Author Topic: Case Study - Help a Single Mom get on the Path to FIRE  (Read 4531 times)

fiddlefaddle

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Case Study - Help a Single Mom get on the Path to FIRE
« on: July 13, 2016, 08:17:17 AM »
Life Situation: 39, newly single mom to a 10 year old
Tax Status: will file Single (I think, need to learn more about taxes) - will be claiming my daughter as a dependent every other year

Gross Salary/Wages: $6,539 per month
(paid bi-weekly, so 2 months have an extra paycheck -- seemed easier to present my case based on the 10 months when I'm paid 2 times)

Pre-tax deductions:
403b: $1384/month
HSA: not eligible
FSA: $185/month
Insurance - health, dental, vision, life: $188

Other Ordinary Income:
Child support - $400/month
Side hustles - $100/month

Qualified Dividends & Long Term Capital Gains: 0

Rental Income, Actual Expenses, and Depreciation: 0

Adjusted Gross Income: $5,282

Taxes:
Federal: $827
State: $244
FICA: $472
*2016 will be my first year filing as single, so I'm not sure what to expect on taxes

Current expenses:
Mortgage: $906
Charity: $100
Gas & Electric: $70
Water & Sewer: $30
HOA: $74 (includes garbage and lawn care)
Home Insurance: $45
Property Taxes: $125
Groceries, Household Items, Toiletries: $360
Restaurants: $120
Cell Phone: $75
Auto Gas: $120
Auto Insurance: $42
Internet: $40
Afterschool Care and Summer Care: $310
Hair: $50
Piano Lessons: $75
Kid Activities (clubs, sports): $50
Fun/Entertainment: $100
Clothing: $50
Vacation/Travel: $200
College Fund: $200
Gifts: $100
Home Repairs/Projects: $200 (just moved; lots of delayed maintenance to take care of; should drop in the next year)
Miscellaneous: $100 (random things that aren't recurring)

Extra: $197*
*The budget above is generous, so I often have more than $197 to put toward other goals each month. Additionally, 2 months per year include a 3rd paycheck and I have $2,400 in FSA reimbursements that I receive in several chunks through the year. I also have months when I make more than $100 from side hustles/freelancing.

Assets:
403b: $64,468
Trad IRA: $29,280
Roth IRA: $37,386
Cash: $12,606
Home Value: $238,000
Total: $381,740

Liabilities:
Mortgage, beginning March 2016
Original Amount: $235,000, 30 years, 2.31%
Monthly Payment: $906
Current Balance: $161,361*
Time Remaining: 18 years
*paid off 30% with proceeds from selling other home
Total: $161,361

Net Worth: $220,379*
*I'll also receive approximately $30k in ex's retirement funds from divorce decree. Also half of his pension, discussed below in the questions section.

Goal: Reach FIRE in 2030, when I'm 53. (Or before!)

Specific Questions:

   1. **Main question** I need some help figuring out what to do about a pension my ex has that I will receive 50% of when our divorce is final. The pension is being terminated and everyone must choose between a lump sum payout or an annuity paid monthly beginning at age 65. The lump sum would be about $25,000. The monthly payment at 65 would be about $625. I'm leaning toward taking the lump sum to add to my stash now, but would like other opinions about that decision.

   2. I already maxed out my Traditional IRA for 2016 in order to decrease my tax burden a bit,  but I'm wondering if I should be contributing to my Roth IRA in order to have some funds accessible before retirement age. Advice?

   3. What should I do with my extra money each month? Right now, I'm just saving up for divorce attorney costs, taxes next year, etc. Once things are more settled, my thinking is to save up for my IRA each year and then put any extra toward my mortgage. It's a family loan and I would like to pay it back as quickly as possible, plus my personality is such that having a mortgage during retirement would be really stressful for me.

   4. If I retire at 53, I'll need to figure out where my living expenses are going to come from until I can access my retirement funds. It seems too overwhelming to think about now, but I'll welcome any advice offered on that.

   5. Are there things I should be doing to decrease my tax burden? Taxes for single people are painful!

   6. Other advice/suggestions?

rubybeth

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #1 on: July 13, 2016, 09:00:40 AM »

   1. **Main question** I need some help figuring out what to do about a pension my ex has that I will receive 50% of when our divorce is final. The pension is being terminated and everyone must choose between a lump sum payout or an annuity paid monthly beginning at age 65. The lump sum would be about $25,000. The monthly payment at 65 would be about $625. I'm leaning toward taking the lump sum to add to my stash now, but would like other opinions about that decision.

A lump sum of $25,000 now vs. $625/mo or $7,200 per year starting at age 65? I would leave the money in the pension and take the $625/mo., but I think I would want more details about how the annuity works. Even if you invest the $25k, I still think getting a guaranteed $7,200/year is a better deal.

DeltaBond

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #2 on: July 13, 2016, 09:54:20 AM »

   1. **Main question** I need some help figuring out what to do about a pension my ex has that I will receive 50% of when our divorce is final. The pension is being terminated and everyone must choose between a lump sum payout or an annuity paid monthly beginning at age 65. The lump sum would be about $25,000. The monthly payment at 65 would be about $625. I'm leaning toward taking the lump sum to add to my stash now, but would like other opinions about that decision.

A lump sum of $25,000 now vs. $625/mo or $7,200 per year starting at age 65? I would leave the money in the pension and take the $625/mo., but I think I would want more details about how the annuity works. Even if you invest the $25k, I still think getting a guaranteed $7,200/year is a better deal.

+1

fiddlefaddle

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #3 on: July 13, 2016, 10:06:33 AM »
Rubybeth and DeltaBond, thank you both for the feedback. My thinking with the lump sum is that it would give me more flexibility after retirement but before age 65. But I think you are correct that the monthly amount at 65 is more money overall. Decisions, decisions...

ZiziPB

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #4 on: July 13, 2016, 10:11:06 AM »
That is a very good annuity payout on the pension.  I have a lump sum of $30K that would result in $325 per month at 65 - so yours is almost double that.  I'd say take it as annuity.

COlady

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #5 on: July 13, 2016, 10:33:02 AM »
Life Situation: 39, newly single mom to a 10 year old
Tax Status: will file Single (I think, need to learn more about taxes) - will be claiming my daughter as a dependent every other year

Gross Salary/Wages: $6,539 per month
(paid bi-weekly, so 2 months have an extra paycheck -- seemed easier to present my case based on the 10 months when I'm paid 2 times)

Pre-tax deductions:
403b: $1384/month
HSA: not eligible
FSA: $185/month
Insurance - health, dental, vision, life: $188

Other Ordinary Income:
Child support - $400/month
Side hustles - $100/month

Qualified Dividends & Long Term Capital Gains: 0

Rental Income, Actual Expenses, and Depreciation: 0

Adjusted Gross Income: $5,282

Taxes:
Federal: $827
State: $244
FICA: $472
*2016 will be my first year filing as single, so I'm not sure what to expect on taxes

Current expenses:
Mortgage: $906
Charity: $100
Gas & Electric: $70
Water & Sewer: $30
HOA: $74 (includes garbage and lawn care)
Home Insurance: $45
Property Taxes: $125
Groceries, Household Items, Toiletries: $360
Restaurants: $120
Cell Phone: $75
Auto Gas: $120
Auto Insurance: $42
Internet: $40
Afterschool Care and Summer Care: $310
Hair: $50
Piano Lessons: $75
Kid Activities (clubs, sports): $50
Fun/Entertainment: $100
Clothing: $50
Vacation/Travel: $200
College Fund: $200
Gifts: $100
Home Repairs/Projects: $200 (just moved; lots of delayed maintenance to take care of; should drop in the next year)
Miscellaneous: $100 (random things that aren't recurring)

Extra: $197*
*The budget above is generous, so I often have more than $197 to put toward other goals each month. Additionally, 2 months per year include a 3rd paycheck and I have $2,400 in FSA reimbursements that I receive in several chunks through the year. I also have months when I make more than $100 from side hustles/freelancing.

Assets:
403b: $64,468
Trad IRA: $29,280
Roth IRA: $37,386
Cash: $12,606
Home Value: $238,000
Total: $381,740

Liabilities:
Mortgage, beginning March 2016
Original Amount: $235,000, 30 years, 2.31%
Monthly Payment: $906
Current Balance: $161,361*
Time Remaining: 18 years
*paid off 30% with proceeds from selling other home
Total: $161,361

Net Worth: $220,379*
*I'll also receive approximately $30k in ex's retirement funds from divorce decree. Also half of his pension, discussed below in the questions section.

Goal: Reach FIRE in 2030, when I'm 53. (Or before!)

Specific Questions:

   1. **Main question** I need some help figuring out what to do about a pension my ex has that I will receive 50% of when our divorce is final. The pension is being terminated and everyone must choose between a lump sum payout or an annuity paid monthly beginning at age 65. The lump sum would be about $25,000. The monthly payment at 65 would be about $625. I'm leaning toward taking the lump sum to add to my stash now, but would like other opinions about that decision.

   2. I already maxed out my Traditional IRA for 2016 in order to decrease my tax burden a bit,  but I'm wondering if I should be contributing to my Roth IRA in order to have some funds accessible before retirement age. Advice?

   3. What should I do with my extra money each month? Right now, I'm just saving up for divorce attorney costs, taxes next year, etc. Once things are more settled, my thinking is to save up for my IRA each year and then put any extra toward my mortgage. It's a family loan and I would like to pay it back as quickly as possible, plus my personality is such that having a mortgage during retirement would be really stressful for me.

   4. If I retire at 53, I'll need to figure out where my living expenses are going to come from until I can access my retirement funds. It seems too overwhelming to think about now, but I'll welcome any advice offered on that.

   5. Are there things I should be doing to decrease my tax burden? Taxes for single people are painful!

   6. Other advice/suggestions?

You will  be claiming head of household assuming you meet the rules, which you most likely will.

Catbert

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #6 on: July 13, 2016, 11:21:22 AM »
I would suggest that you get access to tax prep software for 2015 and play a bit with the numbers based on 2016.  Is 2016 your year to claim your child as a dependent?  You'll likely find that your taxes will change quite a bit from year to year.  You definitely don't want an ugly surprise at the end of the year. 

Doing mock taxes will also help you answer the question about whether Roth or traditional IRA is best.  My general rule is that if you're in the 25% marginal bracket go deductible if possible.  Lower marginal rate Roth is best.

Also consider how likely it is that your ex will promptly pay child support.  That could put a real crimp in your budget.

 

fiddlefaddle

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #7 on: July 13, 2016, 11:57:42 AM »
That is a very good annuity payout on the pension.  I have a lump sum of $30K that would result in $325 per month at 65 - so yours is almost double that.  I'd say take it as annuity.

Thank you - the comparison to your pension is really helpful!

You will  be claiming head of household assuming you meet the rules, which you most likely will.

I think head of household in the years when I claim my daughter and single the other years.

I would suggest that you get access to tax prep software for 2015 and play a bit with the numbers based on 2016.  Is 2016 your year to claim your child as a dependent?  You'll likely find that your taxes will change quite a bit from year to year.  You definitely don't want an ugly surprise at the end of the year. 

Yes, I'll be claiming her as a dependent for 2016. Playing around with some tax prep software is a great idea! I'll work on that.


Also consider how likely it is that your ex will promptly pay child support.  That could put a real crimp in your budget.

I don't foresee any issues with him paying me. So far, he's very punctual.

Thanks for the advice so far!


BTDretire

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #8 on: July 13, 2016, 12:13:19 PM »
I ran your $25k at 7% compound interest for 25 years and got $136k. If you use a 4% WR, that's $450 a month vs $625 from the pension.
How safe is the pension over the next 25 years?
You probably can't answer that, but it's something to think about.
I know people that lost all of their pension.
 That said, I'd probably stick with the pension.
 

rubybeth

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #9 on: July 13, 2016, 12:17:52 PM »
That is a very good annuity payout on the pension.  I have a lump sum of $30K that would result in $325 per month at 65 - so yours is almost double that.  I'd say take it as annuity.

As another example, I have about $30k in my pension right now, that would pay $427/mo. (at age 55) if I quit today.

I don't think $25k is enough to offer you all that much flexibility, and you're going to get $30k from your ex's retirement. Is there any option for withdrawing the lump sum before age 65 due to some hardship? Really read up on the annuity; maybe even start a second thread on just that, if you have questions. I subscribe to the Dave Ramsey school of "don't invest in something you don't understand," so try to understand what's going on with it before making a final decision.

fiddlefaddle

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #10 on: July 13, 2016, 01:12:55 PM »
How safe is the pension over the next 25 years?
You probably can't answer that, but it's something to think about.

Hi Qmavam, I think the pension is very safe because the company is actually terminating the plan and will either pay out the lump sum or purchase an annuity from an insurance company. There's a list of potential companies they could choose for the annuity including Prudential, United of Omaha, etc, so I think it's about as safe as it gets.

Is there any option for withdrawing the lump sum before age 65 due to some hardship?

I don't think a lump sum is an option later. The paperwork says that will only be offered once. I could start the monthly annuity at age 55, but would only get 50% of the $625.

I subscribe to the Dave Ramsey school of "don't invest in something you don't understand," so try to understand what's going on with it before making a final decision.

Good point! I don't know a lot about annuities and I think that is some of my hesitation about it. I'll begin educating myself.

MDM

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #11 on: July 13, 2016, 03:01:35 PM »
   1. **Main question** I need some help figuring out what to do about a pension my ex has that I will receive 50% of when our divorce is final. The pension is being terminated and everyone must choose between a lump sum payout or an annuity paid monthly beginning at age 65. The lump sum would be about $25,000. The monthly payment at 65 would be about $625. I'm leaning toward taking the lump sum to add to my stash now, but would like other opinions about that decision.
The "only" things you need to know are
1. What nominal annual growth rate would you get on the $25K, and
2. How long you will live. ;)

One way to evaluate "pension now"  vs. "pension later"
Compare pension payment promised at the later time to either
  - the "Interest generated by Future Value" (Future Value principal is not touched), or
  - the "Constant withdrawal of FV over time L" (principal goes to zero), or
  - "Trinity-style withdrawal of FV over time L" (annually inflated spending; principal -> zero)
Lump sum nowPV$25000
Payment starting nowPmt_now0$/payment
Interest ratei6.126%/yr
number of yearsn26yr
number of payments/yearfreq12/yr
When payments are made for each ntype00 = at end, 1 = at start
Future ValueFV$122431
Interest generated by Future ValueFV(i,n,P) * i625$/payment
Longevity of future pensionL30yr
Constant withdrawal of FV over time LPmt_future744$/payment
Spending growth rate (e.g., CPI)g2.0%/yr
First year Trinity-style withdrawalW(FV,L,i,g)7127$/yr
594$/pmt

The table above shows that if you could get ~6% annual return and would live until age 95 (30 years after starting the annuity at age 65) the two options are equivalent. 
To the extent you think
a) Cumulative inflation plus real returns will stay below 6%, or
b) you will live even longer
then the annuity is better for you.

To the extent you think
a) Cumulative inflation plus real returns will be higher than 6%, or
b) you will live less than 30 years after age 65
then the lump sum is better for you.

See the 'Misc. calcs" tab in the case study spreadsheet (CSS) if you want to put in your own numbers.

Quote
2. I already maxed out my Traditional IRA for 2016 in order to decrease my tax burden a bit,  but I'm wondering if I should be contributing to my Roth IRA in order to have some funds accessible before retirement age. Advice?
Check https://www.irs.gov/retirement-plans/ira-deduction-limits.  It appears you cannot deduct the full $5500, given what is in the OP.  You would probably want to use traditional, but might have to recharacterize some of the $5500 to a Roth IRA.

Quote
3. What should I do with my extra money each month? Right now, I'm just saving up for divorce attorney costs, taxes next year, etc. Once things are more settled, my thinking is to save up for my IRA each year and then put any extra toward my mortgage. It's a family loan and I would like to pay it back as quickly as possible, plus my personality is such that having a mortgage during retirement would be really stressful for me.
See the 'Investment Order' tab in the CSS for the mathematically likely best.  Or do what you want to do. :)

Quote
4. If I retire at 53, I'll need to figure out where my living expenses are going to come from until I can access my retirement funds. It seems too overwhelming to think about now, but I'll welcome any advice offered on that.
http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

Quote
5. Are there things I should be doing to decrease my tax burden? Taxes for single people are painful!
Put as much into tax-deferred accounts (403b, HSA, tIRA) as possible.  Do you have access to a 457 in addition to the 403b?

fiddlefaddle

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #12 on: July 14, 2016, 08:14:31 AM »
MDM, thank you so much for your detailed reply! Lots for me to think about here. Unfortunately, my crystal ball is cloudy today, so I'm not sure how long I'll live. ;)

I took a glance at the CSS spreadsheet and it's awesome. I'll spend more time playing around in there soon.

The "how to withdraw" thread is perfect. So much simpler than I had worked it out to be in my mind!

Alas, no HSA account or 457.

And it looks like I messed up on my tIRA. Ugh... I think I had the deduction limits for married couples in mind. I don't think my AGI will be below $61k.

Thanks again for your input!

Catbert

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #13 on: July 14, 2016, 10:27:07 AM »


And it looks like I messed up on my tIRA. Ugh... I think I had the deduction limits for married couples in mind. I don't think my AGI will be below $61k.


If the IRA contribution was for 2016 you may be able to re-characterize it to a Roth IRA.

Gin1984

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #14 on: July 14, 2016, 10:53:49 AM »
Are you maxing out your 401k, because based on the number you wrote as monthly, you are not.  Next, I'd don't see medical in your budget so how does the "I have $2,400 in FSA reimbursements that I receive in several chunks through the year" end up helping you at all.  That said, your budget is good but I might look at cutting your phone bill.

fiddlefaddle

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #15 on: July 14, 2016, 11:18:53 AM »
If the IRA contribution was for 2016 you may be able to re-characterize it to a Roth IRA.

Thank you, mary w! Went to the IRS website and I *think* I can deduct about $3,200, or maybe $2,500 just to be safe, and perhaps I can move the rest to my Roth IRA. I'll check with Vanguard. So glad MDM pointed this out or it would have been a really unpleasant surprise next year at tax time!

Hi Gin1984, I do max out my 403b, but I have 2 months when I get 3 paychecks, so that's why the monthly amount is a bit lower than the max. (My biweekly pay made it hard for me to figure out the easiest way to present my budget)

The FSA is for my daughter's after school and summer care, so I do get the full amount back. Our medical coverage is very good and we're healthy, so it doesn't really require a line in the monthly budget currently. Any expenses would be for something major.

Agreed on the phone bill. I bought an iphone last year so that my daughter can Facetime me when she's with her dad. Once the phone is paid for, it will go to $30 a month. Still not great, but it was sort of a conscious un-Mustachian decision.


Gin1984

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #16 on: July 14, 2016, 11:41:58 AM »
If the IRA contribution was for 2016 you may be able to re-characterize it to a Roth IRA.

Thank you, mary w! Went to the IRS website and I *think* I can deduct about $3,200, or maybe $2,500 just to be safe, and perhaps I can move the rest to my Roth IRA. I'll check with Vanguard. So glad MDM pointed this out or it would have been a really unpleasant surprise next year at tax time!

Hi Gin1984, I do max out my 403b, but I have 2 months when I get 3 paychecks, so that's why the monthly amount is a bit lower than the max. (My biweekly pay made it hard for me to figure out the easiest way to present my budget)

The FSA is for my daughter's after school and summer care, so I do get the full amount back.
Our medical coverage is very good and we're healthy, so it doesn't really require a line in the monthly budget currently. Any expenses would be for something major.

Agreed on the phone bill. I bought an iphone last year so that my daughter can Facetime me when she's with her dad. Once the phone is paid for, it will go to $30 a month. Still not great, but it was sort of a conscious un-Mustachian decision.
Ah, that makes total sense.

MDM

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Re: Case Study - Help a Single Mom get on the Path to FIRE
« Reply #17 on: July 14, 2016, 02:36:58 PM »
My biweekly pay made it hard for me to figure out the easiest way to present my budget
One way is to use "monthly = biweekly * 26 /12".