Author Topic: Reader Case Study - Saving Enough in High Cost of Living Area?  (Read 5589 times)

NoMoneyMoProblems

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Hello, first time poster, mid-term lurker. I'm seeking to embrace the low expense lifestyle and hopefully shoot for an FI early retirement. I've attached a copy of the cash flow worksheet to this posting so you can get a sense of our vitals. Would greatly appreciate your advice and wisdom regarding our financial situation and a couple questions. First, some basics (all monthly):

Life Situation: MFJ; wife and I are 31, we have a one year old son; live and work in northern Virginia (suburban Washington, DC); I am an engineer with the federal government and have been working full-time for about 5 years straight out of school; my wife doesn't work outside the home.

Gross Salary/Wages: $8929

Pre-tax deductions: $555 total --- health insurance ($356), vision/dental ($116); healthcare FSA ($83)

Other Ordinary Income: None

Adjusted Gross Income: $8374

Taxes: $1948 total -- FICA ($519); Federal ($880); State ($428); Medicare ($121)

Current expenses: $3929 total

[Roth TSP: $446 (employer match @5% = an additional $446 in traditional TSP)]
529 plan (Utah): $100
Rent (one bedroom apartment): $1551
Utilities (water, trash, electricity), Internet: $200
Cell (AT&T, 2 lines): $125
Insurance (Renters, Life, Health, Dental, Vision): $570
Car maintenance, gas, registration: $104
Groceries, dining, household, beauty, pets: $1047
Healthcare: $100
Misc (travel, computer, entertainment, gifts, clothing): $125

Assets: $208,000 total -- $108,000 in the bank; a couple paid for cars worth about $20,000; $80,000 in federal gov TSP (Lifecycle 2050 fund; about even split between roth and traditional)
https://www.tsp.gov/InvestmentFunds/FundOptions/fundPerformance_L2050.html

Liabilities: None.

Specific Questions:
1. To me, it feels like our taxes and expenses are bloated. Is that accurate in your view, and if so, what are some of the more obvious things we can cut back on?
2. Are we saving a decent amount of my income? What should our goal be?
3. Real estate in our area is kind of ridiculously expensive. Should we be saving for a down payment or just planning on renting at least until retirement?
4. Related to #3 above, you'll notice our rent is high and will only get higher with inflation and as our family grows. Is our best bet for FIRE to get out of the area and work somewhere else? Where is a good low cost of living area with a thriving biomedical engineering/research/care industry?
5. If you were in my position, what else would you want to know?

Thank you very much for your time and attention! ~ Bryan

« Last Edit: May 30, 2016, 02:50:07 PM by NoMoneyMoProblems »

Cassie

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #1 on: May 30, 2016, 05:53:38 PM »
Your grocery etc category is too high as are your cell phones.  Lots of threads on cheaper cell phone plans.

MDM

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #2 on: May 30, 2016, 06:35:56 PM »
NMMP, welcome to the forum.  Some stream-of-consciousness thoughts below.

4 exemptions or 3? (cell G3)

Is the $880 in federal tax the amount being withheld, or is that what you actually pay?  Even with 3 exemptions it seems federal tax should be ~$790.

You show both pre-tax and post-tax health and dental insurance - double counting?  This might explain some of the tax discrepancy if the premiums are actually post-tax.

Agreed w/ Cassie on the high cell phone cost.  See the 1st and 3rd sticky threads in http://forum.mrmoneymustache.com/share-your-badassity/

Depends what is in "groceries" - might be high if that is food only, or might not be too bad if it includes "all items bought at the local superstore."

Many would say (I'd agree) that you should fund your own retirement before putting anything aside for children's college.  Are you contributing $18K/yr to the TSP and $11K/yr to IRAs?

See http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ for some rent vs. own thoughts.

Why the split between Roth and traditional in the TSP?  See https://www.bogleheads.org/wiki/Traditional_versus_Roth.

NoMoneyMoProblems

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #3 on: May 31, 2016, 07:23:19 PM »
Thanks for your replies. I agree our cell phone budget it too high. Unfortunately, we are on a contract right now and can't really get out of it without spending even more money. My plan is once that's done with next year, I'll sign onto one of the low-cost cell plans.

Our grocery budget is probably more like $500 - $600 a month. The number I gave before also includes diapers, kids clothes, other household items, some stuff for my wife's girl scout troop (which we get reimbursed), etc. But I'll take a look at the specifics. How much would you recommend for a grocery budget for us plus a 15 month old?

As far as taxes go, we are claiming 4 exemptions for withholding purposes. $880 is what's actually withheld from my paycheck. We did get a small return for 2015, so actual federal taxes are slightly below that.

Our dental, vision, and health insurance premiums are all pretax. I was a little confused by the worksheet.

I just started putting away $100 a month for my son's college costs, but it's not actually keeping me from fully funding my TSP. I have been putting 5% to the TSP in order to get the match and be able to save for a down payment for a house, but now I'm not even so sure that's a good idea (the house part). I've read through the jlcollinsnh thread but I'll take another look. I have been splitting my TSP between roth and traditional because I wasn't sure which was better in our circumstances (lame, I know). My employer's match is automatically in traditional (vs. roth). Would it be better to do one or the other? If I were to fully fund both the TSP and an IRA, how are you supposed to invest money that's accessible before you reach normal retirement age? It seems like you would need substantial savings in non-retirement accounts to make the early FI thing work out.

Bryan
« Last Edit: May 31, 2016, 07:46:20 PM by NoMoneyMoProblems »

MDM

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #4 on: May 31, 2016, 07:45:03 PM »
Our grocery budget is probably more like $500 - $600 a month. The number I gave before also includes diapers, kids clothes, other household items, some stuff for my wife's girl scout troop (which we get reimbursed), etc. But I'll take a look at the specifics. How much would you recommend for a grocery budget for us plus a 15 month old?
No doubt there are places you could trim, but what you are doing doesn't seem unreasonable.

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As far as taxes go, we are claiming 4 exemptions for withholding purposes. $880 is what's actually withheld from my paycheck. We did get a small return for 2015, so actual federal taxes are slightly below that.
That seems consistent then.

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Our dental, vision, and health insurance premiums are all pretax. I was a little confused by the worksheet.
Ok, thanks for the feedback - perhaps we can make that more clear.

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I have been splitting my TSP between roth and traditional because I wasn't sure which was better in our circumstances (lame, I know). My employer's match is automatically traditional (vs. roth). Would it be better to do one or the other?
Yes.  The harder question is "which one?"  To answer that, you have to make some estimate of your marginal tax rate on withdrawals and compare that with your current savings marginal rate.  In addition to the trad vs Roth wiki entry noted above, see https://www.bogleheads.org/wiki/Marginal_tax_rate.  Estimating your marginal tax rate on withdrawals is a combination of art and science - if you want, take a shot at it and post how you did it for comments.

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If I were to fully fund both the TSP and an IRA, how are you supposed to save money that's accessible before you reach normal retirement age? It seems like you would need substantial savings in non-retirement accounts to make the early FI think work out.
See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

frugaldrummer

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #5 on: May 31, 2016, 10:13:49 PM »
Quote
Where is a good low cost of living area with a thriving biomedical engineering/research/care industry?

What about the research triangle in Raleigh-Durham NC?

NoMoneyMoProblems

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #6 on: June 01, 2016, 06:39:46 PM »
Quote
Where is a good low cost of living area with a thriving biomedical engineering/research/care industry?

What about the research triangle in Raleigh-Durham NC?

Good idea, I hadn't thought about that area, but you're correct.

NoMoneyMoProblems

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #7 on: June 01, 2016, 06:58:36 PM »
MDM, thank you for the links and the help. I read through the Bogleheads wiki page on marginal tax rates and pretty sure I checked out when I hit the calculus talk about partial derivatives. ; )

It seems like the roth vs. traditional decision is almost entirely based on future circumstances which are impossible to predict when one is 31 years old, which is why I had sort of thought maybe it made sense to split the difference. It also seems like whether you are FI at 40 vs. 65 will make a huge difference. Do you go with your aspirations or what society tells you is normal and makes sense? To the point:

Non-tax considerations (Traditional 401(k) vs. Roth IRA):
 If your employer matches 401(k) contributions, put enough to get the maximum match in the 401(k) before contributing to any IRA. [They match up to 5% whether I'm contributing to Roth or traditional. The match is always traditional. I think it makes sense to keep everything in the TSP up to the max and then to an IRA from there for anything else.]
 If you have inferior options in the 401(k), prefer an IRA to unmatched 401(k) contributions. [Good options, N/A]

Tax considerations:
 If your current marginal tax rate is 15% or less, prefer a Roth. [I suspect my marginal tax rate now is higher than 15%]
 If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth. [I'm not expecting a huge increase in salary over my career, particularly if I check out in ~10 years. Looking at +$20k max most likely]
 If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth. [I'll have a pension, but if I stop working with at least 10 and not 25 years under FERS, the benefit is reduced for each lost year, so the pension would be less likely to be "large enough to meet expected retirement expenses"]
 Otherwise, prefer a traditional account.

So, unless I'm thinking about something screwy, that's sort of giving me some mixed signals but maybe traditional makes more sense.

On the home ownership front, I'm leaning more and more towards thinking it doesn't make sense, if we can stay in something that's relatively low rent (maybe <$2000/month?) until FI, and FI doesn't take forever. Still, it's tough for me to think through that. Even if it's just ten years, that's potentially around $240k conservatively. In the mustachian philosophy, is it normal to stay in the same situation before and after retirement, i.e. if you own a home, stay in it; if you rent, keep renting?

muckety_muck

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #8 on: June 01, 2016, 07:20:11 PM »
Another fed here. I didn't see FERS contributions?

Retirement: I would increase the TSP to a minimum of 10% (preferably 15% or max) and switch to traditional TSP for the maximum tax savings.

Cash Savings: If you're not saving for a house down payment (are you seriously considering moving?) then I would invest some of the $100k you have sitting around. I know it's hard to see the future, but to be honest renting is a lot easier than home ownership, and easier to uproot/less risk if you want to move in a year or 3.

Groceries/etc spending: This seems too high. Are you taking advantage of Amazon diaper deals? Or do you cloth diaper? Buy all organic? Where is that $1k/mo going? Fancy haircuts/pedicures?

Future plans: Do you think another kid is on the horizon? #2 was a huge setback for us, we lost our focus/drive to save/invest during those first few years... it can happen easier than you think. Try to keep it under control as much as possible.

Other expenses: are you double-counting health insurance? I'm confused because it appears to show up twice. Do you have commuting costs?

Have you done a zero-based budget yet? Expenses seem somewhat reasonable overall, just want to help you maximize savings! Good luck :)

NoMoneyMoProblems

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #9 on: June 01, 2016, 07:41:59 PM »
Another fed here. I didn't see FERS contributions?

Hi there and good to hear from you. Yeah, I'm putting in $71/month for FERS contributions.

Retirement: I would increase the TSP to a minimum of 10% (preferably 15% or max) and switch to traditional TSP for the maximum tax savings.

That's what I'm thinking too at this point, pending MDM smacking some more sense into me.

Cash Savings: If you're not saving for a house down payment (are you seriously considering moving?) then I would invest some of the $100k you have sitting around. I know it's hard to see the future, but to be honest renting is a lot easier than home ownership, and easier to uproot/less risk if you want to move in a year or 3.

I could become very serious about moving and taking another job if I got feedback here that sticking around the area is a dead end for early FI, primarily because of the cost of housing. But maybe it's just a paradigm shift to stop thinking about home ownership at all and just focus on investing what I can when the ridiculous rent is done being paid every month. Do you own? If not going to buy, where would you invest the savings and how much?

Groceries/etc spending: This seems too high. Are you taking advantage of Amazon diaper deals? Or do you cloth diaper? Buy all organic? Where is that $1k/mo going? Fancy haircuts/pedicures?

Ha, no see one of my earlier replies. That number includes several other categories of purchases, but I'm going to take a closer look at it to see what we can squeeze out of it.

Future plans: Do you think another kid is on the horizon? #2 was a huge setback for us, we lost our focus/drive to save/invest during those first few years... it can happen easier than you think. Try to keep it under control as much as possible.

Thanks for the heads up. It's amazing to me how much kids cost even when you're trying to be frugal about it. Not sure if we'll have another or not at this point. It's possible.

Other expenses: are you double-counting health insurance? I'm confused because it appears to show up twice. Do you have commuting costs?

Have you done a zero-based budget yet? Expenses seem somewhat reasonable overall, just want to help you maximize savings! Good luck :)

No, everything should be single counted, I just did the spreadsheet wrong in a couple places. My commuting costs are minimal because I live close to work (just some gas and car upkeep, etc.) We have had a zero-based budget on and off, so I am familiar with the concept. Will definitely get back on one.


MDM

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #10 on: June 04, 2016, 12:49:17 PM »
MDM, thank you for the links and the help. I read through the Bogleheads wiki page on marginal tax rates and pretty sure I checked out when I hit the calculus talk about partial derivatives. ; )
Yeah, that part might be more confusing than helpful.  Stick with subtraction and division.  If you have a base income and tax amount, and want to know the marginal rate on a different income, use  [(Tax on different income) - (tax on base income)] / [(different income) - (base income)].

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It seems like the roth vs. traditional decision is almost entirely based on future circumstances which are impossible to predict when one is 31 years old, which is why I had sort of thought maybe it made sense to split the difference. It also seems like whether you are FI at 40 vs. 65 will make a huge difference. Do you go with your aspirations or what society tells you is normal and makes sense?
If it's "obvious", go with whatever is obvious.  Otherwise, consider the relative down sides if you choose the "wrong" one:
- Choose trad but Roth would have been better
   This means your retirement income is higher than you expected.  Not all that bad a problem to have.

- Choose Roth but trad would have been better
   This means your retirement income is lower than you expected.  That could be a real problem.

Quote
To the point:
Non-tax considerations (Traditional 401(k) vs. Roth IRA):
 If your employer matches 401(k) contributions, put enough to get the maximum match in the 401(k) before contributing to any IRA. [They match up to 5% whether I'm contributing to Roth or traditional. The match is always traditional. I think it makes sense to keep everything in the TSP up to the max and then to an IRA from there for anything else.]
 If you have inferior options in the 401(k), prefer an IRA to unmatched 401(k) contributions. [Good options, N/A]
And this is really a 401k vs. IRA issue, not trad vs. Roth.

Quote
Tax considerations:
 If your current marginal tax rate is 15% or less, prefer a Roth. [I suspect my marginal tax rate now is higher than 15%]
 If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth. [I'm not expecting a huge increase in salary over my career, particularly if I check out in ~10 years. Looking at +$20k max most likely]
 If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth. [I'll have a pension, but if I stop working with at least 10 and not 25 years under FERS, the benefit is reduced for each lost year, so the pension would be less likely to be "large enough to meet expected retirement expenses"]
 Otherwise, prefer a traditional account.
So, unless I'm thinking about something screwy, that's sort of giving me some mixed signals but maybe traditional makes more sense.
Agreed - based on your answers, traditional seems better for you.

Quote
On the home ownership front, I'm leaning more and more towards thinking it doesn't make sense, if we can stay in something that's relatively low rent (maybe <$2000/month?) until FI, and FI doesn't take forever. Still, it's tough for me to think through that. Even if it's just ten years, that's potentially around $240k conservatively. In the mustachian philosophy, is it normal to stay in the same situation before and after retirement, i.e. if you own a home, stay in it; if you rent, keep renting?
Don't know about normal....

NoMoneyMoProblems

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #11 on: June 04, 2016, 05:50:14 PM »
Just wanted to check in and report that I have already taken a couple steps to reduce our monthly spending in a serious way. I decided to cut the cord with AT&T and terminate our cell contract early. Going to take about a $400 hit to do that, but our new provider (TPO, I would recommend!) provides good coverage, the same calling/data/text plan, let's you BYOD, and even donates 10% to a charity of your choice. All that, and it'll be $50/month for our two phones instead of ~$125. I figured over the next 15 months of the potential contract, that'll end up saving us about $725 total (saving $75 per month minus the early termination fee). We also just cut back our home internet provider service bandwidth to save about $30/month just because we don't really need the super duper fast plan.

To summarize what I've learned/decided from this thread so far:

1. Get back on a zero-based monthly budget and use it to cut back any unneeded expenses. Have already cut cell/cable bills and will be taking a close look at our grocery budget next.
2. Making traditional vs. roth contributions to the TSP probably makes more sense in my situation. I switched yesterday from 5% roth (+match) to 15% going to traditional.
3. Maybe I should consider taking a job elsewhere and moving if being a homeowner is a priority and I don't want to shoot my finances to hell; Otherwise, it probably makes sense to stick around and try to live on as little rent as possible while investing the difference. If we do move,  Raleigh-Durham NC area is promising.
4. Having kids, especially after the first, can really deal a blow to your focus. Try not to lose sight of the goal even as kids come along.

Some follow-up questions that I've been pondering during the back and forth (I really appreciate the continued engagement with me in the thread!)

1. If there is even a slight possibility that we may buy a home at some point (maybe after a move, getting a bigger raise than anticipated, or deciding that hole-in-the-wall tiny condo really is my dream home), is it better to not move cash into investments? Would there be a better place for it to reside in the meantime? If I do decide buying a home is out of the picture, how much and where should I invest the cash? (e.g. retirement account or not; I'm assuming should move over everything but a small emergency fund and enough to cover next month's expenses)

2. I'm very familiar with the 4% rule, but what are some good guidelines about how much of your investment stash whose returns/dividends will provide income in retirement (say $1 million for $40k annually or whatever) should be in retirement accounts vs. investment accounts that aren't tax advantaged so that some money is available easier/earlier than the TSPs/401ks/IRAs?

3. What about tax diversification? Seems like that might be a decent reason to invest some in roth and some in traditional at the same time. Or do the backdoor tricks ("roth pipeline" or SEPP) make this question irrelevant.

4. How much of my current income should I be investing moving forward? Let's say we determined that 50% is a reasonable goal, what is the best order in which to fill accounts since there are contribution limits. For example, TSP to the limit then an IRA to the limit, then what? Is the Lifetime 2050 fund the best or should I shoot for something with less risk since I potentially don't really have 30 years until retirement.

5. As another way to cut expenses, I've been considering selling one of our cars and biking more (to work, etc.) We have a 2011 sedan worth about $16k and a 2004 SUV worth about $2k. Would it make more sense to get rid of the more expensive car because taxes/insurance/maintenance are more or to get rid of the older one because it'll not last as long, needs more maintenance, etc.

thanks! Bryan
« Last Edit: June 04, 2016, 06:02:33 PM by NoMoneyMoProblems »

MDM

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #12 on: June 04, 2016, 07:46:50 PM »
...
Great progress on many fronts!

And great questions below.  For many of them, however, there aren't (at least, I don't have) good clear answers.  Be that as it may...:

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1. If there is even a slight possibility that we may buy a home at some point (maybe after a move, getting a bigger raise than anticipated, or deciding that hole-in-the-wall tiny condo really is my dream home), is it better to not move cash into investments? Would there be a better place for it to reside in the meantime?
Have your cake or eat it - yours to decide.

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If I do decide buying a home is out of the picture, how much and where should I invest the cash? (e.g. retirement account or not; I'm assuming should move over everything but a small emergency fund and enough to cover next month's expenses)
Usually best to put as much into tax-advantaged accounts as possible because...they are tax-advantaged.  Once you maximize those annual contributions, start with taxable investing.  For a little more detail (including some thoughts on down-payment savings) see the 'Investment Order' tab in the case study spreadsheet

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2. I'm very familiar with the 4% rule, but what are some good guidelines about how much of your investment stash whose returns/dividends will provide income in retirement (say $1 million for $40k annually or whatever) should be in retirement accounts vs. investment accounts that aren't tax advantaged so that some money is available easier/earlier than the TSPs/401ks/IRAs?
In short, enough Roth contributions, 457 and taxable accounts to cover five years' spending.  See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ for more details.

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3. What about tax diversification? Seems like that might be a decent reason to invest some in roth and some in traditional at the same time. Or do the backdoor tricks ("roth pipeline" or SEPP) make this question irrelevant.
It's not irrelevant, and splitting between trad and Roth is one way to hedge your bets - but for my money the "better downside" of going with traditional (if in doubt) is compelling.  YMMV.

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4. How much of my current income should I be investing moving forward? Let's say we determined that 50% is a reasonable goal, what is the best order in which to fill accounts since there are contribution limits. For example, TSP to the limit then an IRA to the limit, then what? Is the Lifetime 2050 fund the best or should I shoot for something with less risk since I potentially don't really have 30 years until retirement.
See that Investment Order tab mentioned above for the order.  For the amount? As much as you can without inciting riots on the home front.... ;)

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5. As another way to cut expenses, I've been considering selling one of our cars and biking more (to work, etc.) We have a 2011 sedan worth about $16k and a 2004 SUV worth about $2k. Would it make more sense to get rid of the more expensive car because taxes/insurance/maintenance are more or to get rid of the older one because it'll not last as long, needs more maintenance, etc.
At the risk of a permanent MMM ban :) I'll suggest keeping the two.  By all means reduce your insurance premiums for your own damage as much as possible.  You could try pretending one of the cars is unavailable (other than running it occasionally for preventive maintenance) for a year to see how well that might work "for real."

Choices

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #13 on: June 04, 2016, 08:06:01 PM »
Great progress and great questions!

If you're not sure you want to be a homeowner then hold off until you're dying to have your own place. You'll have lawn maintenance, appliance repair/replacement, leaks, property taxes, etc. Plus, most people buy a bigger place than they'd rent, which means the utilities go up, there's more to clean, and they buy more stuff to fill the space. Owning isn't always better. We have a house and are handy, but upkeep has become one of our main 'hobbies' even with a relatively new house.

I would also not list your cars under your assets unless you plan to sell them ASAP. They go down in value quickly, so we only count our investments, retirements, and house.

NoMoneyMoProblems

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #14 on: June 05, 2016, 06:04:46 PM »
Great progress and great questions!

If you're not sure you want to be a homeowner then hold off until you're dying to have your own place. You'll have lawn maintenance, appliance repair/replacement, leaks, property taxes, etc. Plus, most people buy a bigger place than they'd rent, which means the utilities go up, there's more to clean, and they buy more stuff to fill the space. Owning isn't always better. We have a house and are handy, but upkeep has become one of our main 'hobbies' even with a relatively new house.

And I'm okay with being a renter for a while. My uncertainty is more about what the better financial choice is long term and where do we find housing. I'm assuming no one would advocate for renting their entire lives (or maybe they would?), so in our case then, maybe that means renting until we achieve FI and then finding a more permanent place in retirement.

I would also not list your cars under your assets unless you plan to sell them ASAP. They go down in value quickly, so we only count our investments, retirements, and house.

Good point about the cars.

backyardfeast

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #15 on: June 05, 2016, 10:12:01 PM »
Quote
Where is a good low cost of living area with a thriving biomedical engineering/research/care industry?

Hi! I'm not in this field, or in the US, but I have a good friend that's just completed a second masters in Health Information Science (actually that was her first master's, I can't remember the exact title of the one she's just finished--biomedical research?) at the University of Utah in SLC.  She feels it's total nirvana for these fields: a major university research centre, major vet hospital, etc etc.  She and her DH moved from NC; she's been super impressed with the work being done in SLC.

Not sure if it qualifies as a LCOL, but certainly seems like it's more reasonable than wherever you are.

Good luck!

NoMoneyMoProblems

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #16 on: June 07, 2016, 04:16:12 PM »
Thank you for all the great advice. With your inspiration I believe I've decided to take a position that will provide housing for at least a couple years, which should help us cut our greatest expense every month at least for a little while.

I'm still somewhat confused about where I should be investing my savings, to be honest. My understanding is the TSP has an annual $18,000 limit and IRAs would be $5500 each. Should I focus on the TSP and only if/when meeting the annual maximum contribute to the IRAs? Or contribute to the IRAs after meeting the match in the TSP and then go back to the TSP after contributing max to the IRAs? I understand that I would only invest in an account that's not tax advantaged when everything else is full. If I contribute the max to the TSP and two IRAs (me+spouse) all in traditional (vs. roth), will I be bumping up against anything rules about what I'm allowed to deduct from taxes annually?

Also, what is the thinking on asset allocation. Should we be investing like you're going to retire in 30 years or 10? What level of risk/volatility do early FIers assume, knowing that they'll need the money sooner than most investors?
Bryan
« Last Edit: June 07, 2016, 05:14:01 PM by NoMoneyMoProblems »

Basenji

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #17 on: June 07, 2016, 05:47:02 PM »
Also, what is the thinking on asset allocation. Should we be investing like you're going to retire in 30 years or 10? What level of risk/volatility do early FIers assume, knowing that they'll need the money sooner than most investors?
Bryan

You invest for the rest of your life, not just for 10 years. You retire early, but your money keeps working.

You mentioned having a federal pension, even if it is after 10 years. There's a great thread about success in retirement and  asset allocation and pensions.

With regards to asset allocation, see the link below. The whole thread is great, but my bookmark is where I jumped in after Nords made the point that a military retirement (and perhaps your federal pension) could be considered a bond annuity in one's asset allocation. You can read the posts, but what I learned was because my husband has a healthy military retirement, our AA of our pre- and especially post-tax investment accounts can, and in fact should, be very aggressive (well, mostly index funds). The rules about AA get a bit adjusted if one has an actual pension. But I'm not sure if it's exactly the same for federal pensions. Anyway, hope it's helpful to think over.
http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg739384/#msg739384
« Last Edit: June 07, 2016, 05:51:25 PM by Basenji »

NoMoneyMoProblems

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #18 on: June 07, 2016, 06:28:57 PM »

You invest for the rest of your life, not just for 10 years. You retire early, but your money keeps working.

You mentioned having a federal pension, even if it is after 10 years. There's a great thread about success in retirement and  asset allocation and pensions.
...

http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg739384/#msg739384

Hi, and happy to meet someone else from inside the Beltway. Hadn't seen that thread. I'm afraid it might be a tad too complicated for a beginner like me. It seems like the basic idea is that if you have a pension you can be more aggressive in your investments because you have the pension as a fall back if poo hits the fan. If that's the gist, it makes sense to me. Unfortunately, my read of the federal pension eligibility rules are that the earliest I could take it is probably at my minimum retirement age, 57. The good news is that I'm eligible for a reduced pension eventually even if I leave the government prior to hitting that age. The bad news is that let's say if I FIRE'd in 10 years, I'm still looking at trying to survive for about 15 years before any sort of pension kicks in.

https://www.opm.gov/retirement-services/fers-information/eligibility/

That's why I'm asking about AA. What happens if you are 3 years into it and the market tanks 30%? Then, it would seem, your 'stache is no longer large enough to provide the amount of income needed to stay FI. What am I missing? I'm sure there's something that's just not clicking yet.

Bryan
« Last Edit: June 07, 2016, 06:31:53 PM by NoMoneyMoProblems »

Basenji

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #19 on: June 07, 2016, 07:14:04 PM »
You have the basic point. Yes, you'll need to plan to bridge a gap a little. But even so, understanding your future pension as a large bond allocation helps you decide how to project out. For example, in my case, we have about a 3 to 5-year period before a second retirement kicks in where we want to be sure that we have a buffer for a really bad market crash. We want to be sure we'll let our investment stash ride out a dip. But of course we'll need money to live on (the mil retirement won't cover 100% of our needs--big ol' DC area mortgage). So, based on some advice I got from that thread I linked, while we're saving and still working we're also funding a 3 year buffer fund in laddered CDs. If the stock market during our gap time goes up, fine, we can withdraw from our investments, if the market tanks, we pull from our CDs.

For you, I think you need a large enough stash that you can start pulling quite early. I think AA in your case depends on your personal risk tolerance. But that future money at 57 still works like a bond and not like a risky stock in how you decide to invest and what tolerance for volatility you will have at 57.
« Last Edit: June 07, 2016, 07:15:37 PM by Basenji »

MDM

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #20 on: June 07, 2016, 07:49:59 PM »
I'm still somewhat confused about where I should be investing my savings, to be honest.
If you could comment on what is unclear about the 'Investment Order' tab in the case study spreadsheet (see post above), perhaps we can clarify it for you and others who follow.

Quote
Also, what is the thinking on asset allocation. Should we be investing like you're going to retire in 30 years or 10? What level of risk/volatility do early FIers assume, knowing that they'll need the money sooner than most investors?
It's really your call, although you might consider that not only will you need it sooner, you will also need it to last longer.  See https://www.bogleheads.org/wiki/Three-fund_portfolio and links therein for some thoughts.

NoMoneyMoProblems

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #21 on: June 08, 2016, 06:21:48 PM »
If you could comment on what is unclear about the 'Investment Order' tab in the case study spreadsheet (see post above), perhaps we can clarify it for you and others who follow.

I think the spreadsheet is very clear in what it says, I'm just not entirely sure how it applies to my situation. It would seem to indicate that I should fully fund the TSP (traditional) and both IRAs (traditional) followed by something taxable for whatever is left over every year. Would that be a correct interpretation since I don't have an HSA and some of the other options? Is it really best to skip any Roth contributions anywhere? It seems like tIRA contributions might not even be deductible in certain situations when you are already contributing to an employer-sponsored 401k type plan.
http://www.investopedia.com/articles/retirement/05/032305.asp

Bryan
« Last Edit: June 08, 2016, 06:47:02 PM by NoMoneyMoProblems »

NoMoneyMoProblems

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #22 on: June 08, 2016, 06:24:18 PM »
...

Thank you. That makes sense to me and was very helpful.

Bryan

MDM

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Re: Reader Case Study - Saving Enough in High Cost of Living Area?
« Reply #23 on: June 08, 2016, 08:17:55 PM »
It would seem to indicate that I should fully fund the TSP (traditional) and both IRAs (traditional) followed by something taxable for whatever is left over every year. Would that be a correct interpretation since I don't have an HSA and some of the other options?
That is certainly not the intent of the list.

The pertinent items and explanations:
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.

5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)
5. See #4 for choice of traditional or Roth for 401k

It may be best to use all traditional, particularly for potential early retirees who expect much lower marginal tax rates in retirement than while contributing, but this is not necessarily true for everyone.  You need to look at your own situation.