Author Topic: Late start. What changes to get on track to ER?  (Read 4683 times)

anonprof

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Late start. What changes to get on track to ER?
« on: January 19, 2014, 06:47:14 PM »
Single. No kids, but I support my parents.  One parent has Alzheimerís, and both have a variety of other health issues. They have zero assets and will continue to live with me until death (no siblings to split support).    Update: I do claim head-of-household on my taxes, and also max my pre-tax FSA for medical expenses each year.

I live in HCOL area, and donít see moving anytime soon (at least until parent with dementia passes).  My goal is FIRE before age 50 if possible.

Assets:

297k - 401k (split: 28k in Roth, 269k traditional)
670k - house (536k mortgage)
18k - 2 cars
5k Ė cash
Update: 5.5k IRA

Liabilities:

536k Ė 15 year Mortgage @ 3.75%

Income:

21k Ė parents combined social security contributed to household
102k Ė 2013 salary/bonus (after tax and deductions)

Current expenses: 94k - Facepunch deserved here, but situation is improving.  Iíve been working to correct my mistakes, paid off all debt. Purchased current house in 2012 but only 3.5% down (including borrowing from 401k), so last year my focus was on re-paying 401k loan and paying down mortgage so I could refi and remove $600 monthly MIP.

Expected ER expenses: 40k per year (assumes paid off mortgage).  Amount will be less when living solo and no longer have parent medical expenses, etc., but since I canít predict timing Iíd like to plan for the higher amount.

Specific Question(s):

Iím still reading and learning, and I donít fully understand all the complexities in investment/retirement planning.  Here are some of my initial questions:

1)   Iím making 17,500 in 401k contributions, and get employer match up to first 6%.  I have my contribution split 13% traditional and 4% roth (started roth in 2008), to maximize pre-tax contribution.  Should I put higher percentage into Roth?   Does the IRA limit of 5,500/year still apply when it is part of my employers 401k plan?  I am in a high tax bracket, which is why I was prioritizing my pre-tax contributions to the traditional 401k.  Is it still better to build up my Roth since it allows penalty-free withdrawal prior to age 59.5? 
update: based on responses below my action is to start a new Roth before April to max 5500 for 2013, and then add 5500 in 2014 as I have additional funds avail. Thanks for this info, as I had incorrectly understand the rules for a roth are separate from the one imbedded within my 401k plan.   Also, I will adjust my contribution maximize all of the 17500 pre-tax into my 401k.

2)   My plan was to throw additional funds towards mortgage to pay-off in ~10 years.   Iíve read through several threads about folks choosing investing instead since mortgage interest rates are so low, but I live in such a high-cost area donít think ER is possible with a mortgage.  I also like the comfort of zero debt, but Iím open to hearing alternate suggestions.

3)   Bonus varies every year, but it may be an extra 10-20k this year.  I also have employee stock options vesting in the future.   Per #2 above, I was thinking I should apply it to mortgage, but since all my assets are currently tied up in house & 401k, should I open a separate investment account?  Iíve seen numerous recommendations for vanguard index funds, so that would be as a taxable brokerage account, correct?

4)   Iíve been reading about folks using real-estate rentals to help grow their stash and diversify investments.  I have no idea how I would get started, especially since this would need to be located elsewhere due to crazy real estate costs here.  Any book/internet suggestions to read-up on the subject?

Thanks for reading and suggestions to help me get on the right track!

edited to update based on responses received thus far
« Last Edit: April 18, 2019, 12:41:27 PM by anonprof »

oddients

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Re: Case Study: Late start. What changes to get on track to ER?
« Reply #1 on: January 19, 2014, 07:02:43 PM »
Your Traditional/Roth IRA contribution limit has nothing to do with your 401k contribution limit.

oldtoyota

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Re: Case Study: Late start. What changes to get on track to ER?
« Reply #2 on: January 19, 2014, 07:20:52 PM »
Welcome to the board!

I am confused as to why you are combining the IRA contribution with the 401K. Those are separate vehicles. One can put $17,500 into the 401K and $5,500 into the IRA. You have until April 2014 to make your 2013 contribution, so you can still make that timewise if you wish.

If you have leftover money to invest, you can put money into a taxable account. From what I've read, it's best to invest in stocks for your taxable account (not bonds).

Do your parents count as dependents? If so, I believe you can deduct one or both since they are living with you. You might want to look into that to see if it's possible.

Also--It might be too late for 2014, but look into this for 2015...Can you put pre-tax money into a medical spending account to be used for you or your parents? Also, FSA pre-tax deductions allow payments for eldercare. Review the rules on the IRS site as you could reduce your current tax liability by quite a bit.

Why do you need two cars?



« Last Edit: January 19, 2014, 07:25:30 PM by oldtoyota »

oddients

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Re: Case Study: Late start. What changes to get on track to ER?
« Reply #3 on: January 19, 2014, 08:34:23 PM »
Thanks for the welcome and for the responses.   Here's the answers to your questions:

combining the IRA contribution with the traditional 401K - my employer offers both as part of the same 401k plan - contributions come out of my paycheck, but are pretax for the traditional portion and after-tax for roth.  They only started offering the roth option in 2008.   based on oddients reply, it would seem that I can also fund 5500 into a external roth ira in addition to the 17500 in my employer plan which is great news.   My question though is still:  should I be splitting the 17500 differently than I currently am in the employer plan?

Yes, my parents count as dependents and I claim head of household on my taxes.   I do already have a Flexible Spending Account for medical expenses and I max it to the allowable cap every year.

Two cars because my parents use the other one, and have more distant doctor appts plus various errands to run than you might expect.

Thanks.

Yes, you can put $5500 into an IRA as well. And better yet, you can still contribute for 2013! Regarding your 401k contributions, it's really hard to say, not being a CPA and not knowing all the details of your tax returns. I expect to make less when I retire than I am making now, so I make all my 401k contributions pretax. And I have a Roth IRA as well so I will have some tax-free income in retirement.

anonprof

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Re: Case Study: Late start. What changes to get on track to ER?
« Reply #4 on: January 20, 2014, 02:57:21 PM »
Thanks for the Roth info. I had misunderstood the rules, and will now open a separate Roth before April to max 2013 and add to it in 2014.  I updated my initial post above with this info.

I would be open to hearing any additional suggestions on my savings plans.  Thanks again!
« Last Edit: January 20, 2014, 03:19:06 PM by vizta »

Thegoblinchief

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Re: Case Study: Late start. What changes to get on track to ER?
« Reply #5 on: January 20, 2014, 03:08:14 PM »
It is possible to make money in real-estate remotely, but it gets considerably harder since property managers eat 5-10% off the top. Plus, it's harder to learn an area when you don't live there. I can't imagine there's any money to be made in Bay Area, except maybe in fix-and-flips. The housing market looks primed to remain strong for next decade based on current trends, but that's relying on the always volatile tech sector to keep moving northward from Silicon Valley.

Get the spending down as fast as possible. At 3.5% mortgage, I would throw and extra savings beyond tax-sheltered accounts into a taxable Vanguard account, evenly split between US Total Market, Int'l Market, and something involving REITs for diversification. Unless you take a major dump on capital over 10 years, that becomes your mortgage kill-off fund plus FIRE bridge until you can draw on your Roth and 401(k).

Plus, the more you stick into that Roth, the better using the Roth conversion-ladder strategy:

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

You've got a nice chunk of assets already. Take care of your parents as best you can. Your real goal should be to get spending down. It's much easier to cut that than raise income or make investment returns.

Another Reader

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Re: Case Study: Late start. What changes to get on track to ER?
« Reply #6 on: January 20, 2014, 03:37:45 PM »
Your parents should be on Medicare and have Medigap policies or Medicare Advantage plans.  Are your medical expenses for them the premiums and co-pays?  Is the mentally capable parent caring for the dementia parent?  What is your plan to care for one or both parents in the event of the decline or death of the mentally capable parent?

I'm not sure I follow your logic with the 15 year mortgage.  If your plan is to ER and move, a mortgage at retirement is not relevant because you are going to sell.  The money going to the mortgage would probably have been better off invested.  Water under the bridge, but something to consider when you buy the next property.

If you lay out all your expenses, you will get lots of ideas on what to cut.  Does the $94k include last year's debt pay down?  If so, your real expenses should be much lower and will include parent expenses that you likely will not have at retirement.

DougStache

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Re: Case Study: Late start. What changes to get on track to ER?
« Reply #7 on: January 20, 2014, 08:35:48 PM »
Yes, you can put $5500 into an IRA as well. And better yet, you can still contribute for 2013! Regarding your 401k contributions, it's really hard to say, not being a CPA and not knowing all the details of your tax returns. I expect to make less when I retire than I am making now, so I make all my 401k contributions pretax. And I have a Roth IRA as well so I will have some tax-free income in retirement.
Be careful here. 

You absolutely can contribute $5,500 to your traditional IRA while contributing to a 401k, however you may not be able to claim it as a tax deduction.  In your situation your MAGI would be approximately 102k - 17.5k = 84.5k, which would disqualify you from counting your IRA contributions as a tax deduction.  However, you are still eligible for a Roth IRA, so that may be a better bet.

Source: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014--IRA-Contribution-and-Deduction-Limits---Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work

anonprof

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Re: Case Study: Late start. What changes to get on track to ER?
« Reply #8 on: January 20, 2014, 11:16:23 PM »
You absolutely can contribute $5,500 to your traditional IRA while contributing to a 401k, however you may not be able to claim it as a tax deduction.  In your situation your MAGI would be approximately 102k - 17.5k = 84.5k, which would disqualify you from counting your IRA contributions as a tax deduction.  However, you are still eligible for a Roth IRA, so that may be a better bet.

Yep, thanks for the call-out.  I spent some time today reading up on IRA vs ROTH and my income is too high to deduct IRA deduction, so Roth will be the way to go.

Your parents should be on Medicare and have Medigap policies or Medicare Advantage plans.  Are your medical expenses for them the premiums and co-pays?  Is the mentally capable parent caring for the dementia parent?  What is your plan to care for one or both parents in the event of the decline or death of the mentally capable parent?

Yes, both on medicare plans; expenses are co-pays and prescriptions.  Currently one parent cares for the other (dementia still moderate at this point).  Honestly, we are still exploring options for long term, will probably include some kind of day-care program (to help with care-giver relief) before progressing to nursing home.  Losing the other parent first is a horrifying thought, and would then change my plans quite a bit. But, as with all health issues, you have to take it as it comes. 

I'm not sure I follow your logic with the 15 year mortgage.  If your plan is to ER and move, a mortgage at retirement is not relevant because you are going to sell.  The money going to the mortgage would probably have been better off invested.  Water under the bridge, but something to consider when you buy the next property.

If you lay out all your expenses, you will get lots of ideas on what to cut.  Does the $94k include last year's debt pay down?  If so, your real expenses should be much lower and will include parent expenses that you likely will not have at retirement.

Paying down the mortgage to get to 80% value and then refi was the only option to remove the MIP and I felt like paying $600 MIP every month was a huge waste of money. I did the 15 year because 30 year rates have gone up, so this allowed me to keep a similar low interest rate and was in-line with my original plan to pay-it off as early as possible.

The 94k does not include the pay-down, but I'm not feeling quite ready to post my detailed expenses as they are embarrassingly not mustachian.  The positives since I started reading the blog include reduction in energy usage (water, power) moving a cell phone to Republic, reducing cable/internet, stay-cations instead of travel, and starting the conversation to get the rest of the household on board (eg food expenses, etc.).   We can't be classified as frugal yet, but I'm inching us closer.

You've got a nice chunk of assets already. Take care of your parents as best you can. Your real goal should be to get spending down. It's much easier to cut that than raise income or make investment returns.

Thanks for the suggestions.  I still have a lot to learn on the investing side, and clearly I also need to focus on spending.

anonprof

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Re: Case Study: Late start. What changes to get on track to ER?
« Reply #9 on: March 02, 2014, 01:46:33 PM »
Just a small update.  I'm continuing to work my way through all the MMM articles, and reading the forum.  Tons of great info and I'm trying to absorb as much as possible.

I changed my allocation, so my entire 401k contribution is now pretax.  I already had this set to max out $17500, but I went back to look at my employers contribution and is 10% of my salary+bonus, so I'm stoked as I had been thinking it was only 6%.

I just signed up for vanguard to contribute my allowed IRA max of $5500 for 2013.   Once I get my bonus later this month, I will max my 2014 $5500 IRA.  Once I've got the 2014 IRA funded, my next step is to set up a regular investment account so I can continue my savings there. 

On the income side, I should be getting a promotion next month, not sure yet what the corresponding salary increase will be, but I'm excited about the new opportunity.

On the spending side, I've been using YNAB to track.  I don't have exact amounts for 2013, but a pretty general idea of what we spent on a month-to-month avg for each category last year (too much!).  So far in 2014, we've reduced groceries/eating out by $400.  Some of that was just eating what we had already in the house, but we are eating out far less too.  Prior to MMM I was feeling pretty satisfied by eliminating debt and building up my retirement savings, but now I feel as though I need to catch up.  I make a lot of money and could be saving a lot more than I have been, so reducing spending needs to be my focus going forward.