Author Topic: Case Study - How Long until ER?  (Read 6463 times)

Brooks

  • 5 O'Clock Shadow
  • *
  • Posts: 14
    • Pretend to Be Poor
Case Study - How Long until ER?
« on: April 10, 2014, 02:18:34 PM »


Background: I am 30, married with 2 kids.
Income: $72,000 plus $7,200 bonus Gross


Current annual expenses:
Charity                                 -$8,760
Mortgage (PIT)                      -$11,748
Extra Mortgage Payments     -$16,000
401k Contributions              -$11,208
Total taxes (state, fed)         -$5,700
Car Repairs/ Tires                -$600
Car Registration                   -$104
Petrol                                  -$2,160
Oil Changes                         -$270
Food                                    -$3,640
Kids College Savings             -$1,200
Utilities                                -$3,120
Monthly utility breakdown: ($52 Gas, $67.53 Electricity, $30 Water, $40 Sewer, $17 Trash, $54 Internet)
Car, House Insurance             -$1,530
Clothes                                  -$240
Christmas                              -$600
Other Gifts                             -$500
Household                            -$1,220
Cell Phones                          -$432
Annual Camping trip           -$1,100
Annual family vacation       -$1,200
Dates                                  -$600
Life Insurance                      -$349
Hair Cuts                               -$80

Current annual expenses total: $72,361
Current annual expenses less extra mortgage payments and 401k contributions: $45,153
 
I figure with the extra mortgage payments and 401K saving my saving rate is currently 37%.
When the mortgage is paid off (see below) my savings rate will be 49%.
 
Expected ER expenses:
Same as above less mortgage related expenses and add $550 for medical insurance (best price quote from ehealthinsurence website).
 
Based on the above; annual ER need of $29,505, requiring $737,637 in capital.


Assets:

House worth: $135,000
Savings account: $20,000
401k balance: $89,000

Liabilities:
Mortgage: $57,600.00 @ 3.625%, 15 year fixed

Specific Question(s):
My first goal is to pay off the mortgage: I am putting $1000 a month extra here, along with my bonus (after taxes is $4000), and I plan on paying off the remaining balance when it is 10k with my savings. I should be mortgage free in May of 2016, i.e. 2 years.
 
After mortgage payoff I will be in savings mode. Should be able to sock away $3,040 a month or $36,480 per year. I calculated my 401k will have a balance of around $123,000 at that point. From the mortgage pay off date, I would be about 10 years from ER or 12 years from today.
 
Any ideas on how to do this faster? Do my calculations and assumptions look correct?
Any other face punching required?



Investing4Freedom

  • 5 O'Clock Shadow
  • *
  • Posts: 14
  • Location: Maine
Re: Case Study - How Long until ER?
« Reply #1 on: April 10, 2014, 03:00:18 PM »
Taking a quick look at this, I'd have to ask why $730/month to charity?  While it may be a great cause, some of this money may be able to help you get to your goals (mortgage completion and ER).  After you step away from your current job, you could help your charity even more with time contributions.

Secondly, your mortgage rate is pretty nice - have you weighed investing the extra money instead of accelerating the mortgage payment?  It seems like there is room to increase your 401K contribution, which should also reduce your state and federal tax burden.

Finally - the annual camping trip at $1,100.  I don't know any details to this, but my fiance and I probably take about 8-10 camping trips a year and don't spend close to this.

jasman18

  • 5 O'Clock Shadow
  • *
  • Posts: 35
Re: Case Study - How Long until ER?
« Reply #2 on: April 10, 2014, 03:33:03 PM »
My personal opinion is over 15 years you will have more money if you invested it instead of paying down the mortgage.

I know it is not an apples to apples comparison of guaranteed <3.5% return vs in the market with variable returns.
However with 15 years you will definitely have more by investing elsewhere.
I think you are giving up a big opportunity cost by paying off the mortgage sooner....
GREAT READ:
http://www.joshuakennon.com/mail-bag-why-do-some-people-say-it-is-a-bad-idea-to-pay-off-their-mortgage/

Plus side is you could always take your investments and pay off your mortgage if you cant emotionally handle the low interest debt. 

Catbert

  • Handlebar Stache
  • *****
  • Posts: 1817
  • Location: Southern California
Re: Case Study - How Long until ER?
« Reply #3 on: April 10, 2014, 03:56:23 PM »
^^  I agree.  With a 3.5% 15 year mortgage I wouldn't be in a great hurry to pay it off.  Probably a bit extra each month - or maybe put all your bonuses toward pay-off.  Aim to have it paid off in 12 years or less.  Put the extra $$ in IRA, 401k to the max and taxable accounts.  In the long run you could/should average 7% on your investments compared to saving 3.5% on your mortgage.

ViragoStache

  • 5 O'Clock Shadow
  • *
  • Posts: 33
  • Hoarding me booty...
Re: Case Study - How Long until ER?
« Reply #4 on: April 10, 2014, 04:16:34 PM »
I agree on putting less to paying off the mortgage and put that to max out your 401k since you are so young.  I totally get wanting to get rid of that debt, but it's actually a low mnumber already so with the low interest rate, you can do other things right now.  You could still put an extra 10k to it or so if you really want to.

Also agree, the camping and family vacation seem high.  With two kids maybe you are looking to this as your time with them when they are young(?) but you can do that a lot cheaper at a community pool (that's what they really like when you travel :).

Good job on the food expenses (a real problem with my family).  Keep that work up!!

So then you look at these other expenses and I'm sure people will chime in.  Can you call the internet company and get the "new promo" rate they offer (I did this with TWC and got 20$ off per month, same service).  Really look at that gift list.  Cell phones, Tracfone or Republic (as MMM likes).  Review the insurance each year for better rates?  I'll leave the hair cutes, dates and car repairs to others.  That combo actually sounds like a bad date :)

You are doing great and you could go FIRE even sooner!

Car Repairs/ Tires                -$600
Petrol                                  -$2,160
Oil Changes                         -$270
Utilities                                -$3,120
Monthly utility breakdown: ($52 Gas, $67.53 Electricity, $30 Water, $40 Sewer, $17 Trash, $54 Internet)
Car, House Insurance             -$1,530
Clothes                                  -$240
Christmas                              -$600
Other Gifts                             -$500
Household                            -$1,220
Cell Phones                          -$432
Dates                                  -$600
Hair Cuts                               -$80

MDM

  • Senior Mustachian
  • ********
  • Posts: 10090
Re: Case Study - How Long until ER?
« Reply #5 on: April 10, 2014, 05:05:57 PM »
Brooks, great job understanding your current cash flow.

Add another vote to "go to $17.5K/yr on the 401k, even if that delays mortgage payoff."

From the chicken scratch on the back of my envelope, it appears you can invest the full $17,500 + $5,500 = $23,000 into the 401k+IRA (or ~$11,800 more than current).  This will "cost" you ~$10,000/yr in extra mortgage principal payments.  The extra $1,800 comes from the tax savings.

Good luck!

feelingroovy

  • Bristles
  • ***
  • Posts: 318
Re: Case Study - How Long until ER?
« Reply #6 on: April 10, 2014, 06:13:15 PM »
Agree with MDM.

I am very anti-debt, so I get where you're coming from.

That said, you say you're 12 years away from FI and have a 15 year mortgage.  So even if you never paid any extra and couldn't FI without paying off the mortgage, you'd have very little left on the mortgage in 12 years and could knock it off quickly.

I am starting to realize how important it is to optimize tax savings, so I vote for maxing your 401K and traditional IRA (your wife's IRA too).   This could bring your taxes down quite a lot, especially if you qualify for things like saver's credit and EIC.  Any tax savings can then go to the mortgage principal.

But if you can't get yourself to do that, what about this approach?  Figure out how much it would take in extra principal payments to pay off the house in 10 years instead of 2.  Pay that amount, and put all extra savings into the tax-deferred accounts. 

You will get there quicker.

Thegoblinchief

  • Guest
Re: Case Study - How Long until ER?
« Reply #7 on: April 10, 2014, 07:04:36 PM »
Definitely don't prepay that mortgage.

This makes me sound like a heartless miser, but why so much charitable giving?

I'm so used to seeing monthly numbers instead of annual, but nothing really jumps out at me unless my mental math skills are off tonight.

Brooks

  • 5 O'Clock Shadow
  • *
  • Posts: 14
    • Pretend to Be Poor
Re: Case Study - How Long until ER?
« Reply #8 on: April 11, 2014, 07:22:59 AM »
Thanks for everybody's response. I understand that paying off the mortgage is not exactly the best financial move... It's hard to stop though... I think... it's only two years... What difference is 2 years really going to make? The peace of mind might be worth it. Did MMM pay his off expeditiously despite the math? I thought I read that on one of his posts. Ok so I'm off to calculate the difference it would make to pay off the mortgage in 2 years vs. max out 401k and two IRAs. Wish me luck. I will report back my findings.

Brooks

  • 5 O'Clock Shadow
  • *
  • Posts: 14
    • Pretend to Be Poor
Re: Case Study - How Long until ER?
« Reply #9 on: April 11, 2014, 07:43:37 AM »

Good job on the food expenses (a real problem with my family).  Keep that work up!!


Thanks... But we have an Aldi right around the corner... Makes it easy.

Brooks

  • 5 O'Clock Shadow
  • *
  • Posts: 14
    • Pretend to Be Poor
Re: Case Study - How Long until ER?
« Reply #10 on: April 11, 2014, 08:41:47 AM »

I really tried to calculate this myself but I resorted to google for time's sake. I found this calculator: http://www.globalrph.com/prepay.cgi It looks like prepaying the mortgage, with tax savings considered, turns out to be an $1800 question for the 2ish years it will take. I will essentially be missing out on $1800 of savings. To me it makes paying off the mortgage a no brainer. I can handle missing out on that $1800 of savings to have my mortgage gone in 2 years instead of 7. (If I made minimum payments from today on, it will take me 7 years to pay off the mortgage because of my previous prepayments). What am I missing? Do I need more education? Is this calculator bogus?
 
My assumptions are as follows:
 
Loan Balance   $ 57000.00
Current Payment   $ 733.00
Additional Payment   $ 1300.00
Loan Interest Rate    3.62 %
Loan Interest Deductibility   Yes
Investment Return Rate    8.00 %
Tax Bracket    25.00 %
Investment Type   Tax Deferred

Threshkin

  • Handlebar Stache
  • *****
  • Posts: 1088
  • Location: Colorado
    • My Journal
Re: Case Study - How Long until ER?
« Reply #11 on: April 11, 2014, 09:12:43 AM »
Thanks for everybody's response. I understand that paying off the mortgage is not exactly the best financial move... It's hard to stop though... I think... it's only two years... What difference is 2 years really going to make? The peace of mind might be worth it. Did MMM pay his off expeditiously despite the math? I thought I read that on one of his posts. Ok so I'm off to calculate the difference it would make to pay off the mortgage in 2 years vs. max out 401k and two IRAs. Wish me luck. I will report back my findings.

This was the deciding factor for me.  The freedom of not having that mortgage payment every month was worth far more than the slight financial gain.  That said, I was already maxing out my 401k.

No mortgage gives me much more income flexibility.  That is an enormous relief.

ASquared

  • Bristles
  • ***
  • Posts: 298
Re: Case Study - How Long until ER?
« Reply #12 on: April 11, 2014, 09:35:32 AM »
Where are you?  US I assume? 

If US - paying much in taxes? Might be worthwhile to increase your 401k to decrease your taxable income.

I respect your generous charity contributions but this is obviously a target for expense reduction/optimizing your finances......

samburger

  • Bristles
  • ***
  • Posts: 257
Re: Case Study - How Long until ER?
« Reply #13 on: April 11, 2014, 10:34:24 AM »
Huh. I was going to join the pile on and tell you that you're donating too much, but I crunched the numbers according to a good rule of thumb for the philanthropically inclined: Give 10-20% of your disposable income, with "disposable" defined as (takehome - necessities).

Turns out your gross of $79,200 minus necessities of $29,112 (housing, taxes, cars and related expenses, utilities, food, insurance, clothes) gives you $50,088 in disposable income. $8,760 is 17% of that, right within the recommended range.

So I guess it's not too much by this measure, as long as it's not getting in the way of your goals!

GregO

  • Stubble
  • **
  • Posts: 125
Re: Case Study - How Long until ER?
« Reply #14 on: April 11, 2014, 11:50:09 AM »
I really tried to calculate this myself but I resorted to google for time's sake. I found this calculator: http://www.globalrph.com/prepay.cgi It looks like prepaying the mortgage, with tax savings considered, turns out to be an $1800 question for the 2ish years it will take. I will essentially be missing out on $1800 of savings. To me it makes paying off the mortgage a no brainer. I can handle missing out on that $1800 of savings to have my mortgage gone in 2 years instead of 7. (If I made minimum payments from today on, it will take me 7 years to pay off the mortgage because of my previous prepayments). What am I missing? Do I need more education? Is this calculator bogus?
 
My assumptions are as follows:
 
Loan Balance   $ 57000.00
Current Payment   $ 733.00
Additional Payment   $ 1300.00
Loan Interest Rate    3.62 %
Loan Interest Deductibility   Yes
Investment Return Rate    8.00 %
Tax Bracket    25.00 %
Investment Type   Tax Deferred

I already had a spreadsheet that I made that is very similar to what you were asking.  I modified it a little to meet your assumptions.  I got the same payoff dates as the calculator you found states, but I got very different numbers for the total difference.  To me, it looks like the difference is closer to $13,000 (by looking at month 29 on both sheets).  It looks like the difference between my spreadsheet and your calculator is that I'm including the tax savings you'd get from (1) additional Mortgage Interest deductions and (2) additional contributions to your 401(k) and Traditional IRAs.  I guess the caveat is that all of that Tax Savings is still untaxed money.  But it's got a long time to grow tax-free before you will start paying taxes on any of it.

Also, my spreadsheet may have mistakes.  I tried to think of everything when I created it.  And it's what I used to make my financial decisions.  But if anyone sees errors or incorrect logic, please let me know.

GregO

  • Stubble
  • **
  • Posts: 125
Re: Case Study - How Long until ER?
« Reply #15 on: April 11, 2014, 12:01:02 PM »
Also, this seems to come up a lot and people seem to think of it as an 'all-or-nothing' approach.  You could always do something in between the two extremes.  You could put 50% towards the mortgage and 50% towards retirement, or whatever else you decided was best.  You could decide to pay off the mortgage in 5 years instead of 7.  Or whatever else struck the balance for your family between peace-of-mind and pure math. 

Also, there's no guarantee that you'll get 8% return on your money either (although it is pretty much guaranteed that you'll get all of those tax deductions).  It's more likely that you'd be better off financially by investing, but you never really know for sure.

feelingroovy

  • Bristles
  • ***
  • Posts: 318
Re: Case Study - How Long until ER?
« Reply #16 on: April 11, 2014, 02:24:20 PM »

What am I missing? Do I need more education? Is this calculator bogus?
 

I think what might be the difference is that calculator is assuming you are investing after-tax income, not into a 401K.

At least, I don't see them say anything about whether the investments are going into tax deferred accounts.  So I assume they assume they're not.

MadFientist has a number of very nice posts on the big advantages of saving pre-tax for earlier FI.  I would start here:  http://www.madfientist.com/retire-even-earlier/

 



seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5283
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Case Study - How Long until ER?
« Reply #17 on: April 11, 2014, 02:30:56 PM »
Yeah, it might be worth increasing your 401(k) contributions to the max and making slightly smaller extra payments to your mortgage. You'll probably be amazed at the amount of tax-deferred savings you can accumulate when you max out that 401(k) for a few years, even if it does mean paying a mortgage for a little while longer.