Author Topic: UPDATE 18 months later: First Start Case Study - Let the facepunching commence!  (Read 10928 times)

zeli2033

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Updates provided 1/29/18 in blue
Love the MMM lifestyle and we’ve been lurking for a couple years. Now we’re finally ready to put it into action. First time poster.

Life Situation: Married, filing jointly. No kids, renting in pdx. DW is 28, DH is 31.

Gross Salary/Wages:
Earner #1 : $2,638 2x/month
Earner #2: $5,000/month $3,125 2x/month
Total Monthly Income after taxes: $6,876.91 $5,686 (Due to higher deductions)

Individual amounts of each Pre-tax deductions
Earner #1: 401k - $105 $770 2x/month (Employer matches 4%)
Earner #2: 401k - $770 2x/month Health/Dental/Vision for both of us - $179/month + $575 HSA

Adjusted Gross Income: $117,646 ~$92,000

Payroll Taxes Not sure yet - will update this once dust settles
SS
Earner #1 (2X/Month): $164
Earner #2: $294
Medicare
E#1: $38
E#2: $69
Federal tax
$738
State+local tax
$405
Total income taxes: $1,526

Monthly Average Expenses
Rent: $1,370 - Includes most utilities and $50/month awesome internet
Home/Rent Insurance: $12
Hair/Personal Care: $115 - Yep, should be lower
Bicycle Maintenance: $25 - New to biking. This is a guesstimate
Car Insurance: $100 - Paid semi-annually
Car Maintenance, Registration, etc.: $60 - This is average over last year given large expenses like tires, replacing battery
Christmas/Holidays/Going to Weddings: $50
Clothing/Shoes: $103 - Starter bike commuter gear. Shouldn’t stay this high.
Dining Out: $225 - Average last 3 months. Punch me in the face. Twice.
Electricity: $35
Entertainment: $30 - Games/Books. This is recent, should drastically decrease
Fuel/Public Transport: $59 - Average over last 3 months, should keep going down with more biking.
Groceries/Household Goods/Toiletries: $619 - Punch me in the face. It’s high for two people. We eat meat and veggies for a lot of meals...
Miscellaneous: $59 - Selfcare
Cellphone: $55 - Thank you, ting
Sports/Recreation: $119 - Annual Gym memberships already paid up front for next 12 months
Subscriptions: $51 - Includes Netflix, HBOGo, Dollar Shave Club, Spotify
Travel/Vacation: $93 - Average over last 3 months.
Non-mortgage total: $3,180

Expected ER expenses: Guesstimates based on loose goals
No mortgage/rent: ~$28k annually
With mortgage/rent: ~$40k annually

Assets:
Traditional IRA: $4,524. $4,891
#1 401k: $4,648 6,894
#2 401k: $1,800 $2,746
#1 Roth IRA: $7,820
#2 Roth IRA: $7,822

2013 Golf, owned outright valued at ~$8k. Will drive into the ground.
Total: $18,972 $38,173

Liabilities:
Student Loan: $63,700k @ ave. 6%. This loan can suck it. We’re planning to annihilate it now and be done paying it by June 2019. Every extra penny is going here before we get to the good stuff. (This is a ridiculous statement given our detailed monthly expenses above. I’m aware. Bring on the facepunches).

Pay credit cards to $0 each month so nothing there

OVERALL GOALS IN DESCENDING ORDER OF PRIORITY:
*I'm not including the Student Loan in priority list here since we're addressing that NOW as our hair is ON FIRE

1. Hit FI in 2033 in our early 40s.
2. Have 1 kid within the next 3 years.
3. Buy a home at some point. BUT we like HCOL areas like the fools we are so this may not ever be the smart move. Unless (until?) the housing market implodes in which case, we’d like to have a 20% downpayment ready to roll on a ~$450k 3 bed/2ba home. (Extra room is office for videoconference-heavy telecommuting. With two adults doing this, separate spaces to do so are ideal). We're open to renting until we can make a smart move for somewhere we'll want to stay for awhile.

Specific Question(s):
1. I’ve looked at the Investment Order sticky post. We don’t have an emergency fund. Should we stack up 3 months expenses once the student loan is gone? Or just ride with some risk for a bit while we’re young and we don’t have any kids? We decided to let our e-fund ride in our Roth IRAs until we pay off the student loan in June 2019. That will give us $22K as a buffer once the 2018 year is maxed in case SHTF. Yes, this is riding in the stock market so there's risk there but we also have high enough credit limits in case we hit a true emergency before we freed up more cash flow once the student loan payment is gone. If needed, we can always decrease the 401K contributions in a severe pinch to pay off an emergency accrued on CC's. We're opening ourselves up to the risk of not having a liquid e-fund right now while our employment is strong, we don't have any dependents and our car is 4.5 years old so we can pay down the student loan by June 2019

2. I've been greedily eyeing opening up Roth IRAs for the two of us through Vanguard. The irrational part of my brain wants those accounts opened asap with the $3k minimum sooner rather than later, even if we don't contribute to them until after the student loan is paid off. (Even writing that makes me feel ridiculous, lol). Bad idea with a side of face punch? Opened Roth IRAs

3. Planning to Max out our HSAs once student loan is gone, but does anyone know how HDHP’s + HSAs fair when having a baby? It seems like this wouldn’t be an ideal plan if you were trying to have a kid during that enrollment year. Please enlighten me! Elected to go with the HDHP + HSA now.

4. Our current contributions to our 401ks is laughable. We’re only contributing to get the employer match. In DH’s case, he’s contributing nothing but his employer is so that’s it. Should we start maxing this out once the student loan is gone, even though we want to hit FI sooner rather than later? And if so, when should we stop maxing it out given we want to retire in our early-to-mid 40s? Started maxing out both 401Ks this year

5. The Traditional versus Roth IRA makes my head spin. I understand the basic premise of when taxes are incurred but I can’t wrap my head around what makes the most sense for our situation/income range and our FI target goals. Any helpful pointers? I swear, I’ve read the great articles out there from Mad Fientist and others but direct guidance on which one and when to max out based on our situation would be fantastic! We're using the Roth IRAs now but may switch gears to Traditional next year

6. Knowing all this, what action can we take to maximize our chances of hitting FI by our target date (2033), given we plan to have 1 child? We are open to any and all suggestions. Will minimize the complainypants boohooing when those face punches start rolling in.
« Last Edit: June 16, 2019, 10:35:01 AM by zeli2033 »

MrSpendy

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Re: First Start Case Study - Let the facepunching commence!
« Reply #1 on: December 03, 2017, 07:30:56 PM »
I'm not one to give advice on spending (see my case study for the morbid details of my spendy ways), but I think you  should build a cash reserve, then max out your  401ks,HSA's and IRA's, before attacking the loans/s.

Between the two of you you have $36K 401k and $6.7k hsa and 11k IRA (like 50 g's) of tax deductibility.

Have you run the numbers on what maxing out would look like in reducing your tax bill?


fuzzy math

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Re: First Start Case Study - Let the facepunching commence!
« Reply #2 on: December 03, 2017, 09:06:27 PM »
Mrs spendy has some good advice.

Is your Golf subject to the lawsuit?

You should definitely be doing traditional IRA and 401ks. Your tax brackets are higher now with less dependents. Having a kid later will change that. (Pending horrible tax reform)

Pick 1 tv subscription service. Watch it for a while then switch to the other and quit the first. Repeat. Are you paying for Spotify to avoid commercials?

Re:food. PDX is great for food. Pick to either spend less at home or less out and get that 1 aspect of your life organized. Drink at home. Find $15 or less meals. Food carts are great for the frugal. Shop at Fred Meyer or WinCo, not new seasons and trader joes.

Great job on your rent.

Lady SA

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Re: First Start Case Study - Let the facepunching commence!
« Reply #3 on: December 03, 2017, 09:20:45 PM »
can you refinance the loan to a lower rate? I think you could easily get the rate down to around 5% or lower. Check out Sofi, Earnest, your local credit union, etc. Unless you have bad credit, you can definitely get a better rate than 6%, and at over $60k it is worth it to refinance.

Then I would pay the min on the loan until you build up an emergency stash. That should be priority #1 to help ride out any bumps that life inevitably brings. 2-3 months worth of expenses should be fine, then you can ramp up the loan payment and lower the monthly savings contribution.

A more optimized use of your money is to lower your loan rate as much as you can, then save/invest as much as possible before paying off the loan. For example, my DH and I had $150k in loans (yikes!) but chose to max our 401ks and IRAs and then anything leftover went toward our loan -- not the other way around. You might consider a similar route.

zeli2033

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Re: First Start Case Study - Let the facepunching commence!
« Reply #4 on: December 03, 2017, 10:40:56 PM »
Have you run the numbers on what maxing out would look like in reducing your tax bill?

Probably seems silly, but I had not run the numbers on the taxes yet (talk about basics first). Based on playing with some projections in the spreadsheet (once the student loan is gone), it looks like maxing out our 401ks, HSAs and Traditional IRAs each would drop our AGI from $117,000 to $65,294 and our Federal tax bill would go down from $20,727.50 to $8,861.60...IS THIS MATH RIGHT?!? That seems like the best win, what am I missing??

I’ll be following your case study to watch your progress - thank you!

zeli2033

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Re: First Start Case Study - Let the facepunching commence!
« Reply #5 on: December 03, 2017, 10:45:40 PM »
Is your Golf subject to the lawsuit?

You should definitely be doing traditional IRA and 401ks. Your tax brackets are higher now with less dependents. Having a kid later will change that. (Pending horrible tax reform)

Pick 1 tv subscription service. Watch it for a while then switch to the other and quit the first. Repeat. Are you paying for Spotify to avoid commercials?

Re:food. PDX is great for food. Pick to either spend less at home or less out and get that 1 aspect of your life organized. Drink at home. Find $15 or less meals. Food carts are great for the frugal. Shop at Fred Meyer or WinCo, not new seasons and trader joes.

Great job on your rent.

fuzzy math, not sure I’m following you on the lawsuit comment. We own the Golf now (we previously had a car payment but it’s gone. Dumb decision, won't happen again). Let me know if I'm missing something!

Yes, we’re addicted to streaming services. We pay for family Spotify to avoid commercials while we’re working. We also provide access to friends as trade for one of their subscription accounts. Great idea switching off, especially starting with HBO since we only use it for a few shows we love and they’re not even on right now...

Goal is to cut down Dining Out. While PDX does have great food, we’re doing it for convenience. When no one wants to make dinner, we grab takeout on the way home from work. It does not make us happy to grab food out, we’re just being lazy. You’re right, one food category has gotta go, then the Grocery one needs to be optimized. Thanks so much for the tips!

zeli2033

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Re: First Start Case Study - Let the facepunching commence!
« Reply #6 on: December 03, 2017, 10:49:58 PM »
can you refinance the loan to a lower rate? I think you could easily get the rate down to around 5% or lower. Check out Sofi, Earnest, your local credit union, etc. Unless you have bad credit, you can definitely get a better rate than 6%, and at over $60k it is worth it to refinance.

Then I would pay the min on the loan until you build up an emergency stash. That should be priority #1 to help ride out any bumps that life inevitably brings. 2-3 months worth of expenses should be fine, then you can ramp up the loan payment and lower the monthly savings contribution.

A more optimized use of your money is to lower your loan rate as much as you can, then save/invest as much as possible before paying off the loan. For example, my DH and I had $150k in loans (yikes!) but chose to max our 401ks and IRAs and then anything leftover went toward our loan -- not the other way around. You might consider a similar route.

Great suggestions. We took a look at SoFi. Based on our goal of getting rid of the debt as fast as possible, we would choose 5-year fixed @ 5.625 and our monthly payment would go up to $1,229.33. Right now, I’m finishing out an income-based repayment plan that has my monthly payment at $452.

We thought it made more sense to maintain as low a monthly required payment while paying it down in case something unexpected did come up over the next 12-18 months since we weren’t using an emergency fund. going for higher risk, higher reward without having an emergency fund since we're trying to live on less than 1 income and we'd rather be on the hook for 452 instead of 1230. But you bring up great food for thought. I need to run these numbers all the way through to get a better gauge…

As far as emergency fund, we were thinking we’d hold off on that until the student loan was up since (knock on wood) we both have strong jobs with promising professional growth for each of us this year. Will do some more digging into this. Thank you for your input!

MDM

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Re: First Start Case Study - Let the facepunching commence!
« Reply #7 on: December 04, 2017, 12:47:13 AM »
1. I’ve looked at the Investment Order sticky post. We don’t have an emergency fund. Should we stack up 3 months expenses once the student loan is gone? Or just ride with some risk for a bit while we’re young and we don’t have any kids?
It does suggest "to your satisfaction" and "at least enough buffer to avoid worries about bouncing checks."  If you meet both those criteria, and your jobs aren't particularly insecure, that seems reasonable for now.

Quote
2. I've been greedily eyeing opening up Roth IRAs for the two of us through Vanguard. The irrational part of my brain wants those accounts opened asap with the $3k minimum sooner rather than later, even if we don't contribute to them until after the student loan is paid off. (Even writing that makes me feel ridiculous, lol). Bad idea with a side of face punch?
The minimum is $1K for target date funds.  VTTSX is a reasonable choice.

Also, 6% is less than the ~7.3% discussed in step #2.  It's a close call, but putting more into IRAs or your 401k is not unreasonable.

Quote
3. Planning to Max out our HSAs once student loan is gone, but does anyone know how HDHP’s + HSAs fair when having a baby? It seems like this wouldn’t be an ideal plan if you were trying to have a kid during that enrollment year. Please enlighten me!
Really depends on your specific options.  Might be worth putting your numbers into a couple of comparison tools, e.g., Health Savings Account (HSA) vs. Traditional Health Plan and the 'HDHP Analysis' tab of the case study spreadsheet.

Quote
4. Our current contributions to our 401ks is laughable. We’re only contributing to get the employer match. In DH’s case, he’s contributing nothing but his employer is so that’s it. Should we start maxing this out once the student loan is gone, even though we want to hit FI sooner rather than later?
Cross out "even though", insert "especially because", and you have the reason for a "yes" answer.

Quote
And if so, when should we stop maxing it out given we want to retire in our early-to-mid 40s?
Never.  See https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

Quote
5. The Traditional versus Roth IRA makes my head spin. I understand the basic premise of when taxes are incurred but I can’t wrap my head around what makes the most sense for our situation/income range and our FI target goals. Any helpful pointers? I swear, I’ve read the great articles out there from Mad Fientist and others but direct guidance on which one and when to max out based on our situation would be fantastic!
$36K into traditional 401ks.  As soon as possible.
$11K into Roth IRAs.  As soon as possible.
Direct enough? :)

Quote
Based on playing with some projections in the spreadsheet (once the student loan is gone), it looks like maxing out our 401ks, HSAs and Traditional IRAs each would drop our AGI from $117,000 to $65,294 and our Federal tax bill would go down from $20,727.50 to $8,861.60...IS THIS MATH RIGHT?!? That seems like the best win, what am I missing??
AFAIK the spreadsheet federal tax math is very good.  State tax calculations may be less exact.

You may want to use Roth for the IRAs for a few reasons:
- Roth contributions are immediately withdrawable, and can thus serve as a temporary emergency fund.
- At some point you will drop into the 15% bracket, at which point Roth may be better than traditional.
- If your incomes increase to the point a backdoor Roth becomes advantageous, having $0 in tIRAs will be good.

See tables below for how things might look with those increased contributions.

Paycheck frequency:2X/MonthMonthly
Paycheck ItemsEarner #1Earner #2Annual
Gross Salary/Wages
$2,995$5,417$136,883
Pretax Health/Dental/Vision Ins.$0$260$3,120
Employer-sponsored HSA$141$281$6,750
FICA base salary/wages
$2,855$4,875$127,013
401(k) / 403(b) / TSP / etc.$750$1,000$30,000
W-2 Box 1
$2,105$3,875$97,013
Employer Match$105$210$5,040
Subtractions for AGIAnnualAnnualAnnual
SL int. (approx.)$2,500
1040 AGI
$94,513
Other Specific Investment TypesAnnualAnnualAnnual
Roth IRA$5,500$5,500$11,000
Payroll Taxes2X/MonthMonthlyAnnual
Social Security$177$302$7,875
Medicare$41$71$1,842
Income Taxes
Federal tax$4222017, MFJ, std., 2 ex.$10,125
State+local tax$317OR state calc'n$7,611
Total income taxes$1,144$27,452
Monthly
Income before other expenses$4,880$58,561
Monthly Average ExpensesComments
Rent$1,370$16,440
Home/Rent Insurance$12$144
Beauty Shop$115$1,380
Bicycle Maintenance$25$300
Car Insurance$100$1,200
Car Maintenance, Registration, etc.$60$720
Christmas/Holidays$50$600
Clothing/Shoes$103$1,236
Dining (Lunch/Dinner/Etc.)$225$2,700
Electricity$35$420
Entertainment$30$360
Fuel/Public Transport$59$708
Groceries$619$7,428
Miscellaneous$59$708
Phone (cell)$55$660
Sports/Recreation$119$1,428
Subscriptions (paper/magazines/etc.)$51$612
Travel/Vacation$93$1,116
Non-mortgage total
$3,180$38,160
Loans
Student Loan$1,496$17,952
Total Expense
$4,676$56,112
Total to invest$204$2,449
Summary:
"Gross" income$11,407$136,883
Income taxes$2,288$27,452
After-tax income$9,119$109,431
IRA+401k/403b/TSP/457$1,958$1,458$41,000
HSA$281$281$6,750
Living expenses$3,440$41,280
Non-mortgage loans$1,496$17,952
After-tax investable$204$2,449
Time to FI?:
Guess at time to FI12years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments5.00%percent
Real, after tax, return on taxable investments4.25%percent
Current Savings
Tax-deferred (e.g. trad. IRA/401k)$11,000
Projected Savings at Retirement
Taxable$204,228
Tax-deferred (e.g. trad. IRA/401k)$577,491
Roth + HSA$282,529
Total projected stash$1,064,247
Projected Expenses in Retirement
Non-loan, non-work expenses$38,160
Change in spending after RE$1,840
Annual non-tax retirement expense$40,000
Income taxes$2,459
Total$42,459
Stash needed for retirement @4.0% SWR$1,061,476
Have $2,771 extra.


Filing Status21=S, 2=MFJ, 3=HOH
# Exemptions2
Adult #1Adult #2
Age2831
Full-time student?00
AGI$94,513
Std. Deduct.$12,700
Act. Deduct.$12,700
Exemption$8,100
Taxable$73,713
1040 Tax$10,125
Tax after n-r credit$10,125
Net Tax$10,125
State tax$7,611OR
Item. Deduct.$7,611
VersionV9.09

Loans:Orig. Prin.Orig. LengthCurr. Prin.Yrs leftRate
Student Loan$63,7004$63,70046.0%

MrSpendy

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Re: First Start Case Study - Let the facepunching commence!
« Reply #8 on: December 04, 2017, 06:45:14 AM »
can you refinance the loan to a lower rate? I think you could easily get the rate down to around 5% or lower. Check out Sofi, Earnest, your local credit union, etc. Unless you have bad credit, you can definitely get a better rate than 6%, and at over $60k it is worth it to refinance.

Then I would pay the min on the loan until you build up an emergency stash. That should be priority #1 to help ride out any bumps that life inevitably brings. 2-3 months worth of expenses should be fine, then you can ramp up the loan payment and lower the monthly savings contribution.

A more optimized use of your money is to lower your loan rate as much as you can, then save/invest as much as possible before paying off the loan. For example, my DH and I had $150k in loans (yikes!) but chose to max our 401ks and IRAs and then anything leftover went toward our loan -- not the other way around. You might consider a similar route.

Great suggestions. We took a look at SoFi. Based on our goal of getting rid of the debt as fast as possible, we would choose 5-year fixed @ 5.625 and our monthly payment would go up to $1,229.33. Right now, I’m finishing out an income-based repayment plan that has my monthly payment at $452.

We thought it made more sense to maintain as low a monthly required payment while paying it down in case something unexpected did come up over the next 12-18 months since we weren’t using an emergency fund. going for higher risk, higher reward without having an emergency fund since we're trying to live on less than 1 income and we'd rather be on the hook for 452 instead of 1230. But you bring up great food for thought. I need to run these numbers all the way through to get a better gauge…

As far as emergency fund, we were thinking we’d hold off on that until the student loan was up since (knock on wood) we both have strong jobs with promising professional growth for each of us this year. Will do some more digging into this. Thank you for your input!

I think you should maximize flexibility versus interest savings via short amortization.

For example, let's say you have 2 choices. A 20 year loan @ 6.0% or a 5 year loan at 5.25%.

The 20 year loan (on $67K principal) is a $480/month payment. Over the 20 years you'll pay out a ghastly $48K in interest.

The 5 year loan (on $67K principal) is a $1,272/ month payment. Over the 5 years you'll pay $9.2K in interest.

So the choice seems super clear. Avoid the ~$40K of extra interest of the 20 year loan, right?

But it's kind of an unfair comparison since the 5 year loan has 2.7x the payment.

 If you take the 20 year loan, and assume that every month you have the ability to make a payment down to principal equal to the difference in payment between the 20 year and the 5 year loan ( to make the comparisons fair), then you'll end up paying about $2K more in interest and pay the loan off 2 months later than the 5 year loan.

Assuming my math is correct (which should be checked!!!), then I'd rather pay a little more in interest (in the base case of you being able to make the extra payments every month) in exchange for the option of only having to make a $480 payment if SHTF than having to contractually pay ~$1200 every month.

Flexibility has value. You all have good income relative to spending, but I wouldn't go whole hog into hyper-amortizing the loans and maxing out retirement accounts all at once, lest you face a liquidity issue down the road.

Others feel free to disagree / check the math.

In general, do the math and avoid the "I must be debt free now" urge that is palpable in your writing. You are spending ~$38K and making $122K gross. Your debt service is not huge part of your income or crippling you in any way. Maximizing tax efficiency and getting some liquidity is more important than getting rid of it. You only have so many years to fill up your tax advantaged accounts before you want to FIRE.
« Last Edit: December 04, 2017, 06:50:15 AM by mrspendy »

Ben Kurtz

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Re: First Start Case Study - Let the facepunching commence!
« Reply #9 on: December 04, 2017, 08:43:18 AM »
MrSpendy is spot-on in his analysis.

Max out the deductible 401k contributions and the HSA contributions. Starting now. Your tax analysis is correct and Uncle Sam will reward you generously on your tax returns for doing so.  Invest the 401k in a diversified index-fund portfolio (something like 60% U.S. equities, 20% foreign equities, 20% long-term bonds). HSAs are best held for the long term unless you are sure that have big medical bills coming soon, so invest accordingly. As others have pointed out, in an early retirement scenario there are various ways to access 401k money without penalties or excess taxes (e.g. SEPP withdrawals), so don't get hung up on the "age 59.5" concept.

Max out Roth IRA contributions each year, but for now invest it all in a short-duration bond fund. As others have pointed out, because Roth IRA contributions can be withdrawn without tax or penalty (earnings, however, cannot be so withdrawn), this is your stealth emergency / house down payment fund. You can contribute in the name of Tax Year 2017 up to mid-April 2018, so you can really make $22,000 in contributions in 2018 if you time them right. In 2019 and beyond it will be $11,000 per year.

After the above, build up a 2-3 month emergency fund in a non-tax-advantaged account. Something like an extra $10,000 in your checking account by the end of 2018.

For couples planning on having kids, I also suggest opening a 529 college savings in the name of one of the parents, and contributing each year to max out whatever state tax deduction is available -- in Oregon, that's $4,660 per year of contributions, worth 9% back (or $420 saved) on your taxes. Once the kid is born you can re-designate the beneficiary. There can be gift tax implications if you do this for many years before switching the beneficiary, but on your timeline this won't be a concern.

Put your student loans on the longest-possible repayment plan (some programs allow for 30 year terms), religiously pay the minimums as a first priority (i.e. sacrificing the above savings if you have to), and make repayments above the minimums with surplus cash flow as available (i.e. without sacrificing the above savings). The idea would be to pay this off relatively quickly -- within the next 5 years or so -- while keeping your unavoidable monthly obligations as low as possible, to minimize downside risks. Once the loan is gone, save the extra cash for a possible house purchase.

I would suggest that you avoid buying a house until your first child is safely delivered and you have a better sense of exactly what you need and when you need it. Will you stop at one child? Will you feel inspired to try for more? This may have some bearing on the size and location of the house you'd want to buy -- and you don't want to buy a house that you'd keep for less than 5 years, as a rule of thumb (to spread out the cost of brokerage fees and otherwise make it financially worthwhile relative to renting).  I'd also suggest starting on baby-making promptly -- neither of you are getting any younger, and staying up all night with an infant only gets more punishing with age. The grandparents are also not getting any younger, and (speaking selfishly) they are more helpful when they are still younger and active. You are probably at the ideal time in your lives to get started.

When it comes to early retirement, I suggest having your fixed monthly expenses as low as possible before pulling the trigger, to minimize downside risk and increase stability. Given a net worth of $1,000,000, most people would sleep better with $400,000 tied up in a house they're happy living in (paid off free-and-clear and properly insured) with only $600,000 riding up and down in the investment markets, versus $1,000,000 in the markets and having to make a substantial rent or mortgage payment each month. If the market takes a dip (and sooner or later, it always takes a dip), it's easier to take a philosophical approach and not panic and sell low when all that's really at stake is whether you are flying to Paris or road-tripping to the Grand Canyon for your next big vacation, rather than worrying about the roof over your head.

Another angle to consider is whether the mother would want to go part time, or stay home, after a baby comes along. (Many people pussyfoot around and say "one of the parents" and act all surprised when it turns out to be the mother who takes time off -- I'm willing simply to acknowledge the common pattern and move on.) With a baby comes additional expense, and maintaining a two-working-parent household brings even further expense, in the form of massive day-care charges, so it's worth running the numbers when the time comes.
 
For your long-term outlook, I generally say that a $1,000,000 investment portfolio plus a paid-off house gives a family pretty much unlimited flexibility, assuming fundamentally reasonable spending patterns. In normal cases, nobody has to work ever again if that's what you really want, and there's a bit of spending money in the budget for hobbies that actively cost money.  Similarly, a $500,000 portfolio plus a paid-off house gives you freedom -- meaning enough passive income to provide freedom from worry and freedom from having to put up with conditions that are dissatisfying. A wage should still be earned, but it can be a low as $20,000 per year or as high as you can manage, so you can pretty much pick and choose exactly what kind of job and hours are most satisfying, secure in the knowledge that your family could walk away from the income for years at a time without worry, if need be.

I'm going to divide the next 10 years into two 5 year plans:

For 2018-2022 your priorities will be: Maxing out your tax-advantaged savings accounts (detailed above), putting away a $10,000 emergency fund, paying off the student loan, having your first child (and your second, if you decide you want more), and, towards the end of that span, figuring out what house you want and buying it. The mother may drop down to half-time work at this stage when the children are young.

For 2023 to 2028, your priorities will be: Maxing out your tax-advantaged savings accounts, having your third+ child (if you decide you want that many), and aggressively paying down the mortgage. You will remain a 1 car family, and if the time comes to replace your VW (should be well past 10 years old before you think about replacement), you will buy a sensible used car as described in the blog. The mother may revert to 3/4 or full time work once the kids are in elementary school.

By the end of this ten year plan, I would guess that you'd have around $500,000 in investments (mainly in tax-advantaged accounts) and a house with a pretty big equity cushion. At this point you'll have some decisions to make: You can move to lower housing costs, and declare yourselves free -- meaning, somebody works 1/2 time to generate a bit of cashflow and possibly gain access to a better employer-sponsored health plan, but you don't strictly rely on it. Or, if you're wedded to PDX, you stay put and work relatively hard for another 3-5 years to pay down the mortgage and increase the nest egg, before calling time.

If the markets are with you, or if you have a particularly strong career move, then your numbers at the end of ten years will be better. Finding $250 in monthly savings between your food, beauty, sports & recreation, subscriptions and dining out budgets would also help a lot.

My closing point is a big-picture one: Given your stage and position in life, I would counsel against fixating on a plan for "complete FIRE" -- figuring out some savings number that will "guarantee" you the ability to live out the rest of your lives without working another day, and establishing a plan for how exactly you will get there. There are too many unknowns -- children, career path, choice of geographies, the gyrations of the stock market in the next 5 to 10 years, etc. -- to make this viable. There are huge chances that your assumptions and plans will turn out to be wildly optimistic or entirely over-conservative. The key thing is to build up your position of strength, which your post suggests you have started on well: Get a good job with growth prospects, establish good spending and saving habits, marry a good spouse, and try to avoid making too many bad mistakes. Build up good 5 and 10 year plans, and every few years evaluate your progress and status. Before you know it, you will be wealthy and spoiled for good options, including early retirement and semi-retirement, while your spendthrift friends and colleagues will still be heavily in debt and wondering how it is possible to live on less than $150,000 per year while driving everywhere in their late-model Jaguars. At this stage in life, you're goal is to deal your 38-year-old self a strong hand of cards, not write the script on the next 50 years of life.
« Last Edit: December 05, 2017, 05:18:19 AM by Ben Kurtz »

formerlydivorcedmom

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Re: First Start Case Study - Let the facepunching commence!
« Reply #10 on: December 05, 2017, 09:45:02 AM »
You asked about having a High-deductible plan the year you plan to have a baby.

The year I planned to have a baby, I switched to the most expensive, cover everything health insurance.  I literally paid $25 at the visit where the doctor confirmed I was pregnant, and I didn't pay a pregnancy/birth-related dime again until after delivery.  Said baby was 8 weeks premature (despite healthy mom) and required 3 weeks in NICU.  I was very thankful to have such great insurance with a low deductible.

If you remain on the high-deductible plan, I'd make sure you had enough in cash to cover the entire deductible, just in case (or you are willing to pull from your HSA now).


zeli2033

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Re: First Start Case Study - Let the facepunching commence!
« Reply #11 on: December 05, 2017, 06:17:52 PM »
1. I’ve looked at the Investment Order sticky post. We don’t have an emergency fund. Should we stack up 3 months expenses once the student loan is gone? Or just ride with some risk for a bit while we’re young and we don’t have any kids?
It does suggest "to your satisfaction" and "at least enough buffer to avoid worries about bouncing checks."  If you meet both those criteria, and your jobs aren't particularly insecure, that seems reasonable for now.
Makes total sense.

Quote
3. Planning to Max out our HSAs once student loan is gone, but does anyone know how HDHP’s + HSAs fair when having a baby? It seems like this wouldn’t be an ideal plan if you were trying to have a kid during that enrollment year. Please enlighten me!
Really depends on your specific options.  Might be worth putting your numbers into a couple of comparison tools, e.g., Health Savings Account (HSA) vs. Traditional Health Plan and the 'HDHP Analysis' tab of the case study spreadsheet.
I'll definitely be playing around with our numbers more to have a better understanding on what our options are

Quote
4. Our current contributions to our 401ks is laughable. We’re only contributing to get the employer match. In DH’s case, he’s contributing nothing but his employer is so that’s it. Should we start maxing this out once the student loan is gone, even though we want to hit FI sooner rather than later?
Cross out "even though", insert "especially because", and you have the reason for a "yes" answer.
Love this. It's very clear that we should be maxing our 401ks yesterday.

Quote
And if so, when should we stop maxing it out given we want to retire in our early-to-mid 40s?
Never.  See https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

Quote
5. The Traditional versus Roth IRA makes my head spin. I understand the basic premise of when taxes are incurred but I can’t wrap my head around what makes the most sense for our situation/income range and our FI target goals. Any helpful pointers? I swear, I’ve read the great articles out there from Mad Fientist and others but direct guidance on which one and when to max out based on our situation would be fantastic!
$36K into traditional 401ks.  As soon as possible.
$11K into Roth IRAs.  As soon as possible.
Direct enough? :)
This is perfect, thank you! Exactly what I was looking for.

Quote
Based on playing with some projections in the spreadsheet (once the student loan is gone), it looks like maxing out our 401ks, HSAs and Traditional IRAs each would drop our AGI from $117,000 to $65,294 and our Federal tax bill would go down from $20,727.50 to $8,861.60...IS THIS MATH RIGHT?!? That seems like the best win, what am I missing??
AFAIK the spreadsheet federal tax math is very good.  State tax calculations may be less exact.

You may want to use Roth for the IRAs for a few reasons:
- Roth contributions are immediately withdrawable, and can thus serve as a temporary emergency fund.
- At some point you will drop into the 15% bracket, at which point Roth may be better than traditional.
- If your incomes increase to the point a backdoor Roth becomes advantageous, having $0 in tIRAs will be good.

MDM, thank you for the comprehensive and direct responses. Much appreciated. After reviewing the numbers helpfully included in your post (thanks!), playing with our projected numbers and digging through the forums it seems like starting to max out the 401ks and Roth IRAs as soon as possible is a no brainer. Thanks for sending along the investor forum link as well


zeli2033

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Re: First Start Case Study - Let the facepunching commence!
« Reply #12 on: December 05, 2017, 06:23:34 PM »
can you refinance the loan to a lower rate? I think you could easily get the rate down to around 5% or lower. Check out Sofi, Earnest, your local credit union, etc. Unless you have bad credit, you can definitely get a better rate than 6%, and at over $60k it is worth it to refinance.

Then I would pay the min on the loan until you build up an emergency stash. That should be priority #1 to help ride out any bumps that life inevitably brings. 2-3 months worth of expenses should be fine, then you can ramp up the loan payment and lower the monthly savings contribution.

A more optimized use of your money is to lower your loan rate as much as you can, then save/invest as much as possible before paying off the loan. For example, my DH and I had $150k in loans (yikes!) but chose to max our 401ks and IRAs and then anything leftover went toward our loan -- not the other way around. You might consider a similar route.

Great suggestions. We took a look at SoFi. Based on our goal of getting rid of the debt as fast as possible, we would choose 5-year fixed @ 5.625 and our monthly payment would go up to $1,229.33. Right now, I’m finishing out an income-based repayment plan that has my monthly payment at $452.

We thought it made more sense to maintain as low a monthly required payment while paying it down in case something unexpected did come up over the next 12-18 months since we weren’t using an emergency fund. going for higher risk, higher reward without having an emergency fund since we're trying to live on less than 1 income and we'd rather be on the hook for 452 instead of 1230. But you bring up great food for thought. I need to run these numbers all the way through to get a better gauge…

As far as emergency fund, we were thinking we’d hold off on that until the student loan was up since (knock on wood) we both have strong jobs with promising professional growth for each of us this year. Will do some more digging into this. Thank you for your input!

I think you should maximize flexibility versus interest savings via short amortization.

For example, let's say you have 2 choices. A 20 year loan @ 6.0% or a 5 year loan at 5.25%.

The 20 year loan (on $67K principal) is a $480/month payment. Over the 20 years you'll pay out a ghastly $48K in interest.

The 5 year loan (on $67K principal) is a $1,272/ month payment. Over the 5 years you'll pay $9.2K in interest.

So the choice seems super clear. Avoid the ~$40K of extra interest of the 20 year loan, right?

But it's kind of an unfair comparison since the 5 year loan has 2.7x the payment.

 If you take the 20 year loan, and assume that every month you have the ability to make a payment down to principal equal to the difference in payment between the 20 year and the 5 year loan ( to make the comparisons fair), then you'll end up paying about $2K more in interest and pay the loan off 2 months later than the 5 year loan.

Assuming my math is correct (which should be checked!!!), then I'd rather pay a little more in interest (in the base case of you being able to make the extra payments every month) in exchange for the option of only having to make a $480 payment if SHTF than having to contractually pay ~$1200 every month.

Flexibility has value. You all have good income relative to spending, but I wouldn't go whole hog into hyper-amortizing the loans and maxing out retirement accounts all at once, lest you face a liquidity issue down the road.

Others feel free to disagree / check the math.

In general, do the math and avoid the "I must be debt free now" urge that is palpable in your writing. You are spending ~$38K and making $122K gross. Your debt service is not huge part of your income or crippling you in any way. Maximizing tax efficiency and getting some liquidity is more important than getting rid of it. You only have so many years to fill up your tax advantaged accounts before you want to FIRE.
Makes total sense to me, thanks mrspendy! I appreciate this analysis, it clearly lays out some advantages to maintaining the flexibility while still paying down aggressively. Despite the "I-want-it-all-and-I-want-it-all-now" feeling my original posting gives off, we definitely are aiming for aggressive pursuit of one financial goal at a time, then snowballing into the next.

I feel ridiculous saying this but it was great to be reminded to do the math first. Silly to need to be reminded of that...on a forum for ER. But I digress. I now understand that we need to start maxing out tax-advantaged accounts as soon as possible. Will be getting on that asap.

zeli2033

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Re: First Start Case Study - Let the facepunching commence!
« Reply #13 on: December 05, 2017, 06:27:00 PM »
You asked about having a High-deductible plan the year you plan to have a baby.

The year I planned to have a baby, I switched to the most expensive, cover everything health insurance.  I literally paid $25 at the visit where the doctor confirmed I was pregnant, and I didn't pay a pregnancy/birth-related dime again until after delivery.  Said baby was 8 weeks premature (despite healthy mom) and required 3 weeks in NICU.  I was very thankful to have such great insurance with a low deductible.

If you remain on the high-deductible plan, I'd make sure you had enough in cash to cover the entire deductible, just in case (or you are willing to pull from your HSA now).
This is helpful in thinking about the overall picture of how an HDHP/HSA might fit into our plans, thank you for sharing your experience!

zeli2033

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Re: First Start Case Study - Let the facepunching commence!
« Reply #14 on: December 05, 2017, 07:02:33 PM »
MrSpendy is spot-on in his analysis.

Max out the deductible 401k contributions and the HSA contributions. Starting now. Your tax analysis is correct and Uncle Sam will reward you generously on your tax returns for doing so.  Invest the 401k in a diversified index-fund portfolio (something like 60% U.S. equities, 20% foreign equities, 20% long-term bonds). HSAs are best held for the long term unless you are sure that have big medical bills coming soon, so invest accordingly. As others have pointed out, in an early retirement scenario there are various ways to access 401k money without penalties or excess taxes (e.g. SEPP withdrawals), so don't get hung up on the "age 59.5" concept.
Thank you for laying it out like this so directly. As others have been saying and I've been catching onto in the forums and elsewhere, this is much clearer to me now. Feel a little silly I didn't understand this until now but better later than never!

Max out Roth IRA contributions each year, but for now invest it all in a short-duration bond fund. As others have pointed out, because Roth IRA contributions can be withdrawn without tax or penalty (earnings, however, cannot be so withdrawn), this is your stealth emergency / house down payment fund. You can contribute in the name of Tax Year 2017 up to mid-April 2018, so you can really make $22,000 in contributions in 2018 if you time them right. In 2019 and beyond it will be $11,000 per year.
Interesting, I hadn't considered using short-term bond funds. Our plan with the Roth IRAs was to start with $3k in VBINX with a plan to convert to Admiral shares at $10k in VBIAX. Any thoughts on that?

After the above, build up a 2-3 month emergency fund in a non-tax-advantaged account. Something like an extra $10,000 in your checking account by the end of 2018.

For couples planning on having kids, I also suggest opening a 529 college savings in the name of one of the parents, and contributing each year to max out whatever state tax deduction is available -- in Oregon, that's $4,660 per year of contributions, worth 9% back (or $420 saved) on your taxes. Once the kid is born you can re-designate the beneficiary. There can be gift tax implications if you do this for many years before switching the beneficiary, but on your timeline this won't be a concern.
Had not even thought of this, I was leaving college savings until much further down the line. Thanks for the suggestion!

Put your student loans on the longest-possible repayment plan (some programs allow for 30 year terms), religiously pay the minimums as a first priority (i.e. sacrificing the above savings if you have to), and make repayments above the minimums with surplus cash flow as available (i.e. without sacrificing the above savings). The idea would be to pay this off relatively quickly -- within the next 5 years or so -- while keeping your unavoidable monthly obligations as low as possible, to minimize downside risks. Once the loan is gone, save the extra cash for a possible house purchase.
We've been running some preliminary numbers on what it looks like to pay this off asap versus over the next 2.5 years. While the financial output of the first option is not something to blink at, it's so hard to shake the psychological freedom that I can almost taste when the student loan is gone. And I can't help but think it'd be the most beneficial to eliminate all debt/financial obligations before pursuing any other major life changes. But as you and others have shared, it's about math and not just feelings.

I would suggest that you avoid buying a house until your first child is safely delivered and you have a better sense of exactly what you need and when you need it. Will you stop at one child? Will you feel inspired to try for more? This may have some bearing on the size and location of the house you'd want to buy -- and you don't want to buy a house that you'd keep for less than 5 years, as a rule of thumb (to spread out the cost of brokerage fees and otherwise make it financially worthwhile relative to renting).  I'd also suggest starting on baby-making promptly -- neither of you are getting any younger, and staying up all night with an infant only gets more punishing with age. The grandparents are also not getting any younger, and (speaking selfishly) they are more helpful when they are still younger and active. You are probably at the ideal time in your lives to get started.

When it comes to early retirement, I suggest having your fixed monthly expenses as low as possible before pulling the trigger, to minimize downside risk and increase stability. Given a net worth of $1,000,000, most people would sleep better with $400,000 tied up in a house they're happy living in (paid off free-and-clear and properly insured) with only $600,000 riding up and down in the investment markets, versus $1,000,000 in the markets and having to make a substantial rent or mortgage payment each month. If the market takes a dip (and sooner or later, it always takes a dip), it's easier to take a philosophical approach and not panic and sell low when all that's really at stake is whether you are flying to Paris or road-tripping to the Grand Canyon for your next big vacation, rather than worrying about the roof over your head.
That's a good way to look at it. Our go/no-go on the house depends entirely upon where we wind up. Since we tend to stay in M-HCOL areas, we're open to renting for as long as necessary before pulling the trigger on it. How you've laid it out above is helpful in offering a perspective shift that I (obviously) am lacking :)

Another angle to consider is whether the mother would want to go part time, or stay home, after a baby comes along. (Many people pussyfoot around and say "one of the parents" and act all surprised when it turns out to be the mother who takes time off -- I'm willing simply to acknowledge the common pattern and move on.) With a baby comes additional expense, and maintaining a two-working-parent household brings even further expense, in the form of massive day-care charges, so it's worth running the numbers when the time comes.
 
For your long-term outlook, I generally say that a $1,000,000 investment portfolio plus a paid-off house gives a family pretty much unlimited flexibility, assuming fundamentally reasonable spending patterns. In normal cases, nobody has to work ever again if that's what you really want, and there's a bit of spending money in the budget for hobbies that actively cost money.  Similarly, a $500,000 portfolio plus a paid-off house gives you freedom -- meaning enough passive income to provide freedom from worry and freedom from having to put up with conditions that are dissatisfying. A wage should still be earned, but it can be a low as $20,000 per year or as high as you can manage, so you can pretty much pick and choose exactly what kind of job and hours are most satisfying, secure in the knowledge that your family could walk away from the income for years at a time without worry, if need be.
The former is generally what we're aiming for, hoping that having a kid doesn't detour our ability to get to it sooner rather than later. But really, having the FU money and the freedom to simply have more choice is a very close second. Again, thank you for providing the perspective here!

I'm going to divide the next 10 years into two 5 year plans:

For 2018-2022 your priorities will be: Maxing out your tax-advantaged savings accounts (detailed above), putting away a $10,000 emergency fund, paying off the student loan, having your first child (and your second, if you decide you want more), and, towards the end of that span, figuring out what house you want and buying it. The mother may drop down to half-time work at this stage when the children are young.

For 2023 to 2028, your priorities will be: Maxing out your tax-advantaged savings accounts, having your third+ child (if you decide you want that many), and aggressively paying down the mortgage. You will remain a 1 car family, and if the time comes to replace your VW (should be well past 10 years old before you think about replacement), you will buy a sensible used car as described in the blog. The mother may revert to 3/4 or full time work once the kids are in elementary school.

By the end of this ten year plan, I would guess that you'd have around $500,000 in investments (mainly in tax-advantaged accounts) and a house with a pretty big equity cushion. At this point you'll have some decisions to make: You can move to lower housing costs, and declare yourselves free -- meaning, somebody works 1/2 time to generate a bit of cashflow and possibly gain access to a better employer-sponsored health plan, but you don't strictly rely on it. Or, if you're wedded to PDX, you stay put and work relatively hard for another 3-5 years to pay down the mortgage and increase the nest egg, before calling time.
Thank you for taking the time to lay down some very simple plans to grasp. Excellent food for thought.

If the markets are with you, or if you have a particularly strong career move, then your numbers at the end of ten years will be better. Finding $250 in monthly savings between your food, beauty, sports & recreation, subscriptions and dining out budgets would also help a lot.
That's my goal. Currently starting small with one thing at a time. This month, we're trying to get our Dining Out budget spending from $250 to $125 this month.

My closing point is a big-picture one: Given your stage and position in life, I would counsel against fixating on a plan for "complete FIRE" -- figuring out some savings number that will "guarantee" you the ability to live out the rest of your lives without working another day, and establishing a plan for how exactly you will get there. There are too many unknowns -- children, career path, choice of geographies, the gyrations of the stock market in the next 5 to 10 years, etc. -- to make this viable. There are huge chances that your assumptions and plans will turn out to be wildly optimistic or entirely over-conservative. The key thing is to build up your position of strength, which your post suggests you have started on well: Get a good job with growth prospects, establish good spending and saving habits, marry a good spouse, and try to avoid making too many bad mistakes. Build up good 5 and 10 year plans, and every few years evaluate your progress and status. Before you know it, you will be wealthy and spoiled for good options, including early retirement and semi-retirement, while your spendthrift friends and colleagues will still be heavily in debt and wondering how it is possible to live on less than $150,000 per year while driving everywhere in their late-model Jaguars. At this stage in life, you're goal is to deal your 38-year-old self a strong hand of cards, not write the script on the next 50 years of life.
I want to print the last paragraph out, frame it and put it on display for daily reminders. So well put. As mrspendy also pointed out, the desperation to have a plan that gets us out of debt and well on our way to FIRE makes me focus solely on the number, forgetting that there's still no way to predict what is sure to be an eventful future. The way you've laid this out is another great dose of perspective-shift that I sorely need! Thank you for the taking the time to write out great insights and thoughtful suggestions for us.

2Birds1Stone

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Re: First Start Case Study - Let the facepunching commence!
« Reply #15 on: December 05, 2017, 07:40:10 PM »
MrSpendy is spot-on in his analysis.

Max out the deductible 401k contributions and the HSA contributions. Starting now. Your tax analysis is correct and Uncle Sam will reward you generously on your tax returns for doing so.  Invest the 401k in a diversified index-fund portfolio (something like 60% U.S. equities, 20% foreign equities, 20% long-term bonds). HSAs are best held for the long term unless you are sure that have big medical bills coming soon, so invest accordingly. As others have pointed out, in an early retirement scenario there are various ways to access 401k money without penalties or excess taxes (e.g. SEPP withdrawals), so don't get hung up on the "age 59.5" concept.

Max out Roth IRA contributions each year, but for now invest it all in a short-duration bond fund. As others have pointed out, because Roth IRA contributions can be withdrawn without tax or penalty (earnings, however, cannot be so withdrawn), this is your stealth emergency / house down payment fund. You can contribute in the name of Tax Year 2017 up to mid-April 2018, so you can really make $22,000 in contributions in 2018 if you time them right. In 2019 and beyond it will be $11,000 per year.

After the above, build up a 2-3 month emergency fund in a non-tax-advantaged account. Something like an extra $10,000 in your checking account by the end of 2018.

For couples planning on having kids, I also suggest opening a 529 college savings in the name of one of the parents, and contributing each year to max out whatever state tax deduction is available -- in Oregon, that's $4,660 per year of contributions, worth 9% back (or $420 saved) on your taxes. Once the kid is born you can re-designate the beneficiary. There can be gift tax implications if you do this for many years before switching the beneficiary, but on your timeline this won't be a concern.

Put your student loans on the longest-possible repayment plan (some programs allow for 30 year terms), religiously pay the minimums as a first priority (i.e. sacrificing the above savings if you have to), and make repayments above the minimums with surplus cash flow as available (i.e. without sacrificing the above savings). The idea would be to pay this off relatively quickly -- within the next 5 years or so -- while keeping your unavoidable monthly obligations as low as possible, to minimize downside risks. Once the loan is gone, save the extra cash for a possible house purchase.

I would suggest that you avoid buying a house until your first child is safely delivered and you have a better sense of exactly what you need and when you need it. Will you stop at one child? Will you feel inspired to try for more? This may have some bearing on the size and location of the house you'd want to buy -- and you don't want to buy a house that you'd keep for less than 5 years, as a rule of thumb (to spread out the cost of brokerage fees and otherwise make it financially worthwhile relative to renting).  I'd also suggest starting on baby-making promptly -- neither of you are getting any younger, and staying up all night with an infant only gets more punishing with age. The grandparents are also not getting any younger, and (speaking selfishly) they are more helpful when they are still younger and active. You are probably at the ideal time in your lives to get started.

When it comes to early retirement, I suggest having your fixed monthly expenses as low as possible before pulling the trigger, to minimize downside risk and increase stability. Given a net worth of $1,000,000, most people would sleep better with $400,000 tied up in a house they're happy living in (paid off free-and-clear and properly insured) with only $600,000 riding up and down in the investment markets, versus $1,000,000 in the markets and having to make a substantial rent or mortgage payment each month. If the market takes a dip (and sooner or later, it always takes a dip), it's easier to take a philosophical approach and not panic and sell low when all that's really at stake is whether you are flying to Paris or road-tripping to the Grand Canyon for your next big vacation, rather than worrying about the roof over your head.

Another angle to consider is whether the mother would want to go part time, or stay home, after a baby comes along. (Many people pussyfoot around and say "one of the parents" and act all surprised when it turns out to be the mother who takes time off -- I'm willing simply to acknowledge the common pattern and move on.) With a baby comes additional expense, and maintaining a two-working-parent household brings even further expense, in the form of massive day-care charges, so it's worth running the numbers when the time comes.
 
For your long-term outlook, I generally say that a $1,000,000 investment portfolio plus a paid-off house gives a family pretty much unlimited flexibility, assuming fundamentally reasonable spending patterns. In normal cases, nobody has to work ever again if that's what you really want, and there's a bit of spending money in the budget for hobbies that actively cost money.  Similarly, a $500,000 portfolio plus a paid-off house gives you freedom -- meaning enough passive income to provide freedom from worry and freedom from having to put up with conditions that are dissatisfying. A wage should still be earned, but it can be a low as $20,000 per year or as high as you can manage, so you can pretty much pick and choose exactly what kind of job and hours are most satisfying, secure in the knowledge that your family could walk away from the income for years at a time without worry, if need be.

I'm going to divide the next 10 years into two 5 year plans:

For 2018-2022 your priorities will be: Maxing out your tax-advantaged savings accounts (detailed above), putting away a $10,000 emergency fund, paying off the student loan, having your first child (and your second, if you decide you want more), and, towards the end of that span, figuring out what house you want and buying it. The mother may drop down to half-time work at this stage when the children are young.

For 2023 to 2028, your priorities will be: Maxing out your tax-advantaged savings accounts, having your third+ child (if you decide you want that many), and aggressively paying down the mortgage. You will remain a 1 car family, and if the time comes to replace your VW (should be well past 10 years old before you think about replacement), you will buy a sensible used car as described in the blog. The mother may revert to 3/4 or full time work once the kids are in elementary school.

By the end of this ten year plan, I would guess that you'd have around $500,000 in investments (mainly in tax-advantaged accounts) and a house with a pretty big equity cushion. At this point you'll have some decisions to make: You can move to lower housing costs, and declare yourselves free -- meaning, somebody works 1/2 time to generate a bit of cashflow and possibly gain access to a better employer-sponsored health plan, but you don't strictly rely on it. Or, if you're wedded to PDX, you stay put and work relatively hard for another 3-5 years to pay down the mortgage and increase the nest egg, before calling time.

If the markets are with you, or if you have a particularly strong career move, then your numbers at the end of ten years will be better. Finding $250 in monthly savings between your food, beauty, sports & recreation, subscriptions and dining out budgets would also help a lot.

My closing point is a big-picture one: Given your stage and position in life, I would counsel against fixating on a plan for "complete FIRE" -- figuring out some savings number that will "guarantee" you the ability to live out the rest of your lives without working another day, and establishing a plan for how exactly you will get there. There are too many unknowns -- children, career path, choice of geographies, the gyrations of the stock market in the next 5 to 10 years, etc. -- to make this viable. There are huge chances that your assumptions and plans will turn out to be wildly optimistic or entirely over-conservative. The key thing is to build up your position of strength, which your post suggests you have started on well: Get a good job with growth prospects, establish good spending and saving habits, marry a good spouse, and try to avoid making too many bad mistakes. Build up good 5 and 10 year plans, and every few years evaluate your progress and status. Before you know it, you will be wealthy and spoiled for good options, including early retirement and semi-retirement, while your spendthrift friends and colleagues will still be heavily in debt and wondering how it is possible to live on less than $150,000 per year while driving everywhere in their late-model Jaguars. At this stage in life, you're goal is to deal your 38-year-old self a strong hand of cards, not write the script on the next 50 years of life.

Wow, where did you come from?

Sage advice here, despite not aimed toward myself, I greatly benefit from.

Ben Kurtz

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Re: First Start Case Study - Let the facepunching commence!
« Reply #16 on: December 15, 2017, 06:36:36 AM »
Quote
Interesting, I hadn't considered using short-term bond funds. Our plan with the Roth IRAs was to start with $3k in VBINX with a plan to convert to Admiral shares at $10k in VBIAX. Any thoughts on that?

VBINX (or its Admiral-class clone) is a good vehicle for long-term retirement-type investing, given that it is a 60/40 stock/bond balanced fund. My off-the-shelf advice is usually a bit more aggressive at 20% U.S. bonds, 20% foreign equities and 60% U.S. equities, but 60/40 is a perfectly reasonable allocation and you can't beat the simplicity of buying a single ticker symbol and leaving it alone.

For the portion of the Roth IRA that you are earmarking as "house fund" -- i.e. short term savings that you are likely to spend within a few years, I'd suggest something like VBISX or VBIIX -- Vanguard short or intermediate term bond funds (or the Admiral-class clones), depending on exactly how long you think you're waiting until the purchase. Those will remain far more stable in the event of wild market swings, which is what you want for money that you are counting on to spend in the near-term.

So in your case I'd suggest keeping two funds in your Roth IRA: VBINX, for the money you're setting aside for the long-term, and VBISX, for the money you are counting as "shadow" house fund / short term savings.

ShoulderThingThatGoesUp

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Re: First Start Case Study - Let the facepunching commence!
« Reply #17 on: December 17, 2017, 04:37:58 AM »
My company's HDHP is fantastic and we had twins, with manageable complications, using it last year. You need to make a graph of the total cost of health care (including HSA tax benefits) with each plan for every $1000. Take a look at the inflection points and intersections and figure out what works for you.

zeli2033

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Re: First Start Case Study - Let the facepunching commence!
« Reply #18 on: January 28, 2018, 12:48:16 PM »
Providing a quick update to the case study:

After everyone's very insightful comments, doing the math on several situations and some changes in DH's position, our financial goals over 2018 and into 2019 are:

1. Maxing out 2017 and 2018 Roth IRAs (already maxed out 2017, working on 2018 now). All in VTSMX until there's enough to bump them to Admiral shares/VTSAX
2. Maxing out both 401Ks this year (DH transitioned to new company for a 25% pay bump so this feels like a no brainer)
3. Electing for the HDHP + HSA and maxing that out this year and probably next year as well
4. Once we're done maxing out Roth IRAs in February/March, then going full steam ahead to pay off Student Loans. Given our income and a guaranteed bonus next year for DH, we'll be done paying off the $63K Student Loans ~June 2019
5. Once Student Loans are gone, we'll Max out 2019 Roth IRAs (potentially. Might front load this in January/February 2019, paying the Student loan off a couple months later to give the Roth money more time in the market. Might also make a switch to Traditional IRA pending income. Just not sure yet)

This forum is awesome - got such great input from people. Thanks!

jeroly

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Re: First Start Case Study - Let the facepunching commence!
« Reply #19 on: January 29, 2018, 05:02:15 AM »
I know that there are many here that advocate extreme thriftiness, but given your income your current spending isn't out of control.  If/when you have kids it might get easy to start piling on the expenses - fancy childcare, strollers, private pre-k, etc., and that's when you'll really have to contemplate needs vs. wants vs. keeping up with the Joneses.

I vote for a smallish emergency fund - say two months expenses - that gets moved into a Roth IRA before the end of this year's tax filing deadline (along with maxing both of your Roths out).  As previously mentioned, you can withdraw Roth contributions without penalty or tax, so it can also serve as an emergency fund, albeit a little harder to access than a checking account.

If you're absolutely certain of getting that 'guaranteed bonus' then start maxing out your 401(k)s. Otherwise start on the loan first - repaying a 6% loan is like getting a 6% risk-free rate of return which is unbeatable in the current environment.



LWYRUP

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Re: First Start Case Study - Let the facepunching commence!
« Reply #20 on: January 29, 2018, 06:31:44 AM »

@Ben Kurtz  Wow, bravo.  I have very little to add to that except:

Can the student loans be refinaced to a lower rate?

zeli2033

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Re: First Start Case Study - Let the facepunching commence!
« Reply #21 on: January 29, 2018, 08:04:19 AM »
Second a lot of the above, especially @Ben Kurtz .  Would save an emergency fund up now though.  You want some flexibility.  Make that an immediate goal.  What happens if your car suddenly flops?  Etc.  You have decent cashflow, but not enough to survive a big short-term hit.  Maybe you don't have as big of one (e.g. not six months' expenses), but I would still be sure I had one ready for whatever comes up.

...I vote for a smallish emergency fund - say two months expenses - that gets moved into a Roth IRA before the end of this year's tax filing deadline (along with maxing both of your Roths out).  As previously mentioned, you can withdraw Roth contributions without penalty or tax, so it can also serve as an emergency fund, albeit a little harder to access than a checking account.

If you're absolutely certain of getting that 'guaranteed bonus' then start maxing out your 401(k)s. Otherwise start on the loan first - repaying a 6% loan is like getting a 6% risk-free rate of return which is unbeatable in the current environment.

Thank you for the thoughts! I updated the original case study with some changes we made since posting it. We are currently letting our Roth IRAs serve as our e-fund until we pay off the student loan June 2019. Back up is CCs. Tertiary back up is decreasing 401K contributions to free up cash if needed. Edit: And in addition to this, our checking account actually holds the next month's expenses in total so technically we're always floating about a month of cash as a miniature e-fund.

jeroly, I do usually hesitate on counting on bonuses. However, this one is a retention bonus. It's too good for DH not to stay put until it's in hand. That said, even if SHTF and he has to skip out on the bonus, we'll still pay off the Student Loan by end of 2019. And yes, we started contributing the max to our 401Ks this year.

blinx7, I considered refinancing the student loan. The reason I didn't is because I'm currently on an IBR that keeps the minimum payments incredibly low. If I refinance the loan, the minimum payments triple. In case we do hit a major speed bump, I'd rather be on the hook for a lower payment despite the higher interest since we plan to pay the loan off in ~15 months anyway.
« Last Edit: January 29, 2018, 08:34:45 AM by zeli2033 »

zeli2033

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Re: First Start Case Study - Let the facepunching commence!
« Reply #22 on: June 16, 2019, 10:34:21 AM »
Update ~18 months later

After taking in everyone's insightful comments here, some helpful career growth and some big life changes, we are well on our way to making huge strides toward our original goals:

January 2018 Overview
Gross Household Income: $138k (+ $10k annual bonus)
Monthly Expenses: $3200
Assets: $38k
Debts: $64k (Student Loans)

June 2019 Overview
Gross Household Income: $166k (+ $15-25k annual bonus)
Monthly Expenses: $3800
Assets: $101k
Debts: $0

Goals for next 18 months
1. Welcome our first baby in August 2019
2. Build 6 month e-fund in HYSA now that debt is gone. E-fund will account for expected increase in expenses once daycare hits next year. Goal Completion: Jan 2020
3. Max 401k and HSA for 2020 (We put this on hold for 2019 to eliminate debt and amass cash for baby/e-fund)
4. Max 2019 & 2020 Roth IRAs. Goal Completion: September 2020 (2019 rIRA will be completed by April 2020)
5. Open Taxable Account for investing additional cash. Goal Completion: September 2020
6. Hit $250k NW. Goal Completion: December 2020

I'm contemplating starting a journal here in the forums to track continued progress. Until I land on a decision, I wanted to re-visit where we started to take a moment to appreciate exactly how far we've come thanks to MMM/you fine people!

mistymoney

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Re: First Start Case Study - Let the facepunching commence!
« Reply #23 on: June 16, 2019, 10:46:59 AM »
Update ~18 months later

After taking in everyone's insightful comments here, some helpful career growth and some big life changes, we are well on our way to making huge strides toward our original goals:

January 2018 Overview
Gross Household Income: $138k (+ $10k annual bonus)
Monthly Expenses: $3200
Assets: $38k
Debts: $64k (Student Loans)

June 2019 Overview
Gross Household Income: $166k (+ $15-25k annual bonus)
Monthly Expenses: $3800
Assets: $101k
Debts: $0

Goals for next 18 months
1. Welcome our first baby in August 2019
2. Build 6 month e-fund in HYSA now that debt is gone. E-fund will account for expected increase in expenses once daycare hits next year. Goal Completion: Jan 2020
3. Max 401k and HSA for 2020 (We put this on hold for 2019 to eliminate debt and amass cash for baby/e-fund)
4. Max 2019 & 2020 Roth IRAs. Goal Completion: September 2020 (2019 rIRA will be completed by April 2020)
5. Open Taxable Account for investing additional cash. Goal Completion: September 2020
6. Hit $250k NW. Goal Completion: December 2020

I'm contemplating starting a journal here in the forums to track continued progress. Until I land on a decision, I wanted to re-visit where we started to take a moment to appreciate exactly how far we've come thanks to MMM/you fine people!

very inspiring! kudos!

MrThatsDifferent

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Amazing! Congrats!

BeardedLady

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Congrats on the new baby, and way to knock out that student loan! That's amazing!

civil4life

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Amazing progress!

You mention the HSA, but if you are using daycare see if your employer offers an FSA for that as well.

walkwalkwalk

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Amazing progress!

You mention the HSA, but if you are using daycare see if your employer offers an FSA for that as well.
Ask for an Dependent Care FSA (DCFSA) . The max is $5k.

zeli2033

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Amazing progress!

You mention the HSA, but if you are using daycare see if your employer offers an FSA for that as well.
Ask for an Dependent Care FSA (DCFSA) . The max is $5k.

Great callouts! Yes, we do have the option of a DCFSA - we'll max that as well starting 2020.