Author Topic: Case Study: help us throw some more wood on the FIRE!  (Read 2793 times)

fefifofum

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Case Study: help us throw some more wood on the FIRE!
« on: May 06, 2016, 11:05:55 AM »
Hello Mustachians!

Near the beginning of 2015, my family had a large (about $100,000) windfall. I wanted to make sure I did the best possible thing with this good luck so I started doing a lot of research on investment. In my research I discovered this site and was awakened to the possibilities of FI and early retirement.

My family has never been especially big spenders, and I would say that up until this point we had been moderately financially aware. We managed to avoid many of the worst pitfalls without really focusing on it: weíve always had used cars, avoid debt, avoided blowing money on cable TV, took (partial) advantage of savings plans at work, etc. But just becoming aware that FIRE was a possibility suddenly made me extremely motivated to turn our good fortune into a jump start on early retirement, so 2015 and early 2016 was spent plucking the low-hanging fruit for reducing our expenses, reading tons of blog posts, and making over-complicated spreadsheets.

Part way through 2016, Iím taking a fresh look at our position and Iíd like to ask the community to take a look at it too to help me determine where I should focus my efforts next to accelerate my retirement.

So hereís the summary of our situation:

We are a family of 5. My wife and I are both turning 40 this year; the 3 kids range from 2 to 8. I work, but my wife has been a stay-at-home mom since our first was born. She might go back to work at a low stress job in 4 years when our youngest enters kindergarten.

My home is roughly 15 miles from my workplace (facepunch!), but otherwise very conveniently located to all the schools the kids will attend, groceries, doctors, etc. This results in a daily round-trip commute time of 1 to 2 hours depending on traffic. My daily commute is something Iíd of course like to reduce or eliminate, but prices nearer my workplace are significantly higher than where we are now and public schools are not as good.

MONTHLY INCOME

For some entries below Iíve got two numbers divided by a slash. First number is base salary, second number includes my usual annual bonus (averaged over the year).
  • Gross Salary: $9000 / $10,000
  • Tax withholding: $1600  / $1960
  • 401k withholding: $1500
  • Other pre-tax withholding: $500 (this covers medical/dental/vision insurance, life insurance, and a $1000 FSA account for the year)
  • So, total take-home is roughly $5400 / $6040

FINANCIAL ASSETS: $433,000 retirement assets

The total listed above includes all retirement assets, but not the cash in the bank (some of which is allocated to yearly expenses like property tax) or the college savings plans.
  • 401k: $260,000
  • My Roth IRA: $16,000
  • Wifeís Trad IRA: $11,000
  • Taxable Investments: $115,000
  • Whole Life Policy (if cashed out): $16,000
  • Wifeís PERS Account: $15,000
  • 526 College Savings Plans: $24,000
  • Cash in the bank: $11,000

TANGIBLE ASSETS
  • Our house: Worth roughly $375,000; see remaining loan below
  • 2012 Nissan Leaf (bought for cash). This is my daily commuter and gets the bulk of the miles. Around the time we bought the Leaf, we replaced our light bulbs with LEDs and also got rid of a hot tub that came with our house; these changes have more than covered the electricity costs of my commute. Awesome!
  • 2007 Toyota Sienna (bought for cash). For transporting kids, the occasional Home Depot run, and taking trips outside the range of the Leaf.

DEBTS
  • Mortgage: $235,000. We recently refinanced to a 15-year fixed rate loan at 3.125%; it pays off in late 2029.

AVERAGE MONTHLY EXPENSES: $4400

Home and Garden ($1690):
  • Mortgage interest: roughly $620 (P&I is $1800; I count principal as savings)
  • Home Insurance:  $75
  • Property Tax: $380
  • Yard Service: $195 (this is a splurge that I struggle with, but my wife and I hate yardwork and we would KILL the awesome yard that this house came with)
  • Home Improvement + furnishings: $300 (this was MUCH higher last year since we had just moved into a new house. I hope to keep it at a controlled level from now on)
  • Home Repair: $100 (likely to be higher on average over the long term, I know)
  • Gardening and Other Landscaping: $20

Food ($1250, or about $8.25 per person per day):
  • Groceries: $950 (also includes household goods purchased at grocery stores; been thinking I might need to start itemizing to figure out where the money is going)
  • Dining Out: $200 (this is significantly reduced from a former massive dining-out habit)
  • School Lunches for 2 kids: $100

Utilities and Services ($440):
  • Misc Entertainment Services: $16 (Netflix + Amazon Prime)
  • Electricity: $160 (varies a lot seasonally; home has an electric heat pump)
  • Natural Gas: $34 (gas water heater + gas heat on coldest days)
  • Water and Sewer: $85 (spikes in summer)
  • Garbage Collection: $40
  • Internet Service: $50
  • Mobile phones (2 adults on Ting): $55

Transportation ($440):
  • Car insurance for 2 cars: $115
  • Car registration for 2 cars: $20
  • Gasoline: $60
  • Car maintenance for 2 cars: $200
  • Travel: $40 (Iíve started travel hacking to keep our costs for vacations down)
  • Parking: $5

Everything Else ($580):
  • Misc Shopping, Gifts, Kids, Parties, Etc: $250 (this category is primarily my wifeís, and is not easy to break down, but I might start making an attempt)
  • Clothes: $120  (some clothes expenses end up under misc shopping, too.)
  • Personal Care (Haircuts, Nails, etc): $84
  • Education Expenses: $24
  • Charity: $50
  • Medical: $40
  • Whole Life Policy: $12

MONTHLY SAVING: $3534
  • I count my mortgage principal as saving; roughly $1180 a month this year.
  • 401k contribution: $1500, maxed out
  • 401k matching: $104 (this is capped at an anemic $1250 yearly, but policy changed and this will be about 3x higher next year)
  • 526 College Savings contributions: $300
  • I also fully funded my wifeís Traditional IRA this year to the tune of roughly $450 a month.
  • Note that this amount of saving appears to take us over our available funds by about $290 a month. This is because we received a large tax refund this year (related to the windfall received last year) and invested it. Not sure what our refund situation will be next year, but I hope to maintain the same or higher savings level (reducing spending if we can to make it up).

So, this year it looks like our savings rate is:
  • 40% if you do (pay - taxes - mortgage interest - other expenses) / (pay - taxes)
  • 43% if you do the same but include my extra $290 a month from my tax refund this year

Thatís the scenario. Our goals are pretty simple:
  • Weíd love for me to be able to retire or partially retire. Iíd do it today if I could, but we obviously have a way to go yet.  :-)
  • I want to be able to spend more time with the kids at this important time of their lives (while they still WANT to spend time with us)
  • I have hobbies which I love but donít spend enough time on to satisfy me. And, being retired would enable me to support my wife in raising the kids, to also give her more time to spend on her hobbies.
  • Longer term, we want to help the kids go to college if they want to -- but not pay their way entirely at the expense of our own retirement. We might do something creative to help, like try for low-stress jobs at colleges where employees get a discount for their kids when the time comes.
  • Ideally weíd like to make this work in our current house for now. Itís perhaps a bit large (5 bedroom), but with 3 kids weíre thinking itís not going to seem so large when they are in high school. And, my wifeís hobby in particular is one which benefits from a dedicated room to spread out in.

Some ideas around this that Iím kicking around:
  • From a purely logistical standpoint, my plan is to save up 5 years of expenses in our taxable account, then when we pull the trigger Iíll establish a Roth conversion pipeline to access assets from the 401k/IRA.
  • Thereís a good chance that as we get close, I could wind down slowly at work rather than stop abruptly. Work from home more often, maybe do 3 days a week, etc.
  • In a few years my wife may start working again on a part-time, low stress basis. She may even want to after 12 years of stay-at-home-momming. We might be able to use this extra income to pay down the house quickly

Iím ready to accept any facepunches! Where should I optimize next? How far away from making this work am I, really? And, thanks in advance for your time!

mamagoose

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Re: Case Study: help us throw some more wood on the FIRE!
« Reply #1 on: May 06, 2016, 11:31:20 AM »
You spend $200/month maintaining your cars? What is that?

I came from a big family, and my mom (mostly a SAHM until we were all school age) didn't get her nails done, and she cut all of our hair (even got paid to cut other kids hair when we had playdates). Those are the obvious ones for me.

fefifofum

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Re: Case Study: help us throw some more wood on the FIRE!
« Reply #2 on: May 06, 2016, 11:51:52 AM »
Regarding the $200/month for car maintenance: this is a guess coming from a position of ignorance. Until March 2015 we really didn't track our expenses in any kind of detail, and I haven't dug through our service records to build up a more detailed picture. Looks like our average through 2015 was about $80 a month, but this year so far our average is $230 (due to hitting a major maintenance interval for the Sienna). The Leaf has been very low maintenance so far (no oil to change!), but I know I'll need to replace its tires shortly. Assuming nothing else comes up, it looks like that number might look more like $120/month for this year. How much have you typically found yourself spending on maintenance?

The haircuts are a good point. Don't think that my wife will give up a professional haircut for herself, but we might be able to do the kids ourselves at least and who knows, I might look good with a buzz cut. :-)

The "nails" in that category name is a bit of a red herring, I put it there because at the time I was making this spreadsheet that month's expenses included an expensive mani/pedi trip that my wife went to with her mother. That happens less frequently than once a year, so it's probably not an expense I need to worry about too much.

Thanks for the feedback!

meandmyfamily

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Re: Case Study: help us throw some more wood on the FIRE!
« Reply #3 on: May 06, 2016, 04:37:38 PM »
We spent $90 for all of 2015 for haircuts, nails, etc.  We have 4 kids and 2 adults in our family.  I think that could go down.  Also the misc. spending needs to be broken up.  Does it include Christmas?  If so then $250 is reasonable covering all that.  School lunches could definitely be cut especially with $200 already going to eat out.  They could get a few special treats in their lunches for $100 a month!

fefifofum

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Re: Case Study: help us throw some more wood on the FIRE!
« Reply #4 on: May 06, 2016, 05:14:05 PM »
I will work on the haircuts for the kids and for myself! For diplomatic reasons I think I'll continue to let my wife do what she wants when it comes to her own hair, though.  :-)

The misc spending will include birthdays and Christmas (including gifts purchased for non-family members in some cases, party expenses, etc). However, the number I'm using is based on our average so far for 2016 (which has had a few birthdays but no Christmas, of course!). This category also includes stuff like hobby-related purchases, crafting supplies, etc.

The trend here is definitely very positive. 2016's average is about $250/month over the first four months; there was NO MONTH in 2015 that was below that. The average for 2015 was $540/month! Now that we seem to have plateaued at a new lower level, I will try to break it down further to look for more things to cut.

I've been thinking of the school lunches as a relatively benign expense - it's $2.90 a meal. I suppose I can do quite a bit better than that if I can overcome my natural laziness when it comes to food preparation. :-) What do you budget for an average school lunch?

Thanks for the ideas!

fefifofum

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Re: Case Study: help us throw some more wood on the FIRE!
« Reply #5 on: May 06, 2016, 07:37:04 PM »
A few more details. In my original post I neglected to discuss my investment approach. Luckily I'm taking a super-simple approach so it won't take long to sum up.

Here's my asset allocation:

  • 85% Stock (in a mix of VTSAX and, in my 401k, the closest analogue I could find, which is Fidelity's Spartan S&P 500 fund
  • 13% Bonds (held all in the 401k in Fidelity's Spartan bond fund, FSITX
  • 2% Cash (held in my taxable account)

The 2% cash is also intended to act as part of our emergency fund.

When the market goes south I partake in a little tax-loss harvesting by exchanging VTSAX for VLCAX, then swapping it back if things continue to get worse by the time I can switch back while avoiding a wash sale.

I intend to rebalance once a year on my birthday.

meandmyfamily

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Re: Case Study: help us throw some more wood on the FIRE!
« Reply #6 on: May 06, 2016, 07:43:23 PM »
I absolutely agree that your wife can do what she wants with her hair!  Just suggestions!

If your wife likes blogs, I really am inspired by this one:  http://www.frugalwoods.com/

For school lunches I would play around with a couple easy options and get the kids involved.  See how much it costs vs. paying for it.  Then go from there.

fefifofum

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Re: Case Study: help us throw some more wood on the FIRE!
« Reply #7 on: May 07, 2016, 08:31:15 AM »
I've enjoyed the Frugalwoods myself -- but then I've been going on a FI blog binge, basically just finding a new one I like and then reading everything they post before moving onto the next one. :-) My wife is a heavy reader but hasn't caught the blog bug yet. Thanks for the suggestion, though... I'll see if I can find the right opportunity to introduce her to it.

Packing lunches is now on the "things to experiment with" list. Thanks!

fefifofum

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Re: Case Study: help us throw some more wood on the FIRE!
« Reply #8 on: June 16, 2017, 01:07:03 PM »
Hello Mustachians! Itís been about a year and a month since I originally posted this, and I thought it would be fun to make an update.
 
Looking back at this thread, I have to confess that I donít think weíve made any giant lifestyle adjustments since then. In a way, not much has changed. But we were already on a reasonably good track and our progress has continued. So here we are halfway through 2017:
 
We are a family of 5. My wife and I are both turning 41 this year; the 3 kids range from 3 to 9. I still work at the same job, and my wife is still a stay-at-home mom.
 
Still making a roughly 30 mile round trip commute, but the fact that Iím driving a LEAF at least makes it cheap monetarily even if itís expensive in time. Iíve been working from home a bit more often than I used to which has been nice.
 
MONTHLY INCOME
 
For some entries below Iíve got two numbers divided by a slash. First number is base salary, second number includes my usual annual bonus (averaged over the year).
  • Gross Salary: $9300 / $10,250
  • Tax withholding: $1250  / $1600
  • 401k withholding: $1500
  • Other pre-tax withholding: $550 (this covers medical/dental/vision insurance, life insurance, and a $1500 FSA account for the year)
  • So, total take-home is roughly $6000 / $6600

FINANCIAL ASSETS: $530,000 (up $97,000 since last post!)
 
The total listed above includes all retirement assets, but not the cash in the bank (some of which is allocated to yearly expenses like property tax) or the college savings plans.
  • 401k: $320,000
  • My Roth IRA: $19,000
  • Wifeís Trad IRA: $18,500
  • Taxable Investments: $139,000
  • Whole Life Policy (if cashed out): $17,500
  • Wifeís PERS Account: $16,000
  • 526 College Savings Plans: $32,000
  • Cash in the bank: $9,000

TANGIBLE ASSETS
  • Our house: Worth roughly $450,000 -- up $75k since last year! Housing market went crazy last year.
  • 2012 Nissan Leaf (bought for cash). This is my daily commuter and gets the bulk of the miles. Cheap to operate and so far reliable.
  • 2007 Toyota Sienna (bought for cash). For transporting kids, the occasional Home Depot run, and taking trips outside the range of the Leaf.

DEBTS
  • Mortgage: $220,000. 15-year fixed rate loan at 3.125%; it pays off in late 2029.

AVERAGE MONTHLY EXPENSES: $4632 (up $232 over last year)

Home and Garden ($1700):
  • Mortgage interest: roughly $580 (P&I is $1750; I count principal as savings)
  • Home Insurance:  $85
  • Property Tax: $480 (up almost $100 since last year)
  • Yard Service: $205
  • Home Improvement + furnishings: $120
  • Home Repair: $150 (likely to be higher on average over the long term, I know)
  • Gardening and Other Landscaping: $80


Food ($1140, or about $7.50 per person per day):
  • Groceries: $800 (includes most household goods)
  • Dining Out: $240
  • School Lunches for 2 kids: $100


Utilities and Services ($443):
  • Misc Entertainment Services: $18 (Netflix + Amazon Prime)
  • Electricity: $140 (varies a lot seasonally; home has an electric heat pump)
  • Natural Gas: $50 (gas water heater + gas heat on coldest days)
  • Water and Sewer: $100 (spikes in summer)
  • Garbage Collection: $40
  • Internet Service: $40
  • Mobile phones (2 adults on Ting): $55


Transportation ($385):
  • Car insurance for 2 cars: $140
  • Car registration for 2 cars: $20
  • Gasoline: $65
  • Car maintenance for 2 cars: $100
  • Travel: $50 (includes a Disneyland trip we took this year, about 95% covered by travel hacking!)
  • Parking: $10 (includes airport parking for that Disneyland trip).


Everything Else ($964, UP almost $400 since last time):
  • Misc Shopping, Hobbies, Parties, Etc: $250
  • Kidís activities + babysitting: $120
  • Gifts: $125
  • Clothes: $120  (some clothes expenses end up under misc shopping, too.)
  • Personal Care (Haircuts, Nails, etc): $65
  • Education Expenses: $32
  • Charity: $60
  • Medical: $180
  • Whole Life Policy: $12


MONTHLY SAVING: $4343 (up $809 over what I reported last time)
  • I count my mortgage principal as saving; roughly $1170 a month this year.
  • 401k contribution: $1500, maxed out
  • 401k matching: $373
  • 526 College Savings contributions: $385 (capturing the maximum state tax benefit)
  • 2 x Traditional IRA, fully funded at roughly $915 a month
  • Note that this amount of saving appears to take us over our available funds by about $95 a month. We again received a significant tax refund this year, which I invested. I think Iíve dialed in my withholding to avoid large tax refunds in the future.


I think this all puts our savings rate at about 45% right now. This is a few percentage points higher than last year at this time. I computed this using:

((Takehome + 401k contrib + 401k match) - spending) / (Takehome + 401k contrib + 401k match)

Going through this exercise, I feel like weíre holding fairly steady or making moderate progress in most categories, with the obvious exception of the ďEverything ElseĒ category at the end, which to be honest kind of took me by surprise.

I looks like a big part of that increase was due to unplanned medical expenses that were not really under our control, but another big part of it was due to an increase in spending on kidís activities (fees for participation, etc) and just plain old shopping. Iím going to have to focus more on paying attention to those things over the next year.

All that said, I still feel like weíre on a good track:
  • Weíre saving significantly more than we were
  • Our stash is up $97k since last year (a 22% increase!)
  • Our total net worth is up about $188k since last year (a 30% increase!), because of the crazy housing market

It's hard to believe how much progress we've made in just one year!