Please Help me with my Financial Plan!

[JourneyToLaunch]

Hi!

Please help me fine tune my financial plan. My husband and I are both 33 years old with a 1.5 year old and another baby due in May.

I'm still working on my 2015 taxes but our gross income for 2015 was about $215,266. I expect this to be a little higher in 2016 but not sure by how much.  Our Wages and Salaries from the W2 in 2015 is $195,211. Our current account balances in retirement accounts between the two of us is $210,620. We  have no debt other than our mortgages.

Here are the steps I want to make in the following order for 2016 and ongoing:
1 - Max out my company 401K plan ($18K) plus they match me 4%
2 - Max out my husband's 457 Plan ($18K) - Previously we were contributing to a 401k like plan through his job but after reading  blogs and doing more research, I realize a 457 Plan is much better. My question here is, we have the option to contribute money to a targeted date funds (I was going to use the 2035 Fund since its the closet to when my husband can retire, is that the right method?) or an Equity Index Fund. The targeted date funds have expense ratios ranging from (.20 to .29%) and the Expense ratio for the Equity Index Fund is .05%. Where should I put the money?
3-  Fund 2 Back Door Roth's for myself and husband for the previous year (this assumes we have an income over the $183K after pre tax deductions)
4- Start investing in 529 Plans for the kids. Our state gives a maximum of $10K deduction. Ideally, I would love to get to $10K in total for the two kids but will only do what our budget allows so that we can also do Step 5. I also know that we can use the Roth's to Fund college if we need to.
5- Invest any surplus money in our budget to Vanguard Index Funds.
6- Throw any extra money at paying down our primary mortgage.

I feel like we should have been doing a lot of this stuff in our 20's, so I feel behind. My husband can retire by age 55 so I would like to retire around the same time. We are also planning on having 1 more kid. We have a rental property that will be paid off in 2037 and our current home mortgage will pay off in 2044 if we don't put any extra payments them. I would love to pay off our primary mortgage by age 55 (or earlier) and can adjust my budget or financial steps to do that.

How does that plan sound? Is it realistic? Can we retire at 55 or earlier? Anything you would do differently?

Thanks in advance!

[nereo]

Hi there

your plan sounds good, although there are some minor tweaks I might make (below).  I wouldn't worry about getting a late start' 33 is far from late and with your impressive income you could retire much earlier than 55.  In fact, if you were willing to carefully control your expenses you could be retired i your early 40s for sure... but that's another post.

a few observations/suggestion
On target date funds:  The 'target date' is almost always when the fund will be ~ 60/40 stocks bonds.  If you want to be more heavily in stocks, choose a later date, even if you plan on retiring before this date.  For example, I might choose a 2040 retirement date even though I hope to be FI sometime around 2020, because I want to be more heavily invested in stocks.  YMMV

On retiring at age 55 - why do you think you can't retire before then? that's 22 years away.  With an AIG approaching $200k you could certainly become FI much, much sooner.

#5 and #6 are at odds with each other.  You can't put 'any money' towards one and also the other (though you couuld split them 50/50).  There's fierce debate on this topic, but I htink if your mortgage is <4% your best bet is to leave the mortgage alone and pile everything extra into your index funds.  The longer you keep a mortgage with a low rate, the better it is for you (inflation hedge).

Any details on your annual expenses?  What about your rental home, how much are you earning there?

cheers

[redcedar]

Early congrats on baby #2 due in a few months.

Don't feel too bad about figuring out how you missed years of savings in your 20s. So many people learned that lesson much later than your age of 33. It happens but the beauty of a high savings rate is that you can recover very quickly.

Nereo is right. While you provided lots of great income and savings info, not much provided on the expenses side. If you want the planning wizards here to do their magic, closer to a full picture is needed.

I personally like to combining an equity index fund with a bond index fund instead of using a target date fund. I do this mainly to reduce the funds fees like you noted. Now target date funds rebalance for you, they often add diversity with international and commodity ownership, etc but I don't personally rate those above cutting expenses.

Once your taxes are done for 2015, save a version for scenarios and really play around with it. At your income levels, you have alot of opportunity to get back deductions and credits that you are may not currently enjoy. I bet if you max out every single tax advantaged option available to you, you will find that you are getting free government money as a bonus.

A few questions:

- Can you husband contribute to both a 401k/403b AND the 457? Many people that have access to both can contribute to both. If so, that may be something to consider ahead of backdoor roth.

- Do either of you have an HSA available to you? If so, max it and don't withdraw from it.

- Do either of you have a dependent care FSA available to you? If so and if you have childcare expenses, contribute to it but only to the extent that you can use it since it has some use or lose provisions.

- Can you front load your 401k and still get matching? If so, do that and then shift to husband's 457 assuming he doesn't get a match.

[JourneyToLaunch]

Hi there

your plan sounds good, although there are some minor tweaks I might make (below).  I wouldn't worry about getting a late start' 33 is far from late and with your impressive income you could retire much earlier than 55.  In fact, if you were willing to carefully control your expenses you could be retired i your early 40s for sure... but that's another post.

a few observations/suggestion
On target date funds:  The 'target date' is almost always when the fund will be ~ 60/40 stocks bonds.  If you want to be more heavily in stocks, choose a later date, even if you plan on retiring before this date.  For example, I might choose a 2040 retirement date even though I hope to be FI sometime around 2020, because I want to be more heavily invested in stocks.  YMMV

On retiring at age 55 - why do you think you can't retire before then? that's 22 years away.  With an AIG approaching $200k you could certainly become FI much, much sooner.

#5 and #6 are at odds with each other.  You can't put 'any money' towards one and also the other (though you couuld split them 50/50).  There's fierce debate on this topic, but I htink if your mortgage is <4% your best bet is to leave the mortgage alone and pile everything extra into your index funds.  The longer you keep a mortgage with a low rate, the better it is for you (inflation hedge).

Any details on your annual expenses?  What about your rental home, how much are you earning there?

cheers

I would love to retire earlier, the earlier the better! I just don't know if that is doable with our current expenses. We live in a HCOL (NYC) and while I'm slowly getting my husband on board, the savings and living frugal mentality does not come natural to him. He has thankfully been very receptive to my suggestions and changes so far (implementing a budget, tripling his retirement contribution, etc.)

Thx for the clarification on the Targeted Date Funds, I selected 2045 Fund for the 457 Plan.

Our primary mortgage has a rate of 4.375%

The net of the rental property is about $453 a month after paying the mortgage, common charges , taxes, fees and saving for maintenance items. We pay really low taxes ($9 a year) because of an abatement and that will run out in about 14 years. I have a lot of equity in the property, maybe about $300K before selling costs/taxes if I were to be conservative. I had no intentions of selling anytime soon though because it means a lot to me. I was hoping to pass it down to my kids and use the rent as income once we retire. Rental Gross income is about $2,660. 

Our expenses are high, our mortgage runs about $2,339 a month including insurance and taxes. I am constantly looking for ways to cut other expenses but again its a balancing act with where we live and getting husband on board.

I would love to explore the idea of retiring early. My husband has a more flexible job and doesn't mind working longer. Any tips or ways to start thinking about how to make Financial Independence happen earlier would be appreciated.

[nereo]

I would love to explore the idea of retiring early. My husband has a more flexible job and doesn't mind working longer. Any tips or ways to start thinking about how to make Financial Independence happen earlier would be appreciated.
Report

The most straightfoward way of doing this is to post a full case study detailing expenses and then brace yourself for some well-intentioned face-punches.  There are lots of people here with high incomes in HCOL areas that still managed to spend <$50k/year.  If you could achieve that with your income you certainly could retire in under 10 years.  Actually, with a 75% savings rate (a high target to be sure) you could retire when you hit 40.  Maybe you don't want to be that drastic, but that's a carrot to dangle in front of you and your husband. 
Many will tell you that it's possible to live very well, even in a HCOL area, on $50k/year.

Once you have saved up enough, would you consider moving to a LCOL area?  You could potentially shave years off your FIRE date by choosing to move somewhere cheaper.

your mortgage is in that 'in-between' range.  Do whichever makes you more comfortable... investing more or paying it down faster.  Personally I'd still chose to invest more as 4.375% is still fairly low and gives you a good inflation hedge, but to each their own.

[nereo]

a few posts you might be interested in re: getting your spouse on board.

http://www.mrmoneymustache.com/2012/03/22/selling-the-dream-how-to-make-your-spouse-love-frugality/
http://www.mrmoneymustache.com/2014/07/17/is-mr-money-mustache-ruining-your-marriage/

and a forum thread:
http://forum.mrmoneymustache.com/welcome-to-the-forum/getting-spouse-on-board/

there are lots of others.. just use the search function.

[JourneyToLaunch]

Early congrats on baby #2 due in a few months.

Don't feel too bad about figuring out how you missed years of savings in your 20s. So many people learned that lesson much later than your age of 33. It happens but the beauty of a high savings rate is that you can recover very quickly.

Nereo is right. While you provided lots of great income and savings info, not much provided on the expenses side. If you want the planning wizards here to do their magic, closer to a full picture is needed.

I personally like to combining an equity index fund with a bond index fund instead of using a target date fund. I do this mainly to reduce the funds fees like you noted. Now target date funds rebalance for you, they often add diversity with international and commodity ownership, etc but I don't personally rate those above cutting expenses.

Once your taxes are done for 2015, save a version for scenarios and really play around with it. At your income levels, you have alot of opportunity to get back deductions and credits that you are may not currently enjoy. I bet if you max out every single tax advantaged option available to you, you will find that you are getting free government money as a bonus.

A few questions:

- Can you husband contribute to both a 401k/403b AND the 457? Many people that have access to both can contribute to both. If so, that may be something to consider ahead of backdoor roth.

- Do either of you have an HSA available to you? If so, max it and don't withdraw from it.

- Do either of you have a dependent care FSA available to you? If so and if you have childcare expenses, contribute to it but only to the extent that you can use it since it has some use or lose provisions.

- Can you front load your 401k and still get matching? If so, do that and then shift to husband's 457 assuming he doesn't get a match.

Ok thx , a couple questions. Yes, he can contribute to both a 403B plan and his 457 Plan but not sure how much room we would have in terms of cash flow to do that in our budget. Is the reason you suggested this primarily because of the pretax benefit? I was thinking it would also be good to diversify retirement funds by having some tax free dollars and also being able to access it to help pay for kids college costs was also good. If I could do both, I would. But if I had to choose between the two, I thought maxing out his 457 plan and then contributing to backdoor ROTHs was best. Also the Roths would be funded by my bonus which I get in March of every year.

We don't have HSA available to us and we contribute to the FSA through my job.

Just curious, what is the strategy behind front loading the 401k first and then the 457?

[JourneyToLaunch]

I would love to explore the idea of retiring early. My husband has a more flexible job and doesn't mind working longer. Any tips or ways to start thinking about how to make Financial Independence happen earlier would be appreciated.
Report

The most straightfoward way of doing this is to post a full case study detailing expenses and then brace yourself for some well-intentioned face-punches.  There are lots of people here with high incomes in HCOL areas that still managed to spend <$50k/year.  If you could achieve that with your income you certainly could retire in under 10 years.  Actually, with a 75% savings rate (a high target to be sure) you could retire when you hit 40.  Maybe you don't want to be that drastic, but that's a carrot to dangle in front of you and your husband. 
Many will tell you that it's possible to live very well, even in a HCOL area, on $50k/year.

Once you have saved up enough, would you consider moving to a LCOL area?  You could potentially shave years off your FIRE date by choosing to move somewhere cheaper.

your mortgage is in that 'in-between' range.  Do whichever makes you more comfortable... investing more or paying it down faster.  Personally I'd still chose to invest more as 4.375% is still fairly low and gives you a good inflation hedge, but to each their own.

I don't know if I am cut out to be a true Mustachian. I looked at our budget and I find it quite hard to give up some of the things we enjoy like, saving up for vacations and going out to eat (as an example, we have $250 budgeted a month for going out to eat). We don't spend much in other areas but I do have a long commute and have high commuting expenses.  We love our home and want it to be our forever home so we really have no intentions of moving to LCOL or anywhere else. My husband is a teacher and has a more flexible schedule and only works 15 minutes from our house which is another reason we won't move closer to my job.

Right now, if I am able to accomplish everything I mentioned in my original post, our savings rate would be about 31% (not including principal pay down on mortgages). I played with some numbers and was able to get savings rate up to 40% but that included cutting out saving for vacations, and a car fund and making cuts everywhere else. Again, something I don't know that we can do.  I guess with all that said, retiring extra early, will be near impossible since we cant or don't want to increase our savings rate above the 30%- 35%. I love the idea of retiring early but not sure we have what it takes to get there.

[nereo]

I don't know if I am cut out to be a true Mustachian. I looked at our budget and I find it quite hard to give up some of the things we enjoy like, saving up for vacations and going out to eat (as an example, we have $250 budgeted a month for going out to eat). We don't spend much in other areas but I do have a long commute and have high commuting expenses.  We love our home and want it to be our forever home so we really have no intentions of moving to LCOL or anywhere else. My husband is a teacher and has a more flexible schedule and only works 15 minutes from our house which is another reason we won't move closer to my job.

Right now, if I am able to accomplish everything I mentioned in my original post, our savings rate would be about 31% (not including principal pay down on mortgages). I played with some numbers and was able to get savings rate up to 40% but that included cutting out saving for vacations, and a car fund and making cuts everywhere else. Again, something I don't know that we can do.  I guess with all that said, retiring extra early, will be near impossible since we cant or don't want to increase our savings rate above the 30%- 35%. I love the idea of retiring early but not sure we have what it takes to get there.

PowPow505.  I hope my posts haven't discouraged you in any way.  I wrote them just to show what is possible.  Ultimately there is no "true mustachian" - if I could sum up the ideology in one sentence it would be lining up your spending with your values and happiness. Some people want to live in HCOL areas like NYC and have higher spending.  That's fine.  Others choose a different path.  That fine too.

Now - for starters a 31% savings rate is nothing to sneeze at.  That will have you FI/RE long before the majority of your peers.  Also, I wouldn't necessarily exclude the principle that you are paying on mortgages - while it most likely won't earn you the kind of return that an index fund will (though it's possible) it is equity and eventually the note will be paid off and your cash-flow will improve dramatically.  In reality, >50% of your budget goes either towards savings or principle/debt-reduction, which is considerable.  I can't calculate the exact amount without more specific numbers.

Finally, I'd just add that 'incremental optimization' can have amazing results if you keep at it over several years.  If you try to jump from 31% to 50% savings rate in a year or two you'll likely feel like you are depriving yourself, which is depressing and self defeating. If instead you simply try to spend ~2% less this year than last year (and repeat this every year) you'll find you've made huge progress over the next decade.  That's the "incremental" part.
 Instead of thinking of 'cutting' things out of your budget I find it better to try to "optimize" things.  Cutting is eliminating.  Optimization is just lining up your goals better with your time and expenses.  There's an infinite number of ways this can be done, but here's one example.  Suppose you have goals of eating healthier, spending more quality time with your SO and spending a bit less on food and drink.  Replace just one of your normal 'going-out to a restaurant' times with a specific evening that you and your partner spend cooking a meal together that you've never attempted before. 
Obviously this only works if 1) those are your goals and 2) you both enjoy cooking.  It's just an example of how constant 'optimization' can reap big results.

[JourneyToLaunch]

I don't know if I am cut out to be a true Mustachian. I looked at our budget and I find it quite hard to give up some of the things we enjoy like, saving up for vacations and going out to eat (as an example, we have $250 budgeted a month for going out to eat). We don't spend much in other areas but I do have a long commute and have high commuting expenses.  We love our home and want it to be our forever home so we really have no intentions of moving to LCOL or anywhere else. My husband is a teacher and has a more flexible schedule and only works 15 minutes from our house which is another reason we won't move closer to my job.

Right now, if I am able to accomplish everything I mentioned in my original post, our savings rate would be about 31% (not including principal pay down on mortgages). I played with some numbers and was able to get savings rate up to 40% but that included cutting out saving for vacations, and a car fund and making cuts everywhere else. Again, something I don't know that we can do.  I guess with all that said, retiring extra early, will be near impossible since we cant or don't want to increase our savings rate above the 30%- 35%. I love the idea of retiring early but not sure we have what it takes to get there.

PowPow505.  I hope my posts haven't discouraged you in any way.  I wrote them just to show what is possible.  Ultimately there is no "true mustachian" - if I could sum up the ideology in one sentence it would be lining up your spending with your values and happiness. Some people want to live in HCOL areas like NYC and have higher spending.  That's fine.  Others choose a different path.  That fine too.

Now - for starters a 31% savings rate is nothing to sneeze at.  That will have you FI/RE long before the majority of your peers.  Also, I wouldn't necessarily exclude the principle that you are paying on mortgages - while it most likely won't earn you the kind of return that an index fund will (though it's possible) it is equity and eventually the note will be paid off and your cash-flow will improve dramatically.  In reality, >50% of your budget goes either towards savings or principle/debt-reduction, which is considerable.  I can't calculate the exact amount without more specific numbers.

Finally, I'd just add that 'incremental optimization' can have amazing results if you keep at it over several years.  If you try to jump from 31% to 50% savings rate in a year or two you'll likely feel like you are depriving yourself, which is depressing and self defeating. If instead you simply try to spend ~2% less this year than last year (and repeat this every year) you'll find you've made huge progress over the next decade.  That's the "incremental" part.
 Instead of thinking of 'cutting' things out of your budget I find it better to try to "optimize" things.  Cutting is eliminating.  Optimization is just lining up your goals better with your time and expenses.  There's an infinite number of ways this can be done, but here's one example.  Suppose you have goals of eating healthier, spending more quality time with your SO and spending a bit less on food and drink.  Replace just one of your normal 'going-out to a restaurant' times with a specific evening that you and your partner spend cooking a meal together that you've never attempted before. 
Obviously this only works if 1) those are your goals and 2) you both enjoy cooking.  It's just an example of how constant 'optimization' can reap big results.

Thank you so much for the encouragement. I prefer to look at it in terms of optimization rather than cutting.