Author Topic: Reader Case Study- First real job, want to start out right  (Read 4913 times)

JetsMetsNets

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Reader Case Study- First real job, want to start out right
« on: September 23, 2014, 11:25:25 AM »
I start my first job as a lawyer next week! So, lots of debt but decent salary.

Income (post-tax):
Me: $96,000 (First year attorney)
Husband: $48,000 (Public school teacher)
Total: $144,000 a year ($12,000 a month)

Current monthly household expenses:
Rent: $2,300
Public transportation: $230
Phones, internet, Netflix: $205
Gym: $150
Utilities: $125
Insurance: $75
Food: $300
Laundry and dry cleaning: $100
Misc: $500
Husbandís student loans: $400
My student loans: $1,650
401k + Roth: $2,300
Subtotal: $8,410
Left-over: $3,590


Assets:
Savings: $50,000
Husbandís retirement $15,000
My retirement: $20,000

Liabilities (all student loans)
My Plus Loan $75,000 @ 7.9%
My Stafford loan $65,000 @ 6.8%
Husbandís private loan $40,000 @ 3.13%(v)
Total debt= $180,000

Specific questions:
How much of our savings should we put toward loans? $20k? $30k?
ē   Right now we plan on putting our extra $3,500/month toward loans
ē   Also plan on refinancing my debt with SoFi once I am admitted to the bar

Other info: Would like to have a baby in 2-3 years and have my husband be a stay-at-home dad until pre-school starts. Oh, and we live in NYC. I know we pay a lot in rent but a short commute is really important to me.

Thanks so much for your thoughts. Seems like MMM is a great community.

Catbert

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Re: Reader Case Study- First real job, want to start out right
« Reply #1 on: September 23, 2014, 12:07:11 PM »
I'm guess that you are already funding Roth's for both of you and up to the match on 401ks.  After that I'd hit the student loans with all your extra money.  I'd re-assess once you've paid off the 6.8% and 7.9% loans.  It probably doesn't pay to obliterate the 3% loans especially he's a SAHD at the point.

JetsMetsNets

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Re: Reader Case Study- First real job, want to start out right
« Reply #2 on: September 23, 2014, 12:30:12 PM »
Yup, we are maxing out our Roths and 401ks for 2014 but neither of us have a 401k match.

Wouldn't it be risky to put all of our $50k in savings toward debt? I was thinking we should keep at least $20k for emergencies?

MDM

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Re: Reader Case Study- First real job, want to start out right
« Reply #3 on: September 23, 2014, 12:48:16 PM »
Yup, we are maxing out our Roths and 401ks for 2014 but neither of us have a 401k match.
Quote
401k + Roth: $2,300
Maxing out Roths and 401ks would be ($11,000 + $35,000) / 12 = $3,833/mo.

Quote
Wouldn't it be risky to put all of our $50k in savings toward debt? I was thinking we should keep at least $20k for emergencies?
Why $20K?  Not saying it is wrong, just asking to understand your thought process.

JetsMetsNets

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Re: Reader Case Study- First real job, want to start out right
« Reply #4 on: September 23, 2014, 01:09:07 PM »
Yup, we are maxing out our Roths and 401ks for 2014 but neither of us have a 401k match.
Quote
401k + Roth: $2,300
Maxing out Roths and 401ks would be ($11,000 + $35,000) / 12 = $3,833/mo.

Sorry- should have mentioned that I'm the only one with a 401k, but my husband will have a pension if he keeps teaching.


Quote
Wouldn't it be risky to put all of our $50k in savings toward debt? I was thinking we should keep at least $20k for emergencies?
Why $20K?  Not saying it is wrong, just asking to understand your thought process.

I've heard 3-6 months living expenses is a good emergency fund? I'm really just guessing on what's best though...

retired?

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Re: Reader Case Study- First real job, want to start out right
« Reply #5 on: September 23, 2014, 02:12:12 PM »
Consider your likely salary path.  If you don't get a match, I'd move more towards debt reduction than building up the retirement stash.  Purely an opinion.

Also, since you live in high-tax NYC, you might consider regular IRA rather than ROTH.

BooksAreNerdy

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Re: Reader Case Study- First real job, want to start out right
« Reply #6 on: September 23, 2014, 02:29:40 PM »
Maxing out IRAs for both of you would be 11k/year or 916/mo.

 Your husband probably doesn't have a 401k being a teacher. What sort of retirement acct does he get? The max for your 401k is 17500/yr or 1458/mo. Are you getting a company match?

It's a little unclear if you are maxing out 401k and hubs isn't contributing to his?

Cheddar Stacker

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Re: Reader Case Study- First real job, want to start out right
« Reply #7 on: September 23, 2014, 02:32:35 PM »
Welcome to the forum!

Expenses seem reasonable other than Gym and Misc so maybe re-visit those.

Savings/Emergency Fund - Since you rent you won't have a HELOC to fall back on, but you could use credit cards temporarily. I think you should keep 2-3 months of base monthly expenses in your EF. Once you remove the 401k and Roth you're at ~$6K monthly, so I would keep $12-18K and use the rest to pay down the 7.9% interest debt. Then use all surplus towards that debt as well.

Continue maxing every tax deferral you can for now. You guys are in a shitty spot in the tax code where deductions start to phase out, particularly student loan interest, so tax deferral will be key.

Also, since you live in high-tax NYC, you might consider regular IRA rather than ROTH.

They likely can't contribute to a T.IRA. The cutoff is around $105K if you are a both covered employees and it sounds like they are. Roth is their best bet for additional tax savings after the 401Ks.

JetsMetsNets

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Re: Reader Case Study- First real job, want to start out right
« Reply #8 on: September 23, 2014, 03:04:20 PM »
Thanks for all of the responses!

Just to clarify, my husband has a qualified pension plan through the department of education. I'll have a 401k and plan to contribute $17,500 per year toward it. My employer does not do a match :(

Our pre-tax combined income will be about $225,000 for 2015 so we can't do a traditional IRA or Roth IRA for next year. For 2014 we will be able to do a Roth (but not a traditional), so we will each be putting $5,500 at that.


I like the suggestion of keeping $12-18k for emergencies and putting everything else toward the 7.9% debt. I'm assuming this is best kept in a high-interest savings account? Our savings is currently in a mutual fund.

RetireAbroadAt35

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Re: Reader Case Study- First real job, want to start out right
« Reply #9 on: September 23, 2014, 03:29:40 PM »
It all depends on how liquid you want it to be. 

I run very cash-light.  I have about 2-4 weeks of living expenses in my checking account at any point in time.  Everything else goes towards 401k/IRA/taxable vanguard account for savings (I'm debt-free).

In the case of a small emergency, I have cash.  A medium emergency, I have a credit card.  A big emergency, I sell something from that vanguard account.

As for how to allocate your income, the best answer to optimize your net worth would involve doing some math to figure out if makes sense to invest in your 401k vs debt repayment ... but I suspect the right answer is to pay off that high-interest loan debt as soon as possible.  Attack the 7.9% stuff with a vengeance.
« Last Edit: September 23, 2014, 03:31:13 PM by RetireAbroadAt35 »

MDM

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Re: Reader Case Study- First real job, want to start out right
« Reply #10 on: September 23, 2014, 03:40:12 PM »
No 403b plan for your husband?  E.g. see http://www.fool.com/personal-finance/retirement/2007/01/05/to-403b-or-not-to-403b.aspx - it's from 7 years ago but one might expect even more plans available now.  Maybe something for him to discuss with company HR and/or his teachers' union?

You might look at http://www.bogleheads.org/wiki/Backdoor_Roth_IRA - seems applicable to you.  Note the "Caution" section in that wiki entry if you have significant tIRA assets now.

If you remain significantly cash flow positive each month then the lower emergency fund makes a lot of sense.  Remember that you can withdraw Roth IRA contributions penalty-free at any time - once you have enough Roth contributions, you don't need a separate e-fund.

dandarc

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Re: Reader Case Study- First real job, want to start out right
« Reply #11 on: September 23, 2014, 04:04:55 PM »
Review that benefit packet of your husband's. There may be some things available that will surprise you - I know my wife was working for the state for over 6 years and didn't know the state offered a 457 plan when I stumbled onto that little gem a couple years ago.  She had even gone to HR once to try and defer more  than the mandatory 3% into the retirement system, and they didn't refer her to the 457 plan - I suspect she asked a very specific question to which the answer was "No", but I wasn't there.  Any way.

A lot of people seem to review the benefits when they're hired, then don't really think about it for the rest of the time they are with that employer.  Things change, maybe the employer starts a new plan, or maybe when first hired you couldn't take advantage but now you can.  Best to review what's available from time to time, just to be aware of all of your options if nothing else.

JetsMetsNets

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Re: Reader Case Study- First real job, want to start out right
« Reply #12 on: September 24, 2014, 05:32:52 AM »


As for how to allocate your income, the best answer to optimize your net worth would involve doing some math to figure out if makes sense to invest in your 401k vs debt repayment ... but I suspect the right answer is to pay off that high-interest loan debt as soon as possible.  Attack the 7.9% stuff with a vengeance.

Thanks- what is the best way to calculate my expected return on the 401k?

JetsMetsNets

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Re: Reader Case Study- First real job, want to start out right
« Reply #13 on: September 24, 2014, 05:36:08 AM »
No 403b plan for your husband?  E.g. see http://www.fool.com/personal-finance/retirement/2007/01/05/to-403b-or-not-to-403b.aspx - it's from 7 years ago but one might expect even more plans available now.  Maybe something for him to discuss with company HR and/or his teachers' union?

You might look at http://www.bogleheads.org/wiki/Backdoor_Roth_IRA - seems applicable to you.  Note the "Caution" section in that wiki entry if you have significant tIRA assets now.

If you remain significantly cash flow positive each month then the lower emergency fund makes a lot of sense.  Remember that you can withdraw Roth IRA contributions penalty-free at any time - once you have enough Roth contributions, you don't need a separate e-fund.

Great point about the Roth contributions!  That makes me feel better. Also, I'm going to look more into the 403(b) for sure. Regarding backdoor Roths- would it be better to do this in the future when my husband becomes a SATD? (lower tax bracket?)

JetsMetsNets

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Re: Reader Case Study- First real job, want to start out right
« Reply #14 on: September 24, 2014, 05:38:28 AM »
Review that benefit packet of your husband's. There may be some things available that will surprise you - I know my wife was working for the state for over 6 years and didn't know the state offered a 457 plan when I stumbled onto that little gem a couple years ago.  She had even gone to HR once to try and defer more  than the mandatory 3% into the retirement system, and they didn't refer her to the 457 plan - I suspect she asked a very specific question to which the answer was "No", but I wasn't there.  Any way.

A lot of people seem to review the benefits when they're hired, then don't really think about it for the rest of the time they are with that employer.  Things change, maybe the employer starts a new plan, or maybe when first hired you couldn't take advantage but now you can.  Best to review what's available from time to time, just to be aware of all of your options if nothing else.

Interesting! Thanks!

RetireAbroadAt35

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Re: Reader Case Study- First real job, want to start out right
« Reply #15 on: September 24, 2014, 10:30:45 AM »
Thanks- what is the best way to calculate my expected return on the 401k?

On average, over a long enough time horizon, you can assume ~7.5%, inflation adjusted assume ~5%, provided you have a reasonable asset allocation (over 50% equities I suppose).

I use a future value formula in a spreadsheet to make basic estimates, per year:
Code: [Select]
=FV((EXPECTED_ANNUAL_RETURN)/12, 12, -1*MONTHLY_CONTRIBUTION_AMOUNT, -1*CURRENT_BALANCE)

MDM

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Re: Reader Case Study- First real job, want to start out right
« Reply #16 on: September 24, 2014, 02:59:13 PM »
Regarding backdoor Roths- would it be better to do this in the future when my husband becomes a SATD? (lower tax bracket?)
The backdoor Roth IRA is useful whenever you have investable income but are above the IRS limit for regular Roth IRA (and thus tIRA) contributions.  In other words, it eliminates the IRS limit on Roth contributions - with that caution if you have significant tIRA assets already.

If you are below the IRS Roth limit but above the traditional limit, just do a straightforward Roth contribution. 

MacBury

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Re: Reader Case Study- First real job, want to start out right
« Reply #17 on: September 27, 2014, 10:11:38 AM »
This is straight forward -- pay down ALL high interest debt ASAP. You will not get a better risk free return than this.


RetireAbroadAt35

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Re: Reader Case Study- First real job, want to start out right
« Reply #18 on: October 03, 2014, 03:25:30 PM »
Code: [Select]
=FV((EXPECTED_ANNUAL_RETURN)/12, 12, -1*MONTHLY_CONTRIBUTION_AMOUNT, -1*CURRENT_BALANCE)

btw - this is no substitute for simulations using montecarlo or cfiresim to really gauge the health/longevity of your stache.