Reader Case Study- Are we heading towards the right path?

[Wizard]

Hello MMM forum! This is my first post here, I read the blog regularly but I'm curious about what other Mustachians think about my plan for retirement. My woman and I are fresh out of our parents' and entered the workforce about the end of last year.

Age:I'm 24 and she's 25
Income and assets:
Job:We make $4235 monthly, on average after taxes. Depending on how much overtime we put in.
Car:$800
Vanguard-Target retirement 2030:$6972
Liabilities:
No credit debt, no student loans, no car loan or mortgage. Feels good man.
Expenses:
Rent:$450
Utilities:
Gas:$76
Electricity:$60
Internet:$60
Total Utilities:$196
Gym:$52
Car Insurance:$50
Gasoline:$50
Groceries:$320
Cellphone:$50
Girl stuff:$300

Grand Total: $1468

The plan of action is to put whatever remains after bills and expenses into my vanguard account and stop working anywhere from 10-15 years. My concerns are the following

• Is the Target Retirement account any good for my current situation?
• How could I make my investments more efficient?
• Is there anywhere we could cut back a little more?
• Are our goals realistic?

I don't think there is much more to say. Feel free to ask if I missed anything.
Also thanks for your time!

[Emg03063]

Sounds good and I think target funds are a good choice for your situation.  I might pick a further out date for a more aggressive stock allocation, but that's a personal preference.  I imagine your plan will put you on track to meet your goals, but you can run a simulation on firecalc to check.  A few points:

1.  Do you have renter's insurance?  If not I would recommend buying some.
2.  Do either of you have 401k options at work?  If so, you should be maxing out any employer match options.
3.  Open IRAs for yourself and your so, and max them out.

You could lower your investment expense ratio slightly by recreating the portfolio with a 3 fund portfolio, but I wouldn't bother.

[okashira]

Is that $50 for both phones? Try to negotiatie the internet bill. Threaten to cancel, etc.

I'll try to bite my tounge on the girl stuff category...

You can dump the gym, exercise is free. couple dumbbells, pull up bar and some stretchy things.
Otherwise, very nice.

[AUS Starchie]

A set of sum bells and a pull up bar won't suffice for a semi serious lifter. Drop a few k on a solid power rack and it will save you money in the long run

[rmendpara]

Hello MMM forum! This is my first post here, I read the blog regularly but I'm curious about what other Mustachians think about my plan for retirement. My woman and I are fresh out of our parents' and entered the workforce about the end of last year.

Age:I'm 24 and she's 25
Income and assets:
Job:We make $4235 monthly, on average after taxes. Depending on how much overtime we put in.
Car:$800
Vanguard-Target retirement 2030:$6972
Liabilities:
No credit debt, no student loans, no car loan or mortgage. Feels good man.
Expenses:
Rent:$450
Utilities:
Gas:$76
Electricity:$60
Internet:$60
Total Utilities:$196
Gym:$52
Car Insurance:$50
Gasoline:$50
Groceries:$320
Cellphone:$50
Girl stuff:$300

Grand Total: $1468

The plan of action is to put whatever remains after bills and expenses into my vanguard account and stop working anywhere from 10-15 years. My concerns are the following

• Is the Target Retirement account any good for my current situation?
• How could I make my investments more efficient?
• Is there anywhere we could cut back a little more?
• Are our goals realistic?

I don't think there is much more to say. Feel free to ask if I missed anything.
Also thanks for your time!

An older woman? Nice, bro.

Haha, now to business. Btw what is "girl stuff $300"? Maybe it's not worth the battle...

Given your limited investment capital, a target retirement fund is not a bad option. You are already on a solid path with zero debt. I would continue investing in the target funds until you have ~$10k. Then, start investing in a second fund and stop contributing to the target fund. Then, start investing in a third international fund... etc. You don't have to be diversified all at once. You can work toward it over time.

In any case, you have ~$2.7k each month after expenses. That's fantastic! I don't know where you live, but I am very jealous of your rent and living costs. You could be doing a lot worse.

Questions:

Tgt retirement - It's not a bad option. With your investable cash flow, I'd just go into the individual funds; however, if you don't have an in depth understanding, the target fund is a decent option until you learn more about investing.
Efficiency - Target funds are solid. Vanguard is a great company for retail investors.
Cut back - Lady costs, maybe? It's 20% of your total expenses. You make decent income, compared to your expenses, but life will get more expensive over time, not less. Eventually you'll probably want/need to replace a car, put a down payment on a house, wedding? These things all have one thing in common. They are expensive! Biggest problem is lifestyle inflation. Be careful to not increase your expenses as quickly as your income goes up.
Reasonable goal - A general rule to retire off of is the 4% rule (multiply the income you need in retirement by 25 = 1 / .04). Since you want to retire early, you'll need your stash to last forever, so you can't use the 4% rule. You'll need to use 2.5%-3%. So, based on annual expenses when you retire of ~30k/yr (2.5k/mo in 15 yrs), you would need basically, +/- $1 - $1.2 million (I overestimated to $30k based on 3% inflation for 15 years vs $1,500 today... 1,500 * 12 * 1.03^15 is ~$30k).

Your goal is reasonable, but you'll need to save/invest aggressively and work to increase your incomes.

I think the biggest challenge will be managing early life expenses (marriage, kids, car, home, etc) which will eat into your earnings and investable assets in a big way.

[Mrs. Frugalwoods]

I've got to ask what the $300/month of "girl stuff" is? As a frugal gal myself, I honestly cannot imagine what I would spend that much on every month. I'm guessing this may be an area where you can cut back. And, I'll echo what others have said on ditching the gym membership--so many cheaper ways to work out. Otherwise, looks like you're doing great!

[hexdexorex]

I would see if anyone in your building wants to split internet with you. Last 3 buildings I have lived in that has worked out well.

Also personally I dislike target retirement accounts....especially a 2030 one will have you in a ton of bonds which currently have super low rates...and as rates rise the prices of them will fall...creating an even worse investment. You guys are super young I would do all equities for the long term. VTI VOO..etc David Swensen style

450 in rent? for the two of you? wow...awesome

also learn how to cut your gfs hair...will save some in that girl stuff category

[shotgunwilly]

If you're going to go with a target account right now, I would be in something like 2055. Although you may want to retire around 2030, that target account is set up basically for people that have been investing in it for a long time and are starting to re-allocate their funds to something less risky. 

[NewStachian]

Specifically answering your points:

1) I wouldn't use the account you're using, but I don't have a good reason to tell you not to either. There's no right answer with investing, so the best thing to do is continue to educate yourself over time and keep a clear goal that you're implementing.
2) The best way to make your investments efficient is by automating them and continuously increasing the automatic allotments over time.
3) There are areas you could cut back, but I wouldn't sweat it much. You seem to be on a really good track. (See comments below)
4) Your goal is very realistic.

Some basic numbers:

I'm going to make some assumptions here, feel free to alter the numbers if I'm off.

To retire you will need about 500k using $1500 monthly expenses, 4% rule, and adding in a little buffer

I'm going to assume you currently do not contribute to your 401(k) and have roughly 30% witholdings from your job. Back-calculating that, I get your yearly income at: (4235/.7)*12 = $72,600

Your expenses are: ~$1500/mo * 12 = $18,000 leaving $54,600 to invest.

Assuming your employer contributes 4% and you both max your 401(k) and ROTH IRA, that's (17.5k + 5.5k) * 2 = $47,400 you're adding per year

Assuming you never get a raise and never increase expenses:

Net worth after (~ish):
1 year: (6972*1.07) + 47400 = $54,860
2 years: (54860*1.07) + 47400 = $106,100
3 years: (106*1.07) + 47400 = $160,927
4 years: (160927*1.07) + 47400 = $219,592
...
8 years: (421k*1.07) + 47400 = $498,293
... and that's without using any of the remaining money from your budget (using 46k of 54k), so there's another 8k of wiggle room in there that would cover taxes, other expenses, etc, and probably should make its way to a taxable brokerage account.

General Comments:

You're definitely on track. Keep the expenses low, but don't sweat it too much (Don't go all crazy on your girl because of her $300 and don't quit your gym if you really like it). The last thing you want to do is burn out on frugality early in your career because you're cutting small things that represent negligible percentages of your budget.

Your biggest focus should be on increased revenue generation. This should go up over time as you gain work experience, but keep your eyes peeled for other opportunities that you will both enjoy and that might pay more. Keep your expenses low, don't be wasteful, and your % income to savings will continue to go up over time.

Track everything over time in a spreadsheet. Every month I log: net worth, % paycheck to savings, spending by category.

Add and subtract features from your spreadsheet over time and watch your net worth and financial health grow.

[ch12]

Net worth after (~ish):
1 year: (6972*1.07) + 47400 = $54,860
2 years: (54860*1.07) + 47400 = $106,100
3 years: (106*1.07) + 47400 = $160,927
4 years: (160927*1.07) + 47400 = $219,592
...
8 years: (421k*1.07) + 47400 = $498,293
... and that's without using any of the remaining money from your budget (using 46k of 54k), so there's another 8k of wiggle room in there that would cover taxes, other expenses, etc, and probably should make its way to a taxable brokerage account.

General Comments:

You're definitely on track. Keep the expenses low, but don't sweat it too much (Don't go all crazy on your girl because of her $300 and don't quit your gym if you really like it). The last thing you want to do is burn out on frugality early in your career because you're cutting small things that represent negligible percentages of your budget.

Your biggest focus should be on increased revenue generation. This should go up over time as you gain work experience, but keep your eyes peeled for other opportunities that you will both enjoy and that might pay more. Keep your expenses low, don't be wasteful, and your % income to savings will continue to go up over time.

Track everything over time in a spreadsheet. Every month I log: net worth, % paycheck to savings, spending by category.

Add and subtract features from your spreadsheet over time and watch your net worth and financial health grow.

+1 - I think that you (OP) are doing phenomenally, and you will soon be retired!

I've got to ask what the $300/month of "girl stuff" is? As a frugal gal myself, I honestly cannot imagine what I would spend that much on every month. I'm guessing this may be an area where you can cut back. And, I'll echo what others have said on ditching the gym membership--so many cheaper ways to work out. Otherwise, looks like you're doing great!

I'm also a lady, and I'm slightly ashamed about spending $300 last year on things like going to the spa. Your girl is spending that much in a month. If it's clothing and shoes, then fine [Mustachian heresy!] - if it's stuff like a monthly haircut (which will run you $500 in places like Los Angeles), then it's less fine. Mr. Money Mustache mentioned how his wife cuts her hair and that the technique was on Youtube. Since that post/comment, I have cut my own hair, and nobody has said anything to me about it but, "You cut your hair. It looks nice." I also inspired one of my friends to go get a haircut because she liked the way my hair framed my face.

[Wizard]

To answer some of the recurring questions:

 We share one cellphone, thankfully its a pay as you go phone and I'm looking into switching to republic wireless.  I signed a year contract for my gym(mistake), I thought about buying a powerrack and a set of 300lbs but when I signed up for the gym I didn't have the money to pay for it up front. The girl stuff category is a containment measure, $300 is a worst case scenario, she used to be a lot more spendy before we moved out and I wouldn't like to give her too much of a hard time, its her money and she earned it after all.

I'll ask my boss about the 401k but I think I'm barred from all benefits until I spend a year in the company. How exactly does the 401k work? I have an idea but I lose nothing asking wiser people. 

About the investments, I was thinking placing everything I have on Target to the total market index once I had enough for admiral shares.

Thanks everyone for all the replies! I honestly expected more face-punching.  Sorry for not replying earlier.

[NewStachian]

Wizard,

You're in such a good spot because your overall expenses are insanely low. If that's all you need to spend to be happy, then kudos to you, Mr. Super Mustachian. You will live an incredibly fulfilling life and perpetually be confused by those around you and why they would ever want to lock themselves into jobs they hate to maintain their fleet of  "nice things".

401(k) (assuming you live in the US) is a retirement vessel that allows you to defer paying taxes on up to $17.5k per person per year ($35k for both of you). This essentially allows you to take money that you would have been paying to Uncle Sam and invest it instead. Now, you still have to pay him down the road, but you have more control over it. One of the techniques many MMM'ers use is called the backdoor Roth contribution. This method allows you to tap into both your ROTH IRA (which you can do any time) and your 401(k) way before you're the required 59 1/2 years old. Here's how it works:

You can withdraw principal from your ROTH IRA at any point, for any reason. If you put $5k into a ROTH, and it grows to $6k, you can always take that first $5k out with no penalty or tax burden. However, you get a massive 10% penalty AND taxes if you take the extra $1k out, since that was made inside the ROTH. You can, at any point, "roll" some 401(k) money into your ROTH. This starts a 5-year timer before it also counts as principal... at which point you can withdraw it tax free.

Scenario: You've hit your $500k mark and have all your money in a ROTH IRA and 401(k). Let's say your expenses are $20k a year... You can roll over just enough from your 401(k) each year and treat your ROTH IRA as a checking account. Now, of course, you have to start this process early so it has 5 years to start working, but you should have enough in your ROTH or a taxable account to get you started once you get to FIRE. The only catch is the dollar amount you roll form 401(k) to ROTH counts as taxable income. But, if it's the only money you're making (since you're FIRE), you're most likely not paying any taxes on it, or are paying a really low number.


That's all a really long way of saying the fear many people have of putting too much into a 401(k) and not being able to access it until they're 59 1/2 years old is misplaced. You can easily use both ROTH IRA and 401(k) to early retire. There are further tricks you can use like taking a look at your current state's taxes and look at the state where you want to FIRE. If they're different states, keep in mind that you are not paying taxes today on that money and you are paying taxes down the road on that money. You can theoretically find yourself in a situation where it's optimal to put your money into a normal brokerage account instead of a 401(k) if you live in a state with no state tax, make very little money, and will retire to a state with high income tax... but that's more of a varsity level problem. In that case it would still be wise to at least put enough into the 401(k) to get the company match.

In your income bracket, the ROTH  IRA should be the very first thing you max each year since your marginal tax rate is low. That limit is $5.5k per person per year, so $11k for you and your wife. By declaring this on your tax form each year, you're informing the IRS that you put in principal that year which I believe is how you prove later on that you shouldn't be penalized on the money coming out. (I never did this and now have to go back and file something saying I've been contributing to my ROTH all this time. Oopsies).

Most employers today will match a certain percentage of your 401(k) contributions which boils down to nothing more than free money. Their match doesn't count toward your $17.5k cap (there's some other combined cap for you + employer which is something absurd like $52k). Look into what your employer said about yours. I would guess you can start contributing immediately, but you may not be eligible for their match for a year (My company will match 4% of my salary if I put 6% in, but I vest 50% at 2 years and 100% at 3 years, so I don't get any of their 4% that they added unless I work here 2 years). Either way, there should be an employee handbook of some sort, or someone at HR you can reach out to. Many employers do their 401(k) enrollments quarterly so I'd recommend looking into it now (our next quarterly enrollment is July 1st, but that may differ by company).

If your employer does not offer you a 401(k) plan, then federal law allows you to create and deduct income that you put into a Traditional IRA, which is very similar to a 401(k). Some terrible law prevents you from taking full advantage of a Traditional if your employer offers a 401(k)... which essentially forces employees to use their company's 401(k) even if they'd rather use their own Traditional IRA, but that's a gripe of mine for a different conversation (And I think you're only penalized if your income is north of about $115k anyway).

Keep asking questions here until you've got them all answered. The wealth of knowledge on this forum is mind-boggling!

[ROY2007]

Wizard,

You can withdraw principal from your ROTH IRA at any point, for any reason. If you put $5k into a ROTH, and it grows to $6k, you can always take that first $5k out with no penalty or tax burden. However, you get a massive 10% penalty AND taxes if you take the extra $1k out, since that was made inside the ROTH. You can, at any point, "roll" some 401(k) money into your ROTH. This starts a 5-year timer before it also counts as principal... at which point you can withdraw it tax free.

Scenario: You've hit your $500k mark and have all your money in a ROTH IRA and 401(k). Let's say your expenses are $20k a year... You can roll over just enough from your 401(k) each year and treat your ROTH IRA as a checking account. Now, of course, you have to start this process early so it has 5 years to start working, but you should have enough in your ROTH or a taxable account to get you started once you get to FIRE. The only catch is the dollar amount you roll form 401(k) to ROTH counts as taxable income. But, if it's the only money you're making (since you're FIRE), you're most likely not paying any taxes on it, or are paying a really low number.


That's all a really long way of saying the fear many people have of putting too much into a 401(k) and not being able to access it until they're 59 1/2 years old is misplaced. You can easily use both ROTH IRA and 401(k) to early retire. There are further tricks you can use like taking a look at your current state's taxes and look at the state where you want to FIRE. If they're different states, keep in mind that you are not paying taxes today on that money and you are paying taxes down the road on that money. You can theoretically find yourself in a situation where it's optimal to put your money into a normal brokerage account instead of a 401(k) if you live in a state with no state tax, make very little money, and will retire to a state with high income tax... but that's more of a varsity level problem. In that case it would still be wise to at least put enough into the 401(k) to get the company match.

In your income bracket, the ROTH  IRA should be the very first thing you max each year since your marginal tax rate is low. That limit is $5.5k per person per year, so $11k for you and your wife. By declaring this on your tax form each year, you're informing the IRS that you put in principal that year which I believe is how you prove later on that you shouldn't be penalized on the money coming out. (I never did this and now have to go back and file something saying I've been contributing to my ROTH all this time. Oopsies).
 

Keep asking questions here until you've got them all answered. The wealth of knowledge on this forum is mind-boggling!

NewStachian this reply was so helpful. Thank you! My employer offers a Roth 401k option so does this change the strategy?

- My wife and I are also 24 and 25 and we will gross approximately $85k this year
- $3k in expense each month which includes a mortgage

[NewStachian]

My employer offers a Roth 401k option so does this change the strategy?

I have to be honest with you - I haven't looked into this. I know my company offers one as well, but I figured it was MUTEX with my ROTH IRA so never bothered looking into it.