Author Topic: Case Study - Are we on track?  (Read 21947 times)

SmallTownDA

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Case Study - Are we on track?
« on: May 04, 2016, 10:40:39 PM »
Case Study - Are we on track?
Life Situation: Me, 28, prosecutor at DA's office. Wife, 27, SAHM. Married filing jointly, Two children ages 3 and 0. Rural California
Gross Salary/Wages: 96,360/year, 8030/month
Pre-tax deductions:
457(b): 1500/month, 18k/year
HSA: 279/month, 3350/year
Pension: 282/month, 3384/year
Health insurance 524/month, 6288/year
Other Ordinary Income: ~$200 a month in mileage reimbursements. The office also pays $380/year for my bar dues.
Adjusted Gross Income: $5445/month, plus mileage.

Taxes:
Federal: 2675/year
SS: 5126/year
Medicare: 1191/year
CA: 760/year
CA SDI: 867/year
Total: 10619/year (885/month)

Take home pay:  $4550/month, plus mileage

Current monthly expenses:
Mortgage: $734 (562 P&I/172 T&I)
Health Insurance: $700. Insurance through work is reasonable for me, outrageous for my family, so we buy them individual coverage. Because it's "available" to my family, we do not qualify for subsidies. We bought a platinum tier plan for my wife this year because we knew we would be having a baby.
Student Loans: $300. $162 is my wife on the standard 10 year plan. $138 is mine on income based repayment. 3 years in on public service loan forgiveness.
Groceries: $240.
Gas/Electric/Garbage/Water: $200.
Car Payment: $190.
Gas: $150. Mostly from work travel, but I get mileage reimbursement. I bike to work on days I don't need to travel.
Baby Supplies: $150.
Home Supplies: $150. Tools, yard equipment, furniture, repairs, etc that we didn't have when living in our apartment.
Auto Insurance: $70.
Dining Out: $60. Date night twice per month.
Internet: $60.
Clothing: $50.
Mobile Phone: $40. Republic Wireless.
Dry Cleaning: $20. Needed for work.
Debt Repayment: $417. Repaying my parents for down payment assistance for our house.
Miscellaneous: $100
Total: $3631/month.

Expected Retirement Expenses: $2704/month. Above spending minus dry cleaning, student loans, car loan, and repaying my parents.

Assets:
$16000 cash in checking account.
$1000 in HSA
$10000 in 457(b) plan. 81% Vanguard S&P 500, 4% Vanguard Mid Cap, 15% Vanguard Small Cap. Attempting to emulate total stock market.
House. We paid $167,000, putting 20% down. I value it at 167,000 but market price is probably a little higher.
Liabilities:
Student Loans: $50500 for me, 6.55%. $12000 for wife, $7500 at 3%, $2500 at 6%, and $2000 at 5%. My loans are on IBR and I have 3 years of credit towards public service loan forgiveness. Even if my payment hits its maximum amount, I won't ever pay more than the $50000 I currently owe before it is forgiven in 7 years and will likely pay significantly less. My wife is 3 years into the standard 10 year repayment plan.
Auto Loan: $2200, 2%. $189/month. Original balance $6500
Mortgage: $130,900, 3%. $562/month P&I. 15/15 ARM. Adjusts once at 15 years.
Repay Parents: $20000. 0%.

Specific Question(s):
I work for local government as a prosecutor. I am very happy in my current job, but the allure of FI/RE is strong and my job is very high stress. My current goal is to retire at 45. I think our spending is all pretty reasonable. Health insurance is killing us, but once I retire we are eligible for subsidies. A huge percent of our spending is debt repayment which will be all paid off by retirement. My questions have to do with our monthly surplus and my pension.

We are cash-flow positive by about $1000 a month, but it's just accumulating in our checking account for the moment. My first thought would be open and fully fund IRA's for myself and  my wife (probably traditional because it will lower my AGI for student loan payments, but we're open to Roth if that makes more sense based on our tax bracket). The other option would be to pay off the loan from my parents sooner. My wife's student loans are our highest interest debt, but repaying my parents has higher moral priority if we're going to put the money towards debt.

The other question is what to do with my pension. I get 1% of my final salary per year of service if I start drawing it at age 52 and goes up by 0.1% each year I defer, up to a max of 2.5% at age 67. My position currently maxes out at $130,000 and I have about 5 more years of guaranteed raises before I hit that level. I'm expecting that when I retire the max salary will be at least keeping up with inflation relative to where it is now. I will have 20 years of service if I retire at 45. There is a discretionary COLA based on the investment performance. It's not guaranteed, so I am not considering it for my planning. Taking the pension at 52 would substantially reduce how much I would need to save and could cut several years off my full time working career. I worry about what inflation will do to it over 20 or 30 years. This is really vexing me because of how fast the benefit increases by delaying a few years.

So are we on track for FI/RE at 45? What should we do with our extra money each month? How can I best use my pension to achieve my goals? Any and all advice greatly appreciated.

csprof

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Re: Case Study - Are we on track?
« Reply #1 on: May 04, 2016, 11:43:12 PM »
Case Study - Are we on track?
Life Situation: Me, 28, prosecutor at DA's office. Wife, 27, SAHM. Married filing jointly, Two children ages 3 and 0. Rural California
Gross Salary/Wages: 96,360/year, 8030/month
Pre-tax deductions:
457(b): 1500/month, 18k/year
HSA: 279/month, 3350/year
Pension: 282/month, 3384/year
Health insurance 524/month, 6288/year
Other Ordinary Income: ~$200 a month in mileage reimbursements. The office also pays $380/year for my bar dues.
Adjusted Gross Income: $5445/month, plus mileage.

Taxes:
Federal: 2675/year
SS: 5126/year
Medicare: 1191/year
CA: 760/year
CA SDI: 867/year
Total: 10619/year (885/month)

Take home pay:  $4550/month, plus mileage

Current monthly expenses:
Mortgage: $734 (562 P&I/172 T&I)
Health Insurance: $700. Insurance through work is reasonable for me, outrageous for my family, so we buy them individual coverage. Because it's "available" to my family, we do not qualify for subsidies. We bought a platinum tier plan for my wife this year because we knew we would be having a baby.
Student Loans: $300. $162 is my wife on the standard 10 year plan. $138 is mine on income based repayment. 3 years in on public service loan forgiveness.
Groceries: $240.
Gas/Electric/Garbage/Water: $200.
Car Payment: $190.
Gas: $150. Mostly from work travel, but I get mileage reimbursement. I bike to work on days I don't need to travel.
Baby Supplies: $150.
Home Supplies: $150. Tools, yard equipment, furniture, repairs, etc that we didn't have when living in our apartment.
Auto Insurance: $70.
Dining Out: $60. Date night twice per month.
Internet: $60.
Clothing: $50.
Mobile Phone: $40. Republic Wireless.
Dry Cleaning: $20. Needed for work.
Debt Repayment: $417. Repaying my parents for down payment assistance for our house.
Miscellaneous: $100
Total: $3631/month.

Expected Retirement Expenses: $2704/month. Above spending minus dry cleaning, student loans, car loan, and repaying my parents.

Assets:
$16000 cash in checking account.
$1000 in HSA
$10000 in 457(b) plan. 81% Vanguard S&P 500, 4% Vanguard Mid Cap, 15% Vanguard Small Cap. Attempting to emulate total stock market.
House. We paid $167,000, putting 20% down. I value it at 167,000 but market price is probably a little higher.
Liabilities:
Student Loans: $50500 for me, 6.55%. $12000 for wife, $7500 at 3%, $2500 at 6%, and $2000 at 5%. My loans are on IBR and I have 3 years of credit towards public service loan forgiveness. Even if my payment hits its maximum amount, I won't ever pay more than the $50000 I currently owe before it is forgiven in 7 years and will likely pay significantly less. My wife is 3 years into the standard 10 year repayment plan.
Auto Loan: $2200, 2%. $189/month. Original balance $6500
Mortgage: $130,900, 3%. $562/month P&I. 15/15 ARM. Adjusts once at 15 years.
Repay Parents: $20000. 0%.

Specific Question(s):
I work for local government as a prosecutor. I am very happy in my current job, but the allure of FI/RE is strong and my job is very high stress. My current goal is to retire at 45. I think our spending is all pretty reasonable. Health insurance is killing us, but once I retire we are eligible for subsidies. A huge percent of our spending is debt repayment which will be all paid off by retirement. My questions have to do with our monthly surplus and my pension.

We are cash-flow positive by about $1000 a month, but it's just accumulating in our checking account for the moment. My first thought would be open and fully fund IRA's for myself and  my wife (probably traditional because it will lower my AGI for student loan payments, but we're open to Roth if that makes more sense based on our tax bracket). The other option would be to pay off the loan from my parents sooner. My wife's student loans are our highest interest debt, but repaying my parents has higher moral priority if we're going to put the money towards debt.

The other question is what to do with my pension. I get 1% of my final salary per year of service if I start drawing it at age 52 and goes up by 0.1% each year I defer, up to a max of 2.5% at age 67. My position currently maxes out at $130,000 and I have about 5 more years of guaranteed raises before I hit that level. I'm expecting that when I retire the max salary will be at least keeping up with inflation relative to where it is now. I will have 20 years of service if I retire at 45. There is a discretionary COLA based on the investment performance. It's not guaranteed, so I am not considering it for my planning. Taking the pension at 52 would substantially reduce how much I would need to save and could cut several years off my full time working career. I worry about what inflation will do to it over 20 or 30 years. This is really vexing me because of how fast the benefit increases by delaying a few years.

So are we on track for FI/RE at 45? What should we do with our extra money each month? How can I best use my pension to achieve my goals? Any and all advice greatly appreciated.

Clarification:  Pension is 1% of final salary *per year*, or 1% of AY salary *per month*?  I assume the latter -- a $130k salary turning into a $1300/month pension?

Easy points:  Wipe out your wife's 5% and 6% student loan debt ASAP with some of that $16k cash.  If you can't be selective about it, I'd kill the whole thing -- you have the cash for it and it'll free up $162 of monthly cash flow.  It averages out to about 4%, and for me, a completely risk-free/no volatility 4% ROI is a pretty attractive target.  Others would disagree - it's slightly on the fence.

After that, your IRA plan sounds just fine.  You (just barely) qualify to deduct the 5500 contribution this year, and you'll start getting phased out with those raises.  But note that you won't be able to do as much of this in later years -- you're right at the end of the limit as it stands ($98k, phasing out, fully phased out at $117k).  I'm not a tax accountant - check the math carefully. :)  I don't know the terms of your loan forgiveness, so that's probably the most important thing to check.

If it *doesn't* affect your loan stuff much, then I'd consider Roth instead.  You don't pay much in taxes for which the deduction would be effective -- IRA contributions won't reduce your SS taxes, which are more than 50% of what you're getting hit by as it stands.  So the Roth has some serious advantages in flexibility.  Regardless, the option's not going to be open to you for more than about 4 years anyway, so we're mostly quibbling over peanuts -- perhaps $22k max.

You noted "Attempting to emulate total stock market. " -- do you not have VTSAX / VTSMX as an option?  (Vanguard total stock market fund).  Might simplify things for you.

So you need something like $720k in your total retirement accounts excluding pension, assuming mortgage not paid off by then.  You're putting away about $30k/year right now, and if you hold expenses steady, that should be up to about $45-50k inflation-adjusted within 5 years.  You'll then stay at about that level for an additional 13 years.  Assuming standard market returns (about 4% above inflation), you'll have about $1m in your non-pension accounts.  SWR 4% gives you $40k/year to live on (in today's dollars) plus $1300/month pension, which puts you above your current $43k/year costs -- which you'll have reduced a bit by killing the student loans.  That's more than enough buffer that even if the pension doesn't COLA, you'll be OK if you're living within your current means.

You're on track -- unless you have another kid, or want to pay substantial amounts of your kid's college costs, in which case some recalculation is obviously due.

Kudos for planning to have the flexibility to quit the stressful job if & when the time comes.  I know a lot of burned-out attorneys (and some who stuck with it through their 80s -- shrug), and wish more of them had had the foresight.

jda1984

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Re: Case Study - Are we on track?
« Reply #2 on: May 05, 2016, 01:01:32 PM »
RE: Pension; I think he means 1% of final salary per year of service.  Thus, if at 52, he had served 25 years, he'd get 25% of his final salary per year.

Seems like you are on track with spending below your means, but don't really have a vision of how to get from here to where you want to be (and maybe don't quite know that yet either).

Mikila

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Re: Case Study - Are we on track?
« Reply #3 on: May 06, 2016, 07:30:19 AM »
You are doing a lot of things right and definitely moving in the right direction. 

If I were you, I would pay off those 5% and 6% student loans asap.  Why are you paying the interest when you have the cash to pay it off?  That will give you a better return than you will get in your checking or savings account.

Keep trucking.

csprof

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Re: Case Study - Are we on track?
« Reply #4 on: May 06, 2016, 10:49:18 PM »
RE: Pension; I think he means 1% of final salary per year of service.  Thus, if at 52, he had served 25 years, he'd get 25% of his final salary per year.

Seems like you are on track with spending below your means, but don't really have a vision of how to get from here to where you want to be (and maybe don't quite know that yet either).

Glurp - of course, thanks.  :)  (Can you tell I've never had a job that has a pension?)

Even better - that's about $1800-1900/month in today's dollars, then, if OP retires @ age 45.  Looking just fine.

SmallTownDA

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Re: Case Study - Are we on track?
« Reply #5 on: May 07, 2016, 02:20:54 AM »
Thank you all, this has been very reassuring. It's hard to parse everything out, so just writing down everything for the case study post has been really helpful in getting a big picture view.

csprof: My 457 plan doesn't offer VTSAX or an equivalent total stock market fund, so that's why I'm trying to emulate it with the 3 fund mix. I'm still relatively young, so I'm going 100% equities for the time being. We are planning on another kid, but that's a few years out and so far our 3 year old has not been very expensive. I imagine they get more expensive as they get older, though, so we'll have to keep that in mind. I work with a few defense attorneys in their 70's and even 80's who are so burnt out and probably going to be working until they die. It's a big motivator for me on my path to FI/RE.

Killing the 5% and 6% loans seems like the consensus pick. IRA's will come next. I thought the traditional  IRA deduction income limits was on your income after the 457, HSA, health insurance, pension, and other pre-tax deductions were taken out. If not, I probably won't even qualify this year since I'll be getting a raise in September. Reducing our AGI by $11,000 would save money on the student loans, but I'll need to play around with the repayment estimator to see how much.The Roth may be the better choice anyway because of the added flexibility and tax diversification.

I'm still not sure if I should be planning on taking the pension at 52, 67 or some other age in between. I guess I could run every year through cFIREsim and see what ends up best. Right now it would pay $2150/month if I took it at 52 (assuming I was maxed out), which would cover a big chunk of our expected retirement expenses and would mean we'd only have to fully self-fund 7 years of retirement before it kicked in. At 67, it would pay $5400/month, which is way more than we will be spending, but would mean we'd have to self-fund 22 years. Hopefully at 45 we'll be sitting on an epic stash and won't need to worry about the pension.

terran

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Re: Case Study - Are we on track?
« Reply #6 on: May 07, 2016, 06:18:47 AM »
After that, your IRA plan sounds just fine.  You (just barely) qualify to deduct the 5500 contribution this year, and you'll start getting phased out with those raises.  But note that you won't be able to do as much of this in later years -- you're right at the end of the limit as it stands ($98k, phasing out, fully phased out at $117k).  I'm not a tax accountant - check the math carefully. :)  I don't know the terms of your loan forgiveness, so that's probably the most important thing to check.

I thought the traditional  IRA deduction income limits was on your income after the 457, HSA, health insurance, pension, and other pre-tax deductions were taken out. If not, I probably won't even qualify this year since I'll be getting a raise in September. Reducing our AGI by $11,000 would save money on the student loans, but I'll need to play around with the repayment estimator to see how much.The Roth may be the better choice anyway because of the added flexibility and tax diversification.

You are correct. You still have some headroom because of these deductions. The IRA limits are based on your modified AGI which is your AGI with some things (like traditional IRA contributions) added back in.

I wouldn't worry too much about the flexibility of the roth unless you think you'll need it while still working. Once you separate from service you can withdraw without penalty from the 457, so it's similar in that sense.

kd2008

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Re: Case Study - Are we on track?
« Reply #7 on: May 07, 2016, 07:00:25 AM »
Please think of maximizing HSA contributions. I believe the family maximum is 6750. You will need it in the future.

MDM

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Re: Case Study - Are we on track?
« Reply #8 on: May 07, 2016, 11:22:49 PM »
Specific Question(s):
I work for local government as a prosecutor. I am very happy in my current job, but the allure of FI/RE is strong and my job is very high stress. My current goal is to retire at 45. I think our spending is all pretty reasonable. Health insurance is killing us, but once I retire we are eligible for subsidies. A huge percent of our spending is debt repayment which will be all paid off by retirement. My questions have to do with our monthly surplus and my pension.
That seems an achievable goal, based on what the case study spreadsheet projects using the numbers in your post.  You might want to download a copy and verify. 
For better long term projections, look at some of the tools mentioned in https://www.bogleheads.org/forum/viewtopic.php?t=115839#p1686175, e.g., http://www.firecalc.com/, http://www.cfiresim.com/, and http://www.i-orp.com/.  If you use Quicken, its Lifetime Planner is also decent.

Quote
We are cash-flow positive by about $1000 a month, but it's just accumulating in our checking account for the moment. My first thought would be open and fully fund IRA's for myself and  my wife (probably traditional because it will lower my AGI for student loan payments, but we're open to Roth if that makes more sense based on our tax bracket). The other option would be to pay off the loan from my parents sooner. My wife's student loans are our highest interest debt, but repaying my parents has higher moral priority if we're going to put the money towards debt.
Other than leaving it in the checking account, all those choices are good ones.  Rules of thumb on traditional vs. Roth often assume you will be paying 15% on your traditional withdrawals.  If your spending in retirement won't be significantly higher than now, you might be paying less (if so, you should do traditional).  If you work ~forever and your pension becomes a significant fraction of your salary, you might be paying more (if so, you should do Roth).

If you do traditional, you might as well contribute enough to both IRAs so your AGI gets below $61,500 and you get the $400 saver's credit.

Quote
The other question is what to do with my pension. I get 1% of my final salary per year of service if I start drawing it at age 52 and goes up by 0.1% each year I defer, up to a max of 2.5% at age 67. My position currently maxes out at $130,000 and I have about 5 more years of guaranteed raises before I hit that level. I'm expecting that when I retire the max salary will be at least keeping up with inflation relative to where it is now. I will have 20 years of service if I retire at 45. There is a discretionary COLA based on the investment performance. It's not guaranteed, so I am not considering it for my planning. Taking the pension at 52 would substantially reduce how much I would need to save and could cut several years off my full time working career. I worry about what inflation will do to it over 20 or 30 years. This is really vexing me because of how fast the benefit increases by delaying a few years.
Set yourself a reminder to look at this in ten years. ;)  There isn't anything you can do about this now, and who knows how things will look then?

Good luck!

MDM

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Re: Case Study - Are we on track?
« Reply #9 on: May 07, 2016, 11:36:35 PM »
Please think of maximizing HSA contributions. I believe the family maximum is 6750. You will need it in the future.
Good point if the OP can get a decent family HDHP.  Appears from his post that he has a self-only HDHP while the rest of the family has non-HDHP coverage.

And "family" means "yourself plus one other" (see IRS Pub. 969 for details), so maybe dad plus the 3 year old on an HDHP while mom and the infant on non-HDHP...?