Author Topic: dagiffy1 Case Study  (Read 5606 times)

Zx

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dagiffy1 Case Study
« on: July 15, 2016, 09:52:10 AM »

I have an increase in income due to a new position at work, mainly due to the OT available with the job. The base pay is 105k, but others who work the position tell me that 170k is quite normal. More if you can take the hours! A coworker who has been working this job for six months is married but with one dependent, and he tells me that he maxes out his 401(k) and his take home checks are still over $4000 every two weeks. We will be making the same wage.

I have a Fidelity 401k in which my company contributes 6% as long as I contribute 8% or more. My wife has a portfolio with 15k in it, but she's been self employed for 20 years and does not have any pretax investing acct.

My question is how much to contribute to 401k in light of our new higher income but keeping in mind the staggering debt (for which I've already been face punched silly, thank you) at a Congress set interest of 6.5 to 8 percent. I want to optimize for effective tax rate while assailing school loan debt, then car debt; the two cars are at 1.99 and 2.99, respectively.

For those that know my story, my wife is moving down with me in the bay area January of next year. Cost-of-living, specifically housing, is expensive. Very. It gets a little cheaper as you get away from the Bay Area, but unfortunately for the next year or two I will work in Oakland and the commute gets more tragic but every mile away. My goal is to establish myself in the job in Oakland and then take a bid out to somewhere with half of the cost of living expense yet pretty much the same income.
My goal is to establish myself in the job in Oakland and then take a bid out to somewhere with half of the cost of living expense yet pretty much the same income.

We file married, jointly, and two. Zero dependents. We are both 51 so we can contribute the extra to 401(k).

Gross salary will vary because of the overtime that I would say that my will be 170 K and my wife will be 20k.

I get $2500 worth of FSA every year. At the moment I am contributing 15% to 401(k) after having contributed 8% the first six months of the year.

Medical, dental, and vision are about $400 per month pretax.

The only kind of other income I get is through my company stock in 401(k) which at this point pays me dividends about $150 every three months.

Adjusted Gross Income: roughly 190k

Taxes: California taxes about 9.5% and federal tax will depend on the effective tax rate, which is what I am asking for help with right now to optimize debt pay down, 401k contribution, effective tax rate, etc.

Current expenses: I really would like this case study to be for when my wife is living with me next year, and our rent will be about 2600 per month, which is about the least expensive you can expect around here in a decent apartment neighborhood. There is really no way around this expense, and that is why I lived in my car for five months or more since I moved down here by myself.

Rent: 2600
Food: 700
Car payment 1 @ 1.99%: 380
Car payment 2 @ 2.99%: 525
Balance is 23k each.
Power/Gas: 80 (I get a discount through my job of 12.5%)
W/S/G: 50
Car Ins: 270 combined
Life Ins: 60
Internet: 75
Cable: No, no cable TV

No CC debt
School Loan: 111,000 @ 7.5% My plan is to pay 3000 per month at minimum.

When my wife moves down here I plan to sell my 2015 Chevy Volt, if I can, and buy something that I might be able to pay cash for. However, it has to be able to withstand hours in traffic and the daily commute. The Volt is brand-new, under 10k miles, and it is the perfect sleeping car if it should come to that again, so I hesitate to part with it...but on the other hand if I can find a car I can depend on it is an easy decision to make. I just think that to get something in California that is decent I will not be able to pay cash and I will have a payment anyway, but maybe I am wrong.

I will not sell the car my wife drives as in this area you have to drive everywhere and I am not comfortable with her having less then a quality automobile that is as dependable as we can get.

That's all I can think of, if you need more info or more detailed info, I will be glad to provide. Thank you ahead of time.

MDM

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Re: dagiffy1 Case Study
« Reply #1 on: July 15, 2016, 01:41:23 PM »
My wife has a portfolio with 15k in it, but she's been self employed for 20 years and does not have any pretax investing acct.
Has she considered a Solo 401(k) plan?

Quote
My question is how much to contribute to 401k in light of our new higher income but keeping in mind the staggering debt (for which I've already been face punched silly, thank you) at a Congress set interest of 6.5 to 8 percent. I want to optimize for effective tax rate while assailing school loan debt, then car debt; the two cars are at 1.99 and 2.99, respectively.
Definitely get the 401k match.  After that it's somewhat debatable.  Can you refinance those loans to a lower rate?  If not, paying the student loans ASAP might be best.  At those car loan rates, making minimum payments and investing instead seems reasonable.  See the 'Investment Order' tab in the case study spreadsheet (CSS).

Quote
Taxes: California taxes about 9.5% and federal tax will depend on the effective tax rate, which is what I am asking for help with right now to optimize debt pay down, 401k contribution, effective tax rate, etc.
Have you put your numbers into the 'Calculations' tab of the CSS?  If you do that, how do things look to you?

Mariposa

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Re: dagiffy1 Case Study
« Reply #2 on: July 15, 2016, 09:54:43 PM »
Others here are better than me at this, but I'll take a crack, since we're also relatively high income and living in a HCOL area.

Since you are making such a high income in an area with high local taxes, I would first max out all tax-deferred accounts. +1 to the solo 401k for your wife. That would be 24k to your 401k, and your wife's entire income of 20k into hers.

Subtracting your pre-tax expenses ($400x12 + $2500 + $44,000) from your income of 190k, and using this simple tax calculator:
https://smartasset.com/taxes/california-tax-calculator#NCQgnnv04M

Your post-tax income after the pre-tax expenses and contributions would be $101,200, and your marginal tax rate is 35.75%.

I think your basic living expenses are reasonable for a HCOL area, with a caveat (see below). I'll round them up slightly to $65,000 a year. You would then still have $36,200 left over, or about $3000 to throw at your student loans each month.

Putting this much money into tax-deferred accounts lowers your MAGI to qualify for the student loan interest deduction (MAGI must be less than $160k for the full deduction). Up to $2500 of your student loan interest is tax deductible, which, at the federal rate of 25%, would be a $625 savings each year. By my rough calculation, this would effectively lower the interest rate on your student loans to about 6.9% (not a huge amount since you're currently paying >$8000 a year in interest and only $2500 of it is tax deductible).

Say you continue to pay $3000 a month toward your student loans. Plugging things into an online calculator, the balance will be paid off in 42 months, and you will pay around $14,000 in interest. This represents 12.6% of your principal loan of $111k, far less than your 36% marginal tax rate. Assuming that when you FIRE, you will be able to pull money out of your retirement accounts (nearly) tax-free (multiple threads here on how to do this), it's definitely beneficial to max out the 401k's before paying off student loans in your situation.

With such a high income, you don't qualify for the tax deduction for tIRAs, and I wouldn't bother buying Roth IRAs until your student loans are completely paid off. Seems the market is unlikely to return 6.9% in the next few years. (But you never know.)

A couple of suggestions:

Why do you need $2500 in your FSA? Are you expecting a lot of medical expenses this year? Funds in an FSA have to be used up within the year, or else you lose the money. People around here max out their HSAs, which are different: those funds are held in an investment account and can be used any time. They mostly go along with high-deductible health insurance plans from my understanding.

If I were you, I would live close to work and get rid of both cars, even if rent cost $500-$1000 more each month. Oakland is a fairly compact area, where you can get everything you need by either walking or biking. With a lightweight / foldable bike and the BART / Cal train system, you can pretty much get anywhere in the Bay Area. This would be a $1175 savings on your monthly budget (not including any increased rent) and much safer and more pleasant than driving on CA freeways.

Good luck!

Zx

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Re: dagiffy1 Case Study
« Reply #3 on: July 15, 2016, 11:12:50 PM »
OK, I do need to clarify that the company gives me 2500 into my FSA. I don't put anything in it myself.

I love your ideas. I'd love to be able to live close to work and not have cars. My wife, however, isn't this hardcore. She loathes bicycling, and my job location in Oakland isn't anywhere I'd want to be on a bike at night...and I'm frequently going to be leaving at night after OT.
I can bring this up, gently, but I'm liable to end up regretting that I brought it up.

Starting at my job location I searched close and then further out and further out. I couldn't find anything within biking distance, really. It's not set up for bike lanes and stuff. And the neighborhood around there is like running the gauntlet if I'm driving through. Nobody at that shop lives anywhere close to that place. One guy lives in Walnut Creek. Two others live in Livermore. One works in SF but he lives in a rent controlled apartment that he can afford. Another guy lives in Brentwood.

I love that idea, though, and I'll start asking around, looking around. There's got to be some way to bike to work without also running a 12% risk of getting shot, stabbed, rolled, or mugged. One of the things guys do is carry fake wallets with 5 bucks in them and trick them out to look like it's their wallet. Expired CCs in there, appt cards, 5 bucks, expired out of state DL...cuz getting mugged is a real danger. One guy was shot with a high power pellet gun last year. Two other guys were shot at, their truck was hit, but they were not. The guys can tell you stories! Black guys will just walk up to your truck, reach in for some tools, and stare you in the eye as they walk away. None of us are willing to die for the company's tools. Another time a crew of three were working at a commercial building outside on the gas meter and a black guy walked up and said, "You guys need to leave." They asked what he meant, they need to leave? He said, "I'm telling you, you need to GO. Right now." So the guys hopped in the truck and took off. Who knows, maybe that guy saved their lives after he heard someone talking about taking the workers out?

So this is the area I have to get through to get to my yard. The trick is to find someplace close in to live that doesn't feature a dangerous bike ride to work. I'll have to look deeper before I'm satisfied.

I looked up that calculator. Wow, what a setup. I need to look at it for awhile to get the most out of it. I need to find out what MAGI is. And I need to get my wife set up for a 401k of her own.

addendum: just talked to wife about getting rid of both cars. Not on board! Her reasoning was weak, though, so maybe there's a chance if I bring it up from time to time. She wants a good vehicle should "things go down" so we can get out of there. I told her EVERYONE would be getting out of there. Ergo, the freeways are jammed and not moving. We've got two cats in our car, no guns to defend ourselves, and surrounded by desperate, panicky people.

She goes, "hmmmm" and walked away.

mozar

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Re: dagiffy1 Case Study
« Reply #4 on: July 16, 2016, 10:51:47 AM »
Quote
Black guys will just walk up to your truck, reach in for some tools, and stare you in the eye as they walk away.

Sounds like some people are angry about gentrification. I was going to suggest that you live in San Francisco and do a reverse commute, but you only plan on having this job in Oakland a year or two, why have your wife live with you? Why not continue to live in your car (if that's working for you), pay off your student loans, then take your bid out?

pbkmaine

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Re: dagiffy1 Case Study
« Reply #5 on: July 16, 2016, 11:05:36 AM »
Live someplace safe.

Zx

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Re: dagiffy1 Case Study
« Reply #6 on: July 16, 2016, 11:49:39 AM »
Quote
Black guys will just walk up to your truck, reach in for some tools, and stare you in the eye as they walk away.

Sounds like some people are angry about gentrification. I was going to suggest that you live in San Francisco and do a reverse commute, but you only plan on having this job in Oakland a year or two, why have your wife live with you? Why not continue to live in your car (if that's working for you), pay off your student loans, then take your bid out?

Because I don't want to. Simple as that.  I am exhausted. I'm done. In these new working conditions it is even more of a gigantic pain in the ass than it was before, and I was done with it before. There's no way I'm living in my car now. If not for the possibility of outrageous overtime, I would quit this company, leave California and never come back.

If I was 31 or 21 instead of 51, I would probably go for it. But I am not. And I am done. Living like an animal for two more years to get out of debt maybe six months quicker is not worth it to me.  I no longer have a fridge, microwave, nor a place to plug my car in either at work or at night. But I don't really care that the circumstances have changed because I had no plans on living that way anymore. I have hit the wall. It was fun while it lasted, but the Batcave was a party and parties weren't meant to last!
« Last Edit: July 16, 2016, 11:53:58 AM by dagiffy1 »

Zx

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Re: dagiffy1 Case Study
« Reply #7 on: July 16, 2016, 11:52:54 AM »
Live someplace safe.

I certainly plan to, I have some time to look around before the wife moves down.  I think I may have found some relatively safe apartments about a mile and a half from work but of course it's $3000 a month. But I could sell the Batcave and bike it and I think the 650 a month savings might be worth it.

Mariposa

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Re: dagiffy1 Case Study
« Reply #8 on: July 16, 2016, 06:42:29 PM »
The point is that with such a high salary, you can afford to max out your 401K's AND pay off your student loans AND pay $3000 rent for the apartment close to work. Especially if you get rid of your car.

An alternative would be to get rid of the two cars you currently have and get a 5-10 year old small and reliable Japanese car for $5000-8000 cash. That's probably what I would do if I absolutely needed a car.

The mustache tax guide has a lot of helpful information:
http://forum.mrmoneymustache.com/taxes/the-mustache-tax-guide-(u-s-version)/

I found the answers to all my tax questions by searching old threads in that forum. There are some people who really know their stuff posting in there.

Zx

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Re: dagiffy1 Case Study
« Reply #9 on: July 16, 2016, 07:18:07 PM »
The point is that with such a high salary, you can afford to max out your 401K's AND pay off your student loans AND pay $3000 rent for the apartment close to work. Especially if you get rid of your car.

An alternative would be to get rid of the two cars you currently have and get a 5-10 year old small and reliable Japanese car for $5000-8000 cash. That's probably what I would do if I absolutely needed a car.

The mustache tax guide has a lot of helpful information:
http://forum.mrmoneymustache.com/taxes/the-mustache-tax-guide-(u-s-version)/

I found the answers to all my tax questions by searching old threads in that forum. There are some people who really know their stuff posting in there.

Cool. I agree with you. I will have a chore to get DW on board to live without a car. The only way I will ever get 5000 to 8000 cash is to borrow it from my 401k account, too.

Then again, I haven't started this new position and have no idea the firehose of cash I will be making. Can't relate to it yet. Maybe I could just throttle back and pay minimums for 2 or 3 paychecks and I'll have the cash to pay outright for a car we can trust.

Heck even if I can sell the Batcave that's 650 a month off my plate.

And thanks for that link. You and yours have given me a lot of good links the past few days.
« Last Edit: July 16, 2016, 07:21:57 PM by dagiffy1 »

dess1313

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Re: dagiffy1 Case Study
« Reply #10 on: July 17, 2016, 09:09:16 PM »
don't risk your life trying to save a few dollars.  just make it a priority to get the future job you're looking for and get out of crime central area
You can't enjoy retirement if you're mugged and shot by someone when you're on a bike in a bad neighborhood.  The area around my work is bad and is the reason i don't' live near where i work, but yours sounds like a real hot mess.

Zx

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Re: dagiffy1 Case Study
« Reply #11 on: July 18, 2016, 07:14:01 PM »
 I spent some time on the phone with Fidelity today trying to figure out how I could open a 401(k) plan for my wife. Well it turns out that once she moves to California and is no longer self-employed, the only option is an IRA which has a max contribution at our age of $6500.

If she gets a part-time job working someplace she can use that IRA and also any employer 401(k), but can't contribute more than she earns. I was thinking that I would just stuff 24,000 in there in her name but it doesn't work that way.

If she was self-employed she could open a SEP IRA and could contribute up to 20% of her profits as a profit-sharing thing with a max of $53,000, meaning she had profits of over a quarter million dollars. The most she's ever made is 35,000 or so, 20% of that would be around 6k or 7k anyway.  But in California she won't be self-employed so this category is pretty much moot.

 She has a friend down there already that works for Tuesday mornings so she think she might be able to get a job there fast, and I checked to see that they have a 401(k). So we think that maybe she can get a job there. She will just contribute 100% of what she earns to that 401(k) which would be somewhere around 20,000. And if we can do an IRA for her we could put 6500 in there. I forgot to ask if you can have a 401K maxed out plus an IRA.

Another Reader

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Re: dagiffy1 Case Study
« Reply #12 on: July 18, 2016, 07:34:23 PM »
I would suggest you listen to your fellow employees and not try to "fit into the hood."  They are there and know the area.  Much of Oakland is not safe, even during the day.

For 2016, your wife should be able to do some kind of self-employment retirement plan, based on her self-employment earnings up north.  She can also open a spousal IRA, if all of her earnings go into the 401k.  If she gets a retail job, in 2017 she can put the max in the 401k and do a spousal IRA.  Could be some room in 2016 as well.

kitkat

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Re: dagiffy1 Case Study
« Reply #13 on: July 19, 2016, 02:22:49 PM »
I'm in Oakland (and currently apt hunting) so am very curious where you work and where you have been looking for apartments. If you work in West Oakland, have you tried Temescal or Emeryville? or Rockridge area? You can find a basic 1br apartment for $1800 (or a NICE one for $2000-2200) and your drive to West Oak would be 20 min max. Both are great areas, and you should easily be able to find off-street/gated parking, which extremely increases your safety factor. I completely support prioritizing safety, but it does NOT need to mean living in freaking Walnut Creek! ESPECIALLY if you drive everywhere!

If you're working further south/East Oakland, I'm not as familiar with those areas... but my roommate works in San Leandro (we live near Oakland Children's Hospital) and he doesn't mind his commute, though he leaves around 7am.

Zx

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Re: dagiffy1 Case Study
« Reply #14 on: July 19, 2016, 06:36:22 PM »
Live in the Pleasanton area and work by where Fruitvale crosses over the water into Alameda. What section is that? I know nothing of Oakland besides where the stadium is by the freeway!

kitkat

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Re: dagiffy1 Case Study
« Reply #15 on: August 01, 2016, 10:46:40 PM »
Sorry -- just learned about the "show new replies to your posts" filter :)

Yea, I would consider where you work "East Oakland".. but I'm not very familiar with specific neighborhoods over there. Like I mentioned, Temescal, Emeryville, and Rockridge are all great areas to live in. You'd be surprised how many "rough" areas are being gentrified though (for better or worse...), so you really have more options than you'd think. Definitely check out craigslist apartments to see what is out there! I just looked on google and driving from "Temescal" to Fruitvale bart is 10-14 minutes during the morning commute. Beats the 35min-1hour they estimate for Pleasanton :)

Zx

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Re: dagiffy1 Case Study
« Reply #16 on: August 02, 2016, 02:20:44 PM »
Sorry -- just learned about the "show new replies to your posts" filter :)

Yea, I would consider where you work "East Oakland".. but I'm not very familiar with specific neighborhoods over there. Like I mentioned, Temescal, Emeryville, and Rockridge are all great areas to live in. You'd be surprised how many "rough" areas are being gentrified though (for better or worse...), so you really have more options than you'd think. Definitely check out craigslist apartments to see what is out there! I just looked on google and driving from "Temescal" to Fruitvale bart is 10-14 minutes during the morning commute. Beats the 35min-1hour they estimate for Pleasanton :)

Well when you leave for work no later than 515 am the traffic is flat out moving. The way home is the drag unless I end up working 12 to 14 hours, then I end up driving home at 9 PM. I have been looking around on craigslist and stuff but since I signed my lease before I got the Oakland job I'm kind of locked in there. My wife is moving down in the spring and maybe then I'll negotiate out of it.

I'd love to live in the Alameda area but wow, very expensive.