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 - ~$60002004 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 = 407kLiabilities: 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 – 98kSpecific 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.
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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.
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!