Author Topic: CASE STUDY: Can I be FIRE’d?  (Read 12162 times)

Cornbread OMalley

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CASE STUDY: Can I be FIRE’d?
« on: November 07, 2015, 11:01:47 PM »
Life situation:  I am in the military, single, no dependents, working as a military equivalent of mid-level manager.  I do not own a home.

Gross salary/wages:  $88000 per year.

Pre-tax deductions (Totals $17500 per year):  Thrift Savings Plan (no match):  $1458 a month

Qualified Dividends and Capital Gains:  $26000 estimated in 2015

Adjusted Gross Income:  $96500 in 2015

Taxes (Totals $2003 per month):
Federal Taxes:  $1440 a month
FICA-Social Security:  $456 a month
Medicare:  $107 a month

Current expenses (Totals $3049 per month):
Groceries:  $447 a month
Fuel:  $127 a month
Rent:  $1925 a month
Utilities:  $190 a month
Miscellaneous:  $360 a month

Assets (Totals $969264):
Roth IRA:
Vanguard Total Stock Market Index Admiral VTSAX:  $90300 (81% allocation)
Vanguard Total Intl Stock Index Admiral (Intl) VTIAX:  $21567 (19% allocation)

TSP:
C fund:  $160822 (71% allocation)
S fund:  $43666 (19% allocation)
I fund:  $21846 (10% allocation)

Taxable accounts:
Vanguard Total Stock Market Index Admiral VTSAX:  $211225 (40% allocation)
Vanguard Tax-Man. Small-Cap Adm. VTMSX:  $73800
Vanguard Explorer Admiral VEXRX:  $109690 (VTMSX and VEXRX is 35% allocation)
Vanguard Total Intl Stock Index Admiral (Intl) VTIAX:  $80171 (15% allocation)
Vanguard REIT Index Admiral VGSLX:  $51558 (10% allocation)

Cash savings:  $29619
Collectibles:  $75000

Liabilities:  $0

Notes: Roth IRA contribution $458 a month ($5500 annually)

Specific questions:
1.  Can I be FIRE’d with the current situation?
2.  What adjustments can I make to my allocations to maximize growth and minimize taxes?
3.  Where else can I seek tax-advantaged shelter?
4.  What areas of spending do you suggest I improve and/or modify?
5.  Anything else MMM forum members can think of is appreciated.
« Last Edit: January 27, 2016, 11:36:49 AM by Cornbread OMalley »

terran

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #1 on: November 07, 2015, 11:10:26 PM »
Pre-tax deductions (Totals $17500 per year):  Thrift Savings Plan (no match):  $1458 a month

3.  Where else can I seek tax-advantaged shelter?

Not much, but the TSP limit for 2015 is $18k. http://themilitarywallet.com/thrift-savings-plan-contribution-limits/

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #2 on: November 07, 2015, 11:23:55 PM »
Not much, but the TSP limit for 2015 is $18k.
Nice catch!  I will adjust my contribution rate and make up the $500 difference with no problem.  Thanks!  :-)

MDM

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #3 on: November 07, 2015, 11:43:49 PM »
Specific questions:
1.  Can I be FIRE’d with the current situation?
Yes, if I read and entered your numbers correctly.  Is the graph below close to what you see also?


Quote
2.  What adjustments can I make to my allocations to maximize growth and minimize taxes?
3.  Where else can I seek tax-advantaged shelter?
Not much, beyond the $500/yr terran already mentioned.  Federal tax should be only ~$1,230/mo so you could adjust your W-4 to get and invest a little more take home pay per month.

Quote
4.  What areas of spending do you suggest I improve and/or modify?
With rent >60% of your listed expenses, that is the obvious candidate.

Quote
5.  Anything else MMM forum members can think of is appreciated.
Take a bow and congratulate yourself for the good choices that have taken you this far.  Keep up the good work!

Nords

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #4 on: November 07, 2015, 11:53:01 PM »


 
Life situation:  I am a 39-year old male, in the military, single, no dependents, working as a military equivalent of mid-level manager.  I do not own a home.

Taxes (Totals $2003 per month):

Assets (Totals $969264):

Specific questions:
1.  Can I be FIRE’d with the current situation?
That depends on your spending after you leave the military.  For example, your current $24K/year tax bill seems a little high, but ending your paychecks will dramatically drop your tax bill.

You have plenty of assets to draw on for the 4% Safe Withdrawal Rate so you're probably close to financially independent.  But if you're planning to buy a house then you may be using some of those assets for a down payment or closing costs, and that will reduce the amount of your SWR.

At 39 years of age, how many years have you served?  Are you planning to stay for an active-duty retirement or a Reserve/Guard retirement (at age 60)?  If you reach either of those pensions then you're almost certainly financially independent, although you should still check your SWR for your living expenses after you leave the service.

2.  What adjustments can I make to my allocations to maximize growth and minimize taxes?
Not enough info to make a recommendation.  You might not need to change anything.

Consider your current investing and what your post-retirement income may be.  Active-duty military are lightly taxed, so it's generally better to make your contributions to your Roth TSP (and your Roth IRA) to pay the taxes now.  But if you're planning on dramatically lowering your income after the service (even if you have a pension) then you'd be able to convert your traditional TSP and traditional IRA to a Roth IRA while paying very little tax on the conversion amount. 

You already invest in a high-equity portfolio with some of the world's lowest expense ratios and reasonably tax-efficient funds.  No need to change that.

3.  Where else can I seek tax-advantaged shelter?
I don't think you need to change anything.  You're already lightly taxed on active duty, and when you stop receiving paychecks then you might pay no taxes at all.  If you're receiving a military pension then it's taxed at the federal level (and some states) but if you're also receiving disability compensation then your taxable income will be lower.

You're taking sufficient risk (loss of principal, equity market volatility) to maximize your returns in a tax-efficient manner.  There's no need to seek tax-advantaged shelter.

4.  What areas of spending do you suggest I improve and/or modify?
From the numbers you've listed it looks like you're saving about 30% of your income.  You're already nearly financially independent and there's probably no need to make changes there. 

You could look at your post-military spending and develop that budget.  You'd also want to put in lumpy spending for a home (if you're planning to buy one), replacement vehicles (if you're planning to drive), and travel or other entertainment.  Marriage?  Family?  Other spending?

Hey It's Me

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #5 on: November 08, 2015, 07:35:59 AM »
$26,000 of dividends and gains out of a 527K taxable portfolio seems really tax in-efficient. Are there any other employer pre-tax investments you can take advantage of?

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #6 on: November 08, 2015, 02:35:35 PM »
Thank you all for the responses.  Please see mine below!  

I forgot to add that I pay $264.38 annually for liability auto insurance and $175.82 annually for a $2million umbrella insurance policy.


Yes, if I read and entered your numbers correctly.  Is the graph below close to what you see also?
If I am reading the graph correctly, it depicts getting to $1million in about eight years. My accumulation was nowhere near that fast. It took me 16+ years to get to where I am now. I also made lots of mistakes during those years due to lack of finance education and knowledge. I still have areas I seek to improve. That’s what led me to find this forum.

With rent >60% of your listed expenses, that is the obvious candidate.
Right. I live in a high-cost-of-living area but plan to relocate to less costly locales upon retirement from the military.

Take a bow and congratulate yourself for the good choices that have taken you this far.  Keep up the good work!
Thanks! I’ve been the butt for a lot of jokes for the choices I’ve made. For example, I still drive an old 1999 vehicle with a cassette tape player! Most of my furniture and a lot of my everyday clothes I purchased at thrift stores.

…your current $24K/year tax bill seems a little high, but ending your paychecks will dramatically drop your tax bill.
At 39 years of age, how many years have you served?  Are you planning to stay for an active-duty retirement...?  If you reach...those pensions then you're almost certainly financially independent, although you should still check your SWR for your living expenses after you leave the service.
Thanks for the response! This is so cool! I just placed an order through Amazon for your book. I also recognize that fence behind you in your pic. It also helps that the distinct shape of Diamond Head is in the background. White Plains Beach was where I learned how to surf and was my go-to spot for surfing while I was stationed on Oahu.

I’m looking for techniques to reduce my realized income and reduce the taxes I have to pay for my $24K-$26K returns. I figure when I retire from the military the taxes drop dramatically.

At this point in my career I am pushing to get to 20 years and retiring. I’m at 16.5 years now and am doing my utmost to get to 20 amidst the current military downsizing. Assuming I reach 20 years I expect about $50000 in annual pension.


Not enough info to make a recommendation.  You might not need to change anything.
Consider your current investing and what your post-retirement income may be.  Active-duty military are lightly taxed, so it's generally better to make your contributions to your Roth TSP (and your Roth IRA) to pay the taxes now.  But if you're planning on dramatically lowering your income after the service (even if you have a pension) then you'd be able to convert your traditional TSP and traditional IRA to a Roth IRA while paying very little tax on the conversion amount.
What other info is needed to assess an asset allocation adjustment? I am interested in the procedure to convert my traditional TSP to a Roth IRA since I was late to the Roth TSP party.

If you're receiving a military pension then it's taxed at the federal level (and some states) but if you're also receiving disability compensation then your taxable income will be lower.
I do expect some sort of disability because of the onset of joint pain resulting from years of physical training. But I need to go in to the doctor soon and have all of that documented.

You could look at your post-military spending and develop that budget.  You'd also want to put in lumpy spending for a home (if you're planning to buy one), replacement vehicles (if you're planning to drive), and travel or other entertainment.  Marriage?  Family?  Other spending?
Right. The info I provided is a snapshot of my current situation.  All of the aspects you mentioned will factor in eventually.

$26,000 of dividends and gains out of a 527K taxable portfolio seems really tax in-efficient. Are there any other employer pre-tax investments you can take advantage of?
Yes, I think so too about the taxes.  In fact, it was searching for answers to reduce my taxes that led me to find this forum.  Three years ago I started owing Uncle Sam more taxes at tax time.  But I was so busy with graduate studies I did not pay much attention to my finance situation.  I paid the bill and focused on my studies and earned my graduate degree.  (As an aside, my grad degree helped me get promoted and earn an additional $800 monthly starting in 2016.  Those three years of stressing out over readings and papers after a 12-hour duty day really paid off.  I plan to invest that additional money smartly).  Uncle Sam sent his congratulations during tax season 2015 with a $1500 tax bill.  After some fiddling around with my finance numbers, I found that it was my VEXRX and its capital gain distribution every December that is causing such a high tax footprint.  My first thread on this forum asked about how to reduce these taxes.  But I think I am out of options for tax-sheltered accounts.

Some of the other MMM forum members suggested completely selling VEXRX, which is an option.  For now, I diverted the dividend and capital gain from VEXRX to VTSAX in my taxable accounts.

I think my other option is to keep VEXRX and gut it out with tax payments until I retire in 2019.  I can then use the distribution from VEXRX as income.

« Last Edit: November 08, 2015, 02:43:18 PM by Cornbread OMalley »

MDM

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #7 on: November 08, 2015, 03:05:48 PM »
Yes, if I read and entered your numbers correctly.  Is the graph below close to what you see also?
If I am reading the graph correctly, it depicts getting to $1million in about eight years. My accumulation was nowhere near that fast. It took me 16+ years to get to where I am now. I also made lots of mistakes during those years due to lack of finance education and knowledge. I still have areas I seek to improve. That’s what led me to find this forum.

Perhaps I need to work on the labeling....

On that graph (it is in the case study spreadsheet), zero means you have reached FI.  Negative numbers mean you aren't there yet, and positive numbers show you have more than you need.  The x-axis is "years from now."  In other words, based on the numbers and assumptions used, you are already there and working longer will make you more so.

Makes sense that you didn't get $1million in your first eight years, but given the size of your stash now you could accumulate $1million more if you kept working and investing for eight more years.

Any suggestions to make things more apparent to a new user of the spreadsheet would be appreciated.

Nords

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #8 on: November 08, 2015, 10:14:14 PM »
Bottom line up front:
At this point in my career I am pushing to get to 20 years and retiring. I’m at 16.5 years now and am doing my utmost to get to 20 amidst the current military downsizing. Assuming I reach 20 years I expect about $50000 in annual pension.
Well then, you're good to go.  No need to devote excessive effort to taxes. 

In 18 months, when you reach 18 years of service, you'll be entitled (by federal law) to continue to 20 years of service for your pension.  You may get some hardship-billet hot-fill orders from your assignment officer, but you're entitled to stay on active duty. 

In the unlikely event that you face an involuntary separation (failure to promote) then you'd apply to affiliate with a Reserve unit to drill out to 20 years of service.  Your pension would start at roughly age 60 (instead of in your 40s) but you have more than enough assets to cover the gap.  The critical benefits of a military retirement are the pension's inflation adjustments and the cheap healthcare, and by age 60 you'd be covered either way. 

Thanks for the response! This is so cool! I just placed an order through Amazon for your book. I also recognize that fence behind you in your pic. It also helps that the distinct shape of Diamond Head is in the background. White Plains Beach was where I learned how to surf and was my go-to spot for surfing while I was stationed on Oahu.
Thanks for buying the book!  The first six months of the blog excerpt a lot of the book (except for checklists and reader stories), and the last four years of posts go into much more detail. 

We took family surfing lessons at WPB on my first official day of retirement over 13 years ago.  That's also my go-to beach... usually the rights that break about 200 yards straight off the fenceline, and with my friends among the rest of the Fenceline Crew. 

I’m looking for techniques to reduce my realized income and reduce the taxes I have to pay for my $24K-$26K returns. I figure when I retire from the military the taxes drop dramatically.
Military retirement is the optimum tax-reduction solution.

You're focused on the dollar amount of your taxes, but your overall military compensation includes tax-free allowances and on-base benefits.  Your overall percentage of taxation is lower than most civilian wage earners.  You're paying taxes because your investments grow faster (and throw off more income) than more-conservative portfolios.  If you moved your assets into tax-free funds (municipal bonds) then you'd drastically lower your returns.  The reduction in your net income would be more than your tax savings. 

When you have a military income (which includes a military pension) then you can invest much more aggressively in a high-equity portfolio.  You have no need to invest in bonds (your pension is the gold-plated equivalent of inflation-adjusted bonds) and your tax exposure (on the rest of your assets) is low compared to your asset growth.

You could move the dividend-generating assets to tax-deferred accounts (in this case your IRA) but that move might generate a large capital gain.

For more details on the cap gain history of that Vanguard fund, you could start a thread on Bogleheads.org.  It might turn out that the fund is having an exceptionally good year, or else it finally ran out of capital losses from 2008-09, or some other taxable event that's unlikely to be the norm.  But again you're paying taxes because your assets are generating income, and when you retire your tax bill will drop. 

The first step in converting your tax-deferred accounts starts with your traditional IRA balance.  Every year of retirement you'll convert a small amount up to the top of your tax bracket.  The conversion tax bracket might be the same as the income-tax bracket that you'd be in when you're old enough to take RMDs, but by converting now you'll reduce the taxes on your Social Security and avoid the possibility of higher Medicare premiums through IRMAA. 

Once you've converted all of your traditional IRA to a Roth IRA then you'll roll your traditional TSP account over to a traditional IRA and start converting it.  You want to keep your TSP account as long as you can (for the low expense ratio) but eventually you'll take the funds out of the TSP and convert them to a Roth IRA.  The execution is tedious but the process is straightforward.

I do expect some sort of disability because of the onset of joint pain resulting from years of physical training. But I need to go in to the doctor soon and have all of that documented.
Well, first you'd want the doctor to make sure that this is not a symptom of a more serious condition.  And if the physical training is making it worse then ideally you'd be able to find a different type of physical training that would meet your service's requirements while still passing the fitness standards. 

Especially if that joint pain is coming from knee injuries (and loss of cartilage) caused by years of running. 

In addition to the documentation that you're doing now, start your retirement physical about 8-10 months before you retire.  The medics are looking for life-threatening issues which can be fixed by DoD on active duty instead of when you're retired.  However you'll also be seeking referrals to specialists (probably orthopedic surgeons) who can document the joint damage.  You'll start preparing your VA disability claim during your retirement physical, and if the system is working reasonably well then you'll have it ready to submit by the time you go on terminal leave.


Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #9 on: November 09, 2015, 03:08:50 PM »
Thank you for the follow-up responses.


On that graph (it is in the case study spreadsheet), zero means you have reached FI.  Negative numbers mean you aren't there yet, and positive numbers show you have more than you need.  The x-axis is "years from now."  In other words, based on the numbers and assumptions used, you are already there and working longer will make you more so.

Makes sense that you didn't get $1million in your first eight years, but given the size of your stash now you could accumulate $1million more if you kept working and investing for eight more years.

Any suggestions to make things more apparent to a new user of the spreadsheet would be appreciated.
Thanks for the clarification.  That boggles my mind about an additional $1million in another eight years.  That number was so far away I never really thought about it.

Thanks for buying the book!  The first six months of the blog excerpt a lot of the book (except for checklists and reader stories), and the last four years of posts go into much more detail.

That's also my go-to beach...with my friends among the rest of the Fenceline Crew.
I look forward to reading the book and spreading the knowledge to my friends.  They are of the opinion that financial independence cannot be achieved through a military salary.  You're proof that it is, and you did it while raising a family.  I hope to be another example.

The Fenceline Crew.  What a suitable name!

When you have a military income (which includes a military pension)...
What aspects of the Federal tax on the pension should I start understanding now?

Nords

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #10 on: November 09, 2015, 10:01:04 PM »
When you have a military income (which includes a military pension)...
What aspects of the Federal tax on the pension should I start understanding now?
After your first tax year of retirement, it may take a corrected W-2 or two from the Defense Finance & Accounting Service.  (Especially if you sold back leave instead of adding it to your terminal leave.)  You get your W-2 in Jan-Feb, and they eventually get it right, but it might be March.

DFAS will add links to your myPay account for a monthly Retiree Account Statement and an annual statement of what your next year's pension deposit will be (when the COLA is applied).  Both of these can be used for mortgage applications or other income statements. 

You can choose to have federal taxes (and state taxes, if applicable) withheld from your pension deposit.  You can also choose zero withholding, although you might have to pay quarterly estimated taxes instead.

If your VA disability rating is up to 50%, you'll be asked to waive receipt of that portion of your military pension in exchange for tax-free compensation from the VA.  In other words, the total amount of your federal deposit does not change but the disability portion of it becomes tax-free.

If your VA disability rating is over 50% then you may be eligible for additional VA compensation (in addition to your pension).  Note that you really don't want to qualify for membership in this club, but you may hear wild rumors about additional disability payments. 

Taxes should be a part of financial planning, but they should rarely be the primary reason for the planning.  Your inflation-adjusted pension means that you can take much more risk with the rest of your assets and leave your asset allocation at 90% equity (or higher). 

The Fenceline Crew.  What a suitable name!
Local pro surf photographer Terry Reis (SurfShooterHawaii.com) has even created bumper stickers, t-shirts and rash guards... last year I bought my daughter his White Plains Beach calendar.

patrickza

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #11 on: November 10, 2015, 01:06:14 AM »
Not much to add here except to say well done! That's not a huge salary you've had to work with, but you've really made it work for you. On a side note that military pension would be fantastic. It would leave you ending up wealthier than you could imagine if you keep living as you are. Good luck with hanging on to the post!

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #12 on: November 10, 2015, 10:33:33 PM »
Taxes should be a part of financial planning, but they should rarely be the primary reason for the planning.
That seems to be good advice.  I had my mind wrapped around my tax bill and went back through my finance library.  I found some excerpts from Bogleheads' Guide to Investing and The Millionaire Next Door that got me thinking tax efficiency. But after reading your post about tax considerations for my situation I am more at ease.

Not much to add here except to say well done! That's not a huge salary you've had to work with, but you've really made it work for you. On a side note that military pension would be fantastic. It would leave you ending up wealthier than you could imagine if you keep living as you are. Good luck with hanging on to the post!
Thanks! I haven't had this high of a salary very long.  My salary was $22K when I started my professional career at age 23.  It's fun to compare.  But I finished off the school debt and paid off my vehicle as fast as I could to get my debt to zero.  Honestly, the key to achieving the goal was to start saving early.  Having the knowledge to avoid money mistakes really helps too.  I did not start with a strong knowledge base.  But I self-learned and corrected some mistakes and am better off for it.

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #13 on: November 17, 2015, 08:51:15 PM »
I received the book in mail.  I have two chapters left in A Random Walk Down Wall Street by Burton G. Malkiel and will start on the new book.  Exciting.

Nords

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #14 on: November 17, 2015, 09:32:24 PM »
I received the book in mail.  I have two chapters left in A Random Walk Down Wall Street by Burton G. Malkiel and will start on the new book.  Exciting.
Thanks!  Looks like you have a good reading list...

kd2008

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #15 on: November 18, 2015, 11:48:45 AM »
I think you have done very well. Esp. if you wait for the pension to kick in.

Could you please care to detail what mistakes you made and what improvements you made as you saved this incredible amount at such an young age?

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #16 on: November 20, 2015, 10:13:33 AM »
Could you please care to detail what mistakes you made and what improvements you made as you saved this incredible amount at such an young age?
Certainly.  I took a couple of days to write down my experiences so I can relay them to you.  The overall timeframe is 1999 until now in regards to info below.  I hope you learn something useful from my experiences.

Mistakes:

1)  I entered the financial fray lacking a foundation of financial knowledge.  I also didn’t know where to start to seek out information.  I found out quickly that most people didn’t know either.  During my initial search I ended up in the office of salesman.  It cost me in several areas because I was easily duped by salesmen:

        a)  Buying actively-managed mutual funds with a high expense ratios and sales charges.  I was sold and bought into Franklin Templeton and Fidelity investment vehicles.  These two companies had high expense ratios but also super high sales charges.  In addition, my salesman took 50% of my first year’s investment.  So, my initial investment of $50 a month was cut to $25 a month, and then that was further eroded by the fund’s expense ratio and sales charge.  When my salary increased I also increased my contributions but was slapped with losing 50% of my increase to the salesman for a year.  I owned these investments for seven years, and I was literally giving my money away and smiling about it.

        b)  Buying whole life insurance policies.  The salesman convinced me that buying a whole life policy will lock in low rates and also give me a nice chunk of change when after funding the policy for 50+ years I end the policy and get a whopping $70K in “investment returns.”  These policies may have been suitable for other people but not for me.  I had no dependents.  But I didn’t really understand how that tied into insurance.  I funded three whole life policies for seven years.

        c)  I was deceived by wily salesmen that my employer retirement plan was not good.  My salesman sat me down and actually did a side-by-side comparison on his products versus my employer retirement account.  He actually “proved” to me that his products were superior.  I actually believed him without doing my own analysis.  For seven years I did not contribute a dime to my employer retirement account.

2)  I did not listen to my dad.  My dad’s words to me were, “You’re a dumbass for doing this” (I’m quoting him exactly).  I told my dad about my plans about a month after I made my first purchase into Franklin Templeton and Fidelity.  My dad understood the life insurance game and saw I was getting ripped off by Franklin and Fidelity.  To his credit he provided fatherly advice, but I was too proud to listen.

3)  I got tied into a private lending agreement that led nowhere.  My coworkers knew a developer who was trying to get initial investors into a project to build an office complex.  The developer offered a “guaranteed return of 35% on investment.”  The minimum investment required was $25,000.  I had some extra cash available at the time and thought this was a good chance to cash in.  I agreed to lend $50,000.  This was summer 2008, and then the housing bubble burst.  The office complex project ground to a halt.  Technically, the project is still alive and struggling towards completion, but I don’t even count that money in my overall assets totals.  If I had just put that money into VTSAX my overall totals would be well into seven digits by now.  I did not believe my gut when the offer was “too good to be true.”  LESSON LEARNED: trust gut instinct when a financial offering looks too good to be true.

Corrections/Improvements:

1)  I established financial knowledge base through reading good reference material.  I started with Bogleheads’ Guide to Investing and The Millionaire Next Door.  There are other books I read too.  But a lot of books are crap.  The good books I keep on my bookshelf as reference material.  I’m about to add A Random Walk Down Wall Street to my financial library.

2)  I ended business with my salesman-masked-as-financial-advisor and ended business with Franklin Templeton and Fidelity and sold all my holdings.  My tax-sheltered accounts I rolled over into Vanguard VTSAX.  My liquidation caused a substantial capital gains tax the next tax season.  But I gained an important boost to my psyche and confidence by completely disowning the organization I had done business with.  It was a clean feeling and has served me well.

3)  I dumped all of my whole life insurance policies by cashing out.  By this time my policies had built a small cash value.  Upon ending my policies I received three checks in the mail returning my cash value.  It was not much amounting to about $7500.  But my logic here was instead of buying whole life take that money and invest in an index mutual fund and come out on top after a decade or two.  Compare that return to my whopping $70K cash value had I kept the whole life insurance policies.  It’s easy to see which the bigger number is.  If I need life insurance I plan to buy term to cover my dependents until they leave the nest.

4)  I called my dad and told him that he was correct and that I should’ve taken his advice long ago.

5)  I started contributing to my employer retirement account.  With minor adjustments in personal spending I was able to maximize contributions in short order.  And I just kept at it.  I made certain that I contributed fullest to my tax-advantaged accounts first.  Any adjustments in spending I would adjust the contribution level to my taxable accounts.

6)  When I had money remaining after I had invested and had my fun for the month that extra money was invested in my taxable accounts.

7)  I am still interested in making real estate a part of my portfolio, but instead of jumping straight into things I joined a group that does nothing but talk real estate investing.  I’m learning from talking with the group members.  I found out there are many other ways of real estate investing with varying degrees of risk and return.

8)  I purchased umbrella insurance to protect my assets.

9)  I’m in the process of researching and purchasing a long-term care insurance policy for my parents.

10)  There are still many areas I still need to learn and/or make improvements on.  So I do a lot of homework after a day in the office.

Things I did correctly from the very beginning:

1)  I paid off as fast as possible all my debt in form of car and school loans.

2)  I am still driving the same vehicle I purchased in 2002.  My first vehicle I paid off and it was totaled in an accident.  I took the insurance check and some of my emergency cash and purchased a used vehicle.  I was the third owner of the vehicle and have been driving it since.

3)  I established a disciplined saving plan and started saving and investing a small amount of money every month with the initial goal of maximizing my Roth IRA contributions.  Then I focused on maximizing my employer retirement account.  Any other funds after that went into taxable accounts.

The disciplined saving helped me because it set me up to reap the gains from the market recoveries after the bear markets of 2000-2002 and 2008-2009.  Not that I was fully knowledgeable about my investments and allocations, but the saving plan made me save consistently through those two bear market periods.  The shares I purchased during those two periods skyrocketed in value when the market recovered.

4)  I avoided taking on additional debt.

5)  I found ways to keep living expenses under control.  I learned how to cook and to make meals at home.

6)  I exercise consistently to stay healthy.  It’s a requirement with my career, but exercising has been ingrained in me.  I will exercise until the day I cannot move.

I hope all of this helps!
« Last Edit: November 20, 2015, 12:49:40 PM by Cornbread OMalley »

Exflyboy

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #17 on: November 20, 2015, 12:20:08 PM »
Embrace being the butt of jokes.. I do.

I drive a 1999 Dodge Neon (I even rebuilt the motor).. people think I am nuts (and poor)... I am well past FI...:)

Congrats, you have done well so far

kd2008

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #18 on: November 20, 2015, 02:33:00 PM »
Thank so much for obliging with my request. This is an excellent write up detailing all the twists and turns. I truly appreciate it. It has helped me immensely to understand how complex is the path to FI. I appreciate the time you took to detail this. Thank you for your service and the generosity here on the forum.

Catbert

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #19 on: November 21, 2015, 05:13:08 PM »
A minor possible tax savings.  I too have an actively managed mutual fund that generates capital gains whether I want it to or not.  My holdings in the fund have grown enough it would be a horrendous tax bill if I sold it.  I've done two things to slowly try and inch out of it (or really just keep it from growing larger):

1.  I've set it up so all capital gains and dividends are paid out to my cash account rather than re-invested in the fund.

2.  I use Fidelity Charitable Gift trust to make tax deductible donations of the appreciated mutual fund.  I get to itemize the charity donation at current value but don't have to pay tax on the capital gains.  I'm sure that Vanguard has a similar mechanism.  A good technique if you're going to donate to charity.

Villanelle

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #20 on: November 21, 2015, 05:41:27 PM »
Ah, DH and I made most of those same early mistakes, and I bet we made them via the same company (military-focused?). 

As much as a cringe at the waste, I can't regret it too much, as without that company, I doubt either of us would have started investing as much as we did as early as we did.  The front load and high expenses mean it was grossly inefficient, but it was damn better than nothing. 

(And right now, DH and I share a 2000 Toyota Echo.  Guys at the squadron laugh at our ugly and only car, but our retirement accounts are no doubt much prettier than theirs!)

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #21 on: November 23, 2015, 05:50:16 PM »
...the TSP limit for 2015 is $18k.
I went to adjust my contributions and found that I misquoted my numbers.  I am contributing the maximum to TSP after all.  One less thing to worry about!

On that graph (it is in the case study spreadsheet)...Any suggestions to make things more apparent to a new user of the spreadsheet would be appreciated.
I'm going to relook the spreadsheet when I have more time.

Embrace being the butt of jokes.. I do. I drive a 1999 Dodge Neon (I even rebuilt the motor)...
Wow!  1999 Dodge Neon.  You are brave.  I have a 1999 Toyota.  It's been reliable and over 200,000 miles now.  I've also driven it five years less than I should have due to all the military deployments.  The vehicle has a cassette tape player for which I am ribbed mercilessly.

Thank so much for obliging with my request. This is an excellent write up detailing all the twists and turns. I truly appreciate it. It has helped me immensely to understand how complex is the path to FI. I appreciate the time you took to detail this. Thank you for your service and the generosity here on the forum.
You are welcome.  I think the two biggest take aways are 1) getting educated so you have the background to understand what is coming at you, and 2) starting early.  You motivated me to start my own FI journal because there are other goals I’m working towards which have financial impacts. 

A minor possible tax savings...My holdings in the fund have grown enough it would be a horrendous tax bill if I sold it.  I've done two things to slowly try and inch out of it (or really just keep it from growing larger):

1.  I've set it up so all capital gains and dividends are paid out to my cash account rather than re-invested in the fund...
Thanks.  I started on this forum looking for tax info.  I took one of the suggestions and diverted my capital gain from VEXRX and reinvest it to VTSAX.  I’ll do that for a year or two and see what happens.  The idea is to put a lid on the growth of VEXRX since I am no longer contributing to the fund.  I’m also considering slowly selling off VEXRX.

Ah, DH and I made most of those same early mistakes, and I bet we made them via the same company (military-focused?).

As much as a cringe at the waste, I can't regret it too much, as without that company, I doubt either of us would have started investing as much as we did as early as we did.  The front load and high expenses mean it was grossly inefficient, but it was damn better than nothing.

(And right now, DH and I share a 2000 Toyota Echo.  Guys at the squadron laugh at our ugly and only car, but our retirement accounts are no doubt much prettier than theirs!)
Yes, we both know that organization.  The sad thing is the salesmen are former military.  I guess when one did not handle his own finances well earlier in life one will fleece his brothers and sisters in arms to get by in post-military life.  Ending my dealings with them, taking my money, and walking out the door was very empowering.  They got their cut but I cannot dwell on that.  And you are very brave and have tough skin to drive that Echo.  Your car is cosmetically disadvantaged!  :-)

AlwaysBeenASaver

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #22 on: November 23, 2015, 07:22:42 PM »
I don't see anyone else has mentioned it, so I have to question your grocery expenses, that seems quite high for a single person.


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Re: CASE STUDY: Can I be FIRE’d?
« Reply #23 on: November 23, 2015, 09:01:37 PM »
I don't see anyone else has mentioned it, so I have to question your grocery expenses, that seems quite high for a single person.
Good observation.  And here is the answer.  I lumped three different things into the category labeled "groceries" to keep things simple on my spending spreadsheet:

1)  simple groceries from the supermarket

2)  alcohol

3)  dining out

Perhaps I should have labeled that category as 'sustenance' or 'food.'  But a few notes on my "groceries":

a)  I eat a lot of fresh food i.e. salad, vegetables, fruit, herbs, etc.  I have to eat these types within a few days before they spoil or wilt.  Then I make a run to replenish.  I also eat a lot of salmon.  The fresh veggies and salmon equate to a higher food bill.  But I can justify that in the investment to my long-term health.

b)  My eating-out costs comprise mainly of dining out with VIPs because of the location of where I work.  I have to do it more for the professional requirements and expectations rather than my personal preferences.  Believe me I would rather eat at home rather than dine with some of those VIPs.  But in some instances it is a small price to pay for the enormous network and opportunities they provide.

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #24 on: November 23, 2015, 10:30:04 PM »
Okay.  I started my journal.  The link is as follows:  http://forum.mrmoneymustache.com/journals/quest-for-golden-cornbread-my-fi-journey-continues/

EDIT: I honestly did not know how to account for my additional bonuses: housing allowance and food because they are not taxed.  I thought about it for awhile and decided to account for the amounts in 'additional allowances' because they do impact my financial situation.  My relocating 13 times in the past 16 years has a lot to do with things as well.

I hope to hear from you all as time progresses!
« Last Edit: November 23, 2015, 11:36:01 PM by Cornbread OMalley »

Reader

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #25 on: November 24, 2015, 01:28:25 PM »
7)  I am still interested in making real estate a part of my portfolio, but instead of jumping straight into things I joined a group that does nothing but talk real estate investing.  I’m learning from talking with the group members.  I found out there are many other ways of real estate investing with varying degrees of risk and return.

thanks for your sharing! made many of the same mistakes and like you mentioned, it felt good when i got rid of the whole life insurance and other high priced investments and started afresh.

You can consider REITs which are a more liquid way to invest and get rental returns in real estate.

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #26 on: November 24, 2015, 06:56:22 PM »
You can consider REITs which are a more liquid way to invest and get rental returns in real estate.
I do own a REIT index fund.  I'm researching real real estate to see if I will enjoy the challenges required to deal with that kind of stuff.

Nords

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #27 on: November 24, 2015, 07:21:47 PM »
You can consider REITs which are a more liquid way to invest and get rental returns in real estate.
I do own a REIT index fund.  I'm researching real real estate to see if I will enjoy the challenges required to deal with that kind of stuff.
Here are my favorite references.  They're at public libraries or free on their websites:
(1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions),
(2) Landlording by Leigh Robinson (7th edition or later)
(3) Rent vs Own by Jane Hodges (more for the tenants than the landlords),
(4) Frank Gallinelli's RealData.com, and
(5) Josh Dorkin's BiggerPockets.com website & forums.

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #28 on: November 25, 2015, 07:30:14 PM »
Here are my favorite references.  They're at public libraries or free on their websites:
(1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions),
(2) Landlording by Leigh Robinson (7th edition or later)
(3) Rent vs Own by Jane Hodges (more for the tenants than the landlords),
(4) Frank Gallinelli's RealData.com, and
(5) Josh Dorkin's BiggerPockets.com website & forums.
Great!  My reading list just got bigger!  I just finished A Random Walk Down Wall Street.  It was dry reading but very educational especially if one wants to learn the intricacies of other investing methods, which all do not measure up to a standard index fund.  The bottom line of the book is to stick with index mutual funds!

But I look forward to tackling the proposed reading list!

munch

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #29 on: November 26, 2015, 02:48:06 AM »
Not sure if this was already mentioned but the money in taxable account that is in VTSAX is exposed to a possible big tax hit.   Other readers may understand it better but here is what i believe is the issue - at the end of the year when you receive your 1099 from VG it will list dividends paid along with capital gains incurred and other distributions from the various funds you hold at VG.  If there is an exceptional downturn in the market and people start cashing out their funds (selling low) then VG could be required to sell some of the holdings in VTSAX in order to distribute the cash to people withdrawing their funds.  A large portion of the current value of VTSAX is in effect unrealized cap gains - I read somewhere that it is close to 45%.  If this scenario were to occur then you would get "distributed" to you on the 1099 your share of the realized cap gains incurred due to the extraordinary selling of VTSAX holdings by VG. 
So, even though you are a smart long term holder who is not going to panic and sell your VTSAX when the market makes a drastic drop, you would still be hit with realized cap gains upon which you would have to possibly pay cap gains tax.  All this and you did not withdraw one penny!   Now, if you held VTSAX in a non-taxable account the above would be irrelevant.  But in your case you have a rather large balance in VTSAX held in a taxable account.  So you are exposed.  At least I believe this is correct; someone more knowledgeable hopefully will chime in with confirmation or contradiction if I am mistaken.
I have a much smaller balance in VTSAX in a taxable account.  Up til i read the above scenario i was making weekly contributions to it.  Those have stopped and now am contemplating whether should sell and move that balance into individual stocks.
All of above fyi.

 

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #30 on: November 26, 2015, 09:31:32 AM »
Not sure if this was already mentioned but the money in taxable account that is in VTSAX is exposed to a possible big tax hit....
See https://www.bogleheads.org/wiki/Vanguard_Total_Stock_Market_Index_Fund_tax_distributions for more details.  The scenario posted above is possible - the real question is "how likely?"  Note the amount of cap gain distributions (spoiler: zero to very low) in the two large market downturns (~2000 and 2008) of the past 20 years, and draw your own conclusions.

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #31 on: November 30, 2015, 07:33:28 PM »
Not sure if this was already mentioned but the money in taxable account that is in VTSAX is exposed to a possible big tax hit.   Other readers may understand it better but here is what i believe is the issue - at the end of the year when you receive your 1099 from VG it will list dividends paid along with capital gains incurred and other distributions from the various funds you hold at VG.  If there is an exceptional downturn in the market and people start cashing out their funds (selling low) then VG could be required to sell some of the holdings in VTSAX in order to distribute the cash to people withdrawing their funds.  A large portion of the current value of VTSAX is in effect unrealized cap gains - I read somewhere that it is close to 45%.  If this scenario were to occur then you would get "distributed" to you on the 1099 your share of the realized cap gains incurred due to the extraordinary selling of VTSAX holdings by VG. 
So, even though you are a smart long term holder who is not going to panic and sell your VTSAX when the market makes a drastic drop, you would still be hit with realized cap gains upon which you would have to possibly pay cap gains tax.  All this and you did not withdraw one penny!   Now, if you held VTSAX in a non-taxable account the above would be irrelevant.  But in your case you have a rather large balance in VTSAX held in a taxable account.  So you are exposed.  At least I believe this is correct; someone more knowledgeable hopefully will chime in with confirmation or contradiction if I am mistaken.
I have a much smaller balance in VTSAX in a taxable account.  Up til i read the above scenario i was making weekly contributions to it.  Those have stopped and now am contemplating whether should sell and move that balance into individual stocks.
All of above fyi.

Not sure if this was already mentioned but the money in taxable account that is in VTSAX is exposed to a possible big tax hit....
See https://www.bogleheads.org/wiki/Vanguard_Total_Stock_Market_Index_Fund_tax_distributions for more details.  The scenario posted above is possible - the real question is "how likely?"  Note the amount of cap gain distributions (spoiler: zero to very low) in the two large market downturns (~2000 and 2008) of the past 20 years, and draw your own conclusions.
Thanks, munch and MDM, for the additional info.  I read something along these lines in the April 13, 2015 edition of Forbes magazine.  It was a short article titled "Dodging Tax Bombs: How to keep the IRS at bay and pocket more profits" by William Baldwin.  The article also gave me some insight as to why my VEXRX is pumping out the capital gains.  The 2008-09 crash caused losses that were carried forward by many funds and used as a shelter from the IRS.  Now those carryforward losses are exhausted, and the result is a large capital gain distro in 2013 and doubling in 2014 (this is exactly what happened to me in regards to VEXRX).

I'm max'd to the hilt on tax-deferred accounts so all the rest of my contributions have to go to taxable accounts.  Honestly, I don't see any way around the problem that munch describes above with VTSAX should the problem happen.  I will just have to take the capital gain and pay the tax.

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #32 on: November 30, 2015, 08:01:17 PM »
Nords, I finished your book The Military Guide to Financial Independence and Retirement.  It was a very good and informative read.  Now I have a better understanding of the concepts you talked about in this thread.  I will keep the book and re-read in about a year to apply knowledge to any changes that will occur.  I will recommend the book to others.

As an aside, I was in the office early about an hour before a briefing.  I was skimming the first chapter of the book when a GS-15 walked by.  He is a retired O6.  He noticed my reading material and asked about the author.  I replied, "The author retired after 20 years of service and now surfs every day."  The GS-15 had an incredulous look on his face and asked, "Is that guy happy?"  I just shrugged my shoulder but inside my mind I knew the answer!

Nords

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #33 on: December 01, 2015, 05:52:23 PM »
Nords, I finished your book The Military Guide to Financial Independence and Retirement.  It was a very good and informative read.  Now I have a better understanding of the concepts you talked about in this thread.  I will keep the book and re-read in about a year to apply knowledge to any changes that will occur.  I will recommend the book to others.
Thanks, one reader at a time!

If you're the type of reader who enjoys leaving reviews, please feel free to write one on Amazon: 
http://www.amazon.com/Military-Guide-Financial-Independence-Retirement/dp/1570233195/ref=sr_1_1
or Goodreads:
https://www.goodreads.com/book/show/12000783-the-military-guide-to-financial-independence-and-retirement

I was skimming the first chapter of the book when a GS-15 walked by.  He is a retired O6.  He noticed my reading material and asked about the author.  I replied, "The author retired after 20 years of service and now surfs every day."  The GS-15 had an incredulous look on his face and asked, "Is that guy happy?"  I just shrugged my shoulder but inside my mind I knew the answer!
Sorry to hear that.  If he has to ask the question then he doesn't understand the concept...

It still hurts a little to share this next story, but I'll share it in the hopes that people will break through One-More-Year Syndrome.

Next week will mark the fourth anniversary of the death of a neighbor & good friend.  He was also a GS-15, in his early 60s after a 30-year Army career (CWO4).  He had a cerebral hemorrhage right after the morning meeting at his office and died in the ICU a few days later without regaining consciousness.  He was hale, hearty, healthy, no lifestyle issues, no specific cause:  "just one of those things".  It was less than two weeks before the wedding of his youngest son, and they decided to carry out the wedding plans because that's what Dad would have wanted.  His widow is still recovering from the grief but I haven't seen her break down for several months, and she's finally restarting her life. 

I'll tell you how widely respected this guy is on Oahu:  the Army assigned a Casualty Assistance Calls Officer-- a major-- to his widow.  I believe they did so because of all the volunteers.

For over a decade we had been getting together for the holidays.  When he and I had shared our usual Thanksgiving dinner in 2011 we had our usual conversation:  he'd jokingly ask me when I was going to surf less and get a real job, and I'd jokingly ask him when he was going to retire and learn to surf.  This time he actually paused and thought about it, then said "Just a few more months-- I should be able to pay off the mortgage before the end of 2012."

His widow paid off the mortgage with his life insurance.

When I had my emergency appendectomy last August, it was in the same hospital.  (Not that I was going to mention the thought to my spouse or the surgeons.)  My symptoms started at home and the next morning my spouse was able to drive in to the ER with me.  But if I'd been working at a career, I'm almost positive that I would've tried to go into work that morning and "clean a few items out of my IN box" before the pain got too severe and I headed to the ER.  Pretty stupid, I know, but that's the type of personality I had when I was working for a paycheck.

So I hope your GS-15 is working because he feels challenged & fulfilled, not just for the money.

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #34 on: December 06, 2015, 12:07:45 PM »
I honestly think my GS-15 needs money to sustain his standard of living.  Also, owning an airplane isn't one of the less expensive hobbies one can maintain in retirement.  All the maintenance, fuel, additional ratings, and hangar fees really take a chunk of money.  I know first hand.  I took flight lessons several years ago and solo'd.  It was fun flying an airplane and viewing the neighborhood from above.  I never got to cross country solo, written exam, and checkride.  I had to abandon my efforts due to military relocation.  Now I view those flight lessons as an oppportunity cost.  Ah, well, goals change in life as more important priorities like FIRE arise.

Thanks for the story!  It really puts things into perspective.

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #35 on: December 12, 2015, 09:58:11 PM »
Ah, DH and I made most of those same early mistakes, and I bet we made them via the same company (military-focused?). 
Yeah, it was first USPA&IRA then they changed their name to First Command Financial Planning.  I wonder if the Honolulu office is still there at Pearlridge Center.

Nords

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #36 on: December 12, 2015, 10:09:16 PM »
Ah, DH and I made most of those same early mistakes, and I bet we made them via the same company (military-focused?). 
Yeah, it was first USPA&IRA then they changed their name to First Command Financial Planning.  I wonder if the Honolulu office is still there at Pearlridge Center.
I'd have to go down there and look for it... I can't ever remember seeing one.

Cornbread OMalley

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #37 on: January 24, 2016, 11:49:23 AM »
Not much, beyond the $500/yr terran already mentioned.  Federal tax should be only ~$1,230/mo so you could adjust your W-4 to get and invest a little more take home pay per month.
I totally forgot to ask.  How do I go about adjusting my W-4?

MDM

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Re: CASE STUDY: Can I be FIRE’d?
« Reply #38 on: January 24, 2016, 12:46:39 PM »
Not much, beyond the $500/yr terran already mentioned.  Federal tax should be only ~$1,230/mo so you could adjust your W-4 to get and invest a little more take home pay per month.
I totally forgot to ask.  How do I go about adjusting my W-4?
A) See http://forum.mrmoneymustache.com/taxes/best-way-to-calculate-w-4-exemptions-for-2016/ if you want to do a little more work than needed to solve the W-4 question, but give yourself the ability to plan ahead on all sorts of other tax issues.

B) The quickest way to answer only the federal W-4 question is probably https://www.irs.gov/Individuals/IRS-Withholding-Calculator.

Personally I like option A but many do use option B.