Case Study - Feedback Requested

[tonycar17]

OK All, posting an actual case study for you all to hammer me on.  I feel we make a really good income and I am looking for validation on some things I know we need to be more diligent about.  We are not looking to necessarily RE, but definitely interested in getting to FI as it just gives us more options.

Life Situation: IRS filing status = MFJ, 2 Dependents (7 and 9), Him 41, Her 40, State:  WI

Gross Salary/Wages Expected for 2016: $245K

Pre-tax deductions: His:  $18,000 (401K), $5,750 (HSA - Company contributes $1000), $7,710 (insurance), $1,500 (Dependent Care FSA).  Her:  $18,000 (401K), $1048 (insurance)

Other Ordinary Income: None

Qualified Dividends & Long Term Capital Gains: Not Significant

Rental Income, Actual Expenses, and Depreciation: None

Adjusted Gross Income: $192,992

Taxes: Federal, state/local, and FICA.  His:  $37,009, Hers: 33,170.36

Current expenses (annual):  $84,463

Mortgage:  $18,108
T&I:  $6,000
Cable, Phone, Internet:  $2,496
Utilities (Gas and Electric):  $2650
Auto Gas:  $3,900
Auto Repairs:  $1,500
Home Repairs:  $5,500
Charity:  $5,000
Life Insurance:  $1,392 (500K policies on each of us, also each carry $650K thru work)
Auto Insurance:  $1,040
Groceries:  $9,600
Restaurants:  $1,200
Personal / Blow Money:  $1,200
Camps / Sports for Boys:  $8,000
Gym Membership:  $720
Vacations:  $9,000 (this year is a big one with Disney for the kids + an additional week - we only normally do one week)
Miscellaneous:  $7,157 (need to figure where this is going - more work for me to do)

Current Annual After-Tax Savings:  $38,350
His ESPP:  $5,950
College Savings:  $8,400
General Savings:  $24,000 (currently goes to savings or short term projects - which is why you see the large cash position below)

Expected ER expenses: Expect to live on $5,000 per month (no mortgage)

Assets:
His 401K:  $101,840 (index funds with low expenses)
His ESPP:  $9767 + $1650 for current period
His RSU:  $4,967
His ESOP:  $6,740
Her 401K:  $70,884 (index funds with low expenses)
Her Rollover IRA:  $39,527 (index funds with low expense ratios)
Her Rollover Roth:  $4,921 (index funds with low expense ratios)
Her beneficiary IRA:  $12,200 (just received this, in money market, will get in market in next 30-45 days)
HSA Balance:  $12,000 (all in cash - know we need to get this in the market too - we have good low cost VG options)
Cash on hand:  $82,000
Car 1:  2010 VW Routan worth $10K
Car 2:  2012 Toyota Camry SE worth $13K
Home Value:  $275K

Liabilities: Mortgage of $206,000 - 15 year @ 2.875% (in year 2)

Specific Comments and Question(s):


1.  We have been making this kind of money for only a few years and I feel like we need to get a better handle on our spending.  We could easily spend much less, but we also both recently lost parents fairly young to cancer (her dad @56 and my mom @60 in the last 2 years) - so we have spent more the last couple of years to have some experiences with our kids.  We have recently talked about the need to refocus, and we will.  We are already targeting Groceries, Camps and Vacations, and I am doing more work to figure out where the miscellaneous is going - some will no doubt be parties, gifts, etc. for the kids, family, friends.....still a big number to not be able to easily quantify

2.  We have a few projects we are looking to get done that are related to our house:  kitchen renovation, new driveway, composite deck, new shed, overhaul landscaping.  All in, these expenses will be significant.  Of the 82K in cash, about 37K is earmarked for those projects, and I expect the projects to cost more than double that.  The rest is a nice big cushion of cash that my wife really likes to have since she grew up with nothing.  One question is how to begin to get her to let go of some of that cushion.  I mean, I have run the numbers, and if we needed to, we could get by still relatively comfortably on like $4,000 per month - so I do not see the need to have more than 15-20K in cash.

3.  What are my best options for investing from a tax perspective.....at present we are investing about $80K between 401Ks, Stock Purchase Plans, HSA, and general savings.  We get no tax deduction for an IRA and cannot contribute to Roth.  Backdoor Roth?

4.  I am looking to, over the next 10-12 years to put a minimum of $5000 per month into vehicles earmarked for retirement while simultaneously building enough of a cash position to get through the 5 year Roth Conversion Ladder period.  I would like to maybe pull the plug (or at least have the option to) in our early 50's.  Good plan?  Dumb? 

If I take our currently approximate $264K in retirement assets and add 60K per year at 6% over the next 12 years I get to a little over $1.6MM.  Using 4%, I get about $64K per year which I feel we could easily get by on once there are no more kids in the house (oldest one gone in 11 years). 

5.  Any other recommendations are welcome - it has taken me awhile to even post this because I know we are very fortunate income wise and I feel like we can do a lot better than we have from an expense perspective.

OK, go nuts!

TC

[tonysemail]

at this point, i feel like a broken record, but here are things I have implemented in the past 12 months-

1) if you're not already doing it, then travel hacking can take your vacation expenses way down.
a way to get started is the free course offered by a mustachian at travelmiles101.

2) A DAF is a tax efficient way to fund your charity donations.
Consider donating appreciated assets like ESPP to avoid paying capital gains.

3) backdoor roth is great.
my wife had to fold her tIRA into her 401k first to avoid tax penalty.

4) the thing that really helped my wife was writing an investment policy statement with asset allocation.
we put a lot of thought into how much cash allocation to carry and then there is no disagreement on investing the excess.


Finally, your cable bill is high.  time to cut the cord?

p.s. you did not mention umbrella insurance. 
There are great threads on this forum about why you should or should not buy it.
I just upped my coverage :)

[Mother Fussbudget]

First, I agree with tonysemail - the Cable / Internet / Phone bill looks high, and a great place to start.  Look into pre-paid / pay-as-you-go plans from companies like AirVoice, Republic, etc. Internet, get DSL at a relatively low bandwidth, and try that out.  If you need more data, update later.  Go low, then bump up you data if needed, and use WIFI from home & work instead of cellular data.  Buy a hi-def antenna, and find out what channels you can get WITHOUT cable - you may be surprised...

1. Yes, work on spending.  Make it into a *game* - make it FUN to find bargains.  Shop at thriftshops. Shop at Grocery Outlets. CostCo. Lots of ideas on the forums to save on food & clothing. Like you, I was worried about family health - lost father to heart disease, and other family members to cancer, diabetes, etc. Watched the film "Forks Over Knives" 5 years ago, changed what-I-eat, and have never felt better. Now use my 'fork' wisely (and cheaply!) to avoid the surgical 'knife'. 

2.  Are you interested in DIY? You could save half-the-amount listed for these projects if you do SOME of the work yourself. Does your wife realize you're losing 2% buying power per year on cash due to inflation?  Consider putting that extra cushion into a taxable account at VG.

3. Even if you don't get tax deductions *today* from an IRA/Roth, you will get tax advantages *in the future* from having tax advantaged retirement accounts.  Yes, contribute to a t-IRA even if you don't get a tax deduction.  At 59-1/2, you'll thank yourself.  Backdoor Roth may or may not make sense, and some of that depends on what you think your expenses will be in FIRE.  I'll let others discusss that (as I'm doing the backdoor Roth even though I'm paying tax on 96% of the IRA-to-Roth conversion every year).  After FIRE consider putting in a IRA-to-Roth pipeline (converting all IRA's into Roths).  The best time for most folks is between the ages of 59-1/2 to 70 - or 10-years to convert all IRA's into Roth's.  (Any $$ left in T-IRA's @ age 70 require minimum distributions).

4. $5K/month for retirement?  Great plan. And your math looks right, although your spending while IN FIRE will no doubt be less than your spending today.

5. Other recommendations:  Move to all LED lights.  Add insulation.  Have FUN in the process of preparing for FIRE - it's not all about being 'cheap', but about living a great life, and finding ways to have a great time while spending less overall.   

All the best!

[StockBeard]

I'm also going to state a few obvious things, and you don't have to implement all of these, it depends what you feel comfortable with. At a quick glance:

1) You could probably reduce on groceries + restaurants. Easiest is obviously the restaurants (just stop it entirely, go to restaurants only for big celebrations like birthdays). You spend about $11'000 a year on food. My family of 4 spends about $7'000, and we eat organic, so I think there's some room for you here.

2) Your vacation budget is very high for my tastes. We spend half of what you do, and that includes an expensive trip abroad pretty much every year

3) Dump your cable subscription, switch to Netflix or Amazon Prime. We pay half of what you do for phone + internet

4) Get your miscellaneous section + personal/blow money in order, you'll probably find gems in here.

I think you can easily remove 10K to 15K from your yearly expenses with minimal effort and no impact to your lifestyle. You're at the early stages of your path to FI, you're at a stage where you can get big savings with minimal effort, which is awesome :)

What does T&I stand for?

[MDM]

Taxes: Federal, state/local, and FICA.  His:  $37,009, Hers: 33,170.36

Nice post - well laid out and easy to follow!

Question on taxes: do you file separately, or are those your payroll tax withholding amounts?  Or maybe I fat-fingered something in the case study spreadsheet (CSS) - it appears your total tax bill should be ~$56,500 instead of ~$70,200...?

Mortgage:  $18,108
T&I:  $6,000

Good work separating the principal and interest from the tax and insurance.

Camps / Sports for Boys:  $8,000
Vacations:  $9,000 (this year is a big one with Disney for the kids + an additional week - we only normally do one week)
Miscellaneous:  $7,157 (need to figure where this is going - more work for me to do)

No surprise that these are the blinking hot buttons....

Specific Comments and Question(s):
1.  We have been making this kind of money for only a few years and I feel like we need to get a better handle on our spending.  We could easily spend much less, but we also both recently lost parents fairly young to cancer (her dad @56 and my mom @60 in the last 2 years) - so we have spent more the last couple of years to have some experiences with our kids.  We have recently talked about the need to refocus, and we will.  We are already targeting Groceries, Camps and Vacations, and I am doing more work to figure out where the miscellaneous is going - some will no doubt be parties, gifts, etc. for the kids, family, friends.....still a big number to not be able to easily quantify

We use Quicken to download and categorize all credit card spending, so "miscellaneous" becomes a much smaller amount.  There are other ways to keep track, but that is one.

2.  We have a few projects we are looking to get done that are related to our house:  kitchen renovation, new driveway, composite deck, new shed, overhaul landscaping.  All in, these expenses will be significant.  Of the 82K in cash, about 37K is earmarked for those projects, and I expect the projects to cost more than double that.  The rest is a nice big cushion of cash that my wife really likes to have since she grew up with nothing.  One question is how to begin to get her to let go of some of that cushion.  I mean, I have run the numbers, and if we needed to, we could get by still relatively comfortably on like $4,000 per month - so I do not see the need to have more than 15-20K in cash.

If your planned projects will "cost more than double" $37K, then $82K in cash in reasonable - maybe even low.  You should put the cash somewhere it earns at least 1%, e.g. one of these.

3.  What are my best options for investing from a tax perspective.....at present we are investing about $80K between 401Ks, Stock Purchase Plans, HSA, and general savings.  We get no tax deduction for an IRA and cannot contribute to Roth.  Backdoor Roth?

You are doing great!  Keep up the good work!  Yes, $11K/yr of Backdoor Roth would be good.  You'll want to roll her IRA into her 401k first, assuming the 401k plan allows this.

4.  I am looking to, over the next 10-12 years to put a minimum of $5000 per month into vehicles earmarked for retirement while simultaneously building enough of a cash position to get through the 5 year Roth Conversion Ladder period.  I would like to maybe pull the plug (or at least have the option to) in our early 50's.  Good plan?  Dumb?

Great plan and looks doable.

Note that cutting the $9K/yr for vacation to $0K reduces your time to FI by 2 years, from 12 to 10 (again according to the simple calculation in the CSS).  Not saying that you should switch from travel to stay-cations, but seeing that vacations cost another two years of work may be a new perspective....

After digesting the simple time to FI in the CSS, you may want to look at one or more of the advanced tools: https://www.bogleheads.org/forum/viewtopic.php?t=115839#p1686175.

Again, well done and good luck!

[Mikila]

+1 for travel hacking.  You could enjoy the same vacations you do now, for less than half the cost.  There is potential here to travel practically free.  It is well worth the time, imo. 

Regarding your life insurance costs- they are high.  Have you shoppped policies recently?  A half a million policy can be bought for quite a bit less than you are paying.  If you belong to an organization/ association which offers discounts, this is a good place to start

[tonycar17]

at this point, i feel like a broken record, but here are things I have implemented in the past 12 months-

1) if you're not already doing it, then travel hacking can take your vacation expenses way down.
a way to get started is the free course offered by a mustachian at travelmiles101.

2) A DAF is a tax efficient way to fund your charity donations.
Consider donating appreciated assets like ESPP to avoid paying capital gains.

3) backdoor roth is great.
my wife had to fold her tIRA into her 401k first to avoid tax penalty.

4) the thing that really helped my wife was writing an investment policy statement with asset allocation.
we put a lot of thought into how much cash allocation to carry and then there is no disagreement on investing the excess.


Finally, your cable bill is high.  time to cut the cord?

p.s. you did not mention umbrella insurance. 
There are great threads on this forum about why you should or should not buy it.
I just upped my coverage :)

Thanks for the thoughtful feedback, tonysemail.......
Going to definitely look into the travel hacking thing!
We actually do have an umbrella policy of $1Million for $149 annually - missed it in my expenses. 
Been talking about cutting the cable cord - this will re-stoke those conversations.
Will look into DAF - possibly an option here
I have actually drafted an IPS that we are reviewing in our next budget meeting next Wednesday. 
Yeah, we would need to roll the wife's other IRA into a her 401K - have her looking into that as an option.

TC

[Sibley]

I put my thoughts in red. You live a much more expensive life than me, so if you don't want to simplify to that extent, its up to you.

Current expenses (annual):  $84,463 

Mortgage:  $18,108
T&I:  $6,000
Cable, Phone, Internet:  $2,496  This is high. You don't need cable. The news only makes you unhappy, and wastes time watching commercials which make you want to buy stuff you don't need.
Utilities (Gas and Electric):  $2650
Auto Gas:  $3,900  How much do you drive? Or is your car that inefficient? You're paying over $300 a month for gas.
Auto Repairs:  $1,500
Home Repairs:  $5,500  Are you abusing the house? Is it an older home and just needs more work? Catching up on deferred maintenance? Paying others to do stuff you could learn to DIY?
Charity:  $5,000 
Life Insurance:  $1,392 (500K policies on each of us, also each carry $650K thru work)
Auto Insurance:  $1,040
Groceries:  $9,600  You can really reduce this if you work at it. Look at food waste, eat your cupboard/freezer, don't shop at Whole Paycheck, etc.
Restaurants:  $1,200  Make sure this is something you really care about. If it's McDonold's, stop going.
Personal / Blow Money:  $1,200  Seriously? that's my monthly budget.
Camps / Sports for Boys:  $8,000 Your kids would probably appreciate time with their parents more than camps. Or have them earn it.
Gym Membership:  $720  Get bikes, start biking places, you'll cut out the need for gym memberships and reduce auto costs. Win-win.
Vacations:  $9,000 (this year is a big one with Disney for the kids + an additional week - we only normally do one week) Ok, but you couldn't pay me to spend 2 weeks at Disney.
Miscellaneous:  $7,157 (need to figure where this is going - more work for me to do)  Yep, figure this out. You can probably slash this a lot.

Current Annual After-Tax Savings:  $38,350
His ESPP:  $5,950
College Savings:  $8,400
General Savings:  $24,000 (currently goes to savings or short term projects - which is why you see the large cash position below)

Expected ER expenses: Expect to live on $5,000 per month (no mortgage)

Assets:
His 401K:  $101,840 (index funds with low expenses)
His ESPP:  $9767 + $1650 for current period
His RSU:  $4,967
His ESOP:  $6,740
Her 401K:  $70,884 (index funds with low expenses)
Her Rollover IRA:  $39,527 (index funds with low expense ratios)
Her Rollover Roth:  $4,921 (index funds with low expense ratios)
Her beneficiary IRA:  $12,200 (just received this, in money market, will get in market in next 30-45 days)
HSA Balance:  $12,000 (all in cash - know we need to get this in the market too - we have good low cost VG options)
Cash on hand:  $82,000
Car 1:  2010 VW Routan worth $10K
Car 2:  2012 Toyota Camry SE worth $13K
Home Value:  $275K

Liabilities: Mortgage of $206,000 - 15 year @ 2.875% (in year 2)

Specific Comments and Question(s):


1.  We have been making this kind of money for only a few years and I feel like we need to get a better handle on our spending.  We could easily spend much less, but we also both recently lost parents fairly young to cancer (her dad @56 and my mom @60 in the last 2 years) - so we have spent more the last couple of years to have some experiences with our kids.  We have recently talked about the need to refocus, and we will.  We are already targeting Groceries, Camps and Vacations, and I am doing more work to figure out where the miscellaneous is going - some will no doubt be parties, gifts, etc. for the kids, family, friends.....still a big number to not be able to easily quantify   You don't need to spend thousands of dollars to give your kids the memories you want to. Go to the park. Have a picnic. Build a blanket fort in the living room and play with them. Go camping (real, low cost camping). Visit all the local museums. Read books together. Make a movie. Whatever. Memories of that sort will mean a lot more for longer, and will have renewed meaning when they're older, much more than time at Disney will.

2.  We have a few projects we are looking to get done that are related to our house:  kitchen renovation, new driveway, composite deck, new shed, overhaul landscaping.  All in, these expenses will be significant.  Of the 82K in cash, about 37K is earmarked for those projects, and I expect the projects to cost more than double that.  The rest is a nice big cushion of cash that my wife really likes to have since she grew up with nothing.  One question is how to begin to get her to let go of some of that cushion.  I mean, I have run the numbers, and if we needed to, we could get by still relatively comfortably on like $4,000 per month - so I do not see the need to have more than 15-20K in cash.  Do some DIY, and get the kids involved. Even young children can help with stuff. It's good skills to have, and they'll be spending time with you.

3.  What are my best options for investing from a tax perspective.....at present we are investing about $80K between 401Ks, Stock Purchase Plans, HSA, and general savings.  We get no tax deduction for an IRA and cannot contribute to Roth.  Backdoor Roth?

4.  I am looking to, over the next 10-12 years to put a minimum of $5000 per month into vehicles earmarked for retirement while simultaneously building enough of a cash position to get through the 5 year Roth Conversion Ladder period.  I would like to maybe pull the plug (or at least have the option to) in our early 50's.  Good plan?  Dumb?   With your current income, sounds reasonable. It would be even easier if you reduce your expenses.

If I take our currently approximate $264K in retirement assets and add 60K per year at 6% over the next 12 years I get to a little over $1.6MM.  Using 4%, I get about $64K per year which I feel we could easily get by on once there are no more kids in the house (oldest one gone in 11 years).  Um, I challenge you to reduce that to $40k a year expenses....

5.  Any other recommendations are welcome - it has taken me awhile to even post this because I know we are very fortunate income wise and I feel like we can do a lot better than we have from an expense perspective.

OK, go nuts!

TC

[nereo]

Others have covered the issues I would have also highlighted, but I do have one observation:
You are carrying (and paying for) in insane amount of insurance, especially for a couple where both people work and you have >$200k in investments.
Two $500k life insurance policies, plus an additional $650k through work and a $1MM umbrella policy? 
What exactly is the "insurance" listed under 'pre-tax expenses' totaling $8,150?

I would re-think your insurance needs and save yourself $1k or more.

Also - you buy $1200 in blow a year?  (j/k)