Author Topic: Reality Check?  (Read 3822 times)

Lucky Girl

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Reality Check?
« on: November 04, 2016, 12:15:08 PM »
I have been consider the possibility that I could FIRE in about 6 months, but had a bit of a "panic" moment a few days ago and need some outside perspective.  This will be long, so thanks for those who sift through!

I am not going to post full numbers, in part for privacy, and in part because ya'll would probably deliver a punch to the face, but I would consider us very bare-bones FI currently.  Meaning if we cut all the insane luxury in the budget we could live on 4% right now.  If we moved to a LCOL area we would could live very comfortably and could tap into our 300K in home equity to buy a pretty nice house with no mortgage.

DH does not want to move, but also has the much higher income and does not plan to quit for about 8-10 years.  If he continues to work that long we will be set forever.  I make a very good income, but nothing to DH.  The way I look at it, I am only earning about 50 cents on the dollar because of all the taxes (income, state income, SS, Medicare) when you consider all my income as "marginal." 

But if I RE our savings rate goes down to about 30% instead of 50%.  Also, we have 2 kids, now ages 4 & 7, and it would be nice to pick them up from school and be home with them, and it would make life a lot less crazy.  We save a lot because we are pretty frugal in spite of a few luxuries--no maids, no nannys, we cook almost all meals at home, so my staying home will only save us about 10K in after school care per year.

So, generally it seems to make sense to quit.  Plus, my job is ridiculously boring right now.  But then DH got some bad work news that could negatively impact his job, and this sent me into a panic.  What if he loses his job?  Cutting back to bare minimums will not be fun.  DH would be crazy stressed, and I would feel SO guilty that I quit.  Maybe I should stay on for OMY?  Or two?

I think I'm just panicking unnecessarily.  DH has been at the same company for 20 years, received many awards, and is an actuary (a job in such high demand I think he could another job in about 5 minutes if he lost his).  Does FIRE make sense, or should I keep plugging on a while longer?


Miranda

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Re: Reality Check?
« Reply #1 on: November 04, 2016, 12:31:06 PM »
Well, there's a third option. What if you took part time work that you enjoyed that would allow you to be with the kids after school?  Even if you only did that for a few years, that would give you more of a cushion and you won't have to cut back so much.  You'd also have less stress worrying about what happens if your spouse's job goes south.

notactiveanymore

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Re: Reality Check?
« Reply #2 on: November 04, 2016, 12:37:50 PM »
I agree about part time options. Is your career one where you could go back to it even if you did quit for a couple years? Or since you find it really boring, maybe now is the time to look for something you'd get more enjoyment from or enjoy a more flexible schedule. You might even look into employment options at your kid's school. They may have office aid positions or substitute teaching options that would allow you to be on the school schedule and spend a lot more time with your kiddos including summers.

For the record though, you absolutely do not make 50 cents on the dollar because of taxes. Perhaps other things are taken out of your paycheck like health insurance or HSA funds or pre-tax retirement savings, but you absolutely are not being taxed at 50%.

tonysemail

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Re: Reality Check?
« Reply #3 on: November 04, 2016, 01:50:22 PM »
a fourth option premised on having FU money..
are there redeeming parts of your job that you actually enjoy?
what's preventing you from ditching the boring shit and focusing more on the stimulating work?
What would happen if you spent all your time on the work that's actually interesting?

robartsd

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Re: Reality Check?
« Reply #4 on: November 04, 2016, 03:30:40 PM »
Have you discussed the idea of quitting your job with your husband? If he is supportive, I'd say go for it. It wouldn't hurt to implement any of the alternate employment strategies other have mentioned or pursue an income producing hobby.

For the record though, you absolutely do not make 50 cents on the dollar because of taxes. Perhaps other things are taken out of your paycheck like health insurance or HSA funds or pre-tax retirement savings, but you absolutely are not being taxed at 50%.
Income taxes absolutely can go over 50% (for a couple in California, the marginal tax rate after $526,444 is 49.9% including only state and federal income taxes - the marginal rate income over $1,000,000 would be 51.9%). I doubt the OP's family income gets to these 50% marginal tax rates, but if you add childcare expenses, commute expenses, work wardrobe expenses, etc. I'm sure the overall benefit of working is less than 50% of nominal pay.

notactiveanymore

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Re: Reality Check?
« Reply #5 on: November 04, 2016, 03:35:33 PM »
Have you discussed the idea of quitting your job with your husband? If he is supportive, I'd say go for it. It wouldn't hurt to implement any of the alternate employment strategies other have mentioned or pursue an income producing hobby.

For the record though, you absolutely do not make 50 cents on the dollar because of taxes. Perhaps other things are taken out of your paycheck like health insurance or HSA funds or pre-tax retirement savings, but you absolutely are not being taxed at 50%.
Income taxes absolutely can go over 50% (for a couple in California, the marginal tax rate after $526,444 is 49.9% including only state and federal income taxes - the marginal rate income over $1,000,000 would be 51.9%). I doubt the OP's family income gets to these 50% marginal tax rates, but if you add childcare expenses, commute expenses, work wardrobe expenses, etc. I'm sure the overall benefit of working is less than 50% of nominal pay.

The description she gave would be an effective tax rate of 50%, not a marginal rate. And it's not that she said she only feels like they can spend 50% of the money she earns because of these other work-related expenses. We don't have income information, so perhaps they are super-high earners with a high marginal tax rate. But marginal does not equal effective.

robartsd

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Re: Reality Check?
« Reply #6 on: November 04, 2016, 03:58:09 PM »
The way I look at it, I am only earning about 50 cents on the dollar because of all the taxes (income, state income, SS, Medicare) when you consider all my income as "marginal." 
Sounds obvious to me that she is considering her income as paying their marginal income tax rate to me. Of course if she has access to a 401(k) or similar account through this employment, that tax deferred space certainly can't be filled with his income - reducing her effective tax rate.

The marginal rates I quoted did not include SS and Medicare (I though both these phased out with income, but Medicare does not - in fact the rate goes up for incomes over $200k). I believe the income limit for SS is individual even if you file jointly. This could make the marginal tax rate for the spouse of a very high earner in CA as high as 61.45%.

MDM

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Re: Reality Check?
« Reply #7 on: November 04, 2016, 09:24:19 PM »
For the record though, you absolutely do not make 50 cents on the dollar because of taxes. Perhaps other things are taken out of your paycheck like health insurance or HSA funds or pre-tax retirement savings, but you absolutely are not being taxed at 50%.
Income taxes absolutely can go over 50% (for a couple in California, the marginal tax rate after $526,444 is 49.9% including only state and federal income taxes - the marginal rate income over $1,000,000 would be 51.9%). I doubt the OP's family income gets to these 50% marginal tax rates, but if you add childcare expenses, commute expenses, work wardrobe expenses, etc. I'm sure the overall benefit of working is less than 50% of nominal pay.

Assuming the "second" spouse making $250K/yr, flat state tax rate of 5%, and no other deductions, this is what happens to the "first" spouse's income:


With higher than $250K/yr from the second spouse, and higher state taxes, both the marginal and effective tax rate for the first spouse could be over 50%.

ETA: That chart included only 1 child.  With two, the marginal rates for lower incomes are closer to 50%.
« Last Edit: November 04, 2016, 11:35:44 PM by MDM »

Jesstache

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Re: Reality Check?
« Reply #8 on: November 04, 2016, 11:10:37 PM »
As the much lower earning, self-employed spouse (1099) with a husband earning approx 80% of income (W2): Our fed marginal rate hovers around 25-28% depending on deductions, state marginal rate of 9%, Self-Employment Taxes of 15.3%.  Add in the cost of daycare that was approx 12% of my gross pay and we're talking about a take home of approx 40%.  We effectively saw an 8% drop in overall net income (40% of 20%) when I stopped working this year.   This isn't completely correct since I did contribute the max to an i401k, which is a big tax savings (and the main reason I was working at all to begin with), but I just post the %'s to show it is WAY possible to have an effective marginal rate above 50%. 

So, I worked enough this year to max my i401k then stopped in time to spend the summer with my oldest before she started Kindergarten.  Now I spend a lot of time volunteering at my daughter's school, doing yard work, reducing the grocery bill and doing whatever I can to make my husband's time away from work less stressful (managing vet, dr, dentist appointments, doing home maintenance, rental house management, etc).   We are all happier for it and it is SO nice not to have to worry about being late for work because the kids didn't enjoy waking up at 5:30 am or calling out because someone's sick, or a snow day or one of a million school holidays. 

I do think that once our youngest is in kindergarten I will work again.  Possibly something part time in the school that has the same days off as the kids.  It was actually a hard decision for me to leave since I enjoyed my job, it had flexible part time hours, it was mentally stimulating and I just like earning my "own" money but the stress of the schedule and how to juggle kindergarten AND daycare AND work AND home life was a bit too much for what little monetary gain me and the family was getting out of it.  I was able to leave the door wide open to head back though so it was nice to know I could change my mind at any time and return.  It really depends on your personality though since staying home full time is not for everyone (I absolutely hated it about 2 years ago but enjoy it more now with slightly older children).  I still don't know that it is 100% for me but it's the best for all of us right now.  Hopefully you can weigh all your options similarly but that's how it played out for me/us.

Kriegsspiel

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Re: Reality Check?
« Reply #9 on: November 05, 2016, 06:16:29 AM »
For the record though, you absolutely do not make 50 cents on the dollar because of taxes. Perhaps other things are taken out of your paycheck like health insurance or HSA funds or pre-tax retirement savings, but you absolutely are not being taxed at 50%.
Income taxes absolutely can go over 50% (for a couple in California, the marginal tax rate after $526,444 is 49.9% including only state and federal income taxes - the marginal rate income over $1,000,000 would be 51.9%). I doubt the OP's family income gets to these 50% marginal tax rates, but if you add childcare expenses, commute expenses, work wardrobe expenses, etc. I'm sure the overall benefit of working is less than 50% of nominal pay.

Assuming the "second" spouse making $250K/yr, flat state tax rate of 5%, and no other deductions, this is what happens to the "first" spouse's income:


With higher than $250K/yr from the second spouse, and higher state taxes, both the marginal and effective tax rate for the first spouse could be over 50%.

ETA: That chart included only 1 child.  With two, the marginal rates for lower incomes are closer to 50%.

Yes. It turns into a musket.

Lucky Girl

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Re: Reality Check?
« Reply #10 on: November 05, 2016, 11:05:16 AM »
Thanks all, for the combined wisdom. 

Yes, as several of you noted, marginal tax rates can go above 50%.  With my 401(k), which of course I max out, its not quite that bad, but it is close.  Once you account for the child care, 52 mile per day round trip commute, and the little conveniences, doing a little "Your Money or Your Life" calc is a bit depressing. 

But, as Jesstache noted, the 401(k) is a nice additional tax advantaged space.  That is one reason I don't want to quit for a few more months--I want to fill up the 401(k) for 2017 first.  Good to know you are happy with the arrangement Jesstache--I think you and I are in pretty similar spots, except you enjoyed your job a bit more.

It is possible to go part-time at my job (I think) so I may ask for that option in March or April of next year and see how they respond.  Business has been slow, which is part of why my job is boring, so they may like the idea of part-time, or they may prefer that I just quit altogether. 

I am open to developing some other skills to get a job in a different field, but flexibility will be key.  I plan to learn coding while my kids are at school, and would consider taking Coursera classes.  If I could translate that into some part-time freelance work it may turn into an idea situation, but right now I don't have the time to focus on the classes.  I need to quit first.

It is nice to have the FU money, and have all these choices.  Sometimes I find that it can almost be too many choices!  Mustachian People problems!

TomTX

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Re: Reality Check?
« Reply #11 on: November 05, 2016, 05:00:21 PM »
Thanks all, for the combined wisdom. 

Yes, as several of you noted, marginal tax rates can go above 50%.  With my 401(k), which of course I max out, its not quite that bad, but it is close.  Once you account for the child care, 52 mile per day round trip commute, and the little conveniences, doing a little "Your Money or Your Life" calc is a bit depressing. 

But, as Jesstache noted, the 401(k) is a nice additional tax advantaged space.  That is one reason I don't want to quit for a few more months--I want to fill up the 401(k) for 2017 first.  Good to know you are happy with the arrangement Jesstache--I think you and I are in pretty similar spots, except you enjoyed your job a bit more.

It is possible to go part-time at my job (I think) so I may ask for that option in March or April of next year and see how they respond.  Business has been slow, which is part of why my job is boring, so they may like the idea of part-time, or they may prefer that I just quit altogether. 

I am open to developing some other skills to get a job in a different field, but flexibility will be key.  I plan to learn coding while my kids are at school, and would consider taking Coursera classes.  If I could translate that into some part-time freelance work it may turn into an idea situation, but right now I don't have the time to focus on the classes.  I need to quit first.

It is nice to have the FU money, and have all these choices.  Sometimes I find that it can almost be too many choices!  Mustachian People problems!

Fuck that commute. That's sucking up WAY too much of your day.

Get a job locally.

Metric Mouse

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Re: Reality Check?
« Reply #12 on: November 06, 2016, 02:56:38 AM »
Thanks all, for the combined wisdom. 

Yes, as several of you noted, marginal tax rates can go above 50%.  With my 401(k), which of course I max out, its not quite that bad, but it is close.  Once you account for the child care, 52 mile per day round trip commute, and the little conveniences, doing a little "Your Money or Your Life" calc is a bit depressing. 

But, as Jesstache noted, the 401(k) is a nice additional tax advantaged space.  That is one reason I don't want to quit for a few more months--I want to fill up the 401(k) for 2017 first.  Good to know you are happy with the arrangement Jesstache--I think you and I are in pretty similar spots, except you enjoyed your job a bit more.

It is possible to go part-time at my job (I think) so I may ask for that option in March or April of next year and see how they respond.  Business has been slow, which is part of why my job is boring, so they may like the idea of part-time, or they may prefer that I just quit altogether. 

I am open to developing some other skills to get a job in a different field, but flexibility will be key.  I plan to learn coding while my kids are at school, and would consider taking Coursera classes.  If I could translate that into some part-time freelance work it may turn into an idea situation, but right now I don't have the time to focus on the classes.  I need to quit first.

It is nice to have the FU money, and have all these choices.  Sometimes I find that it can almost be too many choices!  Mustachian People problems!

Fuck that commute. That's sucking up WAY too much of your day.

Get a job locally.

So much this!