Author Topic: Reader Case Study - How's our FI Plan?  (Read 8330 times)

KittyFooFoo

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Reader Case Study - How's our FI Plan?
« on: April 23, 2014, 06:04:24 PM »
Hello all.  It's been a year since we discovered MMM.  In the past year we've made some major lifestyle changes, paid off CC/auto debt, and established an emergency fund.  Now it's time to plan for the future.

Me: 27, software engineer (employed 3 years)
Wife: 33, disability attorney (recently graduated law school, employed 1 year)

Income:
Me: $82,000
Her: $55,000
Total base income: $137,000.

We both receive 3% safe-harbor contributions for an additional $4,110.

Also, my company offers a fat profit sharing 401K contribution.  Of course, it is continent on the company being profitable that year.  However, in my two years of eligibility for the profit-sharing, I've received about $9k each time.  We have also each received end of year bonuses.  So,
Possible extra income: $4,000-19,000

Expenses:
We have come a LONG way with these, but still could improve.  Willing to hear all critiques.  Except, please note that we aren't willing to give up our dogs--pet ownership is joyful, and well worth a 3-6 mo FI delay in our opinion.

Rent$13202BR, includes all but electricity
Electricity$70
Phone:$160two iPhones.  open to MMM-suggested plans when our contracts come up.
Gas:$150
Car insurance$90two cars. 8 and 3.5 mi commutes
TV+Internet$100
Groceries$600Food + household supplies, toiletries etc
Restaurants$50
Gifts$40just a guess at a year average. may be high?
CrossFit membership$250for both of us.  a big luxury for sure
Baby supplies$200~$100 in formula.  ~$40 diapers.  ~$20 wipes + wiggle room for random needs
Wife hair$100
Wife nails$70
Pet food$60two dogs
Vet$50year average.
Clothing$100guess at a year average

Total expenses: $3,410

We also have a non-permanent but huge daycare expense at $1,300/mo.  Fortunately, our employers both offer dependent care FSAs, which we will max. So, this expense amounts to a $10,000 reduction in gross income plus an additional $467/mo expense.

and, we plan to contribute $300/mo toward our son's 529


Assets
Cash savings: $20k emergency fund.
My 401k: $25k
Wife Roth IRA: $17k
we own $15kish between our two cars, but I don't think this counts???
Total assets (not counting cars): $62,000

Debt
None, except
Wife law school debt: $170k @ 6.8% and 7.9%
However, she is eligible for Pay As You Earn (http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn), Obama's insanely generous loan repayment plan.  The basic conditions of this plan are as follows:
* You must have had a 0 balance Oct 1, 2007 and received a loan disbursement on or after Oct 1, 2011
* Each year, you owe (AGI-1.5 * FederalPovertyLine) * 0.1
* Interest accrues, but does not capitalize (you don't pay interest on interest).
* Loans are forgiven after 20 years.  Balance forgiven is taxable income.
We file separately and enroll in PAYE. 

According to this calculator, at wife's current income + 401K max, (https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action#view-repayment-plans), 20 years of PAYE will result in $41,753 of payments plus tax on a $367,927 forgiveness.  AND, that tax bill of ~$120k is all in 2034 dollars.  Compare to a $236,861 bill under a 10-year repayment plan.  Seems like a clear choice to me.

The PAYE plan is a major part of our long-term strategy; definitely willing to hear opinions/be wrong on this. 

Saving strategy
This is the main area where I'd like feedback.  Note that as separate filers, we cannot contribute to a Roth IRA.  Our current plan is as follows:

Wife will always max 401k minimize PAYE payments.  I will not, because my safe harbor + profit sharing contributions are large, and I want to avoid having like 90% of our wealth tied up in retirement accounts in 12 years.  Is this wrong??

So, currently, $137k base - $17,500 401k - $10,000 to FSAs - tax leaves us with a take home of $6,203/mo.

Our expenses (including the after-FSA daycare) are $4,206.  So we can save $2,000/mo in a taxable account. 

I am also guessing extra income (safe-harbor, profit-sharing, bonuses) to be $12,000/year.

Putting this all together, and assuming a 7% return on investments, I compute bare-bones financial independence after 11 years, with a balance of

Retirement accounts: $551,915.11
Taxable accounts: $378,293.42

Working until son hits college would yield:

Retirement accounts: $1,141,548.68
Taxable accounts: $814,871.81

Alternatively, if we maxed both 401ks, in 11 years we'd have:
Retirement $828,128.10
Taxable $194,777.51

about $70,000 extra, but a scary ratio to me.  Can anyone weigh in here?

When we get near FIRE, we would pursue Roth ladder/pipeline tricks for our expenses.

Of course, there are lots of intangibles here.  Our massive daycare bill will be gone in a few years.  I plan to pursue side income (math tutoring, chess lessons, poker).  We've planned to save $100k for son's college, but we may owe more.  And on and on.  But I think the above is a reasonable picture of the future.

So this is our plan so far.  All feedback is greatly appreciated!

brewer12345

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Re: Reader Case Study - How's our FI Plan?
« Reply #1 on: April 23, 2014, 06:25:36 PM »
A few thoughts:

- $170/month for hair and nails?  Obvious area to slash.

- I don't see any expectations of income growth.  At your ages and stage of career I would expect to see significant income growth in the next 10+ years.  That should yield extra cash to save, but may also cause your wife's student loan payments to ramp up aggressively.

- Any plans to buy a house?

- Living in the Jerz and getting yanked on income taxes, I would (and did in a similar situation) have a strong preference for 401k contributions over everything else.  It is automated so its hard to not save plus you get the tax kicker.  DW and I are 40.  I am retired and she is part time self employed.  Roughly 80% of our assets are in retirement accounts.  Our plan is to make it to 50 on taxable accounts and then use a combination of Roth pipeline and/or 72T after that.  Our lifetime tax bill will be far, far lower this way.

MDM

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Re: Reader Case Study - How's our FI Plan?
« Reply #2 on: April 23, 2014, 08:45:38 PM »
What happens if some future administration brings some sanity to "Obama's insanely generous loan repayment plan"?  In other words, it seems as if you are relying on the government to subsidize your choice.  Not sure I'd bet against that, but you are placing a big bet on it - and against your wife's income increase - (by letting interest accumulate instead of repaying the loans over 10 years).

Appears you could go for the full $35K in 401Ks, pay the loans at a normal 10 year payoff rate, and still have an extra ~$300/mo to invest (e.g., by paying down the SLs faster).  Add any spending reductions to the loan payments and you will be even further ahead.

In short, you seem to have a great income and every expectation of getting to FI reasonably quickly - even more so if you trim spending and pay off loans to reduce interest expense.

See below for one version of "what if...?"
CategoryMonthly amt.
Comments
Annual
Salary/Wages$12,500 Assume $150K/yr per OP$150,000
Pretax Health Ins.$0 $0
Pretax Vision/Dental Ins.$0 $0
Health FSA$0 $0
Daycare FSA$833 $10,000
HSA$0 $0
Pretax Commuter costs$0 $0
FICA base salary/wages$11,667 $140,000
Trad IRA$0 $0
401(k) / 403(b) / 457(b)$2,917 At maximum$35,000
Income subject to IRS tax$8,750 $105,000
ESPP$0 $0
LTD$0 $0
Paycheck W-2 income$8,750 $105,000
Other income (int., div., etc.)$0 $0
Federal Adj. Gross Inc.$8,750 $105,000
Federal tax$992 2014 rates, stand. ded., 3 exemptions$11,904
State/City tax$350 Guess, using 0.04 * Fed. AGI$4,200
Soc. Sec.$723 Assumes 2 earners paying$8,676
Medicare$169 $2,028
Total income taxes$2,234 $26,808
Add Daycare reimb.$833 $10,000
Add Health care reimb.$0 $0
Income before other expenses  $7,349 $88,192
Monthly Expenses:
Rent$1,320 $15,840
Home/Rent Insurance$0
Beauty Shop$70 $840
Bicycle Maintenance$0
Cable TV$0
Car Insurance$90 $1,080
Car Maintenance, Registration, etc.$0
Charitable contributions$0
Child activities $200 $2,400
Childcare$0
Christmas$0
Clothing/Shoes$100 $1,200
Computer (paper/software/etc.)$0
Credit card fees$0
Dental Insurance$0
Dentist$0
Dining (Pizza, Restaurant, etc.)$50 $600
Donations/Gifts$40 $480
Electricity$70 $840
Entertainment$0
Financial Planning$0
Fuel/Public Transport$150 $1,800
Gas/Oil for heating$0
Groceries$600 $7,200
Hair Care$100 $1,200
Home Alarm System$0
Household; Maintenance$0
Internet$100 $1,200
Landscaping/Yard work$0
Life Insurance$0
Lunches$0
Medical (Doctor, Hospital, etc.)$0
Medical Insurance$0
Medicine (OTC + Prescription)$0
Miscellaneous$0
Pets$110 $1,320
Phone (cell)$160 $1,920
Phone (landline)$0
Recycling/Trash$0
School Tutition/Books/Etc.$1,300 $15,600
Sports/Recreation$250 $3,000
Subscriptions (paper/magazines/etc.)$0
Travel/Vacation$0
Water/Sewer$0
Wine/Beer$0
Work/Professional fees$0
Non-shelter total$3,390
Loans:
SL #1$978 $11,738
SL #2$1,027 $12,322
3$0 $0
Roth IRA$0 $0
Roth 401k$0 $0
529 plan$300 $3,600
Total Expense$7,015 $84,180
Total to invest$334 $4,012
Additional Mortgage Principal$0 $0
Additional Loan payment$0 $0
Other investments$334 $4,012

HappyCheesehead

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Re: Reader Case Study - How's our FI Plan?
« Reply #3 on: April 23, 2014, 08:47:57 PM »
"We also have a non-permanent but huge daycare expense at $1,300/mo.  Fortunately, our employers both offer dependent care FSAs, which we will max. So, this expense amounts to a $10,000 reduction in gross income plus an additional $467/mo expense."

Are you sure?  I thought the limit was $5000 per household, $2500 each if married filing separately.  Things may have changed....but you might want to look into that.

KittyFooFoo

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Re: Reader Case Study - How's our FI Plan?
« Reply #4 on: April 23, 2014, 09:24:37 PM »
"We also have a non-permanent but huge daycare expense at $1,300/mo.  Fortunately, our employers both offer dependent care FSAs, which we will max. So, this expense amounts to a $10,000 reduction in gross income plus an additional $467/mo expense."

Are you sure?  I thought the limit was $5000 per household, $2500 each if married filing separately.  Things may have changed....but you might want to look into that.

You are right, my mistake, it is federally capped at $5000.

ShortInSeattle

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Re: Reader Case Study - How's our FI Plan?
« Reply #5 on: April 23, 2014, 10:45:20 PM »
Here are a few suggestions:

Budget Trims:

Beauty @ $170/mo.  - Wow! Recommend she downsize to one salon haircut every 6-8 weeks. @ $50 or less. That is still fancy enough to suit a law office environment.

TV - Cut cable and get Netflix. That'll help a bit.

Clothing - Buy a few classic pieces for work and take good care of them. This can be trimmed a bit without too much pain. (10-20% reduction)

Savings:

After accumulating an emergency fund, I suggest you do focus on maxing out both 401(k)s.  Tax deferred compounding is powerful, and as your income rises you'll be able to add to taxable vehicles later on. Sure, you can't touch that money in the short term, but that is kinda the point. :)

Student Loans:

Your call, but I hope you decide to pay them off in full. That debt doesn't go poof - it gets paid by the federal government - as in, all the rest of us. Yes, I know it's a real government program and you have every right to use it. I just personally hope you don't. Now I'll shut up about that.

Best of luck to you and the fam!


mxt0133

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Re: Reader Case Study - How's our FI Plan?
« Reply #6 on: April 24, 2014, 03:09:06 AM »
I'll focus on the income side since others have already given good advice on the the expense side, plus I've lived in Jersey so I can't really tell you to start riding bikes.  Although the last time I visited I saw 1 person bike to a Barnes and Nobles, hey it's a start.

As a software developer in NJ, with your proximity to NY you should be able to double your salary in a few years.  Your commute will suck, but the closer to work to Manhattan the higher your pay will be.  After working as a developer in NJ for about 5 years I was able to get a 45% increase by getting a job for a financial services company based in Jersey City.  It took me about a year to land that job, but basically I interviewed the first year to find out what skill sets I needed and worked on it until I landed the job the following year.  It's really just learning how to ace the interview, it's the same kind of work in the end.

As for your wife, did she really take out a $170k loans at 7% interest and 2-3 year of lost income to start at $55K?  Is this similar to a residency for doctors where the first two years out of medical school they make crap, work crazy hours and then triple their income?  I'm really hoping that her potential income will justify the loan and opportunity costs to get that degree.

Thegoblinchief

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Re: Reader Case Study - How's our FI Plan?
« Reply #7 on: April 24, 2014, 08:00:41 AM »
Find out what the cancellation fees for your phones are. Chances are the monthly savings will easily pay for the cost.

Otherwise +1 to what everyone else has said.

HairyUpperLip

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Re: Reader Case Study - How's our FI Plan?
« Reply #8 on: April 24, 2014, 08:41:36 AM »
As for your wife, did she really take out a $170k loans at 7% interest and 2-3 year of lost income to start at $55K?  Is this similar to a residency for doctors where the first two years out of medical school they make crap, work crazy hours and then triple their income?  I'm really hoping that her potential income will justify the loan and opportunity costs to get that degree.

I did not want to sound rude, but that blew my mind when I read that too.

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Re: Reader Case Study - How's our FI Plan?
« Reply #9 on: April 24, 2014, 08:55:16 AM »
Im with Brewer... 170$ on hair and nails really stood out and Max out your 401k. Find savings and otherways to increase your taxable accounts if thats your worry of imbalance. But take advantage if it. 

sirdoug007

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Re: Reader Case Study - How's our FI Plan?
« Reply #10 on: April 24, 2014, 09:27:39 AM »
Be careful about how you do the math on Pay-As-You-Earn.  It's pretty unlikely that your wife will continue to make $55k/year, it will likely go up significantly and then the savings isn't so big.

You also don't know what your marginal tax rate will be in 20 years.  It could be 50%. 

I don't think PAYE is quite the safe bet you make it out to be with the math you show.  Paying less than $200/month for 20 years seems like a very bad assumption.

You should also do the math for an aggressive payoff, putting like $40k/year to kill the student loan.  I'm betting that will be the cheaper option if you are realistic about your wife's earnings.
« Last Edit: April 24, 2014, 09:32:43 AM by sirdoug007 »

nereo

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Re: Reader Case Study - How's our FI Plan?
« Reply #11 on: April 24, 2014, 10:01:53 AM »
I too am a bit concerned wit hyour PAYE strategy.  Even though your interest doesn't capitolize, you're accruing ~$13,000 per year, and paying off about $2,400? 
If policy changes, your plan falls apart.  As the wife's income increases, the math becomes less favorable.
There's also the moral issue; amassing well over $1M in savings in 11 years or $2M in under 20 while not paying down your loans. To me that's akin to tax-dodging.  The spirit of PAYE was to let people with low/no income and little/no savings pay back their loans - not let a couple reach FIRE and then jettison their debt 20 years later. Especially not a couple who owns two cars and has a fairly high-income lifestyle.  I know it's harsh but I see it as cheating the system and screwing all of us who working through grad school AND took out loans AND are repaying them with ~1/4 of your income.

I would make an alternative plan where you pay $2,000+ per month towards your student loans.  Under this scenerio throw $10k of your emergency fund at the loan now and use all of your annual $4k-19k bonuses towards the loan too.  Sell your less efficient car and put the money towards your loan - the person who has a 3.5 mile commute should be biking.  Cancel cross-fit for the time being (another $3k!) - the person biking won't need it anyway.  Stop spending $840/year on your nails, and cut your haircutting budgets in half - it can be done!  You should still be able to fund your 529 and (most) of your retirements.
. Under these scenarios the loan will be either gone or greatly reduced in 4 years. You will still be able to build your 'stach and reach FIRE before your son goes to college.

KittyFooFoo

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Re: Reader Case Study - How's our FI Plan?
« Reply #12 on: April 24, 2014, 04:28:37 PM »
Thanks all for the responses.  I'm really interested in having a discussion on PAYE.  This is a big decision with a lot of money at stake.

First, regarding ethics: the law is the law.  Wife researched IBR before and throughout all of her loan disbursements; the program impacted her decision to borrow at all, and to borrow as much as she did.  Now we want to make the most rational decisions we can with the rules that exist.  This is a budgeted portion of US law voted in by 2/3 of Congress, purposefully written to reduce repayment costs for a group of borrowers that includes my wife.  To me, opting into this system is no different than sheltering money from taxes via a 401K.  I understand why you may think the system sucks.  But surely the solution is for you to contact your local legislator, not for me to make irrational choices.

Next, the tricky question of whether betting the house on PAYE IS rational.  I've been working on some spreadsheets comparing the effects of standard repayment and PAYE over 20 years.  I made some assumptions:
* 2% inflation
* We pay $2k/mo (almost exactly 10 year repayment)
* Wife experiences 7% average annual salary growth.  This would leave her at $212,000 in 20 years. 

Just the above leads to a fairly similar total bill between standard repayment and PAYE.  $40k less in after-inflation dollars under PAYE, but perhaps close enough that a standard repayment would be worth it for the elimination of risk.

But, there is a massive opportunity cost to standard repayment.  Under PAYE, we can invest that monthly $2000 less our PAYE payment.  This results in a FIVE HUNDRED THOUSAND dollar difference over twenty years--we amass $290,000 in investments after 10 years, which nearly double if we keep them invested over the next 10.

Another very interesting conclusion: after 10 years, under PAYE, our loan and taxable balances will be as follows:
Loan principal: $159,167.45
Interest: $91,862.73
Taxable investments: $290,869.67

So, if my math is correct, it would be fifty thousand dollars cheaper to even just enroll in PAYE, invest our $2k/month, and chuck the balance at the loans--because our taxable accounts make compound interest and, under PAYE, her loan interest does not.  This also suggests that we will have some recourse should Chris Christie come into office and revoke all of this.

If I have fucked up the math I will be embarrassed but would definitely like to know :)

samburger

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Re: Reader Case Study - How's our FI Plan?
« Reply #13 on: April 24, 2014, 04:57:19 PM »
Ethically, I could care less. Universities are charging predatory rates, so do whatever you need to do to protect yourself from them.

That said, I'll just come out and say it: Relying on PAYE is about as responsible as bringing your life savings to the black jack table. It's ingenious on paper, truly, but it's extremely short-sighted to think your circumstances won't change drastically.

I work in the legal industry, so I can speak authoritatively here. High-paying legal jobs are in short supply, so your wife's 55k/yr is not unusual. It's also not unusual for JDs to wise up, quit practicing, and sell their skills in different markets for 2-3x times as much. I know she's not planning on leaving practice now, but--just for the sake of argument--what if she changes her mind? What if she picks up a nice gig for $130k/yr at a consulting company? And what if they toss a $20k bonus at her?

Are you crunching the numbers for all of these possibilities? You really, really can't rely on your wife continuing to make meh money for the entirety of her career.

nereo

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Re: Reader Case Study - How's our FI Plan?
« Reply #14 on: April 24, 2014, 06:05:34 PM »
First, regarding ethics: the law is the law.  Wife researched IBR before and throughout all of her loan disbursements; the program impacted her decision to borrow at all, and to borrow as much as she did.  Now we want to make the most rational decisions we can with the rules that exist.  This is a budgeted portion of US law voted in by 2/3 of Congress, purposefully written to reduce repayment costs for a group of borrowers that includes my wife.  To me, opting into this system is no different than sheltering money from taxes via a 401K.  I understand why you may think the system sucks.  But surely the solution is for you to contact your local legislator, not for me to make irrational choices.

Well for the sake of brevity I'll put this out there once:  the law is the law, but laws amoral.  A person can follow the law and engage in unethical behavior, just as someone can break a law in order to maintain ethical behavior. 
Now, specifically regarding your plan to use PAYE to pay the least amount of your loan back as possible, I am dubious about your rational. It's certainly tempting to interpret doing anything other than the what's economically best for you as making "irrational choices'. However, your wife went into law school with a full understanding of what the tuition would be.  From your response it sounds like she entered the loan contract with the explicit intention of never paying back the full value of the loan.  Where the ethical question comes in is whether it is right for someone who has sufficient means to pay back a loan should opt not to pay it back by taking advantage of a program that was clearly meant for individuals who have far less means and assets then you claim to have. 

For an historical analogy, before 1976 someone could discharge their student loans through bankruptcy.  However, this was changed largely in response to professionals (doctors mostly, but also lawyers) declaring bankruptcy upon graduation, only to come out of it 7 years later with their degree in tact and their entire working career ahead of them. This is also important to your case because it shows how changes in legislation could royally screw up your plan.

Now, ignoring the ethical issue, there's still the question of whether using PAYE is a good strategy.  As mentioned earlier, there are a few big uncertainties here. First it will limit your wife's career choices, and in my experience eventually a high paying job will come knocking.  Second, there is the changed in legislation that I mentioned.  With the elections this fall and a new president coming in for 2016 that would give me pause.

Finally, I think you can run some scenarios where you pay down 4-6 years.  With some back-of-the-envelope calculations you could wind up paying less than $30k in interest, you would loose the uncertainty of changes in legislation, and your wife would be free to pursue jobs that are more in line with her actual education.  And I believe you could still hit your FIRE scenarios in 10-15 years.
To me that seems the most certain route to reach FIRE, even ignoring the thorny issue of PAYE.

just my thoughts - id be happy to communicate further, or you can decide just to ignore me if you wish.

brewer12345

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Re: Reader Case Study - How's our FI Plan?
« Reply #15 on: April 24, 2014, 06:58:41 PM »
Are you crunching the numbers for all of these possibilities? You really, really can't rely on your wife continuing to make meh money for the entirety of her career.

Ding, ding, ding! We have a winnah!!!

I think this is they key sensitivity/risk you need to examine closely.  As for the ethics and whatnot, just ignore the haters.  The program was set up by the gubmint and intended to be used.  If it works for you, use it.

KittyFooFoo

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Re: Reader Case Study - How's our FI Plan?
« Reply #16 on: April 24, 2014, 08:05:28 PM »
From your response it sounds like she entered the loan contract with the explicit intention of never paying back the full value of the loan.

Sigh.  No.  She entered the loan contract with the understanding that there would be safeties in place if she entered the workforce with a 3:1 debt:income ratio or worse.

And.  We will be repaying more than the full value of the loan under either scenario--standard repayment or PAYE.  Approximately $235-240k in either case, but over different time periods with different payment distributions.  But, the differences may massively affect our personal finances.

The question of what happens if her income spikes or all program conditions are suddenly revoked is a more interesting one--and I think I have a good answer.  Just want to obsess over Excel a bit more; updates tomorrow.
« Last Edit: April 24, 2014, 08:15:28 PM by KittyFooFoo »

nereo

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Re: Reader Case Study - How's our FI Plan?
« Reply #17 on: April 25, 2014, 01:13:35 PM »
From your response it sounds like she entered the loan contract with the explicit intention of never paying back the full value of the loan.

Sigh.  No.  She entered the loan contract with the understanding that there would be safeties in place if she entered the workforce with a 3:1 debt:income ratio or worse.

And.  We will be repaying more than the full value of the loan under either scenario--standard repayment or PAYE.  Approximately $235-240k in either case, but over different time periods with different payment distributions.  But, the differences may massively affect our personal finances.

The question of what happens if her income spikes or all program conditions are suddenly revoked is a more interesting one--and I think I have a good answer.  Just want to obsess over Excel a bit more; updates tomorrow.
ok - said my piece about legality/morality, so i won't bring it up again. 
I couldn't sleep last night and for some reason your case study intrigued me, so i ran a couple of scenarios.  For me there's inherent risk with PAYE because you will go through at least 3 presidental cycles before you zero out that debt... anything could happen. 
Also, you calculated you'd still pay around $235k.  And with your assets you can certainly do better.

Here's an alternative plan using your numbers where you can reach FI, shed the debt, fund your son's college fund, etc.  All using the numbers you listed.  To me it eliminates the uncertainty of relying on a government program.
by your numbers you can put $2000/mo to put into savings, plus an estimated $12,000/yr in bonuses (may be slightly higher or lower).  you are also planning on contributing the max to your wife's 401(k) but nothing to the husbands, and $3600/year to your son's 529.

year 1:
put $10,000 of your emergency fund towards the loan
reduce wife's 401(k) to $10,000 for this one year- just go with me here...
divert everything you would put in the 529 towards the loan for year one - again, just go with me...
put the $2000/mo savings plus estimated bonuses of ~$12000 towards the loan ($3925/month with diversions from 40(k) and 529).
Summary: $57,100 towards loan, of which $10,000 will be interest.  Loan balance $120k
Wife's 401(k) grows by $10k (+/- % market change)

Year 2:
Fund the 529
Increase wife's 401(k) to $11,500
Pay $3500/month to loan ($2000/mo from savings, plus bonuses, plus $500 diverted from wife's 401(k)
Summary: $42,000 goes towards loan, of which $7,800 will be interest.  Loan balance $85,800.

Year 3:
Fund the 529
Max out wife's 401(k) (17.5k)
Pay $3000 to loan/mo
Summary: $36,000 goes towards loan, of which $5,175 will be interest.  Loan balance $54,975

Year 4:
exactly like year 3
Summary: $36,000 goes towards loan, of which $2880 will be interest.  Loan balance: $21,855
Wife's 401(k) contributes 17.5k

Year 5: exactly like years 3 & 4.
summary: loan paid down before the 8th month.  $560 interest paid.  Loan balance: $0.
Divert remaining 4 months into savings (another $12,000)
wife's 401(k) contributes 17.5k

Summary of 5 year plan:  Loan paid off, with $26,415 going towards interest.  Total paid: $196,415.  Wife's 401(k) contributions over the 5 year period = $74,000.  529 contributions = $14,400

years 6, 7, 8, 9, 10 & 11
use the $3,000/mo you aren't spending on loans to save.  Take better advantage of taxable accounts - you CAN access them before 59.5
Continue making out wife's 401(k)
continue contribution to 529, but consider putting the brakes on once you have "enough" (see estimates below)
presumably you will also be saving $1200/month from not paying child care, but i'm not factoring this in to the scenarios. That could mostly fund husband's 401(k) or taxable savings.

At end of year 11, assuming 7% growths and above contributions:
wife's retirement account: 251,131
other savings (starting in year 6): 257,000
529 savings 49,800
his 401(k) - left untouched: 49,200
FSAs - 157,800
total (excluding 529) = 715,665
You could reach your 'bare-bones' FI about one year later than originally planned, but without the 20 yr loan.
threeadvantages i see on this path:
1) it doesn't hinge on a plan that could be changed by multiple different administrations, especially given that it's 7+%
2) it provides work flexibility.  wife would be free to take a raise or change.  IMO it seems highly unlikely that another offer won't come along in 11+ years.
3) you ultimately pay far, far less in interest than using PAYE
The downside obviously is that it would add 1 year to your FI plan, albeit with no loan.

Finally there are a few ways you could get to FI even faster; selling one car (and biking to work) will give you several thousand and save you a thousand or more per year., axing the crossfit membership could free up another $3k/year.  Changing cell phone contracts should free up another $1k/yr, and your food budget could be trimmed by about $1k/yr as well.  The hair/nails could be cut in half (another $1k). Taking those steps you wouldn't need to reduce the 401(k) contributions at all, and you are back at 11 years to minimum FI.  Increase wife's salary by $10k-15k and it's an even better picture.

I guess what's interesting about all of this to me is that I've seen other people shed as much debt with fewer resources and reach FI in a decade.
as a final disclaimer there are certainly ways you can 'tweak' the plan above.  I played around with using some of the existing ROTH to pay down expenses, while using both more or less of your emergency stash to make that first dent in the principle.  Eliminating the 7.8% loan by year 2 will make the plan even more rosy.  There's also a lot that can be done with tax-optimization. 
And as always... your preferences may vary.

I hope this is at least helpful to you as a thought exercise.

your preferences may vary.
« Last Edit: April 25, 2014, 01:17:24 PM by nereo »

seattlecyclone

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Re: Reader Case Study - How's our FI Plan?
« Reply #18 on: April 25, 2014, 06:21:34 PM »
What is your reasoning behind filing your taxes separately? Is it only to get better treatment under the PAYE program? I ran your numbers through the fine spreadsheet from excel1040.com, with the following assumptions:
  • You exclude $2,500 of dependent care benefits from your income, but make no 401(k) contributions, so your reportable wages are $79.5k
  • Your wife excludes $2,500 of dependent care benefits from her income and maxes out her 401(k), so her reportable wages are $35k,
  • Besides the standard deduction, personal exemption, and child tax credit (if applicable), you have no more deductions or credits to claim.
Given these assumptions, if you claim your child as a dependent, your tax (using 2013 rates) would have been $12,335 and your wife's tax would have been $3,308, for a total of $15,643. If your wife claimed your child instead, your tax would have been $13,310 and your wife's tax would have been $1,723, for a total of $15,033. If you're wondering why it's better for your wife to claim your child as a dependent when she earns less, the reason is because your income is high enough to phase out of the child tax credit as a married separate filer.

If, on the other hand, you file jointly, a couple of things happen. You become eligible to deduct student loan interest (good for $2,500 off your income), and you also benefit from the wider tax brackets for joint filers. The net result is that your tax bill would have been only $12,989, or a savings of $2,044 compared to filing separately.

Are you factoring this $2k tax savings from filing jointly into your spreadsheet of pros and cons of the PAYE program?

My recommendation would be similar to nereo's, except that you would both max out your 401(k)s before attacking the student loans, and wait on funding the 529 until the student loans are done. The 529 plan can wait until your soul-sucking student loan interest is gone. When that happens you'll have piles of cash to put in the college fund. In the meantime your wife is absolutely free to seek out better-paying employment without worrying one bit about how her required student loan payments would increase as a result.

If you max out both 401(k)s, you'll be right around the border between the 15% and 25% tax brackets. Assume every extra dollar you contribute to your 401(k) accounts will reduce your available cash for repaying the loan by about 75 cents, since you're taking a dollar out of your paycheck but also deferring 25 cents worth of taxation until a later year.

Under this plan, you'll "only" put about $40k toward the loans in year 1 and $30k in subsequent years, so paying off the loan will take a bit longer, but you will have also saved a lot more in your retirement accounts by that point.

If you're worried about having "too much" in those accounts when you reach your FI date, look for other threads about the "Roth pipeline" strategy. Basically you can roll your 401(k) over to a Roth IRA bit by bit every year during retirement and withdraw the principal to live on. The reason to do this instead of keeping your money out of the 401(k) in the first place and investing more in taxable accounts now is that your tax bracket is currently 25%, but will likely be lower when you retire. Thus it's best to defer as much tax as possible until that date.

KittyFooFoo

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Re: Reader Case Study - How's our FI Plan?
« Reply #19 on: April 25, 2014, 07:06:02 PM »
lol guys, literally within the past 48 hours wife got a huge promotion.  She is now upper management.  She is on a trial (<3 mo) to determine if it is a good fit as well as how much extra work it entails.  After that, salary negotiations.  so, might shake things up a bit.

KittyFooFoo

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Re: Reader Case Study - How's our FI Plan?
« Reply #20 on: April 25, 2014, 09:01:49 PM »
What is your reasoning behind filing your taxes separately? Is it only to get better treatment under the PAYE program? I ran your numbers through the fine spreadsheet from excel1040.com, with the following assumptions:
  • You exclude $2,500 of dependent care benefits from your income, but make no 401(k) contributions, so your reportable wages are $79.5k
  • Your wife excludes $2,500 of dependent care benefits from her income and maxes out her 401(k), so her reportable wages are $35k,
  • Besides the standard deduction, personal exemption, and child tax credit (if applicable), you have no more deductions or credits to claim.
Given these assumptions, if you claim your child as a dependent, your tax (using 2013 rates) would have been $12,335 and your wife's tax would have been $3,308, for a total of $15,643. If your wife claimed your child instead, your tax would have been $13,310 and your wife's tax would have been $1,723, for a total of $15,033. If you're wondering why it's better for your wife to claim your child as a dependent when she earns less, the reason is because your income is high enough to phase out of the child tax credit as a married separate filer.

If, on the other hand, you file jointly, a couple of things happen. You become eligible to deduct student loan interest (good for $2,500 off your income), and you also benefit from the wider tax brackets for joint filers. The net result is that your tax bill would have been only $12,989, or a savings of $2,044 compared to filing separately.

Are you factoring this $2k tax savings from filing jointly into your spreadsheet of pros and cons of the PAYE program?

My recommendation would be similar to nereo's, except that you would both max out your 401(k)s before attacking the student loans, and wait on funding the 529 until the student loans are done. The 529 plan can wait until your soul-sucking student loan interest is gone. When that happens you'll have piles of cash to put in the college fund. In the meantime your wife is absolutely free to seek out better-paying employment without worrying one bit about how her required student loan payments would increase as a result.

If you max out both 401(k)s, you'll be right around the border between the 15% and 25% tax brackets. Assume every extra dollar you contribute to your 401(k) accounts will reduce your available cash for repaying the loan by about 75 cents, since you're taking a dollar out of your paycheck but also deferring 25 cents worth of taxation until a later year.

Under this plan, you'll "only" put about $40k toward the loans in year 1 and $30k in subsequent years, so paying off the loan will take a bit longer, but you will have also saved a lot more in your retirement accounts by that point.

If you're worried about having "too much" in those accounts when you reach your FI date, look for other threads about the "Roth pipeline" strategy. Basically you can roll your 401(k) over to a Roth IRA bit by bit every year during retirement and withdraw the principal to live on. The reason to do this instead of keeping your money out of the 401(k) in the first place and investing more in taxable accounts now is that your tax bracket is currently 25%, but will likely be lower when you retire. Thus it's best to defer as much tax as possible until that date.

Thank you both for the suggestions!  I must admit nereo's plan is extremely tempting.  I have a couple of questions about the above:

1) I thought that I did not qualify for the child care credit, since we contribute to dependent care FSAs.  Here's what I'm reading on http://www.irs.gov/uac/Ten-Things-to-Know-About-the-Child-and-Dependent-Care-Credit

Quote
The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.

For 2010, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.

So because we get $5,000 of depcare FSA benefits from our employers and only have one kid, we are eligible for 0 child care credit.  No?

I am considering the nereo plan very seriously.  I tend to agree that it is better to defer loan payoff while maxing 401Ks, because every 401k dollar earns an immediate 25% bonus plus a 7% return forever.  Every dollar paid toward loans earns 6.8/7% return, but without interest capitalization.

Also, of our possible $19k bonuses, only up to ~4k is cash.  The rest is a 401K contribution.  Still, that's a small detail in the plan.  I am 100% on board that it is possible (and TEMPTING) to nuke the loan in ~5 years.  I have started an Aggressive Payoff tab in Excel. 

One reservation that comes to mind: the aggressive loan payoff scenario, which leaves us with $10k or even $6k (if I nuked all outstanding interest on her $106k 7.8% loan) in e-fund, responds very poorly to dual job loss.  My save everything in taxable and abuse PAYE scenario responds AWESOME to job loss.

nereo

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Re: Reader Case Study - How's our FI Plan?
« Reply #21 on: April 26, 2014, 11:56:02 AM »

So because we get $5,000 of depcare FSA benefits from our employers and only have one kid, we are eligible for 0 child care credit.  No?

I am considering the nereo plan very seriously.  I tend to agree that it is better to defer loan payoff while maxing 401Ks, because every 401k dollar earns an immediate 25% bonus plus a 7% return forever.  Every dollar paid toward loans earns 6.8/7% return, but without interest capitalization.

Also, of our possible $19k bonuses, only up to ~4k is cash.  The rest is a 401K contribution.  Still, that's a small detail in the plan.  I am 100% on board that it is possible (and TEMPTING) to nuke the loan in ~5 years.  I have started an Aggressive Payoff tab in Excel. 

One reservation that comes to mind: the aggressive loan payoff scenario, which leaves us with $10k or even $6k (if I nuked all outstanding interest on her $106k 7.8% loan) in e-fund, responds very poorly to dual job loss.  My save everything in taxable and abuse PAYE scenario responds AWESOME to job loss.
Glad I could offer at least an interesting possibility.  There are certainly 'hybrid approaches' as well - for example a 6 year plan where you pay $2900/mo and use none of your savings in year one towards principle.  you'd pay a bit more interest ($39k) but that still puts you under $210k total, makes sure you have a really fat emergency fund (about 6 months at your spending rate) and allows you to fund your 401(k)s, probably to the max.  Don't forget you could use the ROTH to pay down some of the loan and keep most or all of your $20k emergency fund.

Agreed, the PAYE does respond awesome to job loss, but it may be catastrophic to congressional policy change. 
The aggressive loan payoff scenario means you never have to worry about the fickleness of our politicians, but there's always the uncertainty of one (or both) of you loosing your job.  Thankfully, it becomes less of a worry each year, and you'd still have some of your emergency fund. And if you do have a job loss you're back to using PAYE or other income-based repayment options, albeit with a much smaller loan balance.

You have to make the call what you consider the bigger risk to be.  One suggestion:  since your wife is now exploring a new job, she could negotiate for a great early-severance package.  If they terminate her in the first 1, 2, or 3 years she gets 12mo, 9mo, or 6mo severance pay respectively.  AFter that she just gets whatever is standard for the company (usually 1-3 months IME). That would mitigate your risk for job-loss, and it would cost the company nothing as long as they retain her for a minimum of 3 years.

Congrats on the upcoming promotion.

KittyFooFoo

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Re: Reader Case Study - How's our FI Plan?
« Reply #22 on: April 26, 2014, 06:59:51 PM »
OK people.  So, she is getting promoted all the way up to the level of the CFO and taking on a lot of extra work, so we are speculating the raise will be $55k-->$85k.  This raise alone still leaves some (theoretical) advantage to PAYE, but the difference is MUCH smaller now.

Assuming this raise, I ran three scenarios.  In each, I have made the following decisions
* To leave $20k in the bank, to cover dual job loss, car explosions, etc.  I calculated that this costs us about ~$6k of interest over 5-6 years.  Well worth the reduced stress in my book.
* To fund the kid's 529 as planned in all years

THE FUCK YOU PLAN
in which we throw every available penny toward the loans.  No 401K contributions, $5k a month toward debt.  We could pay down the debt in THREE YEARS under this plan, then switch to 401k + taxable contributions.  After 5 years, we have a net worth of $280k.  BUT, this is ~$25k less what we earn under

THE 401K + LOAN PAYOFF PLAN
in which we max out 401ks always, and pay down the debt with our remaining take home pay (about ~$3k/mo).  Debt is gone in 6 years.  Five year net worth is $305k.  FI kicks in around year 11.

PAYE
Now, her AGI is much higher.  Her monthly payments are still RIDICULOUSLY (!!) low after 5 years, but they're up to about 450.  Assuming salary growth, we even pay off about half the principal of her $92k @ 7.9% loan, assuming we work for 20 years under this plan.  Five year net worth is $314k.

looks like it's no longer worth bothering with this shit. 

seattlecyclone

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Re: Reader Case Study - How's our FI Plan?
« Reply #23 on: April 26, 2014, 11:27:56 PM »

1) I thought that I did not qualify for the child care credit, since we contribute to dependent care FSAs.  Here's what I'm reading on http://www.irs.gov/uac/Ten-Things-to-Know-About-the-Child-and-Dependent-Care-Credit

Quote
The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.

For 2010, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.

So because we get $5,000 of depcare FSA benefits from our employers and only have one kid, we are eligible for 0 child care credit.  No?

Yes, you do have to choose between the dependent care benefits and the child care tax credit. There's also a child tax credit of up to $1,000 per kid that you get just for having a child. This is separate from the child care credit/dependent care benefits. See this link for more info about the child tax credit.