Author Topic: Reader Case Study: Too old for ER, but going for the gusto – Advice Please  (Read 4964 times)

MinimalistMoustache

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Hello Mustachians!

Disclaimer:  Non-violent gal here; please no face punching. It takes a lot of courage for me to ask for help. I sincerely appreciate any expertise you would like to share.

I’m 57 years old – My life has been upside-down, and now a beautiful transformation is occurring. A few months ago, chronic depression experienced for almost 45 years was finally diagnosed. My “outside” personality had deceived most everyone in my life, particularly me. Self-destructive behavior included spending great sums of money on other people. Anything purchased for me resulted in feelings of stupidity and deep remorse.

A few weeks ago, something else clicked. I began making small changes in my daily patterns: spending, eating, sleep, exercise. I started earnest reading of Mr. Money Mustache. At first, it hurt. Eventually, I began to experience feelings of hope and assurance each time I would visit the MMM blog. The forums have helped me gain a clearer perspective on healthy money management. Gradually, I began to feel I was worth the energy of my own efforts.

I’ve closed my wallet and adopted a new (for me) mantra: Charity begins at home. I am absolutely dumbfounded to see the difference in the monthly expenditures now that I am only paying for my bills and savings. I have kicked myself for the missed investment opportunities, especially during the last few years. Enough of the past - I’m thankful to be here right now.

Facing my fears: Money management, particularly investing. I was devastated, scared silly from 2008-2009 markets. Following is an overview of my current finances. My questions are posted after the data below. Please advise if my questions are more appropriate for “Investor Alley.” Thanks all who are moved to respond - I value your feedback.

Annual Income:               51,800
Average Gross monthly:     3,984

Breakdown of 3984.00 monthly gross:
  120.00    Health Insurance and Dental Premiums (pre-tax)
    40.00    Flexible Spending Account
  398.00     401(a) contribution
1530.00    Taxes (Federal, SS and Medicare)
_____________________________

After the above deductions, there remains a
Monthly net: $2,750.00

Direct Deposits are then made to:
1,954.00 Checking (BOA)
   700.00 Savings  (credit union)
  100.00  Checking (credit union)
___________________________
Total Deposits     $2,750.00

Current monthly expenses – Paid from $1,954 monthly checking deposit:
1,070.00 Rent                
    40.00  Phone          
    40.00  Water                
    75.00  Electric (Heat and lighting)
    40.00  Pet (Food, Vet, grooming)
  200.00  Food   (Thanks to MMM, this appears to be still decreasing)
    50.00  Car insurance       
    30.00  Car – fuel, registration 
    20.00  Medical               
________________________________
Total Monthly Expenses: $1,565.00*

*Internet – not included as I am terminating service this weekend
 Clothing allowance– Not much, but unsure of what to appropriate.

Car and Household Assets:
3,800  Honda Element 2003
3,000  Household (computer, sofa, kitchen appliances)

Accounts:
1,750.00   Savings (credit union)      
   775.00   Checking (credit union)    
1,000.00   Checking (bank)       

TD Ameritrade (nothing “invested”):
 6,000.00   Roth                     
76,650.00  IRA (traditional)      
44,060.00  Cash (money market)   

Fidelity:
  8,250.00  401(k)  - Fidelity Freedom K 2020 (96%); Freedom K 2025 (4%) - I didn't allocate

Total Assets = 138,585.00 (not counting car and household)

Liabilities: No debt

Work perk: Free Metro fare! This and started walking to/from work Paid cash for the Honda new, runs great and now used mostly by my daughter (lives nearby). I anticipate using it approximately 4 or 5 times a month for any time-sensitive appointments.

Expected ER expenses: Unsure at this time

Questions:

1)   TD Ameritrade holdings (Roth, IRA, Cash) – Just parked there, nothing invested. Must re-read jlcollins. Would like to switch to Vanguard index funds.
•   What to place in which container at Vanguard?
•   Fund Roth (2013 and 2014) at Vanguard with TDA money market?

2)   Fidelity 401(k) – Through employer (actually a 401(a). Company only matches 25% of the first 4% = 1% of pay, maximum.
•   Am I contributing too much to this ($400) each month?
•   Should I drop the contribution down to $160 monthly (for the maximum match) and funnel the remaining $140 elsewhere?

     3)  What else have I missed? ☺

Thanks again!
   

MDM

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Minimalist,

You might consider greatly increasing your 401a contributions.  First, check the table below to ensure it captures your post correctly.  E.g. I don't understand how the taxes can be $1530/mo...?  Also please verify that the extra $333/mo is correct (to match the given annual income).

CategoryMonthly amt.Comments
Salary/Wages$3,984 Per OP
Health Insur.$120 Per OP
401a$398 Per OP
Health FSA$40 Per OP
Pretax$3,426
Other$333 Per OP, to get to $51,800/yr
Federal Adj. Gross Inc.$3,759
Add Health care reimb.$40
Federal tax$399 2014 rates, standard deduct., 1 exemption
Medicare/SS tax$270 6.2% on pretax salary, 1.45% on gross salary
Total taxes$669 Don't understand the $1,530 in the OP
Income before other expenses$3,129 Close to OP if the $333 is ignored
Rent$1,070 Per OP
Groceries$200 Per OP
Pet$40 Per OP
Medical$20 Per OP
Fuel/Public Transport$30 Per OP
Water$40 Per OP
Electric$75 Per OP
Phone$40 Per OP
Car Insurance$50 Per OP
Total Expense$1,565
Remainder$1,564

Assuming the table above is correct, it appears you have a lot of room to increase your pre-tax investment contributions.
I'm not familiar with 401a plans, but from a little internet digging it appears the contribution limits are much higher than for 401k plans.  Values below are for lines that change if you take the 401a deduction to $27,000/yr

CategoryMonthly amt.Comments
401a$2,250 Doable?
Pretax$1,574
Federal Adj. Gross Inc.$1,907
Federal tax$121 2014 rates, standard deduct., 1 exemption
Medicare/SS tax$155 6.2% on pretax salary, 1.45% on gross salary
Total taxes$277 Don't understand the $1,530 in the OP
Income before other expenses$1,670
Remainder$105

This may be (more than) enough to digest at one sitting, so I'll leave thoughts on reallocation of current assets to later (or others' comments).  If there isn't a numerical mistake in the above tables (always possible so please verify on your own), how does a large 401a increase strike you?
« Last Edit: March 08, 2014, 04:02:17 AM by MDM »

warfreak2

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It's really great that you're seeing a big positive turn around, depression can make your life really hard so I'm really happy for you that you got it diagnosed, and hopefully you're getting treatment.

I don't see any facepunching here. It sounds like you have lived most of your life without spending much on yourself, so you're already living frugally. I don't think even the coldest of hearts (or most eager of fists) here would give facepunches for being overly charitable/generous.

Gimesalot

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I don't think the situation is bad at all.  I think you have a good chance at a long and pleasant retirement.  Here is what I am thinking:

Try to reduce you electric and cell phone costs.  I suspect that you could optimize and save at least $100 or more a month.

Can you reduce your rent?

Looking at your current savings, using the 4% rule, you can withdraw just over, $5500 a year.  If you save at your current rate for another 10 years, you could double your savings and get to $11k.  The average social security benefit is another $15k.  Obviously your benefits might differ.  So you have about $26k a year, give or take.  Your expenses are around $19k a year.  So it seems okay.

You didn't mention what you want your retirement to be like.  Do you want to stay in the same city?  Do you want to travel?  If I were you, that is what I would focus on.  See how you can prepare yourself.



phred

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Glad to see that you're funding for retirement.  Now, you need some funds to enhance your present.  Many people purchase DRIP stocks that pay a yearly dividend for this.
  Having money in the bank is great for emergencies and planned purchases, but doesn't grow much.  That is why I suggested some investments that start to pay off today instead of at retirement.
  Your expenses looked OK to me.  Good job, really

bacchi

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Hello Mustachians!

•   Fund Roth (2013 and 2014) at Vanguard with TDA money market?

   

Do this, stat. Read jlcollins. Maybe a mix of VTI and BND or a Target Fund would be appropriate? Either way, get that money working.

Otherwise, I think you're in good shape.

kkbmustang

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Minimalist,

You might consider greatly increasing your 401a contributions.  First, check the table below to ensure it captures your post correctly.  E.g. I don't understand how the taxes can be $1530/mo...?  Also please verify that the extra $333/mo is correct (to match the given annual income).

Cut

I'm not familiar with 401a plans, but from a little internet digging it appears the contribution limits are much higher than for 401k plans.  Values below are for lines that change if you take the 401a deduction to $27,000/yr

CategoryMonthly amt.Comments
401a$2,250 Doable?
Pretax$1,574
Federal Adj. Gross Inc.$1,907
Federal tax$121 2014 rates, standard deduct., 1 exemption
Medicare/SS tax$155 6.2% on pretax salary, 1.45% on gross salary
Total taxes$277 Don't understand the $1,530 in the OP
Income before other expenses$1,670
Remainder$105

This may be (more than) enough to digest at one sitting, so I'll leave thoughts on reallocation of current assets to later (or others' comments).  If there isn't a numerical mistake in the above tables (always possible so please verify on your own), how does a large 401a increase strike you?

401(a) refers to the Internal Revenue Code section that applies to retirement plans. It includes 401(k) plans, etc.

MDM

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Quote
401(a) refers to the Internal Revenue Code section that applies to retirement plans. It includes 401(k) plans, etc.

I'll freely admit to having only "a little knowledge" here....  The OP seemed to make a distinction between 401(k) vs 401(a), so I did a little (again, only a little) reading and found http://www.icmarc.org/for-plan-sponsors/plan-rules/contribution-limits.html, which includes the following:

2014 Retirement Savings Plan Contribution Limits
The information below summarizes the retirement plan contribution limits for 2014.
PlanNormal LimitAge 50 Catch-up LimitPre-Retirement Catch-up Limit
457$17,500 $5,500 $17,500
401(a)$52,000 N/AN/A
401(k)$17,500 $5,500 N/A
IRA$5,500 $1,000 N/A


That seems to reinforce the idea that 401(a) plans have different contribution limits than 401(k) plans.  Anyone able to provide a definitive reference, one way or the other?

MinimalistMoustache

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Minimalist,

You might consider greatly increasing your 401a contributions.  First, check the table below to ensure it captures your post correctly.  E.g. I don't understand how the taxes can be $1530/mo...?  Also please verify that the extra $333/mo is correct (to match the given annual income). . . ."


". . . This may be (more than) enough to digest at one sitting, so I'll leave thoughts on reallocation of current assets to later (or others' comments).  If there isn't a numerical mistake in the above tables (always possible so please verify on your own), how does a large 401a increase strike you?


First, thanks so much for all your helpful replies! I am beginning to feel less fearful about making changes!

MDM: Wow! Thank you for sorting through everything. I can't begin to express the relief I feel already. I apologize - No idea why I typed "1530." According to my worksheet, it should have read "$732" for the monthly total of deductions (Fed $435; SS $241; Medicare $56).

I would consider increasing my 401(k) for the benefits of funding with pre-tax dollars. I keep reading how important it is to "max the pre-tax" :-) Took some time today to read up on my current plan. In addition to matching 25% of the first 4% (doesn't sound like much, but every bit helps!), my employer also contributes 4% of my pay. Another two years, they will contribute 6% of my pay. It's done as a discretionary contribution, whether or not I contribute. Ashamed to admit, I didn't realize this.

Note: MDM, Just saw your recent post as I was about to send this! In re-reading from my benefits packages, I found 401(a) that 1% to 75% can be deferred! No excuses, eh? Up to IRS limits, of course. So, it looks like $17500, plus an additional $5,500 for ages over 50!

Thanks again for providing such a clear snapshot of possibilities - I feel encouraged! This assistance and attention to details has surpassed my expectations.

warfreak2: Your kind words are very dearly appreciated - Thank you! I am very fortunate and most grateful to receive treatment for the depression. Each day, I realize how blessed I am for the ability to be productive at my job.

Gimesalot: Agreed - I could definitely reduce electric. Now, I feel like I'm taking on some neat goals. This is more motivation to be mindful of the usage. The phone bill is for a "flip" model. Yup, a Luddite for sure! Actually, I use it mostly to keep in touch with my daughter - no data, text, movies - plain vanilla. I get a discount through my employer, and it still seems a bit high for the service. It's month-to-month - no plan or contract. I thought I could purchase a cheap, pre-paid phone card from Walmart -- but I'm told it doesn't quite work that way :-(

Thanks for the suggestion to envision how "retirement" would translate for me. Truthfully, I've haven't given it much thought. . . and I like the idea of visualizing the possibilities! My concern has been more for remaining independent and not a burden to anyone, any system.

phred: Thanks for mentioning DRIP stocks. I am not familiar with how they work -- at all. I will certainly read up, as this is new territory -- but I'm teachable :-)

bacchi: Agreed heartily! jlcollins is major print worthiness - even for this minimalist! Thank you for the encouragement. I feel so much better now about having posted about my experiences and concerns.

kkbmustang: It wouldn't hurt for me to also read up on the IRS site outside of tax time. Though you can bet I'll be back on the MMM forums asking for interpretations of IRS "code." Thanks! :-)

I've got more reading to do and feel ready to soon take some action. . . even if only dealing with one account each week. A few more questions, and then I'm back to reading:

1) In order to take full advantage of the benefits in using pre-tax dollars, would I have to do this through Fidelity? (My employer doesn't offer Vanguard).

2) Would you suggest Fidelity's index funds to hold part of my current 401K?

3)  Would it be advisable to begin increasing the 401k contributions gradually, to ensure I'm still solvent with my current daily expenses?

4) No major complaints with TDA, I do tire from their sales calls. From what I've read, I believe I would like the Vanguard culture. Would it seem a good idea to move the accounts (Roth, Trad IRA and MM) currently at TDA over to Vanguard?

Thank you all. Your replies have helped strengthen my resolve to get further past the fears of investing and learn as much as I can. This feels like another layer of healing I hadn't expected. I feel very much a part of this warm community.

MarcherLady

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MM, welcome, it's good to have another member. You've had some great advice so far.  If you haven't already started a journal on the forum you might want to think about doing that, we've got a pretty good support network going on over there, cheering each other on through all sorts of challenges, financial and otherwise. 
One other thing to add is that no one knows your situation better than you, so take your time, and do your research, find out the facts and the risks of any suggestion and only take the financial decisions you feel comfortable with, and understand. 

bacchi

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How many minutes do you use on your phone? T-Mobile has pre-paid plans at $.10/minute. I have a flip phone and use about 100 minutes ($10) each month and use Google Voice (free) and Skype-Out ($35?/yr) for texting/calling if I'm at home.

http://prepaid-phones.t-mobile.com/prepaid-phones
http://prepaid-phones.t-mobile.com/prepaid-plans

Ting, except for the initial smartphone purchase, is also cheap if you're not texting or using a lot of data.


Edit: Forgot you don't have internet at home any more. Anyway, it might be worth it to switch if you use less than 400 minutes/mth.
« Last Edit: March 09, 2014, 12:33:48 PM by bacchi »

MinimalistMoustache

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MarcherLady: Thanks for the warm welcome! I may start a journal after my "no Internet at  home" experiment is completed.

bacchi: Thanks a bunch! Yay!!!! Those links offer exactly the types of phones and plans I was seeking! I'll let you know what results.

Tonight is last day for Internet at home. I'll be in touch, a bit more sporadically, for the next month.
Please know how much I appreciate all these great ideas.