Author Topic: Get me on the right path  (Read 3275 times)

henrydavis

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Get me on the right path
« on: December 18, 2012, 09:46:39 AM »
I’ve been a pretty passive retirement investor but am ready to get aggressive so my wife and I can retire early.  Here’s a quick snap shot of where we are:

•   Married with 2 kids (2 and 4), both 32.  Got started late in life with investing.
•   My 401k = $45,000.  My wife does not have any 401k (school teacher that worked at a charter school because teaching jobs are hard to get).  Wife is a stay-at-home mom and will be until the youngest starts school in 3 years.  She wants to go back to work.
•   House just refi’d at 2.75% for 15yr.  Appraised at $160k, we owe $110k.
•   My pay = $75,000.  I take home around $48,000 after medical and a 6% company 401k match.
•   Car payment of $450/month for 34 more months (PenFed 1.99% for 48 months).
•   Checking and savings total about $15,000
•   We have paid off all student loans, credit cards etc.  No debt other than house/car.

We’ve been spending about $10,000/year for the last few years paying off student loans, my car and fixing up our house which should be done now so we’ll have a bunch of extra money.  Our current liabilities for everything (house, car, insurance, gas, electric etc, food, entertainment etc.) is about $2500/month.  That leaves us with $1500/month excess or $18,000/year, after taxes.  So, here’s my plan:

Open up a Vanguard Roth IRA for both my wife and myself (separate accounts, right?) and put $5000 in each before the end of 2012.  That will leave us with $5000 in checking and savings, which will be fine as the checks are still coming in and that will increase quickly since we aren’t spending nearly as much now.  My employer matches 100% up to 6%, which I’m currently doing.  I would like to increase my contribution to 14% to make an effective 20% 401k.  That will decrease my take home pay by about $4000/year.  Then, in 2013, start an automatic contribution into our Roths to hit the $5500 max in each.  That will be a total of $15,000/year extra contributed into retirement accounts and should leave us with $3000/year in excess a year that can go into savings/checking.  Total effective retirement addition will be around $19,000/year.

How does this sound?

jrhampt

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Re: Get me on the right path
« Reply #1 on: December 18, 2012, 09:59:55 AM »
Your plan sounds good, except that I would argue for alternatives to putting the excess $3k into savings/checking.  Since you already have 15k in liquid cash, why not direct that 3k into the 401k instead?  Or alternatively, why not pay off the car loan early, since money in a savings account is making less than the interest on the car loan?

DoubleDown

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Re: Get me on the right path
« Reply #2 on: December 18, 2012, 10:27:17 AM »
Good plan overall, congratulations on your progress to date, doing well on your house, and a great budget overall for a family of 4! A couple of thoughts:

1. Taking home $48,000 out of $75,000 means a LOT of your paycheck is going somewhere else. You are currently withholding 6% towards your 401k, which is about $4500/year. Where is the other $23,500 going??? "Medical" and taxes should NOT be that much. If you are having too much withheld in taxes and getting a big windfall when filing taxes, lower the amount withheld and put that money to work investing. Or maybe you're paying for an unnecessary "Cadillac" health plan?

2. $450/month for just a car payment is quite a bit. Have you considered less expensive alternatives, or how much the total car costs impact your overall savings and possible FI goals?

3. Depending on your FI/RE goals, you might consider some other alternatives for investing and generating income that are not of the IRA/401k variety (e.g., rental real estate?). But only if you are comfortable in those kinds of areas.

4. When your wife goes back to work, I hope 100% of her take-home pay will go towards savings so that you can both reach FI very quickly!

eyePod

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Re: Get me on the right path
« Reply #3 on: December 18, 2012, 10:36:53 AM »
15k seems to be a bit steep in the emergency fund.  Why not keep two months in there and put the rest in a vanguard fund?  You can get that stuff out of there within a month.  You don't need the whole 15k at your fingertips right away.

Dicey

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Re: Get me on the right path
« Reply #4 on: December 18, 2012, 12:50:44 PM »
Overall, this is a good plan.

The earlier you sock money into retirement savings, the more it's worth. I'd bump up your 401k contribution as much as you possibly can, as it will reduce your taxable income. Also check your withholdings. If you're getting a big tax return each year, you'll want to adjust so the money goes directly into your account instead of being filtered through Uncle Sam's.

Don't worry about the car. Assuming it's not a gas hog, keep it, maintain it well and plan on driving it for at least 10-12 years. At that interest rate, I don't even care if you pay it off early, as having the loan could help your credit score.

Not sure you can contribute to your wife's Roth IRA if she is not working. Perhaps someone more knowledgeable can jump in with more info.

henrydavis

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Re: Get me on the right path
« Reply #5 on: December 18, 2012, 07:17:42 PM »
Thanks for all the input and sorry for the late reply.  Somewhat of a busy day for this well-shaved retiree wannabe!

I'll address a few of the remarks. 

The $15k in savings/checking would be depleted to $5k after I put $10k into our Roth accounts.

I screwed up with my calculations on salary and take-home.  I work an hourly job but get bonus checks and I overshot; I could have swore I worked more overtime this year!  I will have made about $72,000 this year after my last check.  My $48,000 take home was off, too!  I forgot to figure in my bonuses, which have equaled $4200 take home this year.  So, $72,000/year and take home was $52,200.  Hey, free money! ;)

I did opt for the most expensive health plan this year.  It's $410/month.  $600 family deductible which turns into a 90/10 afterward with $2000 max out of pocket for the year.  The two years we had our kids I had this plan.  Last year I had the cheapest plan and it worked out.  I opted for the most expensive this year because my wrist will likely need surgery.  I saw an ortho surgeon a few weeks ago and he needs an MRI.  I'm holding out until next year for the MRI and probably surgery.  I ran the numbers and my breakeven point for the two medical plans would be $12k in medical bills.  Researching the wrist surgery and MRI prices I should be pretty close to that so I figured why not.

The car I purchased was a 2011 Chevy Traverse, brand new, with a $31,000 sticker price.  I paid $19,800 for it.  I know cars very well thanks to my Dad being a master mechanic and plan on my wife driving this thing for 10-15 years so it was worth it for me to buy it new.  I couldn't have picked up a 2 year old one for that price.  My other car is a 2006 Chevy Malibu.  Sticker was $18,900 and I got it for $12,300.  It's paid-off and only has 45,000 miles on it and I plan to keep it for at least 10 more years, if not more.  It's nice living near where you work.

I looked into the Roth for my wife and according to this, stay at home spouses are allowed to have a Roth that can hit the $5000 max:

http://wiki.fool.com/Can_I_Contribute_to_My_Wife%27s_Roth_IRA_if_She_Doesn%27t_Work%3F

I like the idea of maxing out the Roths each year before my 401k because even though I don't ever want to take out money early, if needs be I can withdraw contributed money from the Roth without penalty so I can treat it somewhat like a savings account.  Once our Roths are maxed for 2013 I will up my 401k to max it out, if possible.

Is my stache growing, yet?