Author Topic: Case Study - AM I doing this right? Nervous in NY  (Read 4338 times)

Ottoford

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Case Study - AM I doing this right? Nervous in NY
« on: March 21, 2016, 09:09:33 AM »
My first post since Im still catching up on the MMM blog Im still back in 2013 and trying to catch-up.

Life Situation: Married (age 44 and 42) filing joint, no dependents.  Weve been trying to Mustache up for a while now. 

After reading MMM and knowing my husband had been unhappy at work for a while we decided to take the big step.  I became self-employed and started work from home in 2014.  We were living in the NY metro-area (high taxes).  Once we decided my husband would leave his job we purchased a smaller home in June of 2015 in upstate NY.  We are tentatively scheduled to close on our NY metro area house on March 30th.  This will give us an influx of approximately $350K after we pay down all of our debt.

I have ideas about what to do with that money but could use some advice as well.

So our major mustachian feat so far includes moving from 2,500 sq. feet and $12K per year in taxes to 800 sq. feet and $2k per year in taxes.  Our new area is great.  I can walk or bike to the post office which is a daily event with our side business.  I can bike to the bank.  The grocery store is a bit tougher.  I need to get in better shape for that journey.  There is lots of hiking nearby.  We will be growing our first garden this year.  Plus I can get gas in Massachusetts which is cheaper than NY!

Gross Salary I will make $140,000 for 2016 for my primary job with no commute.  We have a smaller side business that will gross maybe $30,000.  The smaller side business is closer to our hearts and what my husband is working on growing.  My company also pays $1,000 monthly rent to us as a home based business.

My monthly salary looks like this:
Gross    $12,000
FICA    $744
Mediacre    $174
FWT    $1,948
SMT    $759
   
Net    $8,374
   
Pre-Tax deductions Not really applicable but we will be able to write off the HSAs we opened in December since we buy high deductible health insurance on the exchange.  I plan to add the max to each of our HSAs (I think its $3,350 for 2016) once we finalize the sale of our home.  We self-fund health insurance, so I think that is a deduction as well.  I am also considering funding Roth IRAs since our combined income will drop under $184K this year.

Assets:
IRA: $600,000 (mostly mutual funds).
Investments: $160,000 (mostly stocks).
Saving Account: $10,000
Pension At 60 years of age my husband will receive ~$30k per year.

We have an $85,000 HELOC on the new house, so keeping a cash emergency fund is not a priority.

Expenses: This is the new budget for 2016 that I am working on.  This will become effective April 1st after we close on our house and all of those extra expenses disappear.

Expense   Monthly
Garbage Disposal     $20.00
Grocery/Incidentals    $300.00
Gas for Cars    $100.00
Entertainment    $300.00
Propane    $12.50
Oil    $300.00
Electric    $100.00
Direct TV    $62.00
AT&T    $150.00
Netflix    $8.00
Car Insurance    $133.33
Car Registration    $3.79
Motorcycle Insurance    $25.00
Motorcycle Registrations    $11.67
Homeowners Insurance    $65.42
Life Insurance    $51.25
Boat Insurance    $14.58
Cat care    $16.67
Health Insurance    $600.00
Property/School taxes    $166.67
TOTAL    $2,440.88

Some things to note.  The Netflix is for my mother in law.  My AT&T bill is actually closer to $300 per month.  I carry five lines (me, husband, my mom, my dad, my mother-in law) and a hot spot.  My phone and hot spot make up about $150 of the bill which is reimbursed through my business.  Internet and land line are also funded through the business.  Our goal starting April 1st is to live on $36,000 per year as a starting point.  This give us a $560 monthly cushion based on the above. 

I know, having a boat is bad.  Its actually docked at my in-laws so the whole family uses it, but we tend to pay for most of it. 

We also have too many motorcycles.  Working on that.  We do have two newer cars (2011 & 2012) with no loans.  I think I need to shop around for cheaper insurance.  My husband has a pickup truck which has been useful in our house move.  I have a Ford Focus.

So of my $8,374 take home salary, all but $3,000 will go into our e-trade account.

Debt: NONE after March 30, 2016!!!!!

Questions:
1)   I think our best bet with the money from the sale of our home is to continue to invest with strong companies that pay good dividends.  This is our current portfolio of $160,000.  Companies like AT&T, Verizon, Con Ed, Wisconsin Energy, Conagra, Microsoft, Apple, etc.  We also go for the sin stocks alcohol, tobacco, guns and food. 
2)   Or should we just find a couple of Vanguard funds?
3)   While I work from home, I still work a lot, which is why I am only on 2013 of the MMM blog.  I would also like to venture into early retirement.  Are we in a good position to do so?  I feel like we are.  If we can grow the side business, which we dont see as work plus we can start taking some dividends.  Or I can work seasonally at the ski area (and then get free ski passes).  But society has me nervous. 

So, how am I doing?

Thanks for sticking with the long read an appreciate the advice.





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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #1 on: March 21, 2016, 09:50:28 AM »
Guns are sin? haha :p
For what my opinion is worth, you are in great shape, but I would definitely reconsider the direct tv bill...

Ottoford

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #2 on: March 21, 2016, 10:45:14 AM »
Sorry - I personally do not believe guns are sin.  I should not have generalized like that.

I would be in favor of getting rid of Direct TV, I can never find anything to watch anyway.  It would become an issue with my spouse around football season though.  That's when the bill will shoot up for the NFL package. 

little_brown_dog

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #3 on: March 21, 2016, 10:49:12 AM »
If you can save >$5000/mo as your plan suggests, you will be doing fabulously.
As far as investments go, I can't offer much advice. I tend to be more of an index fund investor rather than specific companies.

Personally, I would ask others to pitch in more for the boat expenses if you are comfortable doing so. Shared resources also means sharing the bill. I don't see how much the boat costs you per month other than the insurance. You should figure out what your annual expense is for the boat (maintenance, gas, etc) and then see if others can pitch in to try to make the expense less burdensome for you. You can offer to keep covering the insurance, and a few other things, but try to even out the expense so you aren't paying for the majority of it. If people balk or say they can't cover it, then you have to decide if you feel comfortable subsidizing the family's playtime. Only you can decide if that is right for you based on how much it costs you to run it each year.
« Last Edit: March 21, 2016, 10:55:10 AM by little_brown_dog »

Ottoford

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #4 on: March 21, 2016, 11:04:42 AM »
I am seriously considering index funds over individual companies with the money we get from the house sale.  We've also discussed rental properties, but we are not handy people.  I often feel like you can get the most out of a rental if you can do a lot of the work yourself.  We would have to find something really special for that to be an option.

I agree on the boat.  It isn't too expensive annually.  We have someone that winterizes for $300 plus the cost of insurance.  The other users do add fuel.  Anyone that uses it mostly drives it to the middle of the lake, anchors and floats for an afternoon.  I do have a hard time asking people for money when they often complain about not having money.  I need to get over that. 

bobechs

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #5 on: March 21, 2016, 11:05:25 AM »
At first glance it looks to me like your budget errs substantially on the low side.  That may not matter much, because you expect such a big cushion of current income over expenses but I notice that you have budgeted $0 for home maintenance and repair.  Similarly, you have $0 for routine maintenance, repair and depreciation of your numerous vehicles.

Nothing for all the other walking-around expenses of middle class life unless they are rolled into the portmanteau 'entertainment' category and if so that looks quite low based on what i know about other people.

Sure, you don't know to two decimal places what those expenses will be (as you evidently think you do with propane) but don't imagine that they will really be zero.

Use a rule of thumb; estimate your home upkeep will be about three percent per year of it's value.  Maybe it well be exactly that, maybe it won't.  But paln on spending about that because you probably will, over time.

Similarly, it looks from your plan for gasoline buying that you may be driving in the ballpark of a thousand miles a month.  Plan for your overall car expenses to be about what the IRS estimates a car uses up in money. They have some idea what they are doing in this area.  Ballpark? Twelve thousand miles times fifty cents a mile is six thousand dollars.

Three thousand dollars a year TCO for a family car or pickup also matches up with my personal observation of what keeping one of these beasts going as well.  Maybe a little on the low side.

You have a lot of dough, but you won't have more just by laser focusing only on bills that you can state to the nearest penny.

Axecleaver

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #6 on: March 21, 2016, 11:24:01 AM »
Welcome to Upstate NY! You're in pretty good shape, financially. Could you talk a little more about how your company is set up? For example:

Quote
My company also pays $1,000 monthly rent to us as a home based business.
I am curious how you structured this. You can deduct a percentage of the space you use for a home based business, using a couple of different methods, but I am not aware of a technique you can use to pay rent to yourself as a straight deductible business expense. Do you recognize it as income as well?

Consider a Solo-K or SEP-IRA for retirement contributions. The limit for 2016 is 53k. Twice that if you also pay your husband. At 140k I think the Solo-k will let you contribute a bit more than the SEP.

At 140k, Roth IRA's don't make a lot of sense (unless you mean a backdoor Roth, which you should absolutely be doing). You're under the phaseout limit, use the Traditional for both you and your husband and you'll get another 11k in.

Pay attention to how you're splitting income between yourself and your husband. You'll pay twice the payroll taxes to split it, but you get access to twice the tax deferred retirement accounts.

boarder42

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #7 on: March 21, 2016, 11:31:33 AM »
Sorry - I personally do not believe guns are sin.  I should not have generalized like that.

I would be in favor of getting rid of Direct TV, I can never find anything to watch anyway.  It would become an issue with my spouse around football season though.  That's when the bill will shoot up for the NFL package.

for NCAA football i hope ... if its NFL get rid of it games are free OTA .

little_brown_dog

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #8 on: March 21, 2016, 11:37:27 AM »
I am seriously considering index funds over individual companies with the money we get from the house sale.  We've also discussed rental properties, but we are not handy people.  I often feel like you can get the most out of a rental if you can do a lot of the work yourself.  We would have to find something really special for that to be an option.

I agree on the boat.  It isn't too expensive annually.  We have someone that winterizes for $300 plus the cost of insurance.  The other users do add fuel.  Anyone that uses it mostly drives it to the middle of the lake, anchors and floats for an afternoon.  I do have a hard time asking people for money when they often complain about not having money.  I need to get over that.

You are right about the rentals - rentals can be a great source of passive income or they can be a huge PITA. Given your really high income and your ability to save thousands each month, I don't know if you need the hassle of a rental unless you really want to be a landlord.
As for the boat, you are spending about $180/yr on insurance, plus the $300 to winterize. If that is really all the boat needs, that's not bad. However, to practice optimizing your expenses and to practice advocating for your finances, I would still recommend you ask the other party to contribute. Even just 1/2 the cost of winterizing the boat ($150 per year) would be nice. It doesn't need to be a big deal, it just can be something as simple as "hey we have been thinking about the boat. We love that everyone can use it but we are looking to make some changes in our finances - we are happy to keep paying the insurance, but we were wondering if you could help pitch in to cover the cost of winterizing it each year. It would be $150 each if we split it evenly."
 I don't know your family, but only the very selfish or very destitute would balk at paying $150/year for free access to a boat with no strings attached. If they don't have the money for $150/yr, they clearly should be spending their free time on your boat doing something more financially productive...like working.

Ottoford

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #9 on: March 21, 2016, 02:26:28 PM »
So many great comments, thanks!!  I have a lot to learn and put into practice.

I will say that my goal is to retire, so that $140k will go away, or if I reduce my client base, perhaps be cut in half.  So for the next year, starting April 1st, the test is to track everything to see if we can begin to afford living on passive income, our small business, seasonal work, etc. 

My job is not miserable but it is time consuming.  While we are in this transition I will not walk away from a good income where I don't have a boss and I often work in sweatpants.  I have to remind myself daily that instead of getting two weeks a year for vacation, I have to appreciate the small getaways like an early morning hike or bike ride. 

Bobechs - Good point - The very specific stuff was taken from prior years bills, since it is the best guess.  I really appreciate the rule of thumb on the 3% for maintenance.  I will add that into the budget.  I need to reevaluate gas.  I left a very wide cushion.  Since we both work from home, that will likely come in significantly lower ($50?).  And once I gain the stamina to bike to the grocery store, that will help.  We are not really handy people, so adding in car and house maintenance will be important.

Axecleaver - Here is where my lack of knowledge starts to kick in.  The rent is reported as income.  My accountant (CPA) made the recommendation and she handles the tax returns for both businesses as well as my personal return.  I guess I need to add $500 to my personal annual budget for what we pay her to do our taxes.  I will inquire with her about that structure.

My concern with contributing heavily to an IRA is what I refer to as the gap years.  By that, I mean the span of time from when we start making significantly less money to when we start collecting my husbands pension, can withdraw on IRA's and start collecting Social Security.  I am 42.  Say by age 45 I phase out of my $140k job.  My husband will be 47 - that leaves 13+ years before we see that additional income.  I thought I should focus on building an investment portfolio that we can actually access if we need it.  My accountant does keep recommending a SEP, I just get nervous about not being able to access the funds if I am not working as much in my 50's.  Am I being naive?  Should I keep piling everything I can into retirement?

I also need to Google backdoor Roth, that is a new one to me.  Right now all of the income is solely in my name.  My husband is not employed by either company.  I won them both on my own. 

little_brown_dog - You are absolutely right about the boat.  I am going to do that.

With regard to the NFL - we live in NY but my husband is a Cleveland Browns and Houston Texans fan.  I have no idea why.  So I don't think OTA will work.  He loves the NFL Sunday ticket.

SeanMC

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #10 on: March 21, 2016, 06:33:19 PM »
With regard to the NFL - we live in NY but my husband is a Cleveland Browns and Houston Texans fan.  I have no idea why.  So I don't think OTA will work.  He loves the NFL Sunday ticket.

You should be able to get NFL Sunday ticket for online/streaming now & still come out way ahead vs. year round DirectTv. They have had the service for several years, though it was only first rolled out for people who could not get satellite signal and then expanded the service. Different prices depending on the package of it you get and how you want to stream (tv, mobile devices, xbox, etc.).

Quality is really good. Very minor lag compared to DirecTv (which itself is minor lag to OTA) but unless you are staring at your phone/twitter the entire time, it should not matter.

Ottoford

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #11 on: March 21, 2016, 06:54:08 PM »
If I recall correctly they had a streaming version but you could watch the games a day later. I'll have to call DTV and see what they have. Thanks!!!

SeanMC

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #12 on: March 21, 2016, 07:24:27 PM »
If I recall correctly they had a streaming version but you could watch the games a day later. I'll have to call DTV and see what they have. Thanks!!!

I had the streaming version several years ago. It was live.

I would be careful about calling DirecTV and asking. I bet they would tell you it is not available for you, because they want to keep you as a customer spending more $$$ on the full service. They often say the streaming thing is only allowed for people who can't/don't get DirecTv - that is not actually true in practice.

It changes every year but here is an article from before last season: http://www.gottabemobile.com/2015/09/02/how-to-get-nfl-sunday-ticket-without-directv/

Anyway, it is too early now to sign up or get the pricing for next season. And if you are locked into a 2 year deal, you may not be able to break it now without full pay/penalty. But if you can get out without penalty, you can do so and still be able to get sunday ticket in the future.

Axecleaver

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #13 on: March 22, 2016, 08:36:51 AM »
Quote
I just get nervous about not being able to access the funds if I am not working as much in my 50's.  Am I being naive?  Should I keep piling everything I can into retirement?
Take a look at the stickied posts at the top of each forum. There's a lot of good stuff in there. Here's the one on how to access your retirement accounts before 65. It leverages Substantially Equal Periodic Payments (SEPP) IRS rules: http://forum.mrmoneymustache.com/taxes/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-ag-39647/

Quote
I also need to Google backdoor Roth, that is a new one to me. 
It's a loophole that lets you convert post-tax IRA contributions into a traditional IRA into Roth contributions. A little confusing but really helpful at your income level, once you've taken full advantage of all tax deferred retirement  accounts. https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

So I just re-read your original post and you're totally ready to retire once the house sells. You have 600k in your IRA, 160k in taxable investments, and another 350k of tax-free dollars coming in from sale of your home. That's 600k in tax-deferred and 510k in taxable. You only need 900k stashed to generate 36k a year (900k * 4%), and then you get another 30k in a pension in 16 years, plus whatever you'll get from social security in 21 years.

Congrats! 36k is a 3.2% withdrawal rate on a stash of $1.1m. You can retire tomorrow, your plans leading into a slower paced lifestyle are just icing on the cake. In your shoes, I'd follow the business plan you have laid out, but start deferring as much income as possible into your tax deferred accounts today while you're still generating enough income to take advantage of it. Sell off your taxable investments and convert it TODAY because the investment growth will also be tax deferred. You have PLENTY in your taxable account (about to be 510k) to last you while you wait to access it at 59.5, even before you consider SEPP strategies.

Ottoford

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Re: Case Study - AM I doing this right? Nervous in NY
« Reply #14 on: March 22, 2016, 07:30:05 PM »
Those are great articles on the Roth. Converting to Roth is on the to do list!

I'm looking forward to closing on our house sale next Wednesday!! Starting April 1st the goal is to see how low we can go with expenses for the next 12 months. I'll keep working but it's great to know I don't have to!!

I'm going to spend my weekend reading about all of these Roth options.

Thanks for all the feedback.