Case Study: Where to go from here?

[Vilgan]

Hi everyone,

Somewhat new to the blog, very new to the forum. I've finally gotten to the point where I'm debt free other than the mortgage after bumbling around in my 20s, but I'm not sure what my next steps should be and how long the path to FI will be. I'm 32 now and finished paying off school loans/medical debt in August 2013. All numbers are individual, since the wife and I keep our finances separate in the interest of marital harmony.

Income per paycheck (bi-weekly) right now is ~2k after taxes and the 401k deduction is made as well as paying for medical/dental/etc coverage. This will probably go up 10%/year for 4 years and then be fairly flat.

total post tax monthly income is roughly 5791 before the 401k deduction, 4330 after

Current monthly expenses:
Mortgage: 833
Random house things: 100
Monthly split expenses (HOA, sewer, gas, electric, trash, cable, internet, etc): 366
Gas: 20
Food: 500 (higher than it should be, but lowering this much more can cause marital disharmony as trying different cuisines is one of her favorite things to do)
Misc (hobbies, bad ideas, gadgets, tennis club etc): 200
vacations: 200

Total monthly expenses: 2219

ER expenses: rough guess of 20k/year if mortgage is paid off. I've generally always spent about 1200-1400 per month after paying for rent or mortgage for most of my life, so bumping that up some for health coverage/whatever seems reasonable.

Assets:
11.5k in 401k
6800 in IRA
2000 in checking
~40k equity in house (not sure this counts, since selling is an emergency plan).

Liabilities:
300k mortgage remaining, of which 200k is my responsibility. This is a 30 year loan at 3.875% and we are ~2 years in.

So, right now I'm feeling pretty good especially given where I was a few years ago when I lived in a part of the country I really didn't like and was $40,000 in debt and made less money. However, I'm not really sure what to do now. When you have medical or school debt, it seems very simple. Now: less so. I think maxing out my 401k and IRA contributions are a no brainer, but that still leaves me with roughly 20k/year that I can invest this year and around 35k/year in a few years once I start to cap my salary.

Left to my own, I think I would pound away at the mortgage since that is simple and guaranteed and I think we'd definitely feel safer if we owned our house outright. I'm not sure how sensible that is, and I'm also not sure what the total path to ER would look like.

Here was my own napkin math, but I'm new to this so could easily have this wrong.

$20,000 / 0.04 => 500,000 in investments that actually produce a return (aka: not house equity)

After 7 years, the mortgage will be paid off and I would hopefully have something like $216,000 in investment accounts assuming a 5% real return.
At this point, I would start putting an extra 35,000 per year into taxable investments. Assuming the same 5% real return, roughly 4.5 years later I would have enough to retire.

Real return estimates might be a bit high, but if another 2008 happens we'll suspend extra mortgage payments and get stocks on the cheap which should help.

This feels long, so in summary I guess I have a few questions:

1) Am I understanding the estimation process correctly?
2) Is it crazy to pay extra on the mortgage at 3.875%?
3) A lot of that is going to be locked up in retirement accounts. It seems like there can be some challenges to withdrawing that when only in your late 40s/early 50s. Is there something I should do differently to account for that?
4) Any other advice or comments?

[Thegoblinchief]

There are lots of ways to access 401k and IRA before retirement, but focus on saving now, the mechanics later.

Max ROTH IRAs in addition to the 401k. Any additional savings can go into a taxable account. Use Vanguard or Fidelity with their Spartan funds. Unless you want to do real estate, in which case look at your market if it favors landlords, or turnkey/property management in other markets.

The food, if that's only YOUR share, is insane. I know you said marital harmony, but wow. Do you have ethnic markets in your area? Not only can they supply spices and other things cheaply, often times they are much cheaper for produce as well.

The "random house things" and misc categories are also quite high. Remember that a monthly expense is worth 173 times more in ten years if you invest it instead.

$20K, if that's your half, is a reasonably placeholder retirement budget. If you're saying $20K for two people, you're missing things like health insurance and whatnot.

[Vilgan]

20k is just my half.. and yeah, the food is crazy and I'll work to bring it down but it is a process.

Is there a good place to read methods to get that money out? The blog post basically here: http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/ mentions a few things but nothing seems particularly practical if 50% or more of my money is in retirement accounts that are hard to touch.

I guess my concern is just how to figure out how putting a lot of money into retirement accounts affects things and if we should make any different choices to account for that. Thanks for any insight/comments :)

[Thegoblinchief]

Read this:

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

SEPP is another, but less tax efficient way to withdraw before 59.5.