Author Topic: Low income, how can I make this work  (Read 5181 times)

beached

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Low income, how can I make this work
« on: April 24, 2015, 10:32:36 PM »
Hello Everyone, first post on the board, just registered today to ask this question.

I want to get everyone's input on if early retirement is a possibility for us. The Mrs. and I want to get input on our current situation.

Here's the breakdown:
Age Me: 25
Age Mrs.: 24
Debt free as of March (Yeah tax return)
Combined - pretax income: ~40k/y
Monthly income after tax, ~2800/m, 33600/year (Wife is contract worker so hours each week hover around 30 +-2 hours)
Average cost of living: $2074-2204/m $24888-26448/y
Savings per year: $7152 - $8712

Current savings:
Roth IRA Mrs: $14000
Roth IRA Me: $10000
Traditional IRA Me: $13000

Current Expenses(monthly):
Rent: 735 (Apartment, all utilities included except electric)
Electric: 45-50
Internet: 30
Food: 300-400 (This is way too high, we are working on bringing this down by at least 100-150/month, this is our current financial goal)
Auto Gas: 120
Car ownership: $250 (Insurance, registration, maintenance and repairs for 1 year/12 months)
Entertainment: ~100
Tithe: 280
Phone: 30
Other: 50-75 (Household items like soap, toilet paper, gifts(its wedding season :/ ), etc)

Yearly Expenses:
Plain tickets: $1600 (134/m)
The only yearly expense we incur is a plain ticket to the parents timeshare each year. This is our only vacation each year, the lodging, food, and entertainment while we are there is all covered.

The reason for the variance is because of seasonal changes, work variance, etc. In reality we somehow live on slightly less than all this. We somehow manage to save more into our Roth IRA's then the math allows. For instance, between tax return and cash savings from paychecks, we have already managed to put $6000 away(some into last year), and should be able to put another 5500 away to max out the Mrs. Roth before the end of the year too. For the life of me I cannot figure out why! (I guess there are worse problems to have?)

Our income is not likely to drop during the next 15+ years, in fact there is a good chance that it will increase. My calculations show me that the only way to make this happen by 40-45, is if we get a raise averaging 3K/year over the next 10 years, and contribute all the funds to retirement.

According to firecalc and the 4% withdrawal rule, we will need a portfolio in the 925k range in order to retire safely, 650k if I'm willing to risk not having a financial disaster again. I know somewhere between there is my target, I was hoping to get insight as to how I can make this happen, and what my FIRE date is.

Let me know if you need any additional information.
« Last Edit: April 24, 2015, 10:45:55 PM by beached »

MDM

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Re: Low income, how can I make this work
« Reply #1 on: April 24, 2015, 11:03:26 PM »
Are you putting enough into a Traditional IRA or 401k so you get the full $2000 Saver's Credit (even if you can use only $1540 of it) at tax time?

Chuck

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Re: Low income, how can I make this work
« Reply #2 on: April 24, 2015, 11:09:27 PM »
Define "retire safely". There is a reasonable case to be made that any success rate over 80% is functionally useless.

The expenses that you've outlined come out to 1950 if you meet your food budget goal. That gives you a savings rate of 30%. At that savings rate you need to work for 28 years.

But wait! You already have 37k in savings, so you should just need to work for 26 years and a little change. That means you can retire at 50. If you aren't impressed you bloody well should be: the average retirement age is creeping into the upper 60s right now. 18 years early, on a salary that most consider a sentence to work until death, is quite a feat.

If 26 years is too long, you need to think about losing the car. You rent, is renting closer to work an option? If so, you are able to eliminate over 300 bucks a month (nearly 20% of your current spending). Also give a look at incidental spending (gifts).

Also bear in mind that you should be working professionally to increase take home pay. You shouldn't be making this same wage for too long, and any increase in salary decreases your working time substantially.

beached

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Re: Low income, how can I make this work
« Reply #3 on: April 24, 2015, 11:52:44 PM »
Are you putting enough into a Traditional IRA or 401k so you get the full $2000 Saver's Credit (even if you can use only $1540 of it) at tax time?

NO! I haven't heard of this tax credit yet, what are the requirements to qualify for it? I have contributed $5000 to my Roth and $0 to my wife's Roth for the 2015 tax year. Why does a TIRA count towards this but a roth doesnt? How much do you need to contribute, and can my wife open and contribute to a TIRA to qualify for us if we are filing jointly?




Define "retire safely". There is a reasonable case to be made that any success rate over 80% is functionally useless.

If you aren't impressed you bloody well should be: the average retirement age is creeping into the upper 60s right now. 18 years early, on a salary that most consider a sentence to work until death, is quite a feat.

If 26 years is too long, you need to think about losing the car. You rent, is renting closer to work an option? If so, you are able to eliminate over 300 bucks a month (nearly 20% of your current spending).

Also bear in mind that you should be working professionally to increase take home pay. You shouldn't be making this same wage for too long, and any increase in salary decreases your working time substantially.

  • Retire Safely has meant 98% chance or higher on firecalc for the 925k number, 5% withdraw for the 650k number (32000/year income). is there any literature I can read about why anything over 80% is useless?
  • Thanks for the words of encouragement. I read MMM story about retiring at 40 and I feel like im falling behind! Ironically, at my rate, Ill retire 5-7 years after my parents when i think about it like that, thats pretty good.
  • we both work from home, but church is 15 miles away and we are dance teachers about 5 miles away. We live in west MI where the lake effect snow = terrible for bike riding. We only have one car currently, dont drive much unless we are going to church or dance, everything else like groceries, the park, library is walking distance from the apartment. the cost of the car is the cost of PLPD insurance, oil changes, tire changes, and the occasional repair. Im not sure how we can get it much cheaper, any specific tips? Unfortunately abandoning our church is not on the chopping block for us, if the price to pay to continue attendance is another year or two in the work force, then thats something we are willing to accept. 
  • We rent, for our area we cant get much cheaper for rent unless we move to a shadier area, then we would have to drive more in order to avoid getting mugged/stabbed at night. We are looking at relocating all together though. Our lease is up in September, we only have two requirements, access to highspeed internet (for work) and safe enough to walk around at night without having to worry. any suggestions of locations would be great, anywhere in the continental USA is what we are willing to work with.
  • Working to increase my take home pay is in the works, actually talked with the boss man today, he flat out told me that he needs to increase my salary if he wants to keep me, but doesnt have the fund to do so yet (New company still growing). He laid out his plans to generate those funds and talk with me about that. It looks very plausible, however it wont be for another year until I could get a 3k raise. This is a startup company that I have 10% ownership in, my hopes is that Ill be able to make a normal salary inside of 5 years, and if I get lucky  big payday when it goes public. At what point do you think I should cut my losses and move on, I loose the ownership if I leave before 6 years, I am working on my second year now.

MDM

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Re: Low income, how can I make this work
« Reply #4 on: April 25, 2015, 12:42:09 AM »
NO! I haven't heard of this tax credit yet, what are the requirements to qualify for it? I have contributed $5000 to my Roth and $0 to my wife's Roth for the 2015 tax year. Why does a TIRA count towards this but a roth doesnt? How much do you need to contribute, and can my wife open and contribute to a TIRA to qualify for us if we are filing jointly?
See http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-%28Saver%E2%80%99s-Credit%29

In short, you need your AGI to be no more than $36,000 to get the full credit.  Traditional IRA lowers the AGI, Roth IRA does not.  Yes, your wife can have her own tIRA.
$36,001 is too much, so don't cut it too closely.  Example below is from the case study sticky spreadsheet - you could download a copy for yourself and enter your own numbers.

CategoryMonthlyCommentsAnnual
Salary/Wages$3,333$40,000
Traditional IRA$333Room to increase?$4,000
Income subject to IRS tax$3,000$36,000
Federal Adj. Gross Inc.$3,000$36,000
Federal tax$0Thanks to Saver's Credit$0
State/City tax$90Guess, using 3.00% * Fed. AGI$1,080
Soc. Sec.$207Assumes 2 earners paying$2,480
Medicare$48$580
Total income taxes$345$4,140
Income before other expenses  $2,655$31,860
Monthly Expenses:
Miscellaneous$2,072$24,858
Non-mortgage total$2,072$24,858
Other tax-advantaged investments:
Roth IRA$583$7,000
Total Expense$2,655$31,858
Total to invest$0$2


Filing Status21=S, 2=MFJ
# of earners2
AGI$36,000
Std. Deduct.$12,600
Act. Deduct.$12,600
# Exempt.2
Exemption$8,000
Taxable$15,400
Tax$1,540
Savers' credit$2,000
Tax after n-r credit$0
# Children <170
Child Tax Cred.$0
EIC$0
Net Tax$0
Monthly$0
Mtg. Int. (guess)$0
State tax$1,0803.%
Prop tax$0
Charity$0
Item. Deduct.$1,080

dsmexpat

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Re: Low income, how can I make this work
« Reply #5 on: April 25, 2015, 01:22:06 AM »
I addressed this exact problem a few days ago for my wife and I who are in a similar situation. The question is "how much to defer?" and it's not too hard.

You get 12,600 deduction, that leaves 27,400 left to pay tax on.
8,000 exempt, that leaves 19,400 left to pay tax on. That is around $2000 in tax which means if you contribute over $4000 to any kind of IRA or 401k plan then you get a $2000 non refundable credit which leaves you tax free. If you plan on saving you actually want to pay as much tax as possible, up to $2000, to guarantee as much of your money as possible is post tax. You're not going to be retiring early and abusing tIRA to ROTH conversions so just get as much money already flagged post tax as possible when you can get the tax back. The Saver's Tax Credit is built for you, use it.

Problem is you need your AGI to be a certain amount to get that credit and if it's too high you won't get the 50% match. What this means is that you may have to defer some income into tIRA and 401k accounts, even though you're able to pay up to $2000 in tax and break even. This sucks. The calculator in the case study topic will help you find the magic number of contributions for you. You'll want to do 401k to the match, tIRA to the magic AGI number for the 50% Saver's Credit and the roth up to the $5500 limit with whatever you have left over.

lhamo

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Re: Low income, how can I make this work
« Reply #6 on: April 25, 2015, 04:42:16 AM »
The saver's tax credit might be great for people who are stuck in low-income situations due to other mitigating factors (small children at home and prohibitive childcare costs, one or more of the couple still in school FT, etc). But in your case, if you have two able-bodied adults in your household and no kids/childcare to worry about, I would posit that you are probably going to get further faster if you focus on MAXIMIZING rather than LIMITING your income at this point. 

Is the role you play in the business you work for anything that generates income/profits?  If so, then you have much more room to bargain with him.  Work with him to grow the business/the profits.  Don't just sit back passively and wait for the business to do better so that you can get that 3k raise.


Hey It's Me

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Re: Low income, how can I make this work
« Reply #7 on: April 25, 2015, 06:30:15 AM »
The saver's tax credit might be great for people who are stuck in low-income situations due to other mitigating factors (small children at home and prohibitive childcare costs, one or more of the couple still in school FT, etc). But in your case, if you have two able-bodied adults in your household and no kids/childcare to worry about, I would posit that you are probably going to get further faster if you focus on MAXIMIZING rather than LIMITING your income at this point. 

This. Focus also on the income side of the equation. Is there something you and your wife could be doing to earn more income? $40K/year for two adults is around what you would make doing minimum wage work. How can you make more money than that?

Davids

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Re: Low income, how can I make this work
« Reply #8 on: April 25, 2015, 08:51:52 AM »
The focus needs to be on what you can do to increase your income. You already recognized you need to decrease your food budget, everything else I am ok with based on your expenses (I won't argue tithe as that is your personal choice). What do you guys do, is there any way you can increase your salary, side hussle or finding a new ft job.

beached

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Re: Low income, how can I make this work
« Reply #9 on: April 25, 2015, 10:36:52 AM »
According to IRA.gov "The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly)"

Three questions:
1. I do claim tithe as charitable contributions, does this help reduce my AGI for this purpose?
2. If we contribute the remaining $6000 to the traditional IRA, would we qualify for $3000 back because we are filing jointly?
3. My company is looking into opening a SEP IRA this year. This SEP IRA would technically be in my name, does this SEP share the same contribution pool as the Roth/T IRA?

Is the role you play in the business you work for anything that generates income/profits?  If so, then you have much more room to bargain with him.  Work with him to grow the business/the profits.  Don't just sit back passively and wait for the business to do better so that you can get that 3k raise.

If I quit, the business would implode do to the workload under in about 1 month. There are 3 employee's, He handles sales, marketing, accounting, and helps out with about 10% of the actual work. I do about 70% of the actual service we sell, and I have an employee who helps with about 20% of it. Its a billable service, so the more I work the more we make, we plan to increase the billing rate for new customers by 20% and another employee to reduce my overall work load while increasing my take home pay slightly. This goal is by the end of the year for him, if I run the numbers, I see it happening in about 12 months though. Still not bad, I may be able to get a 4 day work week at 33k this time next year.

Its worth noting I do like the work, both the CEO and I align in future goals and where we want the company to go, I just don't know if its worth sticking around for 2 or 3 more years until my salary meetings up with market rates. That 10% ownership, work from home, possible 4 day work week in 12 months with no reduction in salary, and the fact that he wants me to be CEO in 10 years so that he can start a new company are what keep me here. I could get a job for 45k-55k+ in under 2 months if I started handing out resumes.

How long am I taking off the early retirement by staying? If i get the 4 day work week, if I'm honest with myself, I would not use it to generate more income, the spouse and I would go camping, or go to the beach (Really close to lake MI) more often instead)


obstinate

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Re: Low income, how can I make this work
« Reply #10 on: April 25, 2015, 11:01:19 AM »
It is very tough to retire early on a low income. Your spending is already near what I would call the bare minimum. Sure there are some things you can do, but you're not going to move the ball much on the expense side. The best thing is to try to figure out what you can do to improve your income.

Remember, MMM retired early by making 2.5x what you make, and spending just a little bit more. So it's going to be a longer road for you. That said, you're still in a better position than a lot of people, and you are doing a pretty good job on your expenses. Even though you won't be living the FIRE life at age 30, you can get there much sooner than the average American if you remain cautious.

GreenPen

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Re: Low income, how can I make this work
« Reply #11 on: April 25, 2015, 11:06:08 AM »
1. I do claim tithe as charitable contributions, does this help reduce my AGI for this purpose?

No, this doesn't reduce your AGI because you are taking the standard deduction.

EDIT: Oops, looks like I should do MDM's homework assignment too! Either way, the OP will presumably take the standard deduction, rather than itemizing to claim the charitable giving.


If I quit, the business would implode do to the workload under in about 1 month. There are 3 employee's, He handles sales, marketing, accounting, and helps out with about 10% of the actual work. I do about 70% of the actual service we sell, and I have an employee who helps with about 20% of it. Its a billable service, so the more I work the more we make, we plan to increase the billing rate for new customers by 20% and another employee to reduce my overall work load while increasing my take home pay slightly. This goal is by the end of the year for him, if I run the numbers, I see it happening in about 12 months though. Still not bad, I may be able to get a 4 day work week at 33k this time next year.

Its worth noting I do like the work, both the CEO and I align in future goals and where we want the company to go, I just don't know if its worth sticking around for 2 or 3 more years until my salary meetings up with market rates. That 10% ownership, work from home, possible 4 day work week in 12 months with no reduction in salary, and the fact that he wants me to be CEO in 10 years so that he can start a new company are what keep me here. I could get a job for 45k-55k+ in under 2 months if I started handing out resumes.

How long am I taking off the early retirement by staying? If i get the 4 day work week, if I'm honest with myself, I would not use it to generate more income, the spouse and I would go camping, or go to the beach (Really close to lake MI) more often instead)

These two things in bold. If you are really that valuable to this guy, he should offer you more than minimum wage plus promises. Why not get one of these job offers, and then use this to renegotiate? If he really can't pay you more (despite that you are essential to the company), perhaps he will at least give you more ownership in the company.
« Last Edit: April 25, 2015, 02:49:03 PM by GreenPen »

GreenPen

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Re: Low income, how can I make this work
« Reply #12 on: April 25, 2015, 11:53:09 AM »
And since you are looking for ways to decrease your AGI... make sure you are deducting every business expense that you can.  Does your wife work as an independent contractor from home? If she is working from home, expenses should include a portion of rent, internet, and utilities. You should also deduct business equipment (computer?), expenses related to advertising (business cards, website?), and certain car miles. And you should also be deducting a portion of self-employment tax.

I apologize if you are already doing all of this (it sounds like you got a big refund last year)-- but I wanted to put it on your radar since you are looking for ways to reduce AGI to get that tax credit.



MDM

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Re: Low income, how can I make this work
« Reply #13 on: April 25, 2015, 01:33:34 PM »
According to IRA.gov "The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly)"

Three questions:
1. I do claim tithe as charitable contributions, does this help reduce my AGI for this purpose?
Homework assignment: Study form 1040 and report back the line where AGI is calculated, and the line where charitable contributions are deducted.  Hint: even if you itemize deductions, that won't change your AGI.

Quote
2. If we contribute the remaining $6000 to the traditional IRA, would we qualify for $3000 back because we are filing jointly?
The maximum possible Saver's Credit, per the line you quoted, is "50% of ... $4,000 if married filing jointly".  In other words, $2,000.

Quote
3. My company is looking into opening a SEP IRA this year. This SEP IRA would technically be in my name, does this SEP share the same contribution pool as the Roth/T IRA?
Not sure what you mean by "contribution pool", but SEP IRA funds come from the employer (not employee) and do not count against your own IRA contribution limits.  See http://www.investopedia.com/ask/answers/08/roth-traditional-sep.asp.

beached

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Re: Low income, how can I make this work
« Reply #14 on: April 25, 2015, 02:33:42 PM »
Thanks Everyone, good stuff!

Quote
3. My company is looking into opening a SEP IRA this year. This SEP IRA would technically be in my name, does this SEP share the same contribution pool as the Roth/T IRA?
Not sure what you mean by "contribution pool", but SEP IRA funds come from the employer (not employee) and do not count against your own IRA contribution limits.  See http://www.investopedia.com/ask/answers/08/roth-traditional-sep.asp.

I'm Sorry! I mean Simple IRA, not SEP IRA!
There is a contribution limit of $5500 for 2015 to Traditional IRA/Roth IRA. I can max these out, however if the company opens a Simple IRA would I be able to contribute additional funds to this plan? It looks like a Simple IRA has a contribution limit of $12500, so I would assume the contribution limits for TIRA/RIRA dont have any affect on the contribution limits for Simple IRA, meaning I could contribute up to $23,500 / year? ($5500 for my roth, 5500 for wifes TIRA, and $12500 to simple ira)

lhamo

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Re: Low income, how can I make this work
« Reply #15 on: April 25, 2015, 04:15:48 PM »
If I quit, the business would implode do to the workload under in about 1 month. There are 3 employee's, He handles sales, marketing, accounting, and helps out with about 10% of the actual work. I do about 70% of the actual service we sell, and I have an employee who helps with about 20% of it. Its a billable service, so the more I work the more we make, we plan to increase the billing rate for new customers by 20% and another employee to reduce my overall work load while increasing my take home pay slightly. This goal is by the end of the year for him, if I run the numbers, I see it happening in about 12 months though. Still not bad, I may be able to get a 4 day work week at 33k this time next year.

If this is an accurate description, you are being screwed here, in my view.  It is YOUR work that is bringing money into the company (company would not exist without you) and you are essentially supporting two other people.  And one of them is probably taking home LOTS more than you while whining that he can't give you a raise.  10% stake for a company where you are doing 70% of the basic service that brings in the money is a really crappy trade off.  And I think your idea about going to 4 days a week is a fantasy -- why would the owner let his goose stop laying golden eggs one day a week?  Wouldn't that be a 20% drop in business?

Do you have some kind of skill that is irreplaceable, widely needed, and portable?  If so I would consider moving somewhere else (am guessing you probably have a non-compete clause with the owner) and setting up shop yourself as soon as possible.  Your wife can be the office manager, etc.  There is no need to stick in a lousy deal in a part of the country where you are earning such low wages.  Unless you are doing snowmobile repair or something very geographically limited. 

I'd also be interested to know what your wife is doing for income.  As I mentioned above and others have also noted, $40k for two able-bodied adults is an extremely low income.  If it is due to where you live, you need to think about moving somewhere else.  Especially if you want to grow your dance teaching side business -- that is the kind of thing that you probably would do great in if you were in a major metropolitan area, but that will probably never really take off in a meaningful way in a smaller area because you just don't have the population to draw on, not to mention the economic challenges (who is going to pay for dance lessons if they don't have disposable income, which it sounds like it is hard to generate in your area).  Doesn't have to be NYC or LA (actually I would avoid those places).  Maybe the Twin Cities (if you want to stay north) or Atlanta or any of the larger cities where housing is reasonably affordable.