Author Topic: Reader Case Study - Planning for the Long Haul  (Read 6268 times)

chemistk

  • Pencil Stache
  • ****
  • Posts: 941
  • Location: Mid-Atlantic
Reader Case Study - Planning for the Long Haul
« on: January 30, 2016, 07:04:12 PM »
Hey guys - long time listener, first time caller!

No, but seriously, I have been ruminating on this for a couple months. It's a long one, so kudos if you can get all the way through. Any and all advice is welcome!

Situation: Male, 24, Married (Wife is 24 and still working on her Bachelor's - 1.5 years left) with one child (9 months old). Live in South-Central PA

Gross Salary/Wages: $60,000, with a likely 2%-3% increase come March

Pre-tax deductions:
-401k: Through Vanguard, 6% Contribution (~$280/month)  with a 4.25% employer match
-HSA: $10/month (the minimum contribution needed for employer contribution of $2,000 a year)
-Medical/Dental/Vision: $287/month

Other Ordinary Income:
-Company Bonus - could be $400, could be $1,500. I won't find out until March
-Company Well Being Health Incentive - Wife and I participate in programs throughout the year to earn small bonuses. Usually amounts to $800.

Adjusted Gross Income: Ballpark of $55,000.

Taxes: Ballpark of $6,700 all in.

Current monthly expenses:
-Rent $1,195
-Loan Payments (see below): $550
-Insurance (car and renter's): $190
This definitely high. Justification: I have to occasionally drive a company car and am required to maintain a minimum insurance coverage. Plus, a few years back I had a driving incident that raised my rates for a while. The renter's is the minimum required for our lease. Unfortunately, there is little wiggle room here
-Phone: $127
This is also high. My company stopped providing company phones. Instead, you bring your own smartphone through ATT and they help with a portion of the cost. We pay for the smallest data plan we need (1GB between the two of us). This is an area where we could downsize as we make zero-interest payments on our phones every month. The plan itself costs about $80/month
-Comcast: $66
This is the cheapest high speed internet plan in our area, which my wife needs to do her online classes
-Groceries: $450
Includes our son's formula. Hopefully he'll be done with that in a few months. We live in an area where farmers markets are abundant, but health and well-being is not something I will skimp on. We buy almost no processed food and a lot of fruits and vegetables. Our son's favorite food is curried green lentils, so I'd say we're succeeding in this area even if it comes at a premium
-Gas: $160
We're clowns. Big-time. Problem is both school and work are in opposite directions, compounded with the fact that the only family in the area to watch our son is in another direction from both, so we're living in the middle of the triangle until my wife's done with school. At least our cars are fuel efficient.
Entertainment: $20
Netflix, Hulu, and Amazon Prime
Utilities (Electric, Gas, Water/Sewer, Trash): $220
There's room in this one but not much. There are only so many things that can be done to make a rental property energy efficient.
Charitable Giving: $75
Alcohol: $50
Travel: $100
My family and high school friends live 8 hours away in Michigan, and we make between 3 and 4 trips out there. We spread the travel cost out monthly.
Misc.: $100

All-In, we're looking at ~$3400 per month in take-home pay, and after these expenses, about $350 is left over in the budget. I'm not a budget Nazi, because I know the moment our budget is set, something comes along to smash it into bits. There are also those glorious two months during the year with 3 pay periods. I did not include those in the monthly calculation because I don't like the way that math works. For those two periods, I plan on investing in (used) supplies for our home - bikes, a grill, toddler clothes, etc. and using the rest to make chunk payments on loans.

Assets:
-401(k) - ~$10,000 in a Vanguard Target Retirement Fund. I don't have the option for VTSAX or any of the other big index funds, so I'm going to let the folks over there figure out my allocation for me for a while.
-2 Cars. 2014 Mazda CX-5 and 2012 Ford Focus (Both automatic :/)
I fully accept any face-punches for this one. My wife has told me one thing - her car is non-negotiable. It's fully paid for and is an excellent travel vehicle. She says we can do whatever we need to achieve our goals except sell her car. My car is more flexible and I will probably look into something older with a stick when we can move to within biking distance of my work. For now, I need something reliable to commute in. Plus it's worth just barely more than what we owe on it
-Trust Fund - ~$26,000 <see below>
-Bank Accounts - ~$4,500
We're moving, and in doing so are breaking our current lease, so this covers those 2 months when we're making rent payments on two places. Yuck.
-PA Investment 529 for our son: ~$1,250

Liabilities:
-Student Loan: Originally $23,000, 10 year payoff, 5.1% Interest Rate. Current Balance just over $18,700. Monthly payments ~$246, I pay a little extra at $300
This is a private student loan, offered through the school I went to. Te school does not accept government funding and I do not qualify for any federal aid on this loan.
-Car Loan (AAAAAAAGGGGGHHHHHHHH): Originally for $11,500. 5.5 year payoff, 3.8% Interest rate, just over $6,800 owed. Monthly payment is ~$194 and I also pay extra at $200 a month. If it makes you feel better, I did not buy the car new. In fact, I was able to negotiate $1,500 off the original asking price. I had recently been burned by a very unreliable craigslist ride that needed close to $3,000 in work so I turned to the waiting arms of the dealer...

Hey, at least I have a credit score over 730...

Specific Questions: Find a comfortable chair, this one's long.

I have two burning questions.

1) Planning for the long term

It's pretty clear that I'm not one of the higher earners here. I'm okay with that because I enjoy my job and the company for whom I work. I'm not in any position to leave for a few years, either. I have way too many opportunities to build my resume here before even thinking of looking elsewhere (if I ever do). I do see that there is a high potential I could burn out well before "retirement age", so I've made it a personal goal to retire before my last child is done with high school. Playing with some numbers, it looks like if our income/expenses were to never change, my number would be about 24 years. That's good, but not great.

Here's the problem: my wife and I are looking to have more kids. It's (parenthood) something we enjoy a lot (even though it can be maddeningly frustrating at times). More kids adds more expense and less income, no matter what way you look at it. I know my salary will continue to go up but our expenses will likely rise accordingly. Unfortunately, I discovered MMM and FIRE after marriage and kids, before we could build up a solid financial foundation. I already feel like I'm playing catch-up.

Our current 5 year plan (including the details outlined in Q2 below) has us debt-free in 18 months (by taking $1,000 a month and throwing it at my student loan), and then barring any unexpected setbacks, has us in a house in 3.5 to 4 years (depends on how long it takes to get the down payment together).  After that, we can start aggressively saving more. My wife may work eventually, but she also may decide to homeschool our kids (Her degree is in education, with a focus on private schools) and garden/grow as much produce as she can. I'm leaving that up to her.

I know I want to retire early. 45 is okay, 40 would be nice, 38 would be cool - that gives 14 to 21 years. I know after retirement we want to travel. I have intentions of making money on the side, or even working part time somewhere that feels like a hobby and not a job. My wife may want to work, she may not. Really, I just want every day to be Saturday (I've been thinking a lot about jlcollins' recent post). Post-FI, I expect our expenses to be close to what they are right now. Maybe a little less.

Here's the actual question:

Pretend, for a moment, you're in my shoes. There are a few things non-negotiable: 1) Your job (and the tools to do it - insurance, phone, etc.) 2) Your wife's education and your living situation for the next 4 years. 3) Your wife's car. 4) You're going to have more kids...1 or 2 at least.

How would you achieve FIRE in 14-21 years??



2) About that trust fund...

My wife had a trust fund set up in her name shortly after she was born. There was a large initial deposit and some smaller ones until she was about 3. I don't know what it grew to at its peak but it was at least $150,000. It was set up to fund only her education until she turned 21 and then after that she was granted full control. Her educational path has taken some turns along the way and it's been used for some other things so it's dropped considerably to its current point. Currently she has about $9,000 of classes left (including books, etc.). We get quarterly statements for it and the most recent one showed it was growing at about 5.5% (It holds largely municipal bonds, various index funds, and a few other things. A very conservative mix). Its fees are somewhere around 3%. Not great. The manager of the fund emailed us after our most recent withdrawal and asked if we would like to just close the account instead of have it sit at a slow growth rate. We probably will close it, and here is what I was thinking as far as how we would use the assets:

0) Set aside the remaining funds necessary for school as well as $5,000 for an emergency fund in a high interest online savings bank.
1) Pay off the car loan balance
2) Fully fund our HSA for the year
3) Put the remaining amount in the 529

Is this a wise use of these assets? Or is there a better way?

I appreciate it if you've made it this far and welcome any and all input! Again, thanks for reading...looking forward to the facepunches, I feel like I've gone soft since the holidays.
« Last Edit: January 30, 2016, 07:07:36 PM by chemistk »

MDM

  • Senior Mustachian
  • ********
  • Posts: 10659
Re: Reader Case Study - Planning for the Long Haul
« Reply #1 on: January 30, 2016, 07:59:34 PM »
How would you achieve FIRE in 14-21 years??

chemistk, welcome to the forum.

Before taking a crack at answering that question...how long does the case study spreadsheet suggest it will take for you?

snuggler

  • Stubble
  • **
  • Posts: 154
Re: Reader Case Study - Planning for the Long Haul
« Reply #2 on: January 30, 2016, 08:43:24 PM »
-Company Bonus - could be $400, could be $1,500. I won't find out until March
-Company Well Being Health Incentive - Wife and I participate in programs throughout the year to earn small bonuses. Usually amounts to $800.

I'd stick any extra money that comes in through your bonus and health incentives, as well as your "bonus" paychecks, into a Roth IRA.

-Rent $1,195 where do you live? Could this be lowered?
-Insurance (car and renter's): $190 Have you shopped insurance rates recently? If not, do so immediately. This seems high, and I live in a very high-cost insurance area.
-Phone: $127 Do you have to use ATT, or is that just required in order to get a subsidy? If the latter, you might be able to do better on your own. Check out IPDaley's post on cell phones. I use Ting and my SO uses Republic Wireless, and both offer much cheaper service than the big three.
-Comcast: $66
-Groceries: $450 How much of this is formula v. 'regular' food? My SO and I eat hardly any processed food, and eat a lot of organic fruits and veggies, yet we are at $100/month/person. Where do you shop? Do you buy dried goods (rice, lentils, flour, etc.) in bulk?
-Gas: $160 Would a Costco membership and/or good rewards credit card help minimize this expense?
Entertainment: $20
Netflix, Hulu, and Amazon Prime Cut this to one if you are serious about saving. Each has great options, and plenty to satisfy a busy family with a young child.
Charitable Giving: $75
Alcohol: $50 What do you buy? Where do you buy it? You can save a lot by making homebrew, buying boxed wine, etc.
Travel: $100
My family and high school friends live 8 hours away in Michigan, and we make between 3 and 4 trips out there. We spread the travel cost out monthly. Do your family/friends ever visit you? If not, why not ask them to share this cost? Do you drive there? Stay in a hotel?
Misc.: $100 What does this cover? Could be an easy $100 to add to the savings.

For those two periods, I plan on investing in (used) supplies for our home - bikes, a grill, toddler clothes, etc. and using the rest to make chunk payments on loans. I would not be spending money on grills, bikes, etc. if my SO and I still used cars for commuting, and if I was serious about retiring early. Buy the toddler clothes used. Pay down the student loan instead.

Assets:
-2 Cars. 2014 Mazda CX-5 and 2012 Ford Focus (Both automatic :/) Which one is your wife's and which is yours? You can likely get something older and still reliable now. I drive a 2009 and it is extremely reliable.
-Bank Accounts - ~$4,500
We're moving, and in doing so are breaking our current lease, so this covers those 2 months when we're making rent payments on two places. Yuck. Why don't you find someone who needs short-term housing to help you cover your costs? Or negotiate with the landlord to find someone who will sign a new 12 or 15 month lease to eliminate those 2 months of liability. Alternatively, if you haven't signed the new lease yet, I would seriously consider waiting 2 months. Your rent is high, and that is a huge amount of money to waste on something you are not going to use.

Liabilities:
-Student Loan: Originally $23,000, 10 year payoff, 5.1% Interest Rate. Current Balance just over $18,700. Monthly payments ~$246, I pay a little extra at $300. Prioritize this payoff, since the interest rate is higher than your auto loan. Have you looked into Sofi and other refinancing options?
-Car Loan (AAAAAAAGGGGGHHHHHHHH): Originally for $11,500. 5.5 year payoff, 3.8% Interest rate, just over $6,800 owed. Monthly payment is ~$194 and I also pay extra at $200 a month. Refinance this loan immediately. See, e.g. penfed.com (and there might be even cheaper options out there).


Specific Questions:

1) Planning for the long term

My wife may work eventually, but she also may decide to homeschool our kids (Her degree is in education, with a focus on private schools) and garden/grow as much produce as she can. I'm leaving that up to her. Why is she finishing her degree if she may never work? Do you have life insurance protecting her if something happens to you, and a good plan (and possibly a prenup) that protects her if something were to happen between you two? Have you thought about her running a daycare or teaching other children for additional income if she does stay home?

I have intentions of making money on the side, or even working part time somewhere that feels like a hobby and not a job. My wife may want to work, she may not. Why not start researching (and doing) these side-gigs now? If you are actually using all three tv services, you likely could carve out several hours of tv-watching a week to add to your income.

Here's the actual question:

Pretend, for a moment, you're in my shoes. There are a few things non-negotiable: 1) Your job (and the tools to do it - insurance, phone, etc.) 2) Your wife's education and your living situation for the next 4 years. 3) Your wife's car. 4) You're going to have more kids...1 or 2 at least.

How would you achieve FIRE in 14-21 years??

I would:

- take the advice listed above
- live in the smallest home we could possibly comfortably live in (my children would share rooms, have bunk beds, no guest room, no office, etc.)
- have SO either quit school or speed up graduation date (and thus reduce tuition by increasing credits/semester and speed up ability to earn income) by taking on a bigger course load
- get a side hustle
- save more in the 401K, to reduce my taxable income


2) About that trust fund...

We probably will close it, and here is what I was thinking as far as how we would use the assets:

0) Set aside the remaining funds necessary for school as well as $5,000 for an emergency fund in a high interest online savings bank.
1) Pay off the car loan balance
2) Fully fund our HSA for the year
3) Put the remaining amount in the 529

Is this a wise use of these assets? Or is there a better way?

Because of the origins of this money, I would consider it my SO's and only apply it to her needs. Thus, I'd focus on paying her education, covering life insurance and a good plan/prenup in case something happens to you or your marriage, and funding her own retirement accounts (spousal IRA, taxable Vanguard account).

former player

  • Walrus Stache
  • *******
  • Posts: 6661
  • Location: Avalon
Re: Reader Case Study - Planning for the Long Haul
« Reply #3 on: January 31, 2016, 05:00:34 AM »
You are getting by at the moment, and if you take snuggler's suggestions will do better. 

I have a number of concerns -

1.  While you have a good income for someone aged 24, your current thoughts don't seem to leave much scope for it to increase by much.  And at only age 24 you are already worried about a high potential for burnout.
2.  Your wife has managed to spend about $125k on getting only two and a half years of education in 6 years, hasn't chosen a high paying subject, doesn't seem urgent about finishing and when she has finished doesn't seem to have much interest in using it to earn money outside the house.
3.  You have debt (student loan, car loan).
4.  You and your wife like making and raising babies.
5.  Your non-negotiables are your job, your expenses, your wife's education and non-earning, and your and your wife's making more babies.

None of that adds up to FIRE, to me.  It adds up to the standard lower-middle class American working life: being careful with money and retiring in your 60s.  And that's assuming no major trauma or health issues for you, your wife or your kids.  Nor does any of it add up to you and your wife being able to pass on to your kids the advantages that were given to your wife via that trust fund.

How would I achieve FIRE in your shoes?  I'd start looking hard at those non-negotiables.   Short of a lottery win or a timely inheritance, I don't see what else is going to do it.




chemistk

  • Pencil Stache
  • ****
  • Posts: 941
  • Location: Mid-Atlantic
Re: Reader Case Study - Planning for the Long Haul
« Reply #4 on: January 31, 2016, 05:01:20 AM »
How would you achieve FIRE in 14-21 years??

chemistk, welcome to the forum.

Before taking a crack at answering that question...how long does the case study spreadsheet suggest it will take for you?

According the spreadsheet, I'm looking at 24 years. This assumes my two loans are paid off fast and that my salary never outpaces inflation.

chemistk

  • Pencil Stache
  • ****
  • Posts: 941
  • Location: Mid-Atlantic
Re: Reader Case Study - Planning for the Long Haul
« Reply #5 on: January 31, 2016, 05:45:43 AM »
-Company Bonus - could be $400, could be $1,500. I won't find out until March
-Company Well Being Health Incentive - Wife and I participate in programs throughout the year to earn small bonuses. Usually amounts to $800.

I'd stick any extra money that comes in through your bonus and health incentives, as well as your "bonus" paychecks, into a Roth IRA.

-Rent $1,195 where do you live? Could this be lowered?
-Insurance (car and renter's): $190 Have you shopped insurance rates recently? If not, do so immediately. This seems high, and I live in a very high-cost insurance area.
-Phone: $127 Do you have to use ATT, or is that just required in order to get a subsidy? If the latter, you might be able to do better on your own. Check out IPDaley's post on cell phones. I use Ting and my SO uses Republic Wireless, and both offer much cheaper service than the big three.
-Comcast: $66
-Groceries: $450 How much of this is formula v. 'regular' food? My SO and I eat hardly any processed food, and eat a lot of organic fruits and veggies, yet we are at $100/month/person. Where do you shop? Do you buy dried goods (rice, lentils, flour, etc.) in bulk?
-Gas: $160 Would a Costco membership and/or good rewards credit card help minimize this expense?
Entertainment: $20
Netflix, Hulu, and Amazon Prime Cut this to one if you are serious about saving. Each has great options, and plenty to satisfy a busy family with a young child.
Charitable Giving: $75
Alcohol: $50 What do you buy? Where do you buy it? You can save a lot by making homebrew, buying boxed wine, etc.
Travel: $100
My family and high school friends live 8 hours away in Michigan, and we make between 3 and 4 trips out there. We spread the travel cost out monthly. Do your family/friends ever visit you? If not, why not ask them to share this cost? Do you drive there? Stay in a hotel?
Misc.: $100 What does this cover? Could be an easy $100 to add to the savings.

For those two periods, I plan on investing in (used) supplies for our home - bikes, a grill, toddler clothes, etc. and using the rest to make chunk payments on loans. I would not be spending money on grills, bikes, etc. if my SO and I still used cars for commuting, and if I was serious about retiring early. Buy the toddler clothes used. Pay down the student loan instead.

Assets:
-2 Cars. 2014 Mazda CX-5 and 2012 Ford Focus (Both automatic :/) Which one is your wife's and which is yours? You can likely get something older and still reliable now. I drive a 2009 and it is extremely reliable.
-Bank Accounts - ~$4,500
We're moving, and in doing so are breaking our current lease, so this covers those 2 months when we're making rent payments on two places. Yuck. Why don't you find someone who needs short-term housing to help you cover your costs? Or negotiate with the landlord to find someone who will sign a new 12 or 15 month lease to eliminate those 2 months of liability. Alternatively, if you haven't signed the new lease yet, I would seriously consider waiting 2 months. Your rent is high, and that is a huge amount of money to waste on something you are not going to use.

Liabilities:
-Student Loan: Originally $23,000, 10 year payoff, 5.1% Interest Rate. Current Balance just over $18,700. Monthly payments ~$246, I pay a little extra at $300. Prioritize this payoff, since the interest rate is higher than your auto loan. Have you looked into Sofi and other refinancing options?
-Car Loan (AAAAAAAGGGGGHHHHHHHH): Originally for $11,500. 5.5 year payoff, 3.8% Interest rate, just over $6,800 owed. Monthly payment is ~$194 and I also pay extra at $200 a month. Refinance this loan immediately. See, e.g. penfed.com (and there might be even cheaper options out there).


Specific Questions:

1) Planning for the long term

My wife may work eventually, but she also may decide to homeschool our kids (Her degree is in education, with a focus on private schools) and garden/grow as much produce as she can. I'm leaving that up to her. Why is she finishing her degree if she may never work? Do you have life insurance protecting her if something happens to you, and a good plan (and possibly a prenup) that protects her if something were to happen between you two? Have you thought about her running a daycare or teaching other children for additional income if she does stay home?

I have intentions of making money on the side, or even working part time somewhere that feels like a hobby and not a job. My wife may want to work, she may not. Why not start researching (and doing) these side-gigs now? If you are actually using all three tv services, you likely could carve out several hours of tv-watching a week to add to your income.

Here's the actual question:

Pretend, for a moment, you're in my shoes. There are a few things non-negotiable: 1) Your job (and the tools to do it - insurance, phone, etc.) 2) Your wife's education and your living situation for the next 4 years. 3) Your wife's car. 4) You're going to have more kids...1 or 2 at least.

How would you achieve FIRE in 14-21 years??

I would:

- take the advice listed above
- live in the smallest home we could possibly comfortably live in (my children would share rooms, have bunk beds, no guest room, no office, etc.)
- have SO either quit school or speed up graduation date (and thus reduce tuition by increasing credits/semester and speed up ability to earn income) by taking on a bigger course load
- get a side hustle
- save more in the 401K, to reduce my taxable income


2) About that trust fund...

We probably will close it, and here is what I was thinking as far as how we would use the assets:

0) Set aside the remaining funds necessary for school as well as $5,000 for an emergency fund in a high interest online savings bank.
1) Pay off the car loan balance
2) Fully fund our HSA for the year
3) Put the remaining amount in the 529

Is this a wise use of these assets? Or is there a better way?

Because of the origins of this money, I would consider it my SO's and only apply it to her needs. Thus, I'd focus on paying her education, covering life insurance and a good plan/prenup in case something happens to you or your marriage, and funding her own retirement accounts (spousal IRA, taxable Vanguard account).

Thanks for the advice! Here are some answers to your questions - The OP is long enough as it is so I'm going to keep them down here:

Bonus: Do you think it would be better to pay off loans faster with those bonuses?

Rent: Our rent (per sq. ft.) is lower than average. A lot of the available properties around here are old, in bad parts of town, and/or generally unsafe for kids. If it was just my wife and I, we would be paying $600 a month for a 1 bedroom apt near my job

Insurance: I've shopped recently and there is little savings. Full disclosure: I had a OWI a few years ago that's still showing up on our insurance.

Phone: ATT is required :(

Food: About $75 is formula, and this number includes non-food items. Food alone, we're about $150 per person per month

Alcohol: We buy boxed wine and I get beer from a distributor. Plus a bottle of whisky from time to time. I do actually homebrew. We only have space for cider right now.

Travel: My family comes down a couple times per year. When we go, we always drive, pack lunches for the car, and stay with my parents who also provide nearly all our food. This summer we will be staying in a lakehouse on lake Michigan - funded 100% by my parents. I would say they more than share the cost!


Rent: We aren't allowed to sub-let. We also know few people in the area - all of whom own homes. The 2 months' rent is actually the lease buy-out option. Otherwise we're here until July. It's also in the lease that when we choose to not renew the lease we have a 90 day window to move. A day late and we pay 3x the monthly rent. Even if we moved before the lease is up, we owe all the way through the end. Not a good situation.

Loans: We've been prioritizing the auto loan first for 2 reasons: One, it's a depreciating asset. Two, the student loan is composed of 4 separate loans, each with a different interest rate and payoff length. In 2 years, the interest rate actually drops to below 4%

Wife Work: My wife wants to work. But we do not want our kids in daycare. In a perfect world, I could have a life like MMM - watching my kids grow up every day without havign to worry about money. If she does work, we will most likely send our kids to whichever school she works at. If she does not, she's more than qualified to homeschool (PA law makes it challenging for someone without an education background to successfully homeschool)

Extra Cash: The side-gigs are hobbies I have yet to develop fully (homebrewing, photography). I'm a novice right now and need experience. Plus, I cherish every minute I spend with my family away from work and don't ever want to regret missing out on time with my wife and son (and any future kids)

Her Trust: I have a life insurance policy (free, through work) for which she is the sole beneficiary. If I were to pass, she would also receive the policy plus one full year's salary. Our marriage comes before our kids or money, so with saying that she views that money as ours as a couple and not solely hers.


gecko10x

  • Bristles
  • ***
  • Posts: 420
    • SawyerPF
Re: Reader Case Study - Planning for the Long Haul
« Reply #6 on: January 31, 2016, 06:00:08 AM »
In some ways you sound a lot like me, only you are 12 years younger.
If you don't want to take a hard core route, then you need to look for ways to increase your income. While the kids are young, I'd suggest focusing on your income- look for a different position, be a great performer and ask for a raise, etc.
Once the kids are in school, or your wife otherwise has a bit of free time, she should start looking for some work, even if it's part time or can be done from home. By that time, you should have some debts dealt with, and the savings will start to pile up.

From experience, I will say progress will feel excruciatingly slow on this track. Remind yourself that you chose it, and you could always switch to something more hard core!

If I misinterpreted you, then listen to the others about ways to cut down expenses.

« Last Edit: January 31, 2016, 06:02:35 AM by gecko10x »

MDM

  • Senior Mustachian
  • ********
  • Posts: 10659
Re: Reader Case Study - Planning for the Long Haul
« Reply #7 on: January 31, 2016, 06:03:36 AM »
According the spreadsheet, I'm looking at 24 years. This assumes my two loans are paid off fast and that my salary never outpaces inflation.
Ah, yes, you did say "Playing with some numbers, it looks like if our income/expenses were to never change, my number would be about 24 years. That's good, but not great." - missed that on first read.

I did some playing also - maybe too much, you'll have to be the judge - and got you down to ~18 years.  Of course, much can happen and change in that time.  E.g., I expect you will have more medical expenses than now in your budget.  But your income might also outpace inflation, etc.

Some assumptions:
 - Max HSA contribution.  Increased "salary" to include employer HSA contribution.  Also assumed $5300/mo when including upcoming raise and bonus.
 - 1 max tIRA, plus $1100/mo your 401k contribution, enough to get you the full saver's credit and some EIC.
 - The negative cash flow based on salary alone will be handled by drawing from the trust.
 - Loan payments at minimum required.  You might be able to drop your time to FI a little by paying the SL faster, but using your tax-advantaged investment space seems more valuable.

The marginal savings rate on your 401k, assuming you are already maximizing your HSA and one tIRA, goes through some interesting gyrations.  You have to contribute some at the 15% rate, where rules of thumb might suggest Roth is better, in order to reach higher marginal savings rates:


See tables below for results.  Again, there are assumptions here and this may not reflect what you really can do - take with a few grains of salt and confirm/modify in your own version.  Of course, if you can cut expenses then things will be rosier.  In any case, good luck!
CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$5,467$65,600
Pretax Health Ins.$287$3,444
Employer-sponsored HSA$554At maximum$6,650
FICA base salary/wages$4,626$55,506
Traditional IRA$458Room to increase?$5,500
401(k) / 403(b) / TSP / etc.$1,100Room to increase?$13,200
Employer Match$232$2,788
Income subject to IRS tax$3,067$36,806
Federal Total Income$3,067$36,806
Federal tax-$1152015 rates, MFJ, stand. ded., 3 exempt.-$1,374
State/City tax$0Guess, using 0.00% * Fed. Taxable$0
Soc. Sec.$287Assumes 1 earner paying$3,441
Medicare$67$805
Total income taxes$239$2,872
Income before other expenses  $2,828$33,934
Monthly Average Expenses:
Rent$1,195$14,340
Car Insurance$190$2,280
Charitable contributions$75$900
Electricity$220$2,640
Entertainment$20$240
Fuel/Public Transport$160$1,920
Groceries$450$5,400
Internet$66$792
Miscellaneous$100$1,200
Phone (cell)$127$1,524
Travel/Vacation$100$1,200
Wine/Beer/Tobacco$50$600
Non-mortgage total$2,753$33,036
Loans:
Student Loan$245$2,941
Car loan$193$2,320
Total Expense$3,191$38,297
Total to invest-$364-$4,363
Summary:
"Gross" income$5,467$65,600
Income taxes$239$2,872
After-tax income$5,227$62,728
IRA+401k/403b/TSP/457 (Savers' credit)$1,558$18,700
HSA$554$6,650
Living expenses$3,040$36,480
Non-mortgage loans$438$5,261
After-tax investable-$364-$4,363
Time to FIRE?:
Time to FIRE20years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments5.00%percent
Real, after tax, return on taxable investments4.25%percent
Current Savings
Taxable$26,000
Tax-deferred (e.g. trad. IRA/401k)$10,000
Projected Savings at Retirement
Taxable$27,437
Tax-deferred (e.g. trad. IRA/401k)$737,054
Roth + HSA$219,889
Total projected stash$984,380
Projected Expenses in Retirement
Non-loan, non-work expenses$33,036
Annual non-tax retirement expense$33,036
Income taxes$470
Total$33,506
Stash needed for retirement @4.0% SWR$837,644
Have $146,736 extra.


Filing Status21=S, 2=MFJ, 3=HOH
# Exempt.3
# Children <171
# Children for EIC1
Earner #1Earner #2
Ages2424
# of earners1
Total Income$36,806
Std. Deduct.$12,600
Act. Deduct.$12,600
Exemption$12,000
SL int. (approx.)$906
AGI$35,900
MAGI$42,306
Taxable$11,300
1040 Tax$1,130
Saver's credit$2,000
Tax after n-r credit$0
Child Tax Cred.$1,000
EIC$374
Net Tax-$1,374
Monthly-$115
Charity$900
Item. Deduct.$900
VersionV7.08

Loans:Orig. Prin.Orig. LengthCurr. Prin.Yrs leftRate
Student Loan$23,00010$18,70085.100%
Car loan$11,5005.5$6,80033.800%

chemistk

  • Pencil Stache
  • ****
  • Posts: 941
  • Location: Mid-Atlantic
Re: Reader Case Study - Planning for the Long Haul
« Reply #8 on: January 31, 2016, 06:36:10 AM »
You are getting by at the moment, and if you take snuggler's suggestions will do better. 

I have a number of concerns -

1.  While you have a good income for someone aged 24, your current thoughts don't seem to leave much scope for it to increase by much.  And at only age 24 you are already worried about a high potential for burnout.
2.  Your wife has managed to spend about $125k on getting only two and a half years of education in 6 years, hasn't chosen a high paying subject, doesn't seem urgent about finishing and when she has finished doesn't seem to have much interest in using it to earn money outside the house.
3.  You have debt (student loan, car loan).
4.  You and your wife like making and raising babies.
5.  Your non-negotiables are your job, your expenses, your wife's education and non-earning, and your and your wife's making more babies.

None of that adds up to FIRE, to me.  It adds up to the standard lower-middle class American working life: being careful with money and retiring in your 60s.  And that's assuming no major trauma or health issues for you, your wife or your kids.  Nor does any of it add up to you and your wife being able to pass on to your kids the advantages that were given to your wife via that trust fund.

How would I achieve FIRE in your shoes?  I'd start looking hard at those non-negotiables.   Short of a lottery win or a timely inheritance, I don't see what else is going to do it.

Thanks! I appreciate the honest feedback. We may disagree on the topic of children, and that's okay.

I did not mention any room for salary growth because it's assumed. I typically receive 2%-4% pay increases yearly, with the potential for more. Last month I was promoted to my current position - my pay was $10,000 lower. I can anticipate more of these in the next 10 years, but why play the best case scenario when you can plan around the worst? I am not an engineer, lawyer, doctor, or programmer. My degree gives me a ceiling of $120,000 or so and that's fine by me. Speaking of which...

I'm very happy with what I do. I have no need for a master's or a doctorate. I see my colleagues who are in their forties or fifties who are still trying to save for retirement - or putting retirement off until 65. That is not the life I want to lead, rather I want to retire before I've burned out.

I painted my wife's picture incorrectly. She's spent $60k on her education. For a year, she lived largely on her trust and a part time job (before we were married). We purchased her car using the trust. It helped offset unexpected costs related to the birth of our son. Most of this happened before marriage (our son the exception) and all happened before we were introduced to the concept of early retirement. As it now stands, less than $10,000 is needed to complete her education. IIRC, it's not all about the money. It's about doing what makes you happy. If early retirement/freedom makes you happy then money id the tool to get you there. She may work, she may not. I will never put her in a situation she doesn't truly want to be. As a couple we now share the same financial goals.


chemistk

  • Pencil Stache
  • ****
  • Posts: 941
  • Location: Mid-Atlantic
Re: Reader Case Study - Planning for the Long Haul
« Reply #9 on: January 31, 2016, 06:41:38 AM »
In some ways you sound a lot like me, only you are 12 years younger.
If you don't want to take a hard core route, then you need to look for ways to increase your income. While the kids are young, I'd suggest focusing on your income- look for a different position, be a great performer and ask for a raise, etc.
Once the kids are in school, or your wife otherwise has a bit of free time, she should start looking for some work, even if it's part time or can be done from home. By that time, you should have some debts dealt with, and the savings will start to pile up.

From experience, I will say progress will feel excruciatingly slow on this track. Remind yourself that you chose it, and you could always switch to something more hard core!

If I misinterpreted you, then listen to the others about ways to cut down expenses.

Thanks! And you it it spot on! I think the raise/promotion will take a while. I was promoted last month to my current salary (a $10,000 raise). I work in a very technical field (Chemistry) so switching to something else would probably set me back for a while. If I were to move to a different company, I would have a hard time keeping the same salary. I only have 2.5 years on the job experience, and would probably need 5 or so to make even a lateral move.

The plan is for her to pursue the career she wants to once we're ready. Since her degree will be in education, she very well might get a job at a school where our kids go - avoiding the need for child care.

There is some expense cutting to do, but overall you're completely right - it's going to be slow for a while.

chemistk

  • Pencil Stache
  • ****
  • Posts: 941
  • Location: Mid-Atlantic
Re: Reader Case Study - Planning for the Long Haul
« Reply #10 on: January 31, 2016, 06:44:14 AM »
According the spreadsheet, I'm looking at 24 years. This assumes my two loans are paid off fast and that my salary never outpaces inflation.
Ah, yes, you did say "Playing with some numbers, it looks like if our income/expenses were to never change, my number would be about 24 years. That's good, but not great." - missed that on first read.

I did some playing also - maybe too much, you'll have to be the judge - and got you down to ~18 years.  Of course, much can happen and change in that time.  E.g., I expect you will have more medical expenses than now in your budget.  But your income might also outpace inflation, etc.

Some assumptions:
 - Max HSA contribution.  Increased "salary" to include employer HSA contribution.  Also assumed $5300/mo when including upcoming raise and bonus.
 - 1 max tIRA, plus $1100/mo your 401k contribution, enough to get you the full saver's credit and some EIC.
 - The negative cash flow based on salary alone will be handled by drawing from the trust.
 - Loan payments at minimum required.  You might be able to drop your time to FI a little by paying the SL faster, but using your tax-advantaged investment space seems more valuable.

The marginal savings rate on your 401k, assuming you are already maximizing your HSA and one tIRA, goes through some interesting gyrations.  You have to contribute some at the 15% rate, where rules of thumb might suggest Roth is better, in order to reach higher marginal savings rates:


See tables below for results.  Again, there are assumptions here and this may not reflect what you really can do - take with a few grains of salt and confirm/modify in your own version.  Of course, if you can cut expenses then things will be rosier.  In any case, good luck!
CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$5,467$65,600
Pretax Health Ins.$287$3,444
Employer-sponsored HSA$554At maximum$6,650
FICA base salary/wages$4,626$55,506
Traditional IRA$458Room to increase?$5,500
401(k) / 403(b) / TSP / etc.$1,100Room to increase?$13,200
Employer Match$232$2,788
Income subject to IRS tax$3,067$36,806
Federal Total Income$3,067$36,806
Federal tax-$1152015 rates, MFJ, stand. ded., 3 exempt.-$1,374
State/City tax$0Guess, using 0.00% * Fed. Taxable$0
Soc. Sec.$287Assumes 1 earner paying$3,441
Medicare$67$805
Total income taxes$239$2,872
Income before other expenses  $2,828$33,934
Monthly Average Expenses:
Rent$1,195$14,340
Car Insurance$190$2,280
Charitable contributions$75$900
Electricity$220$2,640
Entertainment$20$240
Fuel/Public Transport$160$1,920
Groceries$450$5,400
Internet$66$792
Miscellaneous$100$1,200
Phone (cell)$127$1,524
Travel/Vacation$100$1,200
Wine/Beer/Tobacco$50$600
Non-mortgage total$2,753$33,036
Loans:
Student Loan$245$2,941
Car loan$193$2,320
Total Expense$3,191$38,297
Total to invest-$364-$4,363
Summary:
"Gross" income$5,467$65,600
Income taxes$239$2,872
After-tax income$5,227$62,728
IRA+401k/403b/TSP/457 (Savers' credit)$1,558$18,700
HSA$554$6,650
Living expenses$3,040$36,480
Non-mortgage loans$438$5,261
After-tax investable-$364-$4,363
Time to FIRE?:
Time to FIRE20years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments5.00%percent
Real, after tax, return on taxable investments4.25%percent
Current Savings
Taxable$26,000
Tax-deferred (e.g. trad. IRA/401k)$10,000
Projected Savings at Retirement
Taxable$27,437
Tax-deferred (e.g. trad. IRA/401k)$737,054
Roth + HSA$219,889
Total projected stash$984,380
Projected Expenses in Retirement
Non-loan, non-work expenses$33,036
Annual non-tax retirement expense$33,036
Income taxes$470
Total$33,506
Stash needed for retirement @4.0% SWR$837,644
Have $146,736 extra.


Filing Status21=S, 2=MFJ, 3=HOH
# Exempt.3
# Children <171
# Children for EIC1
Earner #1Earner #2
Ages2424
# of earners1
Total Income$36,806
Std. Deduct.$12,600
Act. Deduct.$12,600
Exemption$12,000
SL int. (approx.)$906
AGI$35,900
MAGI$42,306
Taxable$11,300
1040 Tax$1,130
Saver's credit$2,000
Tax after n-r credit$0
Child Tax Cred.$1,000
EIC$374
Net Tax-$1,374
Monthly-$115
Charity$900
Item. Deduct.$900
VersionV7.08

Loans:Orig. Prin.Orig. LengthCurr. Prin.Yrs leftRate
Student Loan$23,00010$18,70085.100%
Car loan$11,5005.5$6,80033.800%

Thanks for that! (And thank you for the spreadsheet!)

A question - The trust has a net income of 2.5%-3% after fees. Why wouldn't it be more advantageous to use it to pay down some debt?

former player

  • Walrus Stache
  • *******
  • Posts: 6661
  • Location: Avalon
Re: Reader Case Study - Planning for the Long Haul
« Reply #11 on: January 31, 2016, 06:53:34 AM »
Thanks! I appreciate the honest feedback. We may disagree on the topic of children, and that's okay.

I did not mention any room for salary growth because it's assumed. I typically receive 2%-4% pay increases yearly, with the potential for more. Last month I was promoted to my current position - my pay was $10,000 lower. I can anticipate more of these in the next 10 years, but why play the best case scenario when you can plan around the worst? I am not an engineer, lawyer, doctor, or programmer. My degree gives me a ceiling of $120,000 or so and that's fine by me. Speaking of which...

I'm very happy with what I do. I have no need for a master's or a doctorate. I see my colleagues who are in their forties or fifties who are still trying to save for retirement - or putting retirement off until 65. That is not the life I want to lead, rather I want to retire before I've burned out.

I painted my wife's picture incorrectly. She's spent $60k on her education. For a year, she lived largely on her trust and a part time job (before we were married). We purchased her car using the trust. It helped offset unexpected costs related to the birth of our son. Most of this happened before marriage (our son the exception) and all happened before we were introduced to the concept of early retirement. As it now stands, less than $10,000 is needed to complete her education. IIRC, it's not all about the money. It's about doing what makes you happy. If early retirement/freedom makes you happy then money id the tool to get you there. She may work, she may not. I will never put her in a situation she doesn't truly want to be. As a couple we now share the same financial goals.
Congratulations on the recent promotion.  If future pay rises keep you above the inflation rate you will find that it adds up over the years.  Add on in-house promotions to that, and things become more and more comfortable.  But you are in this for the long-haul even on optimistic projections, so try to keep a balance between pushing hard and burning out.

It's good of you to say that you will never put your wife in a position she doesn't truly want to be.  Does she say the same to you?  Because on current plans you will working to support your wife and kids for the next 20 years.   I haven't heard many 24 year olds who are worried about burning out - many people that age still think they are indestructible.  In a way it's good that you are aware of the possibility and taking account of it, in another way it's a concern, particularly if you don't have an equivalent back-up plan.  It would take a long time for your wife's potential teaching salary to get to the level of replacing yours.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10659
Re: Reader Case Study - Planning for the Long Haul
« Reply #12 on: January 31, 2016, 06:58:29 AM »
A question - The trust has a net income of 2.5%-3% after fees. Why wouldn't it be more advantageous to use it to pay down some debt?
Yes, if you can load up your 401k and tIRA funding enough to get the max saver's credit and pay down the SL faster, all the better! 

See the 'Investment Order' tab in that spreadsheet.  By that logic (and with 10 year Treasuries ~2%) paying more on the SL fits in step 7 and the car loan is merely an expense (like rent) that gets paid each month.

ender

  • Walrus Stache
  • *******
  • Posts: 6530
Re: Reader Case Study - Planning for the Long Haul
« Reply #13 on: January 31, 2016, 07:31:07 AM »
Quote
This definitely high. Justification: I have to occasionally drive a company car and am required to maintain a minimum insurance coverage. Plus, a few years back I had a driving incident that raised my rates for a while. The renter's is the minimum required for our lease. Unfortunately, there is little wiggle room here

Definitely shop rates for this, you are paying $2000+ a year for car insurance!

Quote
-Rent $1,195
Utilities (Electric, Gas, Water/Sewer, Trash): $220
-Comcast: $66

So your total housing cost is $1,481 a month. Considering your takehome pay is $3400, you are paying 44% of your income in housing costs. That is a huge percentage of your income to be going to rent/utilities!! 

What options do you have with this? I would have thought PA would be very low cost of living. This seems to suggest you are living in a much nicer place than other options.

Are you planning on a much cheaper place when your wife graduates? If you save $100/month on car insurance and $200/month on living expenses you just increased your savings rate almost 10% and that doesn't even include other low hanging fruit. Your budget looks to be pretty easily cut $500/month of spending.

Also keep in mind "high speed" can be relative. I went with 3MB/s internet at a previous apartment and was just fine. We could have paid much more for faster internet, but it wasn't needed.

Quote
Rent: Our rent (per sq. ft.) is lower than average. A lot of the available properties around here are old, in bad parts of town, and/or generally unsafe for kids. If it was just my wife and I, we would be paying $600 a month for a 1 bedroom apt near my job

So what if the rent per sq ft is lower than average. I'd rather pay 50% the total cost with a higher rent/sq ft than spend nearly 50% of my takehome pay on my living expenses and save an extra $6k/year towards a house so I can buy several years earlier.

Also, how is a rental "unsafe for kids" if you have a baby? Why is "old" bad? I think you guys have convinced yourself you need a really nice/big/whatever place. Somehow I don't think that anything will change that mind, either. If your 9-month old requires an additional $600/month in rent... then yes, your kids and how much you and your wife spend in order to meet their "needs" will probably make FIRE unachievable in a reasonable timeframe.

You say it's a non-negotiable but frankly it should be non-negotiable to change it - pretty much no financial person, from Dave Ramsey to MMM, would say that a place costing you such a high percentage of your takehome when your income is $60k is reasonable.

Quote
I can anticipate more of these in the next 10 years, but why play the best case scenario when you can plan around the worst?

This attitude is really not great. It has an implication of, "it is what it is, I can't really change much" and that attitude will kill your opportunities in the future.

The way you word your rent/insurance situations scream to  me, "I can't change these." Well.. when was the last time you priced insurance for your cars/renters?

Dreaming is important to achieving FIRE. If your assumption is that FIRE isn't possible because you plan on the worst case scenarios... your motivation for saving and doing better will be lowered, and that will actually help cause it.


Quote
Here's the problem: my wife and I are looking to have more kids. It's (parenthood) something we enjoy a lot (even though it can be maddeningly frustrating at times). More kids adds more expense and less income, no matter what way you look at it. I know my salary will continue to go up but our expenses will likely rise accordingly. Unfortunately, I discovered MMM and FIRE after marriage and kids, before we could build up a solid financial foundation. I already feel like I'm playing catch-up.

Why do you describe it as a problem?

Keep in mind for their first years the primary "cost" is lost wages and/or daycare. Each kid is worth $1k in tax credits and $4k in exemptions, which is roughly a $2000 tax boost. Most people on here spend much less than $2000 on their children.

Unless you refer to the $600/month extra you are spending just for the baby in rent?

Everyone is playing catchup here in some regards. This forum has a crazy diversity in where people are at in their FIRE journey. All we can do is play the cards we are given, so to speak.


Quote
Our current 5 year plan (including the details outlined in Q2 below) has us debt-free in 18 months (by taking $1,000 a month and throwing it at my student loan), and then barring any unexpected setbacks, has us in a house in 3.5 to 4 years (depends on how long it takes to get the down payment together).  After that, we can start aggressively saving more. My wife may work eventually, but she also may decide to homeschool our kids (Her degree is in education, with a focus on private schools) and garden/grow as much produce as she can. I'm leaving that up to her.

18 months? Be more aggressive and optimistic! If you can't be aggressive against paying off debt what makes you think you'll switch that mentality in 5+ years after you get a house?

How big of place are you planning on buying? If you are saving $1500/month for 4 years... that's a $72k down payment. Which is 20% of a $350k house, that again I'm assuming is very huge for where you live.

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 6432
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Re: Reader Case Study - Planning for the Long Haul
« Reply #14 on: January 31, 2016, 08:01:44 AM »
You have received some fantastic advice here. As MDM pointed out you can get the time to FIRE down to 18-19 years with the help of maxing tax advantaged spaces and receiving the savers credit and EIC.

I think what you have to think long and hard on is what you are willing to sacrifice to FIRE even sooner. I wholeheartedly believe that you can FIRE in 10-12 years if you are willing to compromise a bit on your housing/car/food costs.

eliza

  • Bristles
  • ***
  • Posts: 377
Re: Reader Case Study - Planning for the Long Haul
« Reply #15 on: January 31, 2016, 08:09:36 AM »
It doesn't seem like you are accounting for all of your expenses in the budget you posted.  I see no line items for clothing or medical expenses.  And I'm sure there are other things missing as well that may or may not be accurately covered by $100 misc.  I strongly suggest that you start tracking every penny spent - I've recently started doing this myself and it really helped me to see where/what I'm spending.  (If you haven't yet read it, check Your Money or Your Life out of the library and do the exercises.)

At the end of the day, the underlying equation is pretty simple.  Income - Expenses = Savings.  Based on your responses thus far, you are unable/unwilling to consider changing your income or your expenses, so there really isn't much you can do appreciably change your savings.  There is nothing inherently wrong with this, but that probably does mean that early retirement isn't in the cards for you unless you have a change in mindset. 

Just be aware that this is a choice you are making.  You seem very defensive about all of your decisions as if there are no possible other choices you could make.  That's not true, you are choosing comfort, perceived security (housing), perceived health (outrageous food costs),  lifestyle, and convenience (not taking time to look at options for insurance, housing, phone) over early retirement.  Again, these are not necessarily the wrong choices, but proactive choices nonetheless - you are responsible for your decisions and your future.

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 6432
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Re: Reader Case Study - Planning for the Long Haul
« Reply #16 on: January 31, 2016, 08:21:43 AM »
At the end of the day, the underlying equation is pretty simple.  Income - Expenses = Savings.  Based on your responses thus far, you are unable/unwilling to consider changing your income or your expenses, so there really isn't much you can do appreciably change your savings.  There is nothing inherently wrong with this, but that probably does mean that early retirement isn't in the cards for you unless you have a change in mindset. 

Just be aware that this is a choice you are making.  You seem very defensive about all of your decisions as if there are no possible other choices you could make.  That's not true, you are choosing comfort, perceived security (housing), perceived health (outrageous food costs),  lifestyle, and convenience (not taking time to look at options for insurance, housing, phone) over early retirement.  Again, these are not necessarily the wrong choices, but proactive choices nonetheless - you are responsible for your decisions and your future.

You said it much better than I could have! Best of luck OP!

chemistk

  • Pencil Stache
  • ****
  • Posts: 941
  • Location: Mid-Atlantic
Re: Reader Case Study - Planning for the Long Haul
« Reply #17 on: January 31, 2016, 11:53:00 AM »
MDM, ender, 2Birds1Stone, eliza - Thank you all so much for your advice. It's more than I could have asked for!


It's good of you to say that you will never put your wife in a position she doesn't truly want to be.  Does she say the same to you? 

All the time. I have no issue with how things are because one thing we agreed upon before marriage was that we would avoid daycare at all costs. I just want to be home all day every day with my kids.


At the end of the day, the underlying equation is pretty simple.  Income - Expenses = Savings.  Based on your responses thus far, you are unable/unwilling to consider changing your income or your expenses, so there really isn't much you can do appreciably change your savings.  There is nothing inherently wrong with this, but that probably does mean that early retirement isn't in the cards for you unless you have a change in mindset. 

Just be aware that this is a choice you are making.  You seem very defensive about all of your decisions as if there are no possible other choices you could make.  That's not true, you are choosing comfort, perceived security (housing), perceived health (outrageous food costs),  lifestyle, and convenience (not taking time to look at options for insurance, housing, phone) over early retirement.  Again, these are not necessarily the wrong choices, but proactive choices nonetheless - you are responsible for your decisions and your future.

In my OP and some of the follow-up questions, I tried my best not to sound inflexible. I'm pretty new to this still (started reading MMM, others last July) and so there are times when I have a hard time seeing the low-hanging fruit. Some of the line descriptions are lengthy but I was trying my best to pre-answer questions that folks would have. It's true that right now we're tending towards comfort. For us, it's not going to be an overnight change in lifestyle.

I'm going to go and look over everything again. Thank you all for the honest feedback.

DebtFreeBy25

  • Stubble
  • **
  • Posts: 238
  • Age: 34
  • Location: Appalachian and...tolerating it
Re: Reader Case Study - Planning for the Long Haul
« Reply #18 on: January 31, 2016, 12:51:08 PM »
Hi, chemistk. Welcome to the forum!

Brace yourself because I'm a bit brutal. That said, my commitment to frugality enabled me to be totally debt free (including a house) by the time I was 25 with a low-paying public sector job, no trust fund or other family resources and a spouse who was unemployed for 2 years. To put it bluntly I know what I'm talking about.

1. Your housing costs are too high. Paying 44% of your income in rent is never an ideal situation. There are less expensive options out there, but it will require a dedicated search to find something that works for you. That is your best opportunity to find substantial saving. Also, given your circumstances and plans, you should really be saving to buy a home.
2. You are not entitled to have a certain number of children. Children are expensive. There are lots of things this country should be doing to make life easier on parents, but it's not. If you cannot afford a child, you should not have that child. In your current situation, you cannot afford another child. Having another before you are financially able to would be extremely foolish.
3. Your wife needs to earn some income. This can be from a traditional job to a monetized hobby or anything in between. Among the many reasons for this, it will become increasingly difficult for your wife to ever get hired the longer she goes without working. What may currently be a choice will cease to be a choice before you know it. Relying solely on one income is dangerous and ill-advised.
4. Swear off car loans permanently. No one needs a brand new car. Your new-ish vehicles are killing your budget. I would recommend trying to sell the more valuable of the two and getting an older ~4k car in its place. Be warned not to buy anything too cheap unless you or your wife can do most maintenance and repairs yourself.
« Last Edit: January 31, 2016, 12:52:51 PM by DebtFreeBy25 »

Noodle

  • Handlebar Stache
  • *****
  • Posts: 1297
Re: Reader Case Study - Planning for the Long Haul
« Reply #19 on: January 31, 2016, 02:05:03 PM »
You and your wife have some decisions to make...

Basically, there are a couple different approaches to making any kind of change--financial, health, etc. You can be an Abstainer or a Moderator. The Frugal Girl just wrote a great blog post on the subject: http://www.thefrugalgirl.com/2016/01/moderating-abstaining-and-frugality/. An Abstainer finds it works best to make big changes in pursuit of a goal, while a Moderator finds it more sustainable to make smaller changes, knowing that it will take longer to get to point X. So for instance, when losing weight, some people have to ban cookies entirely, because they know they will be tempted to eat a whole bag. Other people know that if they aren't "allowed" to have cookies, eventually they will rebel and eat more than if they just had a cookie every few days along the way.

The thing about early retirement is that the lower your income (or the bigger your debt), the closer you have to stick to Abstainer methods to make it happen, especially if you want it to be quickly--really hard-core Mustachianism. People with the kinds of high incomes that are often seen on this board can make moderate change and still retire early, but those of us with lower incomes don't have as much flexibility. Still fully doable, but you have to really think about how much you want it.

So where in your lists of desires does early retirement fall? Above multiple kids? Above your wife homeschooling? Above having your preferred car or housing situation? Above spending your free time relaxing or playing with the baby instead of pursuing a side hustle?

There is also nothing wrong with a life where you practice moderate frugality, have a whopping FI fund for the day when you need to walk away from a horrible job or have a medical situation in the family, and retire at a semi-normal retirement age. Just pick what matters most to you. And Good Luck!

Gin1984

  • Magnum Stache
  • ******
  • Posts: 4873
Re: Reader Case Study - Planning for the Long Haul
« Reply #20 on: January 31, 2016, 04:50:36 PM »
According the spreadsheet, I'm looking at 24 years. This assumes my two loans are paid off fast and that my salary never outpaces inflation.
Ah, yes, you did say "Playing with some numbers, it looks like if our income/expenses were to never change, my number would be about 24 years. That's good, but not great." - missed that on first read.

I did some playing also - maybe too much, you'll have to be the judge - and got you down to ~18 years.  Of course, much can happen and change in that time.  E.g., I expect you will have more medical expenses than now in your budget.  But your income might also outpace inflation, etc.

Some assumptions:
 - Max HSA contribution.  Increased "salary" to include employer HSA contribution.  Also assumed $5300/mo when including upcoming raise and bonus.
 - 1 max tIRA, plus $1100/mo your 401k contribution, enough to get you the full saver's credit and some EIC.
 - The negative cash flow based on salary alone will be handled by drawing from the trust.
 - Loan payments at minimum required.  You might be able to drop your time to FI a little by paying the SL faster, but using your tax-advantaged investment space seems more valuable.

The marginal savings rate on your 401k, assuming you are already maximizing your HSA and one tIRA, goes through some interesting gyrations.  You have to contribute some at the 15% rate, where rules of thumb might suggest Roth is better, in order to reach higher marginal savings rates:


See tables below for results.  Again, there are assumptions here and this may not reflect what you really can do - take with a few grains of salt and confirm/modify in your own version.  Of course, if you can cut expenses then things will be rosier.  In any case, good luck!
CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$5,467$65,600
Pretax Health Ins.$287$3,444
Employer-sponsored HSA$554At maximum$6,650
FICA base salary/wages$4,626$55,506
Traditional IRA$458Room to increase?$5,500
401(k) / 403(b) / TSP / etc.$1,100Room to increase?$13,200
Employer Match$232$2,788
Income subject to IRS tax$3,067$36,806
Federal Total Income$3,067$36,806
Federal tax-$1152015 rates, MFJ, stand. ded., 3 exempt.-$1,374
State/City tax$0Guess, using 0.00% * Fed. Taxable$0
Soc. Sec.$287Assumes 1 earner paying$3,441
Medicare$67$805
Total income taxes$239$2,872
Income before other expenses  $2,828$33,934
Monthly Average Expenses:
Rent$1,195$14,340
Car Insurance$190$2,280
Charitable contributions$75$900
Electricity$220$2,640
Entertainment$20$240
Fuel/Public Transport$160$1,920
Groceries$450$5,400
Internet$66$792
Miscellaneous$100$1,200
Phone (cell)$127$1,524
Travel/Vacation$100$1,200
Wine/Beer/Tobacco$50$600
Non-mortgage total$2,753$33,036
Loans:
Student Loan$245$2,941
Car loan$193$2,320
Total Expense$3,191$38,297
Total to invest-$364-$4,363
Summary:
"Gross" income$5,467$65,600
Income taxes$239$2,872
After-tax income$5,227$62,728
IRA+401k/403b/TSP/457 (Savers' credit)$1,558$18,700
HSA$554$6,650
Living expenses$3,040$36,480
Non-mortgage loans$438$5,261
After-tax investable-$364-$4,363
Time to FIRE?:
Time to FIRE20years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments5.00%percent
Real, after tax, return on taxable investments4.25%percent
Current Savings
Taxable$26,000
Tax-deferred (e.g. trad. IRA/401k)$10,000
Projected Savings at Retirement
Taxable$27,437
Tax-deferred (e.g. trad. IRA/401k)$737,054
Roth + HSA$219,889
Total projected stash$984,380
Projected Expenses in Retirement
Non-loan, non-work expenses$33,036
Annual non-tax retirement expense$33,036
Income taxes$470
Total$33,506
Stash needed for retirement @4.0% SWR$837,644
Have $146,736 extra.


Filing Status21=S, 2=MFJ, 3=HOH
# Exempt.3
# Children <171
# Children for EIC1
Earner #1Earner #2
Ages2424
# of earners1
Total Income$36,806
Std. Deduct.$12,600
Act. Deduct.$12,600
Exemption$12,000
SL int. (approx.)$906
AGI$35,900
MAGI$42,306
Taxable$11,300
1040 Tax$1,130
Saver's credit$2,000
Tax after n-r credit$0
Child Tax Cred.$1,000
EIC$374
Net Tax-$1,374
Monthly-$115
Charity$900
Item. Deduct.$900
VersionV7.08

Loans:Orig. Prin.Orig. LengthCurr. Prin.Yrs leftRate
Student Loan$23,00010$18,70085.100%
Car loan$11,5005.5$6,80033.800%

Thanks for that! (And thank you for the spreadsheet!)

A question - The trust has a net income of 2.5%-3% after fees. Why wouldn't it be more advantageous to use it to pay down some debt?
I would advise against the traditional IRA until you max out your 401k because money in your 401k can increase your EITC, your traditional IRA does not.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10659
Re: Reader Case Study - Planning for the Long Haul
« Reply #21 on: January 31, 2016, 06:21:42 PM »
I would advise against the traditional IRA until you max out your 401k because money in your 401k can increase your EITC, your traditional IRA does not.

Good idea to look at these options, as the trade-offs aren't obvious.  The extremes are easy: if the OP contributes $0 to both tIRA and 401k, or $5500 to tIRA and $18K to 401k, then the results are whatever they are.

If there is only $5500 to contribute, that is not enough to generate any EIC even if everything goes to the 401k.  In that case, the tIRA would be better (after reaching any 401k employer match).

If there is over ~$10,860 to contribute, that will start EIC dollars and at some point (depending on the fund fees in the 401k vs the tIRA) all 401k (meaning "nothing at all in tIRA") becomes better and stays better through $18K in contributions.

If OP can get to $18K in 401k contributions, then merely $100 into a tIRA will kick in the maximum saver's credit and save $400 in taxes.

Of course, all the above - particularly the amounts corresponding to saver's credit cliffs - are highly dependent on one's exact numbers, so one shouldn't rely on any specific numbers until having done due diligence.

snuggler

  • Stubble
  • **
  • Posts: 154
Re: Reader Case Study - Planning for the Long Haul
« Reply #22 on: February 01, 2016, 08:44:55 AM »

Bonus: Do you think it would be better to pay off loans faster with those bonuses? I'd prioritize retirement savings, because I tend to think history is the best predictor of the future, and history shows us to expect 5-7% return in a well-diversified portfolio. Your loans, while not ideal, are not that bad in terms of interest rates. If you had a higher income, I probably wouldn't even be worried about them at all. But as it is, they are seriously impeding your ability to save.

Rent: Our rent (per sq. ft.) is lower than average. A lot of the available properties around here are old, in bad parts of town, and/or generally unsafe for kids. If it was just my wife and I, we would be paying $600 a month for a 1 bedroom apt near my job I have a really hard time believing that if a one bedroom is only $600/month, that a 2 bedroom costs what you are paying. I would echo some of the others here, that you should be able to find something that is older but in a decent neighborhood. Also, have you actually looked at crime stats? I'm in a so-called "high-crime" area, but it doesn't affect my life much since I prefer hanging out at home at night, and am not into the drug scene.

Insurance: I've shopped recently and there is little savings. Full disclosure: I had a OWI a few years ago that's still showing up on our insurance. Little savings can add up! Switching insurance is one of the easiest ways to save money on it. Insurance companies punish their loyal customers. Go for this easy win now.

Phone: ATT is required :( For you, but what about your wife? Surely that isn't required. How much of the usage is hers, and have you checked IP Daley's guide to see if there is a cheaper option for her?

Food: About $75 is formula, and this number includes non-food items. Food alone, we're about $150 per person per month You can likely cut this to $100 or less per person, especially if one is just a toddler. Increase your whole grain input (brown rice, wheat bread), bake your own bread (super easy, check out 5-minute artisan bread), eat tons of beans, replace meat with nuts and mushrooms, eat tons of fruits and veggies. Bonus: your doc will love you because the research shows that this is the healthiest diet out there. My doc almost swooned at my cholesterol numbers this year :)

Alcohol: We buy boxed wine and I get beer from a distributor. Plus a bottle of whisky from time to time. I do actually homebrew. We only have space for cider right now. Good job! Can you cut this consumption to reduce the cost even further? Or switch to drinking more of the cheap stuff and less of the more expensive stuff.

Travel: My family comes down a couple times per year. When we go, we always drive, pack lunches for the car, and stay with my parents who also provide nearly all our food. This summer we will be staying in a lakehouse on lake Michigan - funded 100% by my parents. I would say they more than share the cost! Where is the cost coming from, then? It seems a bit high for that length of drive. Are you taking your most fuel-efficient car? Packing lobster for lunch? I kid, I kid :)


Rent: We aren't allowed to sub-let. We also know few people in the area - all of whom own homes. The 2 months' rent is actually the lease buy-out option. Otherwise we're here until July. It's also in the lease that when we choose to not renew the lease we have a 90 day window to move. A day late and we pay 3x the monthly rent. Even if we moved before the lease is up, we owe all the way through the end. Not a good situation. Why not just stay until the end of the lease, then? We are dying to move to, but are staying in our lease that ends in July too. Can you suck it up and consider it "worth it"? It would help you save about 4% of your total annual income. That is huge.

Loans: We've been prioritizing the auto loan first for 2 reasons: One, it's a depreciating asset. Two, the student loan is composed of 4 separate loans, each with a different interest rate and payoff length. In 2 years, the interest rate actually drops to below 4% I would argue that an education loan that is not likely to result in any income is actually the faster depreciating asset here. I just don't see your wife going to work if neither of you are willing to budge on the daycare boycott. Again, check out Sofi and other refi options. Also, check out graduated repayment and income-based repayment. This helped me minimize my low-interest minimum payments, which allowed me to direct the same amount at the loans, but more at the higher-interest loans, thus reducing the total amount of interest paid and the time to payoff.

Wife Work: My wife wants to work. But we do not want our kids in daycare. In a perfect world, I could have a life like MMM - watching my kids grow up every day without havign to worry about money. If she does work, we will most likely send our kids to whichever school she works at. If she does not, she's more than qualified to homeschool (PA law makes it challenging for someone without an education background to successfully homeschool) Some daycares allow free childcare for children of their teacher employees. This may be a good option for your family. Also, you may want to look at the research on daycare to help you probe the reasons you are unwilling to budge on this issue. High-quality daycares prepare children just as well as great SAHPs do. Plus, they teach great social skills.

Extra Cash: The side-gigs are hobbies I have yet to develop fully (homebrewing, photography). I'm a novice right now and need experience. Plus, I cherish every minute I spend with my family away from work and don't ever want to regret missing out on time with my wife and son (and any future kids) This sounds like an excuse. Why not develop the skills now? You can homebrew and do photography with your family. Plus, if you can't make the time now, and want to have more children, you should realize this will probably never happen until your children leave and you are retired.

Her Trust: I have a life insurance policy (free, through work) for which she is the sole beneficiary. If I were to pass, she would also receive the policy plus one full year's salary. Our marriage comes before our kids or money, so with saying that she views that money as ours as a couple and not solely hers. Do you have disability insurance? Do you have a life insurance and disability policy on her? How would you replace the work she provides for free for your family, if she were to pass or become disabled? My SO and I also put our marriage before money, but that doesn't mean I treat my SOs pre-marital money as my own. In fact, that is precisely why I would keep that as my SO's money- because I love my SO more than I love money or our marriage. You are the sole income earner here, and this may be the only pile of money she will ever have to rely on if something terrible happened to you or your marriage. Things happen that you may not ever expect. In the past few years, I have seen: (1) one member of a happily married couple for over 50 years get a gambling problem and waste the couple's entire retirement and life savings, (2) one member of a happily married couple for over 25 years develop a brain condition which completely changed their personality into a physical and emotional abuser, and (3) a couple who got married at right around your age go through an almost-divorce more than 3 times already (within 10 years). All of these couples thought the exact same thing as you, but are now in serious financial straits. If you love your spouse, but plan to have her in such a financially vulnerable position by not working, you should be willing to protect her from anyone, including a potentially awful or unlucky future version of yourself.

And, my final comment is, hang in there! It is very normal for change to come in small increments. Focus on 1-2 things now, like staying in your home through July and switching insurance coverage. Tackle groceries and alcohol next month. Then focus on the next thing. Before you know it, your FIRE date will be sooner than you ever thought it could be, and you will be typing up responses to other people's posts :).