Author Topic: Case Study: 14 year plan. Can you review and revise if needed?  (Read 5897 times)

Late_Bloomer

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Hello everyone. I've been a lurker here for a few months and since discovering MMM I've wanted to get involved with the community, as well as share my thoughts and plans for FI for my own situation. I would like you all to review what I'm about to submit and make comments, suggestions.

Background: You can skip this section if you wish, the meat of my plan will follow after this section. I'm 41 and my spouse is 42. We are currently living in central Texas. I've always had a problem with money. Not that it has been hard to earn, or that we have a problem with exorbitant spending, rather, I hate thinking I have to make X amount to feel successful. I have to admit, when I first started browsing the forums, I felt ashamed because it seems that many, if not most of the people that post here are already highly successful. Ie, making upwards of 100k per year or more. That is something that will never happen for my spouse and I. However, what has enabled me to participate in this community is the realization that I can still meet my FI goal, and more importantly, our situation may help to inspire others that don't make a high income to still be able to succeed to becoming FI.

Plan: At our age, we are pretty much at our peak earning years, therefore, the figures have been allocated to reflect current expenses. Any raises, bonus's, or promotions will simply be additional windfalls added to the pot over time.

Net annual earning after taxes: 65,000.00
My TSP annual contribution: 14,400. I receive a 5% match which is not included here. It is a bonus added to the amount contributed. Current TSP balance as of this posting: 5,000.00
Spouse 401K annual contribution:14,400. She receives a 3% match which is not included here. It is a bonus added to the amount contributed. Current 401K balance as of this posting: 32,000.00 
Liquid assets (emergency savings): 18,000.00 and contributing 3,600.00 annually.

At this rate of savings I have computed the following forecast: Total combined saved annually: 28,800.00.
Total amount saved from earned income (excluding each company match): 403,200.00 @ 14 years.
I've added the investment component of compound interest at 5% and it comes out as:650,000.00 @ 14 years.
investment note: we both are investing 60/20/10 all index stocks split (large cap, mid cap, international) for the growth years. Once we hit our gross numbers in 14 years, we will re distribute the funds in more of a 80/20 split bonds/stocks for retirement. At this point we will withdraw the 4% SWR average @ 24,000.00 annually and contribute back 19,000.00 annually for future growth.

We currently live on the MMM guideline of half which, in our case, is less at 24,000.00 per year. We are debt free and only pay a mortgage. We are doubling down on payments which should allow us to pay it off within 10 years. This monthly expense is 1,600.00 which will, at the time of pay off, be contributed to our investments for the "catch up" increase after age 50. This will give us an additional +6 years of added income for a total of 115,000.00, bringing the grand total of net worth to about 765,000.00 in 14 years.

Future Plans: We bought our home for 137,000.00 and plan to sell it around the 14 year mark when we FIRE. We assume we would get at least 100,000 for it and plan on taking that cash and buying a property somewhere where we want to settle out for the remainder of our years. Since I work for the government, I will receive an average of 600.00 per month pension which will pay for either property tax or HOA fees depending on what type of property we purchase.

Final thoughs: This brings us to age 57/58 at the time of FI. Still well below the average retirement age of most people in the United States. Everything I have written, is all due to MMM and the community here, and what I have discovered therein. I have always been frugal, however, I have never had the financial advice I should have been given throughout my life. My parents never invested, they never went to college, they never earned more than 40,000.00 per year and they never coached me on what to do, or how to be financially responsible. I just wish I had someone to coach me when I was a teenager. It is depressing knowing I could have avoided all the financial hurdles of thinking about making a certain wage to be a successful person and just invested money early. I could have been FI in less than half the time I am doing it now. But the important thing is that I am now doing it and have a solid foundation to build upon. I wouldn't trade this knowledge for anything in the world.






« Last Edit: June 16, 2015, 01:36:05 PM by Barrett73 »

MDM

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #1 on: June 16, 2015, 01:34:15 PM »
Barrett73, welcome to the forum.

Any particular reason both of you aren't contributing $18K/yr to your TSP/401k?

What is the interest rate and minimum required P&I for the mortgage?

Forum is "Temporarily Unavailable" or I'd quote from the case study sticky, but you might look closer at that and add some of the details requested.  Up to you, of course, but the more you can share the better the feedback is likely to be.

Late_Bloomer

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #2 on: June 16, 2015, 02:13:30 PM »
Hi MDM, thanks for responding. I hope I get a million and one questions, as they will help define the reasoning and changes needed to make this a successful venture.

We are not both contributing 18k/yr to tsp/401k simply because we don't make enough income to do so. the amounts posed in the OP are not including company matching. My tsp is roughly 1,300.00 shy of making that 18k for 2015. the Spouse amount is a little more since her match is not as much as mine. We are hoping next year we can cut back a bit more and get that up a bit and match starting with 2016 and beyond.

Our mortgage interest rate is 30 yr fixed @ 3.75%. the finance charge is 95,500.00. Amount financed was 134,300.00. P&I is 638.64. Escrow is 346.64 for a grand total of 985.28 per month. We ran the numbers as well as contacting the bank to verify and both concluded that adding an additional principle payment of 638.64 per month would ensure we pay it off in less than 10 years.


MDM

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #3 on: June 16, 2015, 02:25:05 PM »
the amounts posed in the OP are not including company matching. My tsp is roughly 1,300.00 shy of making that 18k for 2015. the Spouse amount is a little more since her match is not as much as mine.
The $18K limit does not count company matches.  E.g., see http://20somethingfinance.com/maximum-employer-401k-contribution/

Quote
Our mortgage interest rate is 30 yr fixed @ 3.75%. the finance charge is 95,500.00. Amount financed was 134,300.00. P&I is 638.64.
Something doesn't add up.  The monthly payment on $134,300 financed at 3.75% over 30 years should be $621.96.  You can check this with Excel's PMT function.

At only 3.75%, consider not diverting money towards the mortgage but instead using it to maximize your 401k and then IRA contributions instead.  Many threads already exist on the "pay more toward mortgage vs. invest" question....

Late_Bloomer

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #4 on: June 16, 2015, 03:16:11 PM »
 MDM wrote:
Quote
At only 3.75%, consider not diverting money towards the mortgage but instead using it to maximize your 401k and then IRA contributions instead.  Many threads already exist on the "pay more toward mortgage vs. invest" question....

This is one of the decisions we need to adjust, or stick with. Our reasoning for paying the mortgage now rather than later is to ensure it is paid off by our 14 year goal. This way, we have more choices:
A)continue living in the home payment free (and reinvest that amount back into the savings)
B)Sell the home for what we can get. We are not all that optimistic our home will sell for more or even come close to what we are paying for it. 135K for a home anywhere isn't that much value and if we have to sell it at a loss, and only get something like 90-100k out of it, we can still have enough to purchase a property outright with that amount in a more suitable location for retirement.
C) Worst case is that if we didn't pay off the house now and something happens with our plan and we don't accumulate the type of funds I have discussed, or the stock market tanks and wipes out half of our investments,ect., We will not be able to retire at our income/savings rate with a mortgage. Plain and simple.

However, this is simply my personal opinion on the matter. If anyone has a more compelling argument about paying off now or later vs. our 14 year plan, I would be interested in hearing your thoughts.

Check2400

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #5 on: June 16, 2015, 03:44:34 PM »
The great debate of house certainty verse investments is a personal choice.  But in your case, you're paying off essentially the final ten years of your loan at 3.75% interest.  What you're giving up is 14 years of 401k money both not being taxed at 15% rate or so, and not compounding on even your conservative number of 5%. 

My thought would be max out 401k (or at least the amount you're doubling down on your house payment) and use any windfalls or bonuses to pay off the mortgage.  In a vacuum, your money would grow more in this manner, and your retirement would be earlier.  You'd have to finagle the whole accessing your 401k early via backdoor roth, a concept that still eludes me, but mathematically it is better to max 401k because of tax benefit and compounding growth. 

On a personal note, I've found that maxing 401k allows for any bonuses or raises beyond that to be truly bonuses.   When I was not maxing contributions I made promises to put any raises to the 401k.  Once I hit 18K a year, I knew that anything more I earned was truly mine.  I needed to have that artificial barrier of having funds automatically withheld, because I grew to whatever budget came through on the 1st and the 15th. 

MDM

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #6 on: June 16, 2015, 04:03:47 PM »
This is one of the decisions we need to adjust, or stick with. Our reasoning for paying the mortgage now rather than later is to ensure it is paid off by our 14 year goal.

Based on historical returns, paying off the mortgage over a long (e.g., 10 year) time loses to investing.  E.g., see http://www.businessinsider.com/range-of-annualized-stock-bond-returns-2014-11.

If you are willing to accept the likely longer time to FI in return for not having a mortgage payment, that is certainly a choice you can make.  And if the next 10 years turns out to be the worst ever 10 years in the history of the stock market you will have beaten the odds and made the correct financial, as well as emotional, decision.  At this point it is an emotional choice.

Although, the cost of the emotional choice may not be so bad.  E.g., if you invest $638.64/mo and get a 7% return instead of using that money to pay the mortgage, you would be ~$22,000 ahead after 130 months.  Up to you to decide if that is a lot or a little.

Late_Bloomer

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #7 on: June 16, 2015, 06:38:54 PM »
I thank you all for contributing to this thread. You've given me some serious information that I am going to take to the drawing board and research more concerning the whole investment vs. mortgage debate.

I have a question though. When I was going over the information and figures for my tsp I read that if you reached the maximum contribution per year amount before the end of the year, matching employer contributions would be stopped. I was under the impression you could only put in 18k no matter what source, meaning the company match contributed to this amount, and not that it was additional that could exceed 18k. If I increase my tsp amount like suggested to max it, the employer match would eventually put me over the limit before the end of each year. Am I understanding it wrong?

Gin1984

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #8 on: June 16, 2015, 06:45:13 PM »
I thank you all for contributing to this thread. You've given me some serious information that I am going to take to the drawing board and research more concerning the whole investment vs. mortgage debate.

I have a question though. When I was going over the information and figures for my tsp I read that if you reached the maximum contribution per year amount before the end of the year, matching employer contributions would be stopped. I was under the impression you could only put in 18k no matter what source, meaning the company match contributed to this amount, and not that it was additional that could exceed 18k. If I increase my tsp amount like suggested to max it, the employer match would eventually put me over the limit before the end of each year. Am I understanding it wrong?
Yes you are.  What it is saying is if you front load your TSP aka say max it out from Jan -Oct, you lose the match for Nov-Dec.  Just max sure you are maxing it out throughout the year and you will be fine.

kpd905

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #9 on: June 16, 2015, 07:23:12 PM »
I was under the impression you could only put in 18k no matter what source, meaning the company match contributed to this amount, and not that it was additional that could exceed 18k. If I increase my tsp amount like suggested to max it, the employer match would eventually put me over the limit before the end of each year. Am I understanding it wrong?

You can put in $18,000 of your own money, no matter what kind of match your employer offers.  Their match is separate from this limit.

MDM

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #10 on: June 16, 2015, 07:24:33 PM »
I was under the impression you could only put in 18k no matter what source, meaning the company match contributed to this amount, and not that it was additional that could exceed 18k.

Not true.  If the previous link was not sufficient, see an IRS version: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-401k-and-Profit-Sharing-Plan-Contribution-Limits

Also, google "401k true-up" and when you understand the issue, ask your employers how they handle the issue.  I.e., does it matter when you reach your $18K limit in terms of how much extra your employer will contribute?

Late_Bloomer

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #11 on: June 16, 2015, 10:34:08 PM »
Thanks for clarifying the information concerning 401k limits. I feel confident we can trim a little more and get that max put in annually at this point.

Another thing I wanted to ask is concerning what we do with our accounts the day we decide to retire. I haven't read or heard anything about combining accounts at retirement. I presume we would roll over my tsp and wife's 401k into a single account. perhaps with Vanguard to take advantage of the lower rates, better allocation options, and the doubling down (so to speak) for future compounding.  Or, is it simply that we would not be able to combine the accounts into one at our time of retirement? 

MDM

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #12 on: June 16, 2015, 10:54:28 PM »
I haven't read or heard anything about combining accounts at retirement. I presume we would roll over my tsp and wife's 401k into a single account. perhaps with Vanguard to take advantage of the lower rates, better allocation options, and the doubling down (so to speak) for future compounding.  Or, is it simply that we would not be able to combine the accounts into one at our time of retirement?
The I in IRA stands for "Individual," so any rollovers will go to separate accounts.

Note that you get exactly the same results from compound interest whether you have X in one account and Y in another, or if you have (X + Y) in the same account.

That does mean you won't get admiral-class shares if you each have, say, $7500 in a fund.  But for Vanguard's various service levels (e.g., Flagship, Voyager, etc.), "eligibility is based on total household assets held at Vanguard."

Late_Bloomer

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #13 on: June 17, 2015, 07:14:17 AM »
Just wanted to thank everyone again who contributed. You've given me wonderful information to think about. Although we are starting later than anyone should, we feel confident we can still retire early. Any time before age 60 is early in my opinion. Going to make a few adjustments to get the tsp/401k maxed starting with next months contributions. After conversing with the wife about the mortgage vs. investment strategies, we decided we're going to stay on track with paying off the mortgage. We know we can save more than enough with what we are doing now, and we know early retirement isn't possible for us with such a huge payment if we extended it out for 30 years rather than our 15 year goal.

If I think up anymore questions as time goes on, I'll let you all know. If you have any additional advice, or thoughts, feel free to share.

CapLimited

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #14 on: June 17, 2015, 07:17:17 AM »
I presume we would roll over my tsp and wife's 401k into a single account. perhaps with Vanguard to take advantage of the lower rates, better allocation options, and the doubling down (so to speak) for future compounding.  Or, is it simply that we would not be able to combine the accounts into one at our time of retirement?

Another Fed here.  If you can work around the inflexibility of TSP, it might be worth considering leaving your funds in, rather than transferring them to Vanguard (and I am a fan -- have been investing with them since the days when you had to send them a paper check -- no electronic transfers).  The TSP (as of 2014) has an expense ratio of 0.029%, while the Vanguard Admiral S&P 500 Fund has an expense ratio of 0.05%.  Most other Vanguard funds have higher ratios.  Not much of a difference, admittedly, but it could add up to serious beer money with a sizable account.

So, the TSP won't let you just withdraw random lumps of cash whenever you feel like it after you are eligible.  You can do a one-time-only partial withdrawal at any time after you are eligible to withdraw, otherwise you either set up a monthly annuity that is not adjusted, or you can ask for a monthly dollar amount payout that can be adjusted once a year, taking effect the January after your requested adjustment.

Will you be giving up eligibility for Federal Employees Health Benefits with your early retirement?  I have to admit, I'm sticking around to age 56 and 4 months, my minimum retirement age, just for that -- paying less than $100/bimonthly for good health insurance (individual, in today's dollars) even into retirement is going to be a hard deal to beat.

Also, you may want to consider putting your extra house payoff dollars into a Vanguard Roth IRA.  Withdrawals of contributions are allowed at any time without penalty, so you could take out your contributions to pay off the house when you retire, leaving the earnings in to grow tax free.
« Last Edit: June 17, 2015, 07:46:42 AM by CapLimited »

MDM

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #15 on: June 17, 2015, 11:23:44 AM »
After conversing with the wife about the mortgage vs. investment strategies, we decided we're going to stay on track with paying off the mortgage...we know early retirement isn't possible for us with such a huge payment if we extended it out for 30 years rather than our 15 year goal.
The first part of the quote is fine: it's your decision and much goes into the definition of whether it is "correct."

But the part about "early retirement isn't possible..." is a different story.  What calculations led to that conclusion? 

In case the calculations added mortgage payments into expenses that were then multiplied by 25 to get the "stash required," see (among others):
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/msg618547/#msg618547
http://forum.mrmoneymustache.com/ask-a-mustachian/excited-a-little-unsure-and-needing-a-second-(or-more)-opinion/msg686366/#msg686366
http://forum.mrmoneymustache.com/real-estate-and-landlording/the-great-%27pay-off-mortage%27-vs-%27invest-in-stocks%27-debate-possible-solution/msg631642/#msg631642

Late_Bloomer

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Re: Case Study: 14 year plan. Can you review and revise if needed?
« Reply #16 on: June 18, 2015, 07:50:33 AM »
MDM wrote:
Quote
But the part about "early retirement isn't possible..." is a different story.  What calculations led to that conclusion? 

Not that it isn't possible, rather it's a personal outlook based on how I feel about the issue. We believe we'll end up selling this house at time of retirement because we don't feel 100% that central Texas is the place for us in the long run. We know that if we have to stay (for whatever reason) we'll be content keeping the house. This is the only part of our retirement plan that is in question, and it comes back around every few months when we daydream on where we are going to retire to!

CapLimited wrote:
Quote
Also, you may want to consider putting your extra house payoff dollars into a Vanguard Roth IRA.  Withdrawals of contributions are allowed at any time without penalty, so you could take out your contributions to pay off the house when you retire, leaving the earnings in to grow tax free.

A good Idea I had not considered. This sounds like the route to take if we decide to go back to paying P/I only without extra principle.
« Last Edit: June 18, 2015, 07:54:26 AM by Barrett73 »