Author Topic: Case Study - FI Plan Checkup  (Read 1898 times)

CSTA

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Case Study - FI Plan Checkup
« on: December 26, 2015, 09:20:42 AM »
Thanks in advance for your input! Sorry for the new account, but I didn't feel comfortable posting this much info with my main account... I'm paranoid :-/

Life Situation: Married (both 29) w/ 1 6 month old infant. I work a W-2 job, Wife has a small business that is very much on the back burner until our son is more independent. No plans for more kids. Northern VA, USA

Gross Wages: $94.5k (Main job) + $16.5k (side job) = $111k

Employer Match, 401k: $4,725

Pre-tax Deductions: $18k (401k) + $11k (2x TIRAs) + $3250 (Health Insurance) = $32225

Post-tax Deductions: $4128 (Pension) + $240 (Life Insurance) = $4368

Other Income: $5k (small business)

Estimated AGI: $83,775  (MAGI $94,775)

Fed and State Income Tax: $10,758 (Per cashflow.xls)

FICA, SS, Medicare & Self Employment taxes: $8942 (Per cashflow.xls)

Current Expenses:
Mortgage PITI: $1,901/ mo, $22,812/yr
Auto/transport:$600/mo, 7200/yr. Includes, gas, insurance, and $400/mo into a savings account for maintenance/replacement costs
Groceries,cleaning supplies: $450/mo, $5400/yr
Household Maintenance/improvement:$400/mo, $4800/yr. (Deposit into a savings account to handle these costs as the come up.)
Entertainment/Dining out:$250/mo, 3000/yr (Netflix/hulu, movies, restaurants, fast food...)
Medical:$200/mo, 2400/yr (Prescriptions, co-pays)
Utilities:$175/mo, $2100/year. (Gas heat, Electricity, Internet, water)
Shopping:$150/mo, $1800/yr. (Clothes, random stuff)
Misc: $100/mo, $1200/yr. ($50 each for 'fun money')
Kid costs: $75/mo, $900/yr (diapers/wipes)
Cell Phones:$50/mo, $600/year (Two lines, one Ting, one tmobile prepaid)
Gift Budget: $50/mo, $600/yr
Student Loan min payment: $50/ mo, $600/yr
TOTAL: $4401/mo, $52812/yr

Expected ER Budget $40k/yr; moving to a LCOL area.

Assets:

Emergency fund: $13.5k (1%)
Car Maintenance Account: $6k (1%)
Home Mainenance Account:$5k (1%)
TOTAL CASH: $23k

401k (TSP): $21.5k
TIRAs: $9k
Roth IRA:$10k
AA is 60% US Total Market, 30% International, 10% G-fund (bonds)
TOTAL INVESTMENTS: $40.5k

Liabilities:
Mortgage: Original Principal $313k, 4.25% interest, $303k Balance
Student Loan: Original Principal $5k, 2.9% interest, $3.8k Balance

Specific Questions:
Just looking for a general check-up, and suggestions for further optimization. Current FI plan is to move to a LCOL college town in ~15 years and teach about half time, or start a tutoring business for ~$20k in income for 10 years or so. I expect to get about $15k in SS at age 70 and $10k in inflation-adjusted pension at age 62. CFiresim says this is workable, and so does cashflow.xls with an assumed 5% real return.

Also, I am trying to decide on the # of exemptions for my w-4 in 2016 and came up with 8- does that sound reasonable?

MDM

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Re: Case Study - FI Plan Checkup
« Reply #1 on: December 26, 2015, 11:59:24 AM »
Thanks in advance for your input! Sorry for the new account, but I didn't feel comfortable posting this much info with my main account... I'm paranoid :-/
Nice write-up.  If you hadn't disclosed the above I'd have been even more impressed that this came from a first time poster - but nice write-up nonetheless!

Quote
Life Situation: Married (both 29) w/ 1 6 month old infant. I work a W-2 job, Wife has a small business that is very much on the back burner until our son is more independent. No plans for more kids. Northern VA, USA

Gross Wages: $94.5k (Main job) + $16.5k (side job) = $111k

Also, I am trying to decide on the # of exemptions for my w-4 in 2016 and came up with 8- does that sound reasonable?
If all $111K is W-2 income, then 8 appears reasonable at first glance.  Back of the envelope reasoning:
Start with the 3 of you
Add 2.75 for the $11K tIRA
Add ~1.5 for itemized deductions above the standard amount
That gets you to ~7.25.  Taking 8 might cause you to owe in April, but only ~0.75*4000*15% = $450 so no penalty.

ETA: Above assumes the $5K SE income is covered by estimated tax payments.  If the W-2 withholding needs to cover that also, then subtracting 5000/4000 = 1.25 from 7.25 gets you to 6 allowances on the W-4.  Then again, if the withholding assumes you are in the 25% bracket, 8 might still be ok.  See http://forum.mrmoneymustache.com/taxes/best-way-to-calculate-w-4-exemptions-for-2016/ for more (i.e., beyond back of the envelope) on this topic.


Quote
Current Expenses:
Mortgage PITI: $1,901/ mo, $22,812/yr
Auto/transport:$600/mo, 7200/yr. Includes, gas, insurance, and $400/mo into a savings account for maintenance/replacement costs
Groceries,cleaning supplies: $450/mo, $5400/yr
Household Maintenance/improvement:$400/mo, $4800/yr. (Deposit into a savings account to handle these costs as the come up.)
Entertainment/Dining out:$250/mo, 3000/yr (Netflix/hulu, movies, restaurants, fast food...)
Medical:$200/mo, 2400/yr (Prescriptions, co-pays)
Utilities:$175/mo, $2100/year. (Gas heat, Electricity, Internet, water)
Shopping:$150/mo, $1800/yr. (Clothes, random stuff)
Misc: $100/mo, $1200/yr. ($50 each for 'fun money')
Kid costs: $75/mo, $900/yr (diapers/wipes)
Cell Phones:$50/mo, $600/year (Two lines, one Ting, one tmobile prepaid)
Gift Budget: $50/mo, $600/yr
Student Loan min payment: $50/ mo, $600/yr
TOTAL: $4401/mo, $52812/yr
Nothing egregious here.  Sure, there are areas that could be cut but aside from "selling and moving to a less expensive house" those cuts would likely be incremental.  You may even be overestimating the car and household saving needs, but if so then all the better.

Quote
401k (TSP): $21.5k
TIRAs: $9k
Roth IRA:$10k
AA is 60% US Total Market, 30% International, 10% G-fund (bonds)
TOTAL INVESTMENTS: $40.5k
Again, well done.  No way to know if this is "best" but it is certainly reasonable and defensible.

As you will likely end in the 15% federal marginal bracket (plus whatever state), the "traditional vs. Roth" question does not have a clear answer.  You should go traditional with the 401k and IRAs at least to get out of the 25% fed bracket, but beyond that you could make a case for either.

Quote
Specific Questions:
Expected ER Budget $40k/yr; moving to a LCOL area.
Just looking for a general check-up, and suggestions for further optimization. Current FI plan is to move to a LCOL college town in ~15 years and teach about half time, or start a tutoring business for ~$20k in income for 10 years or so. I expect to get about $15k in SS at age 70 and $10k in inflation-adjusted pension at age 62. CFiresim says this is workable, and so does cashflow.xls with an assumed 5% real return.
Given that your non-mortgage expenses are ~$35K/yr now, your housing situation in the LCOL area (and how your current home's price changes between now and then) is the biggest unknown.  You can refine the estimates as time goes by.  It all appears well thought out - good luck!
« Last Edit: December 26, 2015, 12:22:50 PM by MDM »

CSTA

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Re: Case Study - FI Plan Checkup
« Reply #2 on: December 26, 2015, 01:57:12 PM »
Thanks MDM! The house is pricier than I would like, but it was (and I believe still is) the best option for our situation. Fortunately it is only one level and ~1000 sq.ft., so it is fairly inexpensive to keep up. Houses closer to work are less expensive but the schools have a lot of drug problems, and the military base I work on is literally the only thing in the local economy. If they were to shut down the facility I work at I could find myself without a job and a worthless house.

My thinking on the maintenance accounts is once I get 'enough' liquid cash in them I can divert that money into a taxable account. Any moderate 'lumpy' expenses (like the carpet we just bought) can come out of the cash account and be replenished over time. For large expenses we can sell some taxable investments if needed. At $5k I'm probably very close to enough in the house account, but we plan to buy a new to us car in a year or two for 10-15k, so I will continue building that account for the time being. 

One more question- I'm interested in helping my son with his college expenses. Predicting what college will look like or cost in 18 years seems impossible to me. That, combined with relatively 'meh' benefits to a 529 over a taxable account planning to eschew a 529 in favor of dumping any extra money into a taxable account (which I've yet to open). My analysis assumes I have $200/mo available to invest in either and the CAGR is 5%:

Taxable
Invest $2400/year for the next 15 years, let it compound 3 more years until he turns 18. Account value=$63k (36k/27k; basis/LTCG). $0 in tax if my income is as low as I hope at that point,~$4k if I am above the 15% bracket or the rules change. So 'worst case' here is a usable value of $59k.

529
Invest $2400 + $138 in tax savings for the next 15 years, let it compound 3 more years until he turns 18. The ER of available funds in my state's 529 is higher than vanguard by an average of about 0.5%, so that brings the CAGR down to 4.5%. Account value=$63k, no tax if used for education. Money is subject to tax and penalty if I don't use it for education.

Roth
Alternatively, I could swap some of my TIRA space for Roth. Moving $2400 in contributions for the TIRA to the Roth per year works out like the taxable account above; Account value=$63k. I still have my $200/mo to invest, but contributing $2400 less to a TIRA and would leave me with a $360 tax bill, so total invested in taxable is now 2040/yr. Account value=$53.5k, (30.5k/23k; basis/LTCG).

To me the 529 does not look to be worth considering, unless I've missed something. As MDM said, the Roth/TIRA is kind of a toss up in the 15% bracket, so maybe this is a good reason to diversify my IRA contributions a bit.