Author Topic: Case Study: 10 year plan - advice and feedback requested  (Read 7345 times)

planner10

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Case Study: 10 year plan - advice and feedback requested
« on: February 03, 2015, 01:36:16 AM »
Ok guys here's where we are:
age: 35
income: 210k together
net worth: 1M
house: 350k mortgage left on 500k house

expenses:
85k state and federal taxes
25k food, utilities, everything else
42k daycare annually (for 4 more years) until kids get to public school. 
50k student loans (total not annually) (half of this will be paid off in 4 years, the other half is 1% interest so going to let that ride out for 20 years with minimum payments) - currently paying 8k/yr, this drops to 2.4k/yr in 4 years)
40k mortgage annually (paid off in 12 years)
10k saving annually (401k)

We were pretty frugal and then I quadrupled my salary over the last 8 years, refinanced to a 15 yr mortgage to try to fast track debt repayments (and get a new great rate), and then had twins and was hit by the ridiculous daycare prices in my area.

Obviously we aren't saving much at the moment, but:
 in 4 yrs will still need to pay for some sort of after school care or activities, but it won't be 10 hours a day so should be able to save another 25k.
in 4 yrs we will be able to save 5.5k because one student loan will be done.
in 12 yrs we will pay off the mortgage (another 32k saved - still need to pay taxes insurance and hoa)

Given our current investments of about 850k I should be able to let that grow - hopefully count on 5% (it's in diversified mutual funds - about half is in 401k other half is taxable).

Even if we're not saving at a high rate at the moment I think we should be on track to retire in about 10-12 years given the projected drop in expenses, minimal savings rate, and passive investment appreciation.  Can you guys help me with a sanity check?  Any suggestions? 

I would love to spend more time with the kids and quit now - my job is a LOT of hours - but it's also bringing in big bucks.  Hubby's is more regular hours, but still high (50 hrs/wk), less income, but he likes his job and would probably keep going for 10 years even if he didn't have to.  I know kids grow up so quickly, but I also know if I took time away from the work force I wouldn't come back in at anywhere near this income level.  So I'm thinking just pound it out ... but am torn and would love thoughts from this community.


« Last Edit: February 03, 2015, 01:38:03 AM by planner10 »

Monkey Uncle

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #1 on: February 03, 2015, 04:42:10 AM »
Yes, kids grow up fast, and it's a damn shame that most of us are forced to work like dogs during those years because we can't afford not to.  Do you at least have the option of reducing or rearranging your hours enough that you can be home for dinner and the evening/bedtime routine every day?

As for your expenses:

You are doing quite well if you're spending 25k on "food, utilities, and everything else." 

Can you downsize your house to something less expensive?  I know you're on track to pay it off in 12 years, but $32k/yr for 12 years is a lot of money.

Have your husband do the math on the payoff from his job.  Compare after tax salary to the sum of daycare, clothes, commuting costs, lunches, and everything else he spends related to working.  Could you get rid of a car if he quits working?  With 42k/yr in daycare expenses, my guess is he isn't netting much.

What is the interest rate on the portion of the student loans that will be paid off in 4 years?  Would it be worth paying this off to save interest?

ShoulderThingThatGoesUp

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #2 on: February 03, 2015, 05:57:30 AM »
Is your husband interested in staying home? It's not for everybody, but if my wife had been making a whole-number multiple of my salary when our daughter was born I think I would have jumped at the opportunity.

Why aren't you maxing out your 401ks?

MetalCap

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #3 on: February 03, 2015, 05:59:54 AM »
At your high income, it would make a huge deal if you could trim even a little and max out your 401k.  With the tax savings from your high income, this big savings wouldn't make a huge dent in your day to day but will turbo charge your savings.

A little more detail on the food & everything else might help but it seems like you get the basics.

One other thing to think about is the longer loans hang out the farther retirement is from you.  Even if it's 1% that is like dragging a stone behind you to retirement.  You'll still get there but you'll be more tired than you needed to be.

Baron235

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #4 on: February 03, 2015, 06:39:07 AM »
You could almost retire now if you moved to a place where you could get a 350k home and not a 500k home.  So why would you want to work 10 years longer?

ThatGuy701

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #5 on: February 03, 2015, 07:54:30 AM »
planner10,

Thanks for sharing. Breaking out your expenses like this is a great way to understand where your family can save more money.
Your second step should be reviewing these expenses with the family to determine where you can cut your costs.
$25k/year is a lot a money to be spending on food and utilities; you can probably cut around $10k/year in this category alone.

Next like Monkey Uncle suggested an analysis should be done to determine if your husband should be staying home.
I would guess to say that having your husband stay home would cut out around $60k/year in expenses coming from daycare cost, food cost, and gas consumption.

After you determine where you can cut costs start paying off your high interest student loans asap, max out 401k, and then put more money towards paying off your house.

You are in a great situation here in that you are way closer than 10 years to early retirement if you can just find ways to cut your expenses.

Good Luck!

Baron235

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #6 on: February 03, 2015, 08:01:38 AM »
Also,  your tax numbers are wrong.  Using a simple tax estimator and assuming really high state taxes I get this:

Federal: $37,563 (http://www.calcxml.com/calculators/federal-income-tax-calculator?skn=#results)
State: $18,000
Fica: $15,000

Total:  $70,563

This is assuming basically no deductions outside of the standard and 401k 10k you mentioned.  This is clearly high since you have a mortgage and that would lower your taxes even more. 

MDM

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #7 on: February 03, 2015, 09:21:43 AM »
Also,  your tax numbers are wrong.  Using a simple tax estimator and assuming really high state taxes I get this:

Federal: $37,563 (http://www.calcxml.com/calculators/federal-income-tax-calculator?skn=#results)
State: $18,000
Fica: $15,000

Total:  $70,563

This is assuming basically no deductions outside of the standard and 401k 10k you mentioned.  This is clearly high since you have a mortgage and that would lower your taxes even more.
+1

High state taxes alone will get you into itemized deductions, plus the mortgage interest....

You might try entering numbers in the spreadsheet found here and modify the OP as needed.

planner10

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #8 on: February 03, 2015, 01:16:07 PM »
You guys rock!  Hubby won't quit although you're right, it would definitely make financial sense.  He loves his job and really gets a lot of personal enjoyment from it.

I am going to start looking at where I could live around here that would be cheaper but not add too much time to my commute.  We originally chose this house because it has a bedroom, full bath, and kitchen-type sink in the basement so my parents could live with us, and then they decided not to.  So we could definitely downsize, although odds are right after we did they would then want to move in with us. :)

Taxes are added up from our W2s so not sure why they are so far off from some of the commenters (we usually owe a couple hundred bucks on both Federal and State, haven't gotten a tax refund in a LONG time).  I will update after I do my taxes just in case I am somehow off this year!  Our problem is that for the last several years if I take the mortgage deduction I get hit with AMT which even takes away the child tax credits.  I do the taxes both ways (deducting what we can deduct, and going standard deduction), but with the AMT it gets rid of all the basic stuff most other people get to deduct.  Where are all the high income tax loopholes I keep hearing about!??

401k is a good point.  My employer doesn't offer a match so it just hadn't been a priority.  Plus I was worried about tying up too much money and then not being able to access it without paying a penalty if we did end up retiring early.  Although we do have a good chunk not tied up in it now ... I will take another look at this and see if we can do better here. 

I am considering paying next years tuition up front to get a 5% discount.  Of course, that would make moving much more difficult.

The 25k expense category includes a lot more I didn't list out.  Food, utilities, phone, internet, medical, gas, car insurance, and a ton I am not thinking of at the moment.  I'm actually kind of proud of it because we don't buy coffee, eat out much, have cable, or a home phone, or buy clothes, watches, purses or whatever fancy things people buy, or new toys for the kids (of course they are still in the "this cardboard box is the BEST EVER" phase).  I am not really willing to cut this much more.  I don't even think we would get rid of a car if hubby WAS willing to quit - he would still need it in case the kids needed to go to the doctor while I was at work, or if he wanted to take a trip to a museum or something.  If we both quit?  Absolutely we would drop a car. 

I do expect to have medical and housing responsibilities for my parents down the road, so my financial goals are a bit higher than just FI for myself.  I unfortunately have experience with serious medical situations and have found that a good cushion of cash gives you priceless options.

What do you guys think about refinancing to a 30 year and saving more?  I was afraid that would drag out my golden handcuff time period, but maybe it would open up more options by boosting savings?

Really appreciate your feedback and ideas!!!
« Last Edit: February 03, 2015, 01:33:13 PM by planner10 »

MDM

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #9 on: February 03, 2015, 01:48:19 PM »
Our problem is that for the last several years if I take the mortgage deduction I get hit with AMT which even takes away the child tax credits.  I do the taxes both ways (deducting what we can deduct, and going standard deduction), but with the AMT it gets rid of all the basic stuff most other people get to deduct.

AMT could well be why the quick calcs don't match reality.

FrugalSpendthrift

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #10 on: February 03, 2015, 03:15:11 PM »
Plus I was worried about tying up too much money and then not being able to access it without paying a penalty if we did end up retiring early.
With your tax bill, I would try to shelter as much income as possible from it.  Even if you both maxed out 401k's that would only be about 16% of your income.
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

BBub

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #11 on: February 03, 2015, 05:54:49 PM »
$42k annually for daycare seems crazy high.  You could hire a full time nanny for less.  Then you'd have help w/ meals, laundry, cleaning, grocery shopping.  I'm not saying that's a mustachian idea, but if you're shelling out that kind of money you could be getting a whole lot more bang for it.

frugaldrummer

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #12 on: February 03, 2015, 06:54:16 PM »
Yeah - you have a house with basically a granny-suite apartment in the basement?  Get a nanny with free room and $2,000 a month salary, save yourself $18k/year AND have someone who can do some cooking, cleaning and the like!

DanielleS

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #13 on: February 03, 2015, 06:58:23 PM »
Haha, I had the exact same thought as frugal drummer and BBub - you should hire a nanny asap. Have the nanny live in the basement apt., they'd probably love the solitude when they're not working. It would probably take a lot of stress out of your life.

aschmidt2930

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #14 on: February 03, 2015, 07:14:49 PM »
Cut costs where you can, but overall if your goal is to work ten more years, I think you're in the clear.  Your investments are impressive for 35, and assuming 10 years of average market growth, your nest egg will be plenty for a very comfortable retirement.  At this point, if you get the mortgage and student loans paid off, you're essentially free.  Congrats!

MDM

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #15 on: February 03, 2015, 09:11:04 PM »
Our problem is that for the last several years if I take the mortgage deduction I get hit with AMT which even takes away the child tax credits.  I do the taxes both ways (deducting what we can deduct, and going standard deduction), but with the AMT it gets rid of all the basic stuff most other people get to deduct.
AMT could well be why the quick calcs don't match reality.

Now I'm not so sure.  Taking numbers in the OP, plus some guessing, I get only ~$1100 in extra AMT.  Planner10, would you mind taking a look at the attached and comment on where your 2015 return is significantly different, particularly in the AMT portion (tab 'Form6251')?  In other words, I'm looking for beta testing to find "obvious" errors, so if anyone else is so inclined....

If the discrepancy is something arcane, e.g. "Depreciation on assets placed in service after 1986 (difference between regular tax and AMT)," then I'll chalk it up to "out of scope for most MMM Reader Case Studies."  Not trying to compete with Excel1040 here.

If, however, it is a "simple AMT calculation" (assuming such a thing exists), then we can add this capability to the spreadsheet described here.  The one attached to this post is a modified version of the one on the Google Drive.

Thanks!

CDP45

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #16 on: February 03, 2015, 10:11:58 PM »
Can you give the split in salary between you and hubby? Even if it's equal it doesn't make sense to pay $42k in daycare.  because the tax brackets are progressive, you would save more than half of the $85k in taxes, so let's guesstimate $45k there and another $42k in day care and you've saved $87k/yr AFTER TAX! Plus you don't have to work anymore! Wow congrats! you're welcome :)

Plus you probably avoid AMT too! (This outlook is even better if one is making a lot more than the other)
Also thank you for not listing out your $25k in living expenses as that avoided multiple posts about cutting your cable and phone bills.

Lol forgot to add with that 1mm in net worth you're already FIRE TODAY if you stop working and  move a bit out of town to a reasonably priced house.

On a more serious note, you shouldnt plan to finance your parents healthcare with your retirement savings. If they can't afford it they need to buy a lot of insurance, and you can help them with those premiums If you want, but you may need to finance your own healthcare and they presumably won't be around to help you. You can buy health insurance, but you can't get a loan for your retirement.
« Last Edit: February 03, 2015, 10:25:10 PM by CDP45 »

gluskap

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #17 on: February 03, 2015, 10:35:45 PM »
We have a lot of similarities...I am also 35 and we both make in the low $200k salary range too. We don't have to pay AMT though but that might be because we are maxing out our 401k. You are paying so much in daycare, are you using the dependent FSA? You should also be getting a tax credit for childcare...there isn't an income max on that. You just can't use the same daycare expenses for the FSA as for the child care credit but your expenses are so high that you should be able to do both. Seems like you are paying way too much in taxes...it is essentially a 40% effective rate. I think with all of our mortgage interest deduction we pay about a 15% effective tax rate. We are also planning on retiring in 10 years but you have way more saved up in investments than we do. We only have about 400k in investments so you are way ahead of us there.

Monkey Uncle

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #18 on: February 04, 2015, 04:29:08 AM »
You guys rock!  Hubby won't quit although you're right, it would definitely make financial sense.  He loves his job and really gets a lot of personal enjoyment from it.

Seriously, run the numbers, and pay attention to what CDP45 said.  If your husband's employment situation truly is cash negative, he needs to realize that he doesn't have a job; he has an expensive hobby.

Indio

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #19 on: February 04, 2015, 07:34:21 AM »
The dependent FAS is definitely a money saver. I used that when my kids were in pre-school and still use it for summer camp.
If you are going to consider moving look for a new town where they have district pre-K. That might save cut your day care expenses down. Pre-K is usally only half a day so you still might need after school care. I had a nanny watch my kids after they were born. It was way cheaper than daycare and they didn't get sick as often, which made night duty much easier on me. Also look for a town that has a subsidized summer camp. Summer camp can be a huge expense too but not when the town offers a low cost option.

planner10

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #20 on: February 04, 2015, 10:05:44 PM »
First off thanks for all the thoughtful responses and questions!  I really appreciate your time and insight! 

I promise I will come back and update in March after I get a few more documents together for our taxes.  Note that because of all our investments there is some additional taxed "income" there in the form of dividends (this is fairly significant) and some limited capital gains when I change investments. Even though we're not actively using it for income, and are reinvesting, that still adds to the taxes we owe as well. 
MDM - I will go through your spreadsheet and will let you know if it's on the mark although it might take me a little while before I gather all of this years paperwork to enter it.  I usually do this in March, so I will make a point to follow back up with you.  Thanks for looking into this!  No we do not have anything too crazy like depreciated whatever :) 

Whoever wrote about the Dependent Care Tax fund is my newest hero!  They will save me about 2500 a year!!  I can apparently write off up to $5500 per year in child care and I did not know that at all!  I will increase 401k contributions accordingly :)

Also awesome idea to look for a county/district that offers pre-K.  I heard that the next county over is thinking of doing that, but it probably won't be in time for my little ones, but maybe other counties do?  I'm going to look into that this weekend.  Frankly even finding a district that has full-day kindergarten would save us a YEAR of day care costs. The figures in my original post include the Montessori Kindergarten year because 3 hours of public kindergarten does us no good whatsoever.

The live-in nanny is an awesome idea!!!  I looked on Craigslist today and they seem crazy expensive - worse than my daycare!!  It might just be the DC area.  I am going to look into au pairs and see if that is any better.  Please let me know if anyone has any recommendations or tips on that as I am starting from zero there.  I wish we had family we could convince to stay with us ... I'd pay well!!!

Another question for the group - I have been avoiding moving even though our house is clearly more than we need because I hate the costs that come with moving.  We have big heavy furniture and although we've always moved ourselves in the past, I really don't think we'd survive it this time.  Also I would probably have to paint just about every room and the thought of keeping everything in "showing" shape with the kids is daunting.  Anyone a veteran mover with secrets to make this easier?  I also hate the idea of giving real estate agents 6% when I don't really feel like they add a ton of value in this day and age.  I actually looked into getting my real estate license to pocket that myself but it was a bit more involved than I can do at this time.  Is anyone here a real estate agent near DC in VA?  Would love to use you!!  Anyone have any tips?  RedFin seems good ...
Other considerations to take into account when considering a move (property tax, etc.  anyone have good resources or links)?  I'll do a comprehensive cost analysis.  I'm out of town at a conference this week so it'll take me a while to pull this together but I will definitely let you all know the results.

Thanks again!!!  Hope some others get some value out of this discussion as well.  I know I am!!
« Last Edit: February 04, 2015, 11:21:45 PM by planner10 »

Setters-r-Better

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #21 on: February 05, 2015, 05:42:31 AM »
Were the nanny prices you looked at for live in nannies?  You should be able to pay less because they would live with you and not have their own rent/utilities to pay.
Id vote keep the big house and get the live in nanny arrangement if you can :-)

If not a nanny,  you could rent the space to someone else to reduce your housing expense without having to move.  (I totally understand just being too tired to take on moving).

People sometimes use rental properties to reduce taxes because they generally lose money on tax returns.  Could be an option,  sounds like you'd have to rely on a propert manager for now. 

gluskap

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #22 on: February 08, 2015, 01:02:41 AM »
We used  Redfin and I would recommend it. They only charge 5% to sell plus you get a rebate. But be prepared to do some work as I don't think they hold your hand as much as a full service realtor. But like you said with the Internet these days it's so easy to do your own comparables. Besides you could end up paying more for a realtor and they still suck so might as well save the money.

Indio

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Re: Case Study: 10 year plan - advice and feedback requested
« Reply #23 on: February 08, 2015, 06:30:13 AM »
I didnt find my nanny off of craigslist but through the local library. I started talking to the staff and told them I was looking for someone to do in home daycare. Librarians know lots of people and unemployed folks may hang out at the library. In my case the wife of the library director was looking for a job so it worked out perfectly.