Case Study - No money for taxable investments!

[Chrissy]

Life Situation:  Me (43F), Husband (46M), Warrior Princess (4.75), Chunky Baby (2.75).  MFJ.  My company shut down temporarily (entertainment), due to the pandemic, so we have given up our Chicago apartment, and reside in a LCOL area, in the house Husband brought into the marriage.  We will return to Chicago in the late summer, when my job is scheduled to resume.

Gross Salary/Wages:  Husband, $140k; me, $61k in 2019.  Husband's bonus is $10.8k gross.

Individual amounts of each Pre-tax deductions: We typically max 401k(s), family HSA, ROTHs and FSA.  We front loaded the 529s, and are done contributing.  Health insurance is $520/mo for the family.

Employer contributions:  $8k/yr 401k, $5k/yr pension

Taxes:  $31k

Expenses:  Chicago, $9.3k/mo.  LCOL, $4.5k/mo.

Expected ER expenses: I'm assuming $100k/yr because Husband wants to be (even more) spendy.

Current Assets:

BREAKDOWN
House:  $380k
Intrafamilial loan for house:  -$90k
401(k)s:  $337k 
ROTHs: $201k
529s:  $125k
Pension:  $79k (mine, still accruing, can be rolled to tIRA at separation)
HSA:  $43k
Cash:  $38k
SEP:  $34k
Taxable:  $22k (this is overseas, and I can't get it out without going there)
Car:  $12k

Total worth:  $1.182M  (Stash is $755k when we discount the 529s)

Question:  Should we stop contributing the max to 401ks in order to put some into (accessible) taxable?  How would YOU access the money without taxable to draw from first?

Relevant Info:
We used to have a large taxable account, but we got pissed at the bank, so we gave it to the contractor during the reno, taking a minimal loan from my FIL.

The house is on a lake.  We aren't done with the reno, but Husband wants to DIY the remainder.  Husband also wants to give $10k to FIL in a lump sum to kick-start our loan repayment.  And, he wants a party barge for $26k and a jetski for $4k.  However, I would like to have a $50k emergency fund... we're at $38k now.

We can do a mega backdoor ROTH through his employer, I just can't find the money for it.

[KungfuRabbit]

Am I understanding that you have $427,000 in 529 accounts for toddlers?  Thats, ummmmm...a lot. 

The 4% rule for your $100,000 spending is $2,500,000, so you need to keep saving $1,745,000.  I'm a little confused by your expenses (does the LCOL house go to $0 when you're not living there?) because with both expenses you have basically no savings, with just Chicago expenses you are saving about $60,000 / year.  With that savings rate you'll get to $2.5 million is about 12 years assuming a 7% annual return, obviously longer / never if instead of saving you spend it on boats. 

With that math your husband would be 58 when you hit your goal, so just one year away from penalty free retirement account withdraws.  So, based on that, I'd keep pumping everything into tax advantaged accounts, because you'd only need to save up 1 years worth of savings...

However, I may have done the math wrong, since your spending is not clearly laid out.  But I guess my advice would be to calculate your estimated retirement age, and unless its far under 59 I would keep working those tax advantaged accounts...

[YttriumNitrate]

And, he wants a party barge for $26k and a jetski for $4k.

First, and foremost, do not buy a jet ski. I despise those damn things.

How much of the Roth IRAs is principal? You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA. https://www.schwab.com/ira/roth-ira/withdrawal-rules

[Chrissy]

Am I understanding that you have $427,000 in 529 accounts for toddlers?  Thats, ummmmm...a lot. 

The 4% rule for your $100,000 spending is $2,500,000, so you need to keep saving $1,745,000.  I'm a little confused by your expenses (does the LCOL house go to $0 when you're not living there?) because with both expenses you have basically no savings, with just Chicago expenses you are saving about $60,000 / year.  With that savings rate you'll get to $2.5 million is about 12 years assuming a 7% annual return, obviously longer / never if instead of saving you spend it on boats. 

With that math your husband would be 58 when you hit your goal, so just one year away from penalty free retirement account withdraws.  So, based on that, I'd keep pumping everything into tax advantaged accounts, because you'd only need to save up 1 years worth of savings...

However, I may have done the math wrong, since your spending is not clearly laid out.  But I guess my advice would be to calculate your estimated retirement age, and unless its far under 59 I would keep working those tax advantaged accounts...

We have $125k total in the 529s.  I'll see if I can clarify the original post.

The house utilities are lower when we're not here, but not there's still taxes, insurance, etc, plus whatever the loan repayment will be... we haven't started yet, so I don't know.  We're estimating $1.5k/mo. 

Husband wants out ASAP. I could keep working, but we have to go back to Chicago for that.  I have our stash at $2.6M in 2030.  We beat my estimate by $50k this year.

[reeshau]

Gross Salary/Wages:  Husband, $140k; me, $61k in 2019.  Husband's bonus is $10.8k gross.

Expenses:  Chicago, $9.3k/mo.  LCOL, $4.5k/mo.

If I am reading this right, it appears that your gross wages just about cover the increased expenses of living in Chicago.  Are you tied to that idea?  It would seem that if you found anything where you currently are, you would improve on your current plan.

[Chrissy]

And, he wants a party barge for $26k and a jetski for $4k.

First, and foremost, do not buy a jet ski. I despise those damn things.

How much of the Roth IRAs is principal? You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA. https://www.schwab.com/ira/roth-ira/withdrawal-rules

HAHA!  I definitely don't want a jet ski.  We'll see if he actually buys one.

My ROTH has $77k in contributions, his is probably roughly the same.  If we both stay employed for the next 10 years, I guess we'll have close to $300k in contributions, so close to 3yrs of expenses.  Just gotta figure out how to get ~$200k in taxable between now and then.

[Chrissy]

Gross Salary/Wages:  Husband, $140k; me, $61k in 2019.  Husband's bonus is $10.8k gross.

Expenses:  Chicago, $9.3k/mo.  LCOL, $4.5k/mo.

If I am reading this right, it appears that your gross wages just about cover the increased expenses of living in Chicago.  Are you tied to that idea?  It would seem that if you found anything where you currently are, you would improve on your current plan.

Expenses in LCOL will be $1k to $1.5k higher once we start paying down the intrafamilial loan.

Here are the reasons we're definitely going back to Chicago:

Both sides of the family live in Chicago.

I hate it here, and Husband loves the scenery, but dislikes the society.

In Chicago, I do location-specific work that I love, very part-time...  like quarter-time.  Broken down to an hourly wage, my rate is higher than Husband's.  My industry does not exist in the extremely rural LCOL area we live in at the moment.

I work for a non-profit with some unusual benefits:  $5k/yr to pension and $12k/yr for the family for health-related expenses.  I get a lump sum whenever separate:  $7k now, $19k by 2030.  And, I'm tenured, so I'm guaranteed my position when we resume.  It's a sweet gig, I tell ya.

Our child-related expenses in Chicago which were $40k last year, will fall to $27k when we go back, $18k the year after, and will be $5k-$14k from then on.  Meanwhile, I will probably get raises at work.

[chicagomeg]

I'm having trouble making sense of your expenses, like previous posters, so it's hard for me to make suggestions where you should make changes to achieve your goal.

At a high level, my gut reaction is that with a combined salary of $200k in a normal year, it's shocking to me that you can't max your 401k AND contribute to your emergency fund or other non-restricted investment accounts. The most obvious answer to me is to reduce your expenses, but you finished your post talking about a jetski and a party barge (is that a thing people own in the Midwest??? Wild.) so maybe that's easier said than done.

Additionally, it's not totally clear to me what your objective is. Are you trying to contribute to your non-restricted accounts now while you're unemployed and you're living in the LCOL area? Or are you trying to plan for this summer when you'll be back in Chicago and back to normal wages? What is the goal of that money? Just to increase your emergency fund? Or to add money into long term taxable investments because you are concerned your 401k's won't be accessible when you're ready to retire?

[Chrissy]

Because of the fluctuating situation (reno, job hiatus, relocation, children aging out of child care), it just seemed too complicated to figure out, but I just took the numbers from my own post:

$30k taxes
$112k Chicago expenses
$39k 401ks
$12k ROTHs
$7k HSA

= $200k.

Shit.  We just flat don't have any extra for taxable, except for the take-home on his bonus. 

I'm going to discount the job hiatus and relocation because it's temporary, and, if it nets us any money, he'll probably spend it on a party-barge anyway.  BUT, I'm going to try hard to talk him out of it.

[reeshau]

...but you finished your post talking about a jetski and a party barge (is that a thing people own in the Midwest??? Wild.)

Party barge = pontoon.  It's not meant to go fast, so what's it for?  Voila

[Chrissy]

Thank you, everyone, for responding, and helping me think this through.

Had a big talk with Husband.  Showed him the numbers.  He'd seen the monthly total on our Chicago expenses, but not the yearly, and he about had a heart attack!  He was leaning away from the party-barge idea anyway, so we've officially nixed it.  Also, no lump sum to his father.  Didn't bring up the jet ski.  We both agree that we need a larger emergency fund, and we think we can do that during our time living here.

Our projections had us retiring at the end of 2030, but I found an inaccuracy in the equation.  I adjusted (saving $73/yr includes employer match @ 7% = $2.5M in 10 years) and we still make it.  Husband will be 56.5 in Dec 2030, so we'll only need THREE years of expenses to bridge to 59.5, and we'll have nearly that in ROTH contributions.

Reviewed the Investment Order, and I see that we should do the Mega Backdoor before we invest in taxable.  But, I guess we'll have to go without either for now.  Over the next couple of years, the child care expenses will decrease, and hopefully we'll see some raises... maybe there will be a chance in the future.

[chicagomeg]

Because of the fluctuating situation (reno, job hiatus, relocation, children aging out of child care), it just seemed too complicated to figure out, but I just took the numbers from my own post:

$30k taxes
$112k Chicago expenses
$39k 401ks
$12k ROTHs
$7k HSA

= $200k.

Shit.  We just flat don't have any extra for taxable, except for the take-home on his bonus. 

I'm going to discount the job hiatus and relocation because it's temporary, and, if it nets us any money, he'll probably spend it on a party-barge anyway.  BUT, I'm going to try hard to talk him out of it.

It's hard for me to imagine there's no wiggle room in a budget of $112k in Chicago, being an incredibly affordable major city (that I personally live in for far less than $112k/year). But I don't have dreams of owning a jetski or a party barge either.

[Freedomin5]

The biggest issue is not the non-existent party barge that they currently do not own. It’s $112k annual expenses. They make a good income. If they can manage expenses better and not spend most of what they make, they would have boatloads of money to put into taxable accounts.

[reeshau]

The biggest issue is not the non-existent party barge that they currently do not own. It’s $112k annual expenses. They make a good income. If they can manage expenses better and not spend most of what they make, they would have boatloads of money to put into taxable accounts.

I agree with this perspective.  $112k per year involves a lot of *choices* made--things you want, rather than things you need.  Choosing to have them, or not, is fine.  But you will be more at peace with yourself understanding that the cause of either a later retirement or less luxury now is you and your choices, rather than feeling helpless or hoping for outside intervention.  (i.e. raises)

[chicagomeg]

The biggest issue is not the non-existent party barge that they currently do not own. It’s $112k annual expenses. They make a good income. If they can manage expenses better and not spend most of what they make, they would have boatloads of money to put into taxable accounts.

Right, but being even willing to consider buying such luxuries while also considering reducing your 401k contributions is an indication of an underlying spendypants attitude (or major misalignment in goals with one's partner perhaps)

[MaybeBabyMustache]

Do you understand where the $112k of expenses are going? Are you satisfied & aligned on that level of spending? Because, I think that's probably the more macro question. If you can't afford to put money into your 401k because of expenses that you are both mutually aligned on & are "required" for whatever reason (one time medical costs, bad year of house expenses, etc), I think that's one thing. But, it sounds like you want to be able to max your retirement contributions, and just don't see a way forward. To answer that question, you'll need to have a clearer picture of where the $112k is going, what you'd be comfortable cutting, & ensuring you're aligned with your spouse.

[Chrissy]

Per my earlier post, the party-barge/pontoon idea is dead.

Do you understand where the $112k of expenses are going? Are you satisfied & aligned on that level of spending? Because, I think that's probably the more macro question.

Yes, I've tracked to the penny for two years.  Husband and I are aligned on regular spending, and now we're aligned on NOT spending on a party-barge or lump-sum debt repayment.

If you can't afford to put money into your 401k because of expenses that you are both mutually aligned on & are "required" for whatever reason (one time medical costs, bad year of house expenses, etc), I think that's one thing. But, it sounds like you want to be able to max your retirement contributions, and just don't see a way forward. To answer that question, you'll need to have a clearer picture of where the $112k is going, what you'd be comfortable cutting, & ensuring you're aligned with your spouse.

We already max all the tax-advantaged space:  HSA, two ROTHs, two 401k(s), dependent care FSA.  My question was: should we stop contributing the max to 401ks in order to put some into taxable?  But, I've since determined that we will have enough ROTH contributions to bridge three years from retirement (when he's 56.5) to being able to access the retirement accounts at 59.5.

[YttriumNitrate]

...but you finished your post talking about a jetski and a party barge (is that a thing people own in the Midwest??? Wild.)

Party barge = pontoon.  It's not meant to go fast, so what's it for?  Voila

If you stick a large enough motor on it, they can go fast enough to pull a water skier.

[reeshau]

...but you finished your post talking about a jetski and a party barge (is that a thing people own in the Midwest??? Wild.)

Party barge = pontoon.  It's not meant to go fast, so what's it for?  Voila

If you stick a large enough motor on it, they can go fast enough to pull a water skier.

Yes, I have done so myself.  That's why I phrased it as "it's not meant to go fast."  I figured someone would bring this up. :)

And there's no wake to speak of, so where's the fun in that?

[Chrissy]

Oh my word...

[Loud Noises]

I don't understand why you want money in a taxable account, especially at the potential expense of not maximizing a tax advantaged account.  Tax benefits, liability protection... the perks of "retirement" accounts go on and on. 

You don't need any money in a taxable account to retire early.  If you separate from your job with 401(k) after 55, you can start penalty free withdrawals.  If you retire earlier than that, do the math on a sustainable SEPP plan and withdraw that way.  These funds are not locked up until 59.5.  They just aren't.  Not to mention the freedom with Roth contributions which has been mentioned already.