in our HSA.  Typically we have used the HSA to pay our 3k annual deductible and any medical expenses.  We have had a baby in 2014, 2016, and 2017 and we have an expected surgery later this year so we have been hitting our deductible pretty consistently.  Havent played with investing inside the HSA to-date, but in my FIRE reading, it sounds like the 1st option account for a lot of people.



You could use your taxable accounts to fund your HSA deductibles. Invest the funds within the HSA and keep the receipts. You can reimburse yourself from the HSA at any point in the future with the tax free growth from the HSA.

swashbucklinstache

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Quote
Blow - $50 ($100) each    $        100.00     $     200.00     $    2,400.00    Cash
I laughed hard at this line at first :) :)

   I would like help with calculating a savings rate that is actually meaningful.  At a glance, 102k AGI minus 64k in expenses (although some is sinking funds) seems like not a lot of saving happening...especially after taxes.  I've tried the MMM formula and got like 90% which doesn’t seem right.  Also tried a couple three formulas from earlyretirementnow.com….just struggling to understand what is actually meaningful for our situation.
You may ignore savings rate calculations.  As you have found, they can be more confusing that helpful.

This succinct answer covers it. Savings rate is an elevator pitch for early retirement. You're here, understand spending less + earning more = earlier retirement, and should move to your other questions as long as you mathematically get that "spending less" usually has the biggest impact.

In case you're super bored:

Here's 2 things someone with the data and a pen can put on a bar napkin in 30 seconds:
1) their expenses
2) their income or money left over after expenses

3) From those two, you can calculate their savings rate and time until retirement under market return assumptions. If you dig deeper, the elevator is going to reach their floor before the conclusion! Just tell them gee, lowering #1 is way more impactful than raising #2 cuz math, much easier for most, and can be done while your life actually gets better! [Remember to be polite and not ask why they have a bar napkin in an elevator :)]

Yay! You opened their eyes to the idea of early retirement and gave them the mechanism to get there.

Actual financial things that matter in retirement:
4) $$ actually "needed" from stash when the time comes
5) how big your stash needs to be when you're using it to get #4 given your actual market returns

Savings rate is strictly a tool to take #1 and #2 and estimate a date at the start and teach that lowering #1 has a more noticeable impact on that date. In stark contrast to the other 4 items, going down the rabbit hole provides little marginal value; It is napkin-math to be an eye-opener that early retirement is possible and napkins don't have a chapter 2. If you get #4 and #5 right no one cares. At retirement it's just a napkin.

How much you care about the below questions should be different across phases of your financial life but I'm confident the first two won't matter to you going forward of their own merit, because as with all elevator pitches, in real life it's harder than that.

Hard numbers:
What did someone else's definition of savings rate say about this year? - care in the elevator
What did my savings rate say about this year? - never care
What were my total expenses this year? - care every year
How much $ did I put towards retirement/savings this year? - care first 3/4 of accumulation
Does this account for me giving my kids a $100,000 down payment plus the new roof on all 4 of my rental houses all definitely needed next year? - care as retirement approaches (OMY)
How big is my #5 compared to my projected #4 compared to last year? - care last 1/4 of accumulation and forever after that

Risk:
Will my average anticipated $$ need from stash over the next 50 years really be the $25,000 it has averaged the last 5 years or will it be $50,000 including long term care? - think about the latter half of accumulation
How okay am I with the risk of ^that compared to known cost of working x more years to grow my #5 to account for that? - think about the latter half of accumulation
What's going to happen to tax brackets and ACA and capital gains and the Roth IRA pipeline next year? - early in accumulation I don't care about this almost at all.
..

I casually track a version of it that helps prod me to spend less and, as a person appropriately invested according to my IPS with few year-over-year lifestyle changes, lets me say shit like "I did better than last year because my savings rate went up from 50% to 53% this year, even if my NW is down 35% because of the market" which of course doesn't actually mean anything but gives me warm and fuzzies.
hey hey

Savin' like i got a cape on

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MrsWolfeRN

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Mad Fientist has an article on why traditional is better than Roth 401k (just Google it, I can't paste links on my phone). You should definitely be maxing this out every year.

On the medical expenses, a regular insurance plan with lower deductibles might come out cheaper for you than HDHP +HSA. You will have to run the numbers next open enrollment and see what makes sense for your family. In the meantime use some of that 33k of cash.

Now, I see that nobody has tackled your expenses yet. I see that you are paying over $100/ month for cell phones. You don't need Verizon. There is a whole sticky thread about phones on the forum,  you can easily get this down below $50.
Next drop the kiddies life insurance and the identity theft protection. You don't need these, nobody needs these. You might be able to shop around or drop unnecessary coverage and get your car insurance cheaper too.
What is the pool category? Are you paying someone to maintain your pool? I DIY mine for less than$100/year, although my pool season is much shorter than yours.
Your groceries seem reasonable but your household/toiletries category is high. I know you have 2 in diapers but have you tried to get things cheaper with coupons?
I'm sure there are more things you can cut back on to get your yearly spend down, especially if you and your wife are in it together.

Laura33

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First question:  if your expenses are $64k and your AGI is over $100k, why do you need to “free up cash” for out-of-pocket medical expenses?  You should have cash flying out your ears.  Also, you do not need insurance on your kids, period.  And you do not need to pay for credit monitoring unless you have already been a victim of identity theft.

Bigger picture:  I think you are trying to run before you can walk - you seem to be chasing after fancy things like employee stock purchases and MegaBackdoor Roth, but you haven’t even maxed out your 401(k) yet.. Unless your plan is truly wretched, this makes no sense whatsoever.

At your income, you probably want to choose the traditional over the Roth, but do the math yourself.  The traditional option is a double-bonus: you get an initial tax deduction, and then your investments grow tax-free until you withdraw them.  Yes, you do pay taxes then, but you control how you do the withdrawals (e.g., take out more in years with very low other income to stay in a low tax bracket), so you can really minimize the tax hit - don’t get too caught up in those details now, just know they are there.  Also note:  that up front tax deduction is at whatever your marginal tax rate is - so if you are in the 15% bracket, and you contribute $18k to your t401(k), you pay $2700 less to the US Treasury every year at tax time.

This is why I said you are running before you can walk.  Think about this:  you are doing the ESPP because you get an immediate 15% return, right?  Super-cool!  But then you pay taxes on that (at your marginal rate), so if you buy $10k and are in the 15% bracket, you actually get $8500 in hand.  Ok.  So then you invest that, and every year, you get to pay capital gains taxes on any distributions; then you sell and pay CG on the profit.

OTOH, if you take that same $10k and put it in your t401(k), you get to put the full $10k in for the same net cost (because you don’t have to pay taxes on the money before you invest it).  Then it grows tax-free for decades; and then you withdraw it under a plan that keeps your overall taxes low.  Which option do you think is going to leave you with more money in your pocket in the end?

Now, obviously, I am doing this for illustration only - I don’t want you to choose a t401(k) over the ESPP, I want you to do both.  :-). But I chose that comparison to show you that the “obvious” win of the ESPP discount actually pales in comparison to the huge tax advantages of the 401(k) (assuming you are in the 15% marginal bracket).  But most people are going to chase the up-front discount without doing the math.  So do the math!!  That’s how you get ahead.

*of course, if you contribute enough that you are in a lower tax bracket, your numbers will be different.  Which is why I say run the math yourself.
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fuzzy math

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How much in federal taxes did you pay last year? Was it pretty close to the $13k you are having withheld? I agree with others here. My biggest take away is that you are saving well, but the way you're doing it, it's like you're determined to maximize the amount you waste to taxes along the way. It's really hindering you. For reference, my single earner family of 5 has paid roughly $5-6k in federal taxes on AGIs ranging from $60-80k (gross income higher than yours). You need to get that AGI down. Those numbers are from 2016 and earlier, so with 2018s new tax brackets it should be even lower for both of us.

1) Max your HSA first. The 2018 limit is $6900, so you should be putting in enough that your employer match brings you to that. Why do you have separate medical expenses of $100 a month listed if you are currently reimbursing yourself from your HSA? Long term you should move away from using your HSA money and use it as a savings account, and then you would have monthly medical expenses.

2) Do pre-tax 401k.

3)Max your wife's IRA pre tax (since she is not employed she is eligible). Your IRA may not be eligible for pre tax contributions (it depends on income) since you have access to a 401k at work, so leave yours alone until you've maxed your 401k at work. With the new much lower federal taxes you'll be paying, you will have thousands more a year to put in your work acct.

I have never had access to employee stock due to the nature of my work, but I would put that far down the list. A previous poster has explained why your investments are getting taxed so highly. I would put this down as advanced technique, something to do only after you've maxed the HSA and your 3 retirement accounts. Even then I'd be wary of the whole Enron type scenario. Having to wait 2 years to be taxed at a lower rate on something seems risky.

Ditto to ditching theft protection and insurance on your kids. What is a kid fund? Your gas usage is really high too. If your wife is at home homeschooling all day and you're at work all day, who is driving that much? Do you live 30 miles from your job?
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civil4life

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Only a few initial observations.
Follow the investment order.  Especially with maxing 401k and HSA max.
I agree with others you do not need the ID theft or life insurance on the kids.  Since your wife is a homemaker you really do not need the life insurance on your wife.  You are the one bringing in the income which is what is protected with Life Insurance.
In general your expenses seem a little high.  I would probably pick them one at a time and see what kind of cuts you can make. 
You pay can medical expenses however you want, but the HSA is the best avenue for it.













































































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TheBeardedOfficial

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   I would like help with calculating a savings rate that is actually meaningful.  At a glance, 102k AGI minus 64k in expenses (although some is sinking funds) seems like not a lot of saving happening...especially after taxes.  I've tried the MMM formula and got like 90% which doesn’t seem right.  Also tried a couple three formulas from earlyretirementnow.com….just struggling to understand what is actually meaningful for our situation.
You may ignore savings rate calculations.  As you have found, they can be more confusing that helpful.

Quote
   Order of operations for retirement savings – DR would say: 401k up to match, then max roth IRA, then come back to 401k to max, and then do taxable.  Considering our situation, please advise on how to best allocate now so we can take advantage of Roth conversion ladder, backdoor roth, etc to best accelerate ER.

   My company just started offering an after-tax (non-roth) 401k contribution up to 10k/year.  I know this is what is used for the Mega Backdoor Roth, but not sure how to best incorporate that into our plan.  Somewhat related to order of operations. 
Investment Order is the usual advice.

Quote
   Help me understand the tax impacts of roth 401k vs. pre-tax 401k.  I understand implicitly that a pre-tax dollar is worth less than an after-tax dollar…but Id like to get a more concrete understanding of exactly how much difference there actually is.
You will almost certainly (e.g., no mention of a pension) be better with traditional than Roth.  See the discussion and links in the Investment Order post for reasons.

Quote
   Suggestions for what to do with ESPP proceeds when I sell the shares after the grant.  Currently contribution 10% of salary each pay period (after tax) and company buys shares at a 15% discount from the market price twice a year (May 1, and Nov 1).  I can sell the shares I think 3-5 days later.  I usually sell them as soon as I can, but don’t want to lose this savings to consumption if I can be more intentional about where to allocate it.  So far we have treated it like DR’s concept of irregular income.
Putting the proceeds into some version of a Three-fund portfolio would be reasonable.

Quote
   Tips for freeing up cash flow to pay medical deductibles / expenses out of pocket rather than tapping our HSA.  We currently have about $6000 in our HSA.  Typically we have used the HSA to pay our 3k annual deductible and any medical expenses.  We have had a baby in 2014, 2016, and 2017 and we have an expected surgery later this year so we have been hitting our deductible pretty consistently.  Havent played with investing inside the HSA to-date, but in my FIRE reading, it sounds like the 1st option account for a lot of people.
Are your withholding amounts set correctly?  If you get a big "refund" (aka return of the interest free loan you have the IRS) when filing, change your withholding to have more income during the year.

Good luck - both in general and with the new baby!


Thanks for the detailed breakdown...reading through these and trying to synthesize the actionable steps.   

TheBeardedOfficial

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What he said mostly, one note though.

For ESPPs if you sell right away that 15% discount is counted as traditional income, if you hold at least 2 years it is counted as capital gains - a lower tax rate.

I didn't do detailed calculations but it's somewhere around $250 less taxes, but the risk is you have a lot of single company stock as opposed to broad market funds.

So it depends on your risk tolerance and volatility of your company I guess. No matter what though sell after two years and diversify.

To date, we have been selling ESPP immediately thinking the $250 tax hit is preferable to tying up too much in company stock.  That said, in the 8 years with the company, the stock has gone from around low 40s to around 160 now. #hindsight.


MDM

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Thanks for the detailed breakdown...reading through these and trying to synthesize the actionable steps.
As the saying goes, the best way to get the right answer on the internet is not to ask a question; it's to post the wrong answer.

Post the result of the synthesis, and....  :)

TheBeardedOfficial

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Mad Fientist has an article on why traditional is better than Roth 401k (just Google it, I can't paste links on my phone). You should definitely be maxing this out every year.

On the medical expenses, a regular insurance plan with lower deductibles might come out cheaper for you than HDHP +HSA. You will have to run the numbers next open enrollment and see what makes sense for your family. In the meantime use some of that 33k of cash.

Now, I see that nobody has tackled your expenses yet. I see that you are paying over $100/ month for cell phones. You don't need Verizon. There is a whole sticky thread about phones on the forum,  you can easily get this down below $50.
Next drop the kiddies life insurance and the identity theft protection. You don't need these, nobody needs these. You might be able to shop around or drop unnecessary coverage and get your car insurance cheaper too.
What is the pool category? Are you paying someone to maintain your pool? I DIY mine for less than$100/year, although my pool season is much shorter than yours.
Your groceries seem reasonable but your household/toiletries category is high. I know you have 2 in diapers but have you tried to get things cheaper with coupons?
I'm sure there are more things you can cut back on to get your yearly spend down, especially if you and your wife are in it together.

-- looked up Mad Fientist article and added it to the list.  Thanks for the lead.
-- looking into cell phone options.  We both bought iPhone 7s around thanksgiving 2016, so we are locked into contracts until Nov.  At that time, I think our bill should drop ~$25/line due to not paying the subsidy back.  But I'll add this to our list of things to re-evaluate.

-- kids/spouse Life insurance -- Any thoughts on the monetary value to replace a SAHM?  Before I hit FI, I cant stop and raise the kids myself, so does it make sense for spouse in the years between now and achieving FI?  Agree I can probably self-insure any expenses related to a child's death.  (man...that sounds heartless). 

-- pool category - I do all the maintenance myself, and this is a number we havent changed from when we bought our house in 2015.   At the time, all of the pump equipment was pretty old, and since then we have replaced the pump, filter, and polaris on top of all of our chemicals.  Since we are so far south, we do tend to keep the pool open year round (although no one swims, its cheaper than winterizing for 2-3 months).  Last I looked, the sinking fund was fairly healthy, so we might adjust this downwards.  Thanks for this pointer.

-- I think household is much more of a catch-all category for us...includes small home improvement projects.  My wife and I have been talking about organization vs. minimalism and this is another area we are looking to tackle.  As someone else mentioned, I think there might be some running before walking happening as we are only about 3 weeks into the FI community and it just feels like a lot of adjustments needed across the board.  Trying to tackle them one-by-one might just take time.

Thanks for the thoughtful reply. 

TheBeardedOfficial

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First question:  if your expenses are $64k and your AGI is over $100k, why do you need to “free up cash” for out-of-pocket medical expenses?  You should have cash flying out your ears.  Also, you do not need insurance on your kids, period.  And you do not need to pay for credit monitoring unless you have already been a victim of identity theft.

Bigger picture:  I think you are trying to run before you can walk - you seem to be chasing after fancy things like employee stock purchases and MegaBackdoor Roth, but you haven’t even maxed out your 401(k) yet.. Unless your plan is truly wretched, this makes no sense whatsoever.

At your income, you probably want to choose the traditional over the Roth, but do the math yourself.  The traditional option is a double-bonus: you get an initial tax deduction, and then your investments grow tax-free until you withdraw them.  Yes, you do pay taxes then, but you control how you do the withdrawals (e.g., take out more in years with very low other income to stay in a low tax bracket), so you can really minimize the tax hit - don’t get too caught up in those details now, just know they are there.  Also note:  that up front tax deduction is at whatever your marginal tax rate is - so if you are in the 15% bracket, and you contribute $18k to your t401(k), you pay $2700 less to the US Treasury every year at tax time.

This is why I said you are running before you can walk.  Think about this:  you are doing the ESPP because you get an immediate 15% return, right?  Super-cool!  But then you pay taxes on that (at your marginal rate), so if you buy $10k and are in the 15% bracket, you actually get $8500 in hand.  Ok.  So then you invest that, and every year, you get to pay capital gains taxes on any distributions; then you sell and pay CG on the profit.

OTOH, if you take that same $10k and put it in your t401(k), you get to put the full $10k in for the same net cost (because you don’t have to pay taxes on the money before you invest it).  Then it grows tax-free for decades; and then you withdraw it under a plan that keeps your overall taxes low.  Which option do you think is going to leave you with more money in your pocket in the end?

Now, obviously, I am doing this for illustration only - I don’t want you to choose a t401(k) over the ESPP, I want you to do both.  :-). But I chose that comparison to show you that the “obvious” win of the ESPP discount actually pales in comparison to the huge tax advantages of the 401(k) (assuming you are in the 15% marginal bracket).  But most people are going to chase the up-front discount without doing the math.  So do the math!!  That’s how you get ahead.

*of course, if you contribute enough that you are in a lower tax bracket, your numbers will be different.  Which is why I say run the math yourself.

Laura,
--For kids LI - As someone else had mentioned, I think we will take this point and self-insure that scenario.

--For identity theft, we have had credit cards stolen and this is a peace of mind thing for me and my wife.

--for Order of operations:  I think our ordering may simply be relics of when we were just starting our, our income was 50k/year, and we were hardcore DR acolytes.  Part of the purpose in getting feedback here was to identify some places to re-order...I am working with the FI Spreadsheet to try to wrap my head around how much I can do into 401k without reducing our take home too drastically to start...trying to work it with baby steps, and it sounds like there are alot of areas of our financial life that we need to adjust/tweak. 

-- ESPP / 401k example:  I think my initial run at the numbers has me reallocating the 6% from Roth 401k, the 5500 to my Roth IRA, and the 2640 from her Roth IRA...this would bring my 401k contribution to around 15k/year with just reordering and leave our after-tax income similar to today.   Now, if the goal is to get to 18k/18k for me and spouse 401k, 36k total, then would you suggest stopping the ESPP in lieu of bulking up those 401ks?

--As I am sure it has been discussed, can you link me to setting up spousal 401k?  specifically I am wondering how do you get this pulled out as a payroll deduction?  is it something the company has to offer? or something that you set up outside the company and "recover" the tax benefit when filing tax returns?

Thanks for your help!

MDM

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-- ESPP / 401k example:  I think my initial run at the numbers has me reallocating the 6% from Roth 401k, the 5500 to my Roth IRA, and the 2640 from her Roth IRA...this would bring my 401k contribution to around 15k/year with just reordering and leave our after-tax income similar to today.   Now, if the goal is to get to 18k/18k for me and spouse 401k, 36k total, then would you suggest stopping the ESPP in lieu of bulking up those 401ks?

--As I am sure it has been discussed, can you link me to setting up spousal 401k?  specifically I am wondering how do you get this pulled out as a payroll deduction?  is it something the company has to offer? or something that you set up outside the company and "recover" the tax benefit when filing tax returns?
Unfortunately, there is no such thing as a "spousal 401k".  A 401k is for the employee only.

That may make it easier for you to do both the ESPP and your 401k, as Laura33 suggests.

TheBeardedOfficial

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How much in federal taxes did you pay last year? Was it pretty close to the $13k you are having withheld? I agree with others here. My biggest take away is that you are saving well, but the way you're doing it, it's like you're determined to maximize the amount you waste to taxes along the way. It's really hindering you. For reference, my single earner family of 5 has paid roughly $5-6k in federal taxes on AGIs ranging from $60-80k (gross income higher than yours). You need to get that AGI down. Those numbers are from 2016 and earlier, so with 2018s new tax brackets it should be even lower for both of us.

1) Max your HSA first. The 2018 limit is $6900, so you should be putting in enough that your employer match brings you to that. Why do you have separate medical expenses of $100 a month listed if you are currently reimbursing yourself from your HSA? Long term you should move away from using your HSA money and use it as a savings account, and then you would have monthly medical expenses.

2) Do pre-tax 401k.

3)Max your wife's IRA pre tax (since she is not employed she is eligible). Your IRA may not be eligible for pre tax contributions (it depends on income) since you have access to a 401k at work, so leave yours alone until you've maxed your 401k at work. With the new much lower federal taxes you'll be paying, you will have thousands more a year to put in your work acct.

I have never had access to employee stock due to the nature of my work, but I would put that far down the list. A previous poster has explained why your investments are getting taxed so highly. I would put this down as advanced technique, something to do only after you've maxed the HSA and your 3 retirement accounts. Even then I'd be wary of the whole Enron type scenario. Having to wait 2 years to be taxed at a lower rate on something seems risky.

Ditto to ditching theft protection and insurance on your kids. What is a kid fund? Your gas usage is really high too. If your wife is at home homeschooling all day and you're at work all day, who is driving that much? Do you live 30 miles from your job?

-- paid 6850 last year in taxes.  Had 11k withheld.  Largest refund I had ever gotten by far, but I think I attributed that to the fact that it was only the 2nd year we had itemized, had significant (above our normal) charitable donations on the year, and I started deducting business expenses/mileage from a hobby turned advocation.  But with the feedback from this thread, I can see that it may also be due to moving up in tax brackets over the last couple of years, and not driving down taxable income.  I will also review my withholdings to ensure estimates are closer to actuals.

-- not determined to waste $ on taxes :)  lol.  just a newbie looking for help.  I think the DR war drums might have drilling into my head that Roth is always best, and I have slacked on doing the math as our tax bracket and situation changed with more kiddos.

-- HSA vs. separate medical category:  our thinking here was that we were wanting to move towards paying medical expenses OOP instead of with the HSA, so trying to build that sinking fund up to (and above) our deductible. 

-- HDHP vs. other health plan:  i think we are a pretty healthy family typically...and without having babies, we wouldnt be hitting our deductible.  My wife is leaning towards not wanting to be pregnant again, so we will probably look to adoption if we continue to grow our family. 

-- "something to do only after you've maxed the HSA and your 3 retirement accounts"  - just to clarify:  1) HSA (6900) 2) My/spouse 401k (18k/18k = 36k) 3) My/spouse Roth IRA (5500x2=11000), then ESPP?  Still trying to distill the Order of Operations post that was linked earlier.

-- kid fund -- this can be a wide variety of things.  diapers, my wife's addiction to cute kids pinterest projects, garage sales for clothes/toys, etc.  Basically anything that is not food for the kids.

-- gas - my work is about 5 miles away, but I travel around south texas a fair amount for my advocation.  we allocate this, and then move $ left over each pay period into a "general travel" envelope which then funds road trips to visit family in Arkansas or other travel/flights.  With getting into travel hacking, this expense may also be able to be reduced.

TheBeardedOfficial

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Thanks for the detailed breakdown...reading through these and trying to synthesize the actionable steps.
As the saying goes, the best way to get the right answer on the internet is not to ask a question; it's to post the wrong answer.

Post the result of the synthesis, and....  :)

I hadnt heard this one....but I like it!  And I will!  It just might take me some time.  Im starting to feel the universe expanding inside my brain.

TheBeardedOfficial

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-- ESPP / 401k example:  I think my initial run at the numbers has me reallocating the 6% from Roth 401k, the 5500 to my Roth IRA, and the 2640 from her Roth IRA...this would bring my 401k contribution to around 15k/year with just reordering and leave our after-tax income similar to today.   Now, if the goal is to get to 18k/18k for me and spouse 401k, 36k total, then would you suggest stopping the ESPP in lieu of bulking up those 401ks?

--As I am sure it has been discussed, can you link me to setting up spousal 401k?  specifically I am wondering how do you get this pulled out as a payroll deduction?  is it something the company has to offer? or something that you set up outside the company and "recover" the tax benefit when filing tax returns?
Unfortunately, there is no such thing as a "spousal 401k".  A 401k is for the employee only.

That may make it easier for you to do both the ESPP and your 401k, as Laura33 suggests.

Am I using the wrong terminology?  What is the option for a non-working spouse to open a retirement account?  Or is that limited only to tIRA, Roth IRA, or taxable acct?

MDM

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...is the option for a non-working spouse to open a retirement account...limited only to tIRA, Roth IRA, or taxable acct?
Yes.

Why?  Because that's how the laws have been written.  No "good" reason why, just the way it is.

MrsWolfeRN

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Haha my pool is only open 3 months/ year, but my power bill is much higher during those 3 months. A winter kit runs me about $30. I buy my shock and chlorine tablets at Costco,
and the algecide and other stuff from hydropool.com or my local pool store. (No, I would not have bought the pool but it came with the house). I have my own well so don't pay for water.
I would probably keep the spouse life insurance until all of the kids are old enough to go to school, or until you have enough in the stash to self-insure for this. Multiply the cost of daycare in your area x 3 kids x 5 years or so. This also depends on your risk tolerance.
You might have too much life insurance on yourself, but this is a matter of opinion. Do you want your wife to have enough to never work again, or just to meet expenses until the kids reach school age?
Personally I have only 200k life insurance on myself (that I get free from work) and nothing on my spouse, who is also a SAHP, but I would want to downsize to an easier to maintain house if something happened to him, regardless of how much money I had.

fuzzy math

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-- paid 6850 last year in taxes.  Had 11k withheld.  Largest refund I had ever gotten by far, but I think I attributed that to the fact that it was only the 2nd year we had itemized, had significant (above our normal) charitable donations on the year, and I started deducting business expenses/mileage from a hobby turned advocation.  But with the feedback from this thread, I can see that it may also be due to moving up in tax brackets over the last couple of years, and not driving down taxable income.  I will also review my withholdings to ensure estimates are closer to actuals.

-- not determined to waste $ on taxes :)  lol.  just a newbie looking for help.  I think the DR war drums might have drilling into my head that Roth is always best, and I have slacked on doing the math as our tax bracket and situation changed with more kiddos.


-- "something to do only after you've maxed the HSA and your 3 retirement accounts"  - just to clarify:  1) HSA (6900) 2) My/spouse 401k (18k/18k = 36k) 3) My/spouse Roth IRA (5500x2=11000), then ESPP?  Still trying to distill the Order of Operations post that was linked earlier

Max Your HSA, then max your 401k (pretax). Those contributions need to be done during the year. Then if you still have $$ left over before the end of the year, work on the IRAs, starting with your wife's (pre tax). You have up until April of the following year to contribute to your wife's and your IRAs. Tell your accountant at tax time you want to contribute to your IRAs and they will tell you if any of yours can be pre tax. Your wife's can automatically be pre tax. She is not eligible for a 401k unless you employ her in your side business.
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Fi365

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Fellow newbie here, so all I can offer is...

Calculating savings rates can be tricky, as you've seen. In my experience, it's more helpful to think of it as "savings discipline" instead of a "savings rate," and to calculate it consistently each year. In other words, the exact definition/numerators/denominators you choose don't matter so much, but consistently measuring (and improving!) your rate does matter.

Sure, it's fun to compare your own savings rate to other families, but who really cares? There are people on the forums who save 90-100% of their income, often due to awesome work situations where they get free housing and even some free meals. But for the vast majority of us with mortgages or rent, those high numbers are fairly difficult.

Savings rates can certainly help you calculate your time to FI (like the Networthify site), but you can also calculate your time to FI the old-fashioned way. See row 263: https://docs.google.com/spreadsheets/d/1oDfc1-QBNuoO84IO7XaXZe9SIa1llUcZJiJ-tQRkGdQ/edit#gid=0

Good luck!!!
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civil4life

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I think some commented on the HDHP vs other plans.

When you have kids that is the time in your life when you should consider other plans.  Kids are always sick.  Especially with an infant you have regular check ups every month to quarterly.  Then there are annual physicals.

HDHPs work best for those with no chronic health issues and meant pretty much to cover a catastrophic event like a major surgery or cancer.
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TheBeardedOfficial

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Thanks for the detailed breakdown...reading through these and trying to synthesize the actionable steps.
As the saying goes, the best way to get the right answer on the internet is not to ask a question; it's to post the wrong answer.

Post the result of the synthesis, and....  :)

Added update 1 to OP with my synthesis and actionable steps.  Please comment and help me refine.  I'd like to take action by end of this week so my payroll dept has time to get the changes made prior to next pay period.  TIA!

MDM

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Total after tax reduction of $12,386.  According to my company's payroll calculator, this should be within $10/pay period of the $18k pre-tax 401k contribution.  (please check this math).   Can anyone give me an easy way or tool to calculate if this reduction in taxable income will be sufficient to reduce the tax burden to balance out the $1200 shortfall created by increasing exemptions/decreasing witholdings in step #1?
The spreadsheet referenced in How To: Write a "Case Study" Topic (aka the case study spreadsheet - see how clever we are with names around here?) should be able to do all that for you.

harvestbook

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Not sure how the additional tax savings would break down using the Roth 401K, but I'd go further and see how low you can get it by using tIRAs instead of Roth IRAs. If you retire early and are "earning" little, then you can easily do tax-free or cheap Roth conversions during those years, per the Mad Fientist strategy Looks like you'll be safely within the 12 percent tax bracket though, so maybe there's not enough advantage worth losing the future flexibility over.

You didn't mention in, but if you get a 529 tax break in your state, you might want to do that with the $4,000 instead of a UTMA, or at least up to the tax credit max. With three kids, it's likely one will want to go to college. My philosophy is to pay as little tax as possible because taxes paid is money gone forever. But I may contradict myself - I pay medical costs out of HSA because I believe in getting some of my tax break right now instead of postponing it all. Sounds like you're developing a solid plan. Good luck.
I'm not smart enough to know and I can't afford to guess.

TheBeardedOfficial

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Total after tax reduction of $12,386.  According to my company's payroll calculator, this should be within $10/pay period of the $18k pre-tax 401k contribution.  (please check this math).   Can anyone give me an easy way or tool to calculate if this reduction in taxable income will be sufficient to reduce the tax burden to balance out the $1200 shortfall created by increasing exemptions/decreasing witholdings in step #1?
The spreadsheet referenced in How To: Write a "Case Study" Topic (aka the case study spreadsheet - see how clever we are with names around here?) should be able to do all that for you.

Touche'    -- and here i was thinking I was on top of things by updating my OP instead of just adding replies.

TheBeardedOfficial

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Quick update on actions we've taken:

1) Ended ESPP contributions and diverted those funds plus dollars previously contributed to Roth 401k to max out 401k with all pre-tax dollars.
2) maxed both Roth IRAs for myself and spouse.
3) topped off HSA contributions to max those, and are actively working to cash flow medical expenses.
4) increased witholding exemptions from 3 to 9 based on the W4 worksheet.

This has driven our tax withholdings down from $519 per period to $166 per period (some portion of that was also the tax reform changes).  So, we now have some additional discretionary income to allocate towards our next savings goal.

Talked with our broker who seemed concerned about us shifting away from Roth 401k towards pre-tax 401k qualified accounts.  We compromised by keeping increasing our IRA contributions to max both, while keeping those funds directed towards Roth accounts.
 
His recommendation was to ''balance" our total nest egg between qualified and non-qualified accounts.  Given that we have around 200k in qualified accounts, and only about 5k in non-qualified taxable accounts, he suggested that we place our next available savings dollars to build up the taxable investment account to be approx equal in size to the qualified accounts. 
His rationale was for flexibility in the following goals:
1) 5-year cash flow when setting up Roth Conversion ladder
2) funding unexpected expenses above and beyond our emergency fund
3) funding education (he was mainly considering college funding in lieu of a 529).

My goal is now to be at FI in 10-11 years (end of 2028) based on inputs/outputs from the case study worksheet.  At that time, my kids will be 13,12, and 10, and we want to homeschool and have the flexibility to travel around the country to build a rich educational experience for them during their adolescent years.

My question is now whether I should consider funding the taxable account more, or if I should direct my next available savings dollars towards an "after-tax" (non-roth) 401k contribution that my company only started offering this year up to 10k.  If my understanding is correct, this is the mechanism used for the "mega backdoor roth". 

As always, any advice is appreciated.

MrsWolfeRN

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Great job on the tax savings. I think the mega backdoor Roth would be preferable to taxable but I'm not 100% sure. Have you been able to cut any expenses?

Laura33

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What is your broker recommending for education “in lieu of” a 529?  I am confused by the terminology, given that a 529 is for education.

One thing to keep in mind is that a broker is going to get paid only on the assets that he manages, and even if he is a good guy, that naturally leads him to advise investments that are in his financial interests.  Personally, I am a fan of 529s, if your state had a low-cost plan and offers a tax deduction (I get $10k off my state taxes every year plus tax-free growth plus tax-free withdrawals, so for me it’s a no-brainer).  But if you want an analysis of your own situation, find a fee-only* financial planner to look at your situation and advise next steps.

Btw, you also do not need a broker.  You can save yourself significant ongoing costs and fees by moving to Vanguard or Schwab. 

*By this, I mean “pay by the hour,” not the variety who wants to manage all your accounts and charges a percentage of the total.
Laugh while you can, monkey-boy

TheBeardedOfficial

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Quick update at the 6 month mark since beginning to pursue FIRE:

Finished reading Simple Path to Wealth and pulled the trigger on firing (pun definitely intended) our broker (Thanks for the suggestion Laura!).  I think the final straw was when he said that the IRS does NOT allow conversions from Trad to Roth to be treated as contributions for purpose of early withdraw...I then did a quick google search and provided him with the IRS guidance...then realized...what am I paying this guy for?  Now with Schwab and I have direct deposits and automatic investing all set up so I dont even have to touch either mine or my wife's Roth IRAs and will automatically dollar cost average $229.16 twice a month.  Who knew it could be so easy!

I did have some job angst over the last few months as my previous contract ended, and there was some very real concern about finding another role without relocating (and incurring wife aggro due to family proximity).  Fortunately, I was able to land a new role, and essentially have no major change beyond a longer commute (10-15 mins before, now about 30 mins).   New challenge will be meal planning for lunches since I was previously able to come home for lunch.

Going to start exploring possible options to invest some portion of our current 25k emergency fund. 
Any thoughts about appropriate cash holdings to keep available for emergencies?   We use sinking funds and envelope system extensively, and in the last 5 years, we have not needed to touch out EF cash hoard at all. 


Dragonswan

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A little late to the party.  Just found your thread with your recent update.  Just a word about life insurance on children.  This one really isn't about covering funeral costs.  If one of your children passes you and your wife will be emotional wrecks.  You will want to take time off from work to grieve and seek counseling.  This takes money.  You don't want to have to show up for work a week after such trauma because you need the paycheck.  This is what the insurance is for; it allows you to take the full FMLA weeks off unpaid so you can begin the healing process.

Now for happier subjects.  There are a variety of things you can do with your emergency fund.  First you need to decide how much of that 25K do you really need immediate access to and which needs to be safe from investment risk?  For most folks that's around 10K. Think about it, that'll cover most house, car and medical stuff not covered by insurance. So put that in a savings account. If you Google you'll find there are a couple banks offering over 1% interest (i.e. Ally).  This keeps your money safe and accessible, but long term will lose purchasing power to inflation. Some might advise a CD ladder, and I'm OK with that too.

The other 15K should be put in a taxable account in a broad index fund - such as one that tracks the S&P 500.  If the trifecta happens (you lose your job, the market crashes and now you have something go wrong with the house or car) you have the 10K to tide you over while you either wait for the market to recover or accept the loss and liquidate the rest of your efund at whatever the current value is.  Others will tell you you can also use your Roth IRA contributions (not earnings) in an emergency, but once that tax advantaged space is gone, it's gone forever so this would be the last-resort- the-emergency-is-lasting-for-months option.