The Money Mustache Community

Learning, Sharing, and Teaching => Case Studies => Topic started by: politenessman on May 09, 2018, 01:39:57 PM

Title: How screwed are we for early retirement?
Post by: politenessman on May 09, 2018, 01:39:57 PM
Let me preface this by saying that I am very glad I found this place, and that I wish I had seen this when I was in my early 20s, because I have made a considerable number of mistakes, and now, late in life, I need to get all of this sorted out.
We have just recently moved to Colorado, for health, Quality of life and family reasons. We are still dealing with the vestiges of the move as we have only been here for 4 weeks.  We have not purchased our bicycles yet!
We both work from home, so we have zero commute, and we use the car once per week for groceries etc.

My wife and I want to retire early, but given our very late start and now lack of house (which may not be an issue - we like renting), I am throwing myself at the mercy of the forum for advice and face punches when needed. In terms of early retirement, I would like to be done by 62 rather than 67, or earlier if possible.

At this time I don't have a specific question, I just want to make sure I am not sabotaging myself.

Life Situation: Married filing jointly, No dependents, USA, CO
Ages: 52 (me) and 55 (DW)

Gross Salary/Wages:
   Me: $ 92K
   DW: $150k
   DW also gets an annual bonus ~$25k

Individual amounts of each Pre-tax deductions (I don't have the info in front of me but as best I can remember)

   My 401k:     (27%) - small employer match
   DW 401k:   (15%) - great employer match
   DW ins:      No idea but it covers me too

With the 401k deductions, we are both fully funding our 401ks including the allowed top up amounts, so the 401Ks are building by ~24K per year, for both of us. We plan to continue to do this for as long as we can.
There is no other income

Assets
Emergency Fund      $10,000  (0.01% interest)
DW 401k$200,000
me 401k$64,000
DW IRA$50,000
Me IRA$9,500
Total$333,500

Liabilities: small car loan at ~$15k Should be gone by September.


Joint Monthly expenses
Electric $     35
Gas $     35
Rent $ 1960   inc trash & water
Phones $   250      (3 lines inc data)
Car Ins $   100
Renter Ins $     10
Petrol $     30
Internet $     50
Groceries $  1000*
Amazon $     10
Netflix $     11
Entertainment $   100
$ 3591
*Groceries plus pet food/expenses, as we own a dog.


Individual expenses

Me: DW:
Spotify        $ 11          Spotify$   11
HBO $ 15Dropbox$   10
Britbox $   7iCloud $    3
Dotster $   7Boho Box $  25
Allowance $ 100Allowance $ 200
Storage $ 108Work Travel $ 800**
$ 248 $ 1049

Take home          = 6000+3480   = $9480
total expenditure    = 3591+248+1049   = $4888

Delta          = 9480-4888   = $4592

**A note about the travel.
Currently DW has to pay for her own work travel
It is one of the reasons she gets the big salary
We are working on resolving that issue.

What have we done so far to improve our situation?
In doing this we reduced our monthly expenses from $6k to $3600

Total debt eliminated ~$368,000
Monthly cash freed up ~$2,400

In addition, we have reduced my monthly costs:

Antivirus    $  9 - moved to a free service
Hosting    $ 14 - removed all hosting
Dotster    $ 13 - Let some URLs go
CBT Nuggets    $ 83 - moved this to a work expense
$119  - removed from my monthly expenses

What do we need to do next?
The next steps in getting our outgoings down are:

*ideally I would like to get rid of the storage but we have a large collection of books, some family heirlooms and other stuff that does not fit in the apartment at the moment. This is in part because we both work from home and effectively have two offices.

So at this time it looks like after September we will have about 4500-4600 available to work with.
How am I doing and are we screwed?
Title: Re: How screwed are we for early retirement?
Post by: Car Jack on May 09, 2018, 02:04:25 PM
You already know that the storage is a problem.  Craigslist is your friend.  Although it's evil, eBay can get rid of things that are too unique to sell locally.  If you haven't used something in a year, it's useless and adding nothing good to your life.  Sell it.  Sorry.....I'm not a fan of keepsakes beyond what can fit in a shoe box.

Easy one next.  I have cricket and wifi makes data free.  I think we're up to.....I don't know.....either 3GB or 5GB each for data.  4 phones.  $100 total, all in.  No fees, extras or anything.  I have an iPhone (it was free from my former company) and wife and kids have something else.  I see zero reason to pay more than that.  This even gives you a spare phone.

Are you using reward cards for everything?  Slate is THE card for business and gives you 5% most places.  There are a bazillion other cards (I own most of them).  Same for airline miles, hotel points, restaurant points.  When I traveled for a living, I would plan specifically for points that I had a path to turn into cash.

With the money you guys have coming in, I'd think that beyond what you're saving, you'd be doing backdoor Roths every year......although you'd need to roll those IRAs into your 401k's to do it without a lot of mess.

Your emergency fund is scarily low.  It's also getting no return.  Redneck Bank will give you 1.75% up to $35k.  Ablebanking 1.7% with no limit.  In my opinion, you need at least $100k in emergency funds.  I have a lot of my eFund in US Savings bonds.  It does take a year to make them cashable, so you'd want to build slowly.

You are way behind on retirement savings, but you make a boatload of money in a low cost area.  You can catch up but you need to be serious about it.

Good luck.
Title: Re: How screwed are we for early retirement?
Post by: Check2400 on May 09, 2018, 02:11:26 PM
So, to break it down to the relevant big picture views (rounding for ease)
                Month        Year
Expenses: $5000        $60,000/yr

Savings:   $4500        $54000
401k:       $4000        $48000  ( you say $24,000 "for both of us" but also say both fully funding, so I am assuming both = each)
Total per year:           $102,000
Invested Assets:         $325,000

So, 60K times 25 for 4% SWD = 1,500,000, or if you remove the roughly $10,000 in annual work travel expenses, your expenses are 50K, and your SWD = $125,000.
Savings + Current Assets @ 7% interest = $1,563,000 in 7 years, or $1,250,000 in roughly 5.5 years. 

Lets say you do 6 more years, because OMY (I really wish we could change this to 1MY, but neither here nor there) and you are sitting at $1,350,000.  Your Wife will be able to access 401k, and you'll be less than 2 years from doing the same.  Wife will be one year from early SS, and 4 years from Medicare.  I think you're close enough to count on SS too, which you should go and see your expected benefits on the IRS page for fun. 

There are things you can do, like ensure you're getting deductions on taxes for travel costs, etc., and things you can choose not to do, like buy a house, that will nudge things around a little bit.  But just going from the numbers you're throwing around, you're under your stated goal.  A lot of people will come in here recommending lower groceries and no storage, but in the grand scheme of things, we're talking about months at worst of extended work for the hyper frugal cuts you would have to make (honestly your numbers already seem way low, only 100 for entertainment for two?). 

If travel is in your retirement plans, I would ensure you're baglogging as many points on work travel as possible.  I disagree that $100,000 is a relevant emergency fund number, but I would go ahead and start investing in taxable accounts to have accessible funds from the $4500 in excess you're earning. 

Aside from that, you're good if you can make it 5-6 years.  The most important thing for you, in my opinion, is to start investing the money now so you get used to saving, and then you can work on making your spending more efficient. 



Title: Re: How screwed are we for early retirement?
Post by: nereo on May 09, 2018, 02:15:46 PM
Nice case study

Overall I think you are doing very well, and your expenses are fairly reasonable.  My one overarching comment is that you might find it very useful and enlightening to carefully track where every dollar goes over the next several months. Often it reveals hidden 'leaks' that you had overlooked.

I'm going to assume that your rent (your largest expense) is reasonable for your area.
The three things that jump out at me is the cost of your phones, the storage charge, and the numerous subscription services which, while taken individually all seem reasonable but collectively get very expensive and have a lot of overlap (e.g. Amazon, Neftlix, HBO, Spotify, Britbox, iCloud, Dropbox etc.). 

Storage you might be able to address by doing a real purge.  Ask yourself what you have that you rarely use anymore, and whether its really worth $6,000 every 5 years to keep that storage compartment. Could you make space in your apartment, move what you truly can't replace and sell/give away everything else?

Consider paring down your subscription services. You probably shouldn't spend that much time watching TV anyway, and I suspect some of those (e.g. Britbox) is just for a few specialized shows.

Mobile phones can certainly be found cheaper; 3 lines with data should be closer to $100/mo, not $250.  Shop around.

Otherwise, keep up the good work. Now that a lot of your old debt is going you can really start saving to the tune of $70-90k/year (including your 401(k)s).  AT that pace you should be on target to retire in your early 60s, depending somewhat on what the markets do.

Homework:  Go to the SS website and determine what you and your wife's benefits might look like.  Given your high earnings I'm guessing you will bring in > $2500/mo at age 65, which could easily fund over half of your post-retirement expenses (which could be reduced). That means your target may be much closer to $600-700k instead of $1.2MM

PS - get a bike... they're fun to ride and completely change the way you interact with your neighborhood :-)
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 09, 2018, 02:42:04 PM
Easy one next.  I have cricket and wifi makes data free.  I think we're up to.....I don't know.....either 3GB or 5GB each for data.  4 phones.  $100 total, all in.  No fees, extras or anything.  I have an iPhone (it was free from my former company) and wife and kids have something else.  I see zero reason to pay more than that.  This even gives you a spare phone.

That's good info. I'd heard of Cricket but never really paid them any attention. I know DW is heavily invested in the Apple ecosystem, so what ever we do, she needs Apple. Looks like Cricket can support that, so i will be looking seriously at that.

Are you using reward cards for everything?  Slate is THE card for business and gives you 5% most places.  There are a bazillion other cards (I own most of them).  Same for airline miles, hotel points, restaurant points.  When I traveled for a living, I would plan specifically for points that I had a path to turn into cash.
Currently I am using Capital One and Amex (both paid off every month)
Maybe I can swap out the Capital One card and move to slate.

With the money you guys have coming in, I'd think that beyond what you're saving, you'd be doing backdoor Roths every year......although you'd need to roll those IRAs into your 401k's to do it without a lot of mess.
This is something I have no clue about. Guess I need to read up on backdoor Roth's although I was under the impression that with our joint income, we were not eligible to open a Roth IRA.

I would also love to roll my IRAs into my 401k but didn't know you could do that. Who should I talk to about that?

As for the emergency fund, you are right, it is low, and earning no interest. I would like to keep maybe $5k on hand and put the other 5K into a higher interest earning savings account and then throw another 5-10K in there to top the fund up.

Thanks, all this is food for thought.
Title: Re: How screwed are we for early retirement?
Post by: kenner on May 09, 2018, 05:55:54 PM

Are you using reward cards for everything?  Slate is THE card for business and gives you 5% most places.  There are a bazillion other cards (I own most of them).  Same for airline miles, hotel points, restaurant points.  When I traveled for a living, I would plan specifically for points that I had a path to turn into cash.
Currently I am using Capital One and Amex (both paid off every month)
Maybe I can swap out the Capital One card and move to slate.


Just FYI, but Slate is probably not the card you want here unless there's a non-Chase card called Slate that I haven't seen.  Chase Slate doesn't give 5% in various categories, that's the Ink Business Cash.  Slate just has 5% balance transfers which is useful if you're trying to lower interest rates, but it doesn't sound like you are.  There are a bunch of different recommendations for good credit cards out there...I like https://frequentmiler.boardingarea.com/best-credit-card-sign-up-offers/ but there's another thread about credit card recommendations in Ask A Mustacian
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 09, 2018, 10:26:54 PM
At this time I don't have a specific question, I just want to make sure I am not sabotaging myself.
...
How am I doing and are we screwed?
Well done case study!

If the market is at all well behaved, it appears you could reach FI in ~5 years (based on a quick look using the case study spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/)).  Cut ~$600/month from your various non-work expenses, invest the $600, and time to FI drops to ~4 years.  Up to you whether that is worthwhile....

A couple of questions:
- No medical insurance?
- Why not put $6500/person/year into Roth IRAs?
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 10, 2018, 06:35:38 AM
Your grocery costs are insane for 2 people, even considering the dogs.  I spend $600-700/month with lots of splurges for 2 adults, 2 teens.

Spotify family plan is $16.49/month tax included for four people.
I'll look into spotify family plan, but we've both had our individual accounts for so long, I'm not sure how much effort is involved in moving over all our play lists etc.

As for the groceries, you are correct; it is very high. This is one of the things we are looking at bringing down, and I would like to see us running at about half of that.

If the market is at all well behaved, it appears you could reach FI in ~5 years (based on a quick look using the case study spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/)).  Cut ~$600/month from your various non-work expenses, invest the $600, and time to FI drops to ~4 years.  Up to you whether that is worthwhile....

A couple of questions:
- No medical insurance?
- Why not put $6500/person/year into Roth IRAs?

I'm not sure what the numbers are for insurance, but yes, it is there. It comes out of DW's paycheck and covers me as she has much better medical coverage than I can get.

I'm looking into the Roth thing but for the life of me cannot see the advantage given the tax bracket we are in now.
Title: Re: How screwed are we for early retirement?
Post by: mbl on May 10, 2018, 06:36:48 AM
At this time I don't have a specific question, I just want to make sure I am not sabotaging myself.
...
How am I doing and are we screwed?

A couple of questions:
- No medical insurance?
- Why not put $6500/person/year into Roth IRAs?

At their income level they don't qualify for the full amount if any at all.
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 10, 2018, 06:39:21 AM
At this time I don't have a specific question, I just want to make sure I am not sabotaging myself.
...
How am I doing and are we screwed?

A couple of questions:
- No medical insurance?
- Why not put $6500/person/year into Roth IRAs?

At their income level they don't qualify for the full amount if any at all.
They do qualify, via the Backdoor Roth IRA (https://www.bogleheads.org/wiki/Backdoor_Roth_IRA) - might be a problem for the $50K tIRA, but worth considering for the $9.5K tIRA.
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 10, 2018, 06:39:41 AM
At this time I don't have a specific question, I just want to make sure I am not sabotaging myself.
...
How am I doing and are we screwed?

A couple of questions:
- No medical insurance?
- Why not put $6500/person/year into Roth IRAs?

At their income level they don't qualify for the full amount if any at all.
I do have an old IRA with about 8-9k in it that I could back door, but again, is it worth it?
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 10, 2018, 06:42:39 AM
I do have an old IRA with about 8-9k in it that I could back door, but again, is it worth it?
Will your 401k plans accept rollovers of your tIRAs?

If so, yes it would be worth it.
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 10, 2018, 06:57:14 AM
I do have an old IRA with about 8-9k in it that I could back door, but again, is it worth it?
Will your 401k plans accept rollovers of your tIRAs?

If so, yes it would be worth it.
I will find out. That IRA is doing a grand total of nothing for me at the moment, so I do need to do something with it.
Title: Re: How screwed are we for early retirement?
Post by: freya on May 10, 2018, 07:40:14 AM
I'm in the same age range and going through many of the same moves you should be considering...

I think your budget is pretty tight given your high rent.  I'm assuming that the $1000 in groceries covers incidentals and household items?  That stuff can add up and I don't see a budget line for it anywhere else.

ABSOLUTELY you should do annual back-door Roth IRA contributions and yes you can open a Roth IRA account.  Roll your existing IRA into either a solo 401K or one of your employer accounts, then open a traditional IRA and save up $$ until you have enough to make the non-deductible contribution.  Be aware that Roth conversions can't be withdrawn for 5 years.

Also, at the rent you're paying, you should definitely look into buying.  If you decide to go this route, open an online savings account and throw your savings in there - don't try to invest it.  Otherwise, I agree that you need to fatten up the emergency fund before investing in taxable.

Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 10, 2018, 08:07:43 AM
I'm in the same age range and going through many of the same moves you should be considering...

I think your budget is pretty tight given your high rent.  I'm assuming that the $1000 in groceries covers incidentals and household items?  That stuff can add up and I don't see a budget line for it anywhere else.

ABSOLUTELY you should do annual back-door Roth IRA contributions and yes you can open a Roth IRA account.  Roll your existing IRA into either a solo 401K or one of your employer accounts, then open a traditional IRA and save up $$ until you have enough to make the non-deductible contribution.  Be aware that Roth conversions can't be withdrawn for 5 years.

Also, at the rent you're paying, you should definitely look into buying.  If you decide to go this route, open an online savings account and throw your savings in there - don't try to invest it.  Otherwise, I agree that you need to fatten up the emergency fund before investing in taxable.
The $1000 in groceries is an allowance that covers some incidentals and household items although being renters, those don't occur that often. I believe we can likely cut that in half once we get a rhythm going.

I still don't see the advantage in a Roth IRA. With our earnings, the tax bracket we are in is too high to make a Roth worthwhile, but I am open to it if someone can show me the math.

DW and I have made the decision not to buy simply because we believe the money we would invest in property would be better invested and get us to retirement faster if we invested in mutual funds etc. Additionally, we are really enjoying not owning a house right now :)
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 10, 2018, 08:12:21 AM
I still don't see the advantage in a Roth IRA. With our earnings, the tax bracket we are in is too high to make a Roth worthwhile, but I am open to it if someone can show me the math.
Why do you think "the tax bracket we are in is too high to make a Roth worthwhile"?

E.g., do you prefer paying tax on your taxable account interest, dividends, and capital gains, vs. paying no tax for those in a Roth account?

Note that in your situation a deductible traditional IRA is not available, so the pertinent comparison is between Roth and taxable.
Title: Re: How screwed are we for early retirement?
Post by: Laura33 on May 10, 2018, 08:32:49 AM
I do have an old IRA with about 8-9k in it that I could back door, but again, is it worth it?

Is 30, 40, 50 years of tax-free growth worth it?  x $6500/yr, x 2 people, for as long as you continue to earn income?  And paying no taxes at all on all that growth when you sell?  IDK -- keep that up for a decade or two, and pretty soon you're talking about real money.

IF you can roll the existing IRAs into your current 401(k)s, it's a no-brainer.
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 10, 2018, 09:01:34 AM
I do have an old IRA with about 8-9k in it that I could back door, but again, is it worth it?

Is 30, 40, 50 years of tax-free growth worth it?  x $6500/yr, x 2 people, for as long as you continue to earn income?  And paying no taxes at all on all that growth when you sell?  IDK -- keep that up for a decade or two, and pretty soon you're talking about real money.

IF you can roll the existing IRAs into your current 401(k)s, it's a no-brainer.

OK I see what you are saying. I ran this from https://www.bankrate.com/calculators/retirement/roth-ira-plan-calculator.aspx (https://www.bankrate.com/calculators/retirement/roth-ira-plan-calculator.aspx) and I can see that the Roth gives slightly better performance than traditional savings and of course I am paying the same tax no matter where I put the money.

(http://www.tonypickett.com/wp-content/uploads/2018/05/Capture.png)

... and I guess the payout is tax free, where as the traditional (taxable) savings is of course taxed. OK now I see why that works.
I'll take a deeper look into how to back door a Roth from the IRA I have now.
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 10, 2018, 10:19:29 AM
I ran this from https://www.bankrate.com/calculators/retirement/roth-ira-plan-calculator.aspx (https://www.bankrate.com/calculators/retirement/roth-ira-plan-calculator.aspx)....
On the one hand that calculator makes Roth look better than a fair comparison does.  That's because it assumes each year's 7% return in the taxable account pays 28% tax on that 7%.  This would be accurate for a savings account earning 7% interest, but not for a stock fund.  A stock paying 2% dividends and having 5% growth annually, with 15% tax on both the dividends and long term capital gains, would end up with $91,177 instead of $86, 037.

On the other hand, nothing says you have to withdraw everything in 10 years.  Continue to put more into the Roth each year, either from contributions or traditional to Roth conversions, and the gap between Roth and taxable only gets larger.
Title: Re: How screwed are we for early retirement?
Post by: Laura33 on May 10, 2018, 10:38:17 AM
A stock paying 2% dividends and having 5% growth annually, with 15% tax on both the dividends and long term capital gains, would end up with $91,177 instead of $86, 037.

Right.  But then if you need to use the money, you also have to pay capital gains on growth above your basis (unless your income at the time is so low that you are at the 0% CG rates, presuming those are still around then).
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 10, 2018, 10:40:39 AM
So essentially we are quibbling about $5k over 10 years, at which point I plan to retire anyway.
Is that a fair assessment?
Title: Re: How screwed are we for early retirement?
Post by: Prairie Stash on May 10, 2018, 11:01:21 AM
*ideally I would like to get rid of the storage but we have a large collection of books, some family heirlooms and other stuff that does not fit in the apartment at the moment. This is in part because we both work from home and effectively have two offices.

If you really have family heirlooms, do you not have family that can enjoy them? Its not a heirloom if no one wants it in their house.

I too have a lot of books, I built a bookcase to store them. I also have storage in unique spots; I built extra shelves in closets, storage under beds, shelves along the top corners of rooms etc. Can you think outside the box and downsize a lot and keep the rest in your apartment? You have two home offices, a living room, a bedroom, a kitchen and more; surely some of that space could be rearranged.

The first step is to get rid of all the extra stuff. Eventually you will be buying a house; are you going to buy a bigger house just to store stuff or a smaller house so you can FIRE sooner? Its not just the storage unit costs today, if you are planing on storing it in the future in your new house, you're already planning on buying a larger accomodation than you currently have. Are you unhappy with your current place? So unhappy that you want to work longer? Thats the choice, longer work career or smaller house. Brutal honesty is required, the facepunches are meant to help you, all I get is the satisfaction of hopefully helping someone.

Keep up the good work, I'm impressed with everything you have already accomplished.
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 10, 2018, 11:31:18 AM
*ideally I would like to get rid of the storage but we have a large collection of books, some family heirlooms and other stuff that does not fit in the apartment at the moment. This is in part because we both work from home and effectively have two offices.

If you really have family heirlooms, do you not have family that can enjoy them? Its not a heirloom if no one wants it in their house.

I too have a lot of books, I built a bookcase to store them. I also have storage in unique spots; I built extra shelves in closets, storage under beds, shelves along the top corners of rooms etc. Can you think outside the box and downsize a lot and keep the rest in your apartment? You have two home offices, a living room, a bedroom, a kitchen and more; surely some of that space could be rearranged.

The first step is to get rid of all the extra stuff. Eventually you will be buying a house; are you going to buy a bigger house just to store stuff or a smaller house so you can FIRE sooner? Its not just the storage unit costs today, if you are planing on storing it in the future in your new house, you're already planning on buying a larger accomodation than you currently have. Are you unhappy with your current place? So unhappy that you want to work longer? Thats the choice, longer work career or smaller house. Brutal honesty is required, the facepunches are meant to help you, all I get is the satisfaction of hopefully helping someone.

Keep up the good work, I'm impressed with everything you have already accomplished.
You make some good points, thank you. We got a storage unit when we moved (~4 weeks ago) as we have downsized from 4000 square feet, to an apartment of 1000 square feet. The storage is temporary as we work through the last few things that we have and some stuff will be eliminated and some will find its way into the apartment.

When we initially planned the move, we were looking at buying a house in a year or so of about 1200-1800 square feet, and once that happened, the storage would not be required. I think at this time we are leaning towards staying in rental property for a while (for a number of reasons and not all of them finance related) so there is now more of an urgency in getting rid of the storage.

I'm actually very good at making space where there is none, so I am pretty sure I can soak up all I need to into the apartment, it is just going to take some time, given everything else that is going on.
Title: Re: How screwed are we for early retirement?
Post by: nereo on May 10, 2018, 11:49:37 AM
So essentially we are quibbling about $5k over 10 years, at which point I plan to retire anyway.
Is that a fair assessment?

Not quite.  As Laura33 said earlier (and I had a post that disappeared somehow) - another major advantage is that you won't pay LTCG taxes on the money when you take it out.  That could save you 15% (or even 20%, depending on your bracket)  compared to taking out a similar amount from either a taxable or 401(k) account.  To put numbers to it, suppose your money doubles in the next decade.  In a Roth if you take out $10k you pay $0 on that disbursement.  If you take out $10k you could pay 15% on the portion of that money which is considered 'gains' (here $5k, but that's assuming you have 0% gains now).  So your tax bill would be $750 higher on that $10k.

You can leverage Roth dollars to take out just enough from your taxable/401k accounts to keep your taxable burden very low each year.
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 10, 2018, 01:09:24 PM
A stock paying 2% dividends and having 5% growth annually, with 15% tax on both the dividends and long term capital gains, would end up with $91,177 instead of $86, 037.

Right.  But then if you need to use the money, you also have to pay capital gains on growth above your basis (unless your income at the time is so low that you are at the 0% CG rates, presuming those are still around then).
The phrase "end up" means that capital gain taxes have been paid at the end when the money was all withdrawn for use.  See rows 127-145 on the 'Misc. calcs' tab of the case study spreadsheet (http://forum.mrmoneymustache.com/forum-information-faqs/case-study-spreadsheet-updates/).
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 10, 2018, 01:14:56 PM
So essentially we are quibbling about $5k over 10 years, at which point I plan to retire anyway.
Is that a fair assessment?
Yes.  It might take you 5-10 hours total over those 10 years to make the Roth contributions (with most of that coming in rolling your IRA into your 401k, if allowed), so the "hourly wage" for that work is...?
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 10, 2018, 01:30:42 PM
It might take you 5-10 hours total over those 10 years to make the Roth contributions (with most of that coming in rolling your IRA into your 401k, if allowed)
You'll have to excuse me, I am an engineer who is just starting to get to grips with all of this, but I don't understand what this means?  If I convert my IRA to a Roth, and I am putting $6500 a year into it, what am I rolling into my 401k?
Title: Re: How screwed are we for early retirement?
Post by: Prairie Stash on May 10, 2018, 01:36:44 PM
You make some good points, thank you. We got a storage unit when we moved (~4 weeks ago) as we have downsized from 4000 square feet, to an apartment of 1000 square feet. The storage is temporary as we work through the last few things that we have and some stuff will be eliminated and some will find its way into the apartment.
That changes my opinion dramatically, 4 weeks is a pretty short time frame. 4000 sf to 1000 is equally impressive. My house is 920 sf, however I imagine a person who lived in a tiny home would be appalled by all my stuff, its all relative.

The main part is to keep a healthy and happy focus, which it appear you have. In hindsight, you didn't need a post about it, you needed a congrats for continuing the progress you're making.

You may want to start a journal to keep yourself accountable. You may find it beneficial and fun, journals are only for yourself and others to applaud your efforts. You seem to be well in control, but most of us need the occasional bit of motivation and thats how journals help. When I reread my own posts, I often see it a different way a year later (and sometimes wonder what I was thinking back then), hopefully you keep at this for years to come.
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 10, 2018, 01:55:48 PM
It might take you 5-10 hours total over those 10 years to make the Roth contributions (with most of that coming in rolling your IRA into your 401k, if allowed)
You'll have to excuse me, I am an engineer who is just starting to get to grips with all of this, but I don't understand what this means?  If I convert my IRA to a Roth, and I am putting $6500 a year into it, what am I rolling into my 401k?
See this post (https://forum.mrmoneymustache.com/case-studies/how-screwed-are-we-for-early-retirement/msg2001489/#msg2001489) - you were going to check on this possibility? ;)

Presuming your marginal rate now is higher than it will be after retirement, you would prefer not to convert pre-tax traditional to Roth now.  Instead, roll the pre-tax IRA over to your 401k plan.  With no pre-tax IRA balance, the path is clear for Roth contributions via the backdoor method.
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 10, 2018, 02:04:55 PM
The main part is to keep a healthy and happy focus, which it appear you have.
We try. Both myself and DW are excited about happiness through financial independence. There are so many things we want to do and places we want to go, and work does seem to get in the way!
It is also nice to be able to throw some numbers together and have actual targets for retirement instead of this nebulous thing sometime in the (now near) future.
I don't journal, I don't have the patience for it, but she does. All this is getting written down!
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 10, 2018, 02:06:37 PM
It might take you 5-10 hours total over those 10 years to make the Roth contributions (with most of that coming in rolling your IRA into your 401k, if allowed)
You'll have to excuse me, I am an engineer who is just starting to get to grips with all of this, but I don't understand what this means?  If I convert my IRA to a Roth, and I am putting $6500 a year into it, what am I rolling into my 401k?
See this post (https://forum.mrmoneymustache.com/case-studies/how-screwed-are-we-for-early-retirement/msg2001489/#msg2001489) - you were going to check on this possibility? ;)

Presuming your marginal rate now is higher than it will be after retirement, you would prefer not to convert pre-tax traditional to Roth now.  Instead, roll the pre-tax IRA over to your 401k plan.  With no pre-tax IRA balance, the path is clear for Roth contributions via the backdoor method.

OK Now I understand,.
I am indeed looking into it - the company I work for uses Fidelity and so far I've not found anything about rolling my IRA into the 401k, but once my work day is done, I will be doing more digging.
Title: Re: How screwed are we for early retirement?
Post by: Laura33 on May 10, 2018, 08:26:47 PM
@MDM -- oops, missed that.  Thanks for clarifying.  So I assume that the original chart also takes that into account, since there is a line-item for taxes.

@politenessman:  It's not just 10 years; remember, you may be retiring in 10 years, but you won't be spending all your money then.  If you save that Roth money for another, say, two decades, even if you don't add any more funds to it, what's the delta then?

Personally, also I like having some money in a Roth because it will free me up to do more sophisticated tax planning as time goes on.  For example, with the $24K standard deduction, you can have up to $24K in income (withdrawals from your 401(k)/traditional IRA count) without paying any federal tax; if you will be close to that but might go over, why not take a little out of the Roth that year (which doesn't count as income) to avoid paying any federal taxes?  In addition, you also have a long-term capital gains rate of 0% if your total income (including CGs) is below @$77K (MFJ, as of now, I think).  But if you have a year in which you exceed that threshold, then from what I understand, ALL of your CGs are taxed at 15% or @23.8% (depending on your marginal tax bracket).  So maybe one year you need to sell a chunk of your assets, because you need a new roof or a car or to pay a medical bill.  If you take the money from your 401(k), that generates "income" that puts you over the threshold; if you take it from selling regular stocks in a taxable account, that generates CGs that put you over.  But if you pull it from the Roth, there are no tax implications -- and so your taxable income stays below that @$77K threshold, and so you avoid the need to pay any tax at all on any of your CGs that year.  And that might be worth a lot more than $10K, you know?
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 10, 2018, 09:59:13 PM
@MDM -- oops, missed that.  Thanks for clarifying.  So I assume that the original chart also takes that into account, since there is a line-item for taxes.
The calculations behind the chart treat the investment as a bank savings account earning 7%/yr interest, so ordinary income tax rates apply to the annual interest and there are no capital gains at all.

The chart comes from an advertising site, and at least they are upfront about the purpose of the site:
Quote
Bankrate.com is an independent, advertising-supported publisher and comparison service. Bankrate is compensated in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website. This compensation may impact how, where and in what order products appear. Bankrate.com does not include all companies or all available products.
Title: Re: How screwed are we for early retirement?
Post by: fuzzy math on May 11, 2018, 07:58:53 AM
Were your former salaries similar to what you're making now? Have you checked out your Social security benefits on their website?

I may be reaching here (as I'm not an accountant and am still pretty confused about the new tax laws), but I believe work costs are no longer tax deductible. Your DW might be better off asking for a lower salary and all work costs reimbursed. Companies can still deduct that stuff. It would make it cheaper for the company (deductions, plus they'd pay less in payroll taxes etc) and for your family you'd pay less in income tax with lower salaries. I would make this your highest priority.

Your books may not fare so well in storage. You also can't access them to read or enjoy in storage. Please consider (once you're settled) donating them. I bet 95% of what you own is either able to be found at goodwill or the library. Do you even go back and read the same books over again?

Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 11, 2018, 08:17:00 AM
Were your former salaries similar to what you're making now? Have you checked out your Social security benefits on their website?
No, its taken us a while to get where we are, especially DW. She has put a lot of effort into her career and it has paid off for her.
We have looked as the SS web site and we both have the same figures:
Retire at:
67            $2397
70            $3095
62            $1562

Quote
I may be reaching here (as I'm not an accountant and am still pretty confused about the new tax laws), but I believe work costs are no longer tax deductible. Your DW might be better off asking for a lower salary and all work costs reimbursed. Companies can still deduct that stuff. It would make it cheaper for the company (deductions, plus they'd pay less in payroll taxes etc) and for your family you'd pay less in income tax with lower salaries. I would make this your highest priority.
Actually we are working on getting the travel as a business expense without lowering the salary. No sense in giving money away!

Quote
Your books may not fare so well in storage. You also can't access them to read or enjoy in storage. Please consider (once you're settled) donating them. I bet 95% of what you own is either able to be found at goodwill or the library. Do you even go back and read the same books over again?
See one of the posts above. We just moved here and downsized from 4000 square feet to 1000 square feet. The storage is essentially overflow for some of our residual stuff (including the books) that we intend on moving into the apartment once we have room and place for it all. Some of the stuff will likely be given away or CL'd.
Title: Re: How screwed are we for early retirement?
Post by: freya on May 11, 2018, 08:20:34 AM
OP, the Roth IRA contributions are IN ADDITION to your 401K contributions and NOT for Roth-converting your trad IRA, in case that wasn't clear.  There are many good reasons for you to open a Roth IRA now, and there is zero downside except the minimal amount of time spent doing it.   Would you not spend a couple hours to save even just $1000 on taxes?  That's like a $500/hr side gig, and the easiest money you'll ever get.  You'll want this later anyway, for doing Roth IRA conversions from your nice fat 401Ks in retirement to fill up your 0% and 10% tax brackets - another rocking deal.  There are rules about needing to have a Roth IRA open for at least 5 years before withdrawing, so you really want to be opening it asap.

Another option we haven't talked about:  an HSA.  Calculate the cost difference between a high deductible plan and a standard medical plan, if you have both options available.  It's likely you'll find that the added cost of a HDHP with its higher deductible & lower premiums is less than the tax savings from making HSA contributions - and you may not incur the entire deductible cost.   This is another big potential slug of cash that you shouldn't leave on the table.  Note however that if you do go with an HSA you will want a larger emergency fund to cover the deductible.

Yet another tax dodge:  since you and DW are now working from home, can you arrange for at least one of you to become an independent contractor?  The tax treatment of this is infinitely better:  1) all work-related expenses are deducted including home office, 2) you only pay income tax on 80% of net income, and 3) you get to open a solo 401K which allows you to tax defer 20% of income in addition to the $24,500 401K contribution limit, up to a $53,000 overall limit.  The income you get from your employer will need to increase, since you'll be saving them fringe benefits & payroll taxes plus having to pay self-employment tax.  You'll have to check about health insurance options though.
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 11, 2018, 08:36:05 AM
OP, the Roth IRA contributions are IN ADDITION to your 401K contributions and NOT for Roth-converting your trad IRA, in case that wasn't clear.  There are many good reasons for you to open a Roth IRA now, and there is zero downside except the minimal amount of time spent doing it.
I need to check and see if we are eligible for a Roth, as our MAGI may put us over the limit for opening a Roth. If that is the case, I will need to open a traditional 401k and then convert it to a Roth.

Quote
You'll want this later anyway, for doing Roth IRA conversions from your nice fat 401Ks in retirement to fill up your 0% and 10% tax brackets -
ok this is new to me. Do what now? Can you explain this - like I am a 5 year old.
(seriously, I have an engineering background but money math confuses the fuck out of me. I have no clue about any of this stuff which is why, late in life, I am just getting to grips with this.)

Quote
Another option we haven't talked about:  an HSA.
I have no real clue about health ins. so I need to dig into this and try to understand it. So far, its all greek to me so it will take some time, reading and work to get an understanding of how this works for us.

Quote
Yet another tax dodge:  since you and DW are now working from home, can you arrange for at least one of you to become an independent contractor?
No, neither employer will go for this, we know, we asked.
Title: Re: How screwed are we for early retirement?
Post by: freya on May 11, 2018, 09:04:33 AM
OP, the Roth IRA contributions are IN ADDITION to your 401K contributions and NOT for Roth-converting your trad IRA, in case that wasn't clear.  There are many good reasons for you to open a Roth IRA now, and there is zero downside except the minimal amount of time spent doing it.
I need to check and see if we are eligible for a Roth, as our MAGI may put us over the limit for opening a Roth. If that is the case, I will need to open a traditional 401k and then convert it to a Roth.

Quote
You'll want this later anyway, for doing Roth IRA conversions from your nice fat 401Ks in retirement to fill up your 0% and 10% tax brackets -
ok this is new to me. Do what now? Can you explain this - like I am a 5 year old.
(seriously, I have an engineering background but money math confuses the fuck out of me. I have no clue about any of this stuff which is why, late in life, I am just getting to grips with this.)

Compared to the storage issue, this is very large potatoes and it's worth putting in the work to gain expertise here.  First, regarding the Roth account:  you are not barred from opening an account.  You can't make direct contributions, is all.  Please do read up on the back-door Roth dodge, as it's important to do it correctly or you could end up with a big tax bill.  You maybe should consider consulting a tax attorney on this and various other issues, if you're not comfortable handling it yourself.

After you retire, you will no longer have the employer wage income.  This will leave you with income from two broad categories:  1) interest, unqualified dividends, and wages from side jobs, and 2) interest and dividends.  If you make less that $90K, income in category 2 is tax free - so you only have to pay income tax on category 1.  Let's say category 1 is limited to $5,000 per year.  Since you have a $24,000 deductible before you have to pay even $1 of tax, you could bring in another $19,000 of income without paying any income tax.  You do that by withdrawing $19,000 from your 401K.  However, let's say you don't need this money right away and just want to keep it stashed away - and, you can't simply withdraw it without penalties since you're not at age 59.5 yet.  So you convert it to the Roth IRA.

This means that you didn't pay any tax on this $19,000 when you put it into the 401K.  Once it's safely in the Roth, you will never pay a dime in taxes on it.  Then means you got this money tax free.  Wow!  Since even a 10% tax rate is a bargain and you'll have a lot of money in tax deferred accounts that you'll want to get at, you should do this up to the top of the 10% tax bracket.  Still very minimal taxes.

Be aware that there are rules about using Roths - please do read up on it.  The main ones to know about:
- You can withdraw from a Roth at any time if you are at least 59.5 years old.
- If you retire at age 55 or older you can withdraw from a Roth without penalty, but ONLY one that's been open for at least 5 years.
- If you are younger than 55 or separated from your job before age 55 and are not yet age 59.5, you can only withdraw Roth contributions (not gains) that have been sitting in the account for at least 5 years.

Happy reading!
Title: Re: How screwed are we for early retirement?
Post by: fuzzy math on May 11, 2018, 09:14:28 AM
Were your former salaries similar to what you're making now? Have you checked out your Social security benefits on their website?
No, its taken us a while to get where we are, especially DW. She has put a lot of effort into her career and it has paid off for her.
We have looked as the SS web site and we both have the same figures:
Retire at:
67            $2397
70            $3095
62            $1562

Quote
I may be reaching here (as I'm not an accountant and am still pretty confused about the new tax laws), but I believe work costs are no longer tax deductible. Your DW might be better off asking for a lower salary and all work costs reimbursed. Companies can still deduct that stuff. It would make it cheaper for the company (deductions, plus they'd pay less in payroll taxes etc) and for your family you'd pay less in income tax with lower salaries. I would make this your highest priority.
Actually we are working on getting the travel as a business expense without lowering the salary. No sense in giving money away!

Quote
Your books may not fare so well in storage. You also can't access them to read or enjoy in storage. Please consider (once you're settled) donating them. I bet 95% of what you own is either able to be found at goodwill or the library. Do you even go back and read the same books over again?
See one of the posts above. We just moved here and downsized from 4000 square feet to 1000 square feet. The storage is essentially overflow for some of our residual stuff (including the books) that we intend on moving into the apartment once we have room and place for it all. Some of the stuff will likely be given away or CL'd.

I agree you'd be best off getting them covered at current salary but you'd be second best off with a lower salary if that fails.

I did see your post about downsizing. I wasn't trying to have you move all your stuff into your apt to save money, I was urging you to challenge the notion that you need a ton of books in your home. E books are another easy way to read the materials you want to read. I do think you've done a lot and deserve recognition for that!
Title: Re: How screwed are we for early retirement?
Post by: Novik on May 11, 2018, 09:28:56 AM
There's going to be a lot of math in this post, but OP please read because the ending is GOOD.

Assuming you will spend 60k a year in retirement (same as now, but maybe shifted costs from groceries and work travel to health insurance and fun travel), if you took SS for 2400$/month at 67, each, that's effectively your 60k right there. You could retire today if you had enough savings to take you the next 12-15 years.

You don't. So let's say instead that you want to take SS at 70 for your wife, and 67 for you, totaling approx 5500$/month = 66k/year. You need savings to get you from the year you retire to then. Let's call how many more years you work "A".

That's right - you could retire in 3.5 years, live by drawing down your stash while waiting for SS to kick in, and then live off SS. (You would likely have stash left over because this math only accounts for investment returns matching inflation - so it works even investing conservatively).

Even if you want some stash leftover or don't fully trust SS, an extra six months of work or some slightly reduced spending take care of that.  If you crack down on the spending, fix the work travel, etc you could maybe do it in less than 3 years.

tl;dr  America SS is amazing, you can retire in 3 years if you take advantage of your ability to save 102k per year.
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 11, 2018, 09:43:43 AM
I did see your post about downsizing. I wasn't trying to have you move all your stuff into your apt to save money, I was urging you to challenge the notion that you need a ton of books in your home. E books are another easy way to read the materials you want to read. I do think you've done a lot and deserve recognition for that!
We went from ~25 boxes of books down to 9.
Only one of those is mine, the other 8 belong to DW.
Mine are mostly reference and a couple that have sentimental value.
We did this by donating and replacing with kindle and other eDocuments (pdf etc).
Its a work in progress!
... and in fact I have a larger library now that I use ebooks than I ever had with paper books. Ebooks are my friend!
Title: Re: How screwed are we for early retirement?
Post by: Laura33 on May 11, 2018, 10:03:37 AM
There's going to be a lot of math in this post, but OP please read because the ending is GOOD.

Assuming you will spend 60k a year in retirement (same as now, but maybe shifted costs from groceries and work travel to health insurance and fun travel), if you took SS for 2400$/month at 67, each, that's effectively your 60k right there. You could retire today if you had enough savings to take you the next 12-15 years.

You don't. So let's say instead that you want to take SS at 70 for your wife, and 67 for you, totaling approx 5500$/month = 66k/year. You need savings to get you from the year you retire to then. Let's call how many more years you work "A".
  • Amount needed to get from 'now+A' to SS = 60*(15-A)
  • Invested assets at 'now+A' = 325 + 102*A       (using numbers from Check2400's summary - substitute as needed)
  • Solve for A:  (15-A)*60 = 325+102*A   ->   A = (15*60 - 325) / (60 + 102)     ->    A = 3.5

That's right - you could retire in 3.5 years, live by drawing down your stash while waiting for SS to kick in, and then live off SS. (You would likely have stash left over because this math only accounts for investment returns matching inflation - so it works even investing conservatively).

Even if you want some stash leftover or don't fully trust SS, an extra six months of work or some slightly reduced spending take care of that.  If you crack down on the spending, fix the work travel, etc you could maybe do it in less than 3 years.

tl;dr  America SS is amazing, you can retire in 3 years if you take advantage of your ability to save 102k per year.

Except:  SS stops when you die.  So you also want to have a little extra money left by the time you claim SS to cover expenses between the time that the first one of you dies and the second goes, when you will be down to the one remaining SS income.  OTOH, that usually doesn't need to be a huge figure, because it will very likely have plenty of years to grow before you are in that situation.
Title: Re: How screwed are we for early retirement?
Post by: Novik on May 11, 2018, 10:46:41 AM
Except:  SS stops when you die.  So you also want to have a little extra money left by the time you claim SS to cover expenses between the time that the first one of you dies and the second goes, when you will be down to the one remaining SS income.  OTOH, that usually doesn't need to be a huge figure, because it will very likely have plenty of years to grow before you are in that situation.

True! So let's say they both delay to 70 to receive 3100$ each (37k/year/person). When both collecting, that's 74k (!!). With only one SS there's a 23k gap to 60k spending.

Now your ages are 52 and 55. So in 18 and 15 years you can claim SS. In 15 years if you had 575k it would generate 23k/year forever to bridge the gap between single SS and spending. This requires setting aside 210k invested now to grow to 575.

Then you just need the same math but subtracting 210k from the 325k you're starting with:
Solve for A:  (15-A)*60 = 115 +102*A   ->   A = (15*60 - 115) / (60 + 102)     ->    A = 4.85    (4 years 10 months)


But realistically, a single person household would have reduced expenses for travel/food/allowance/insurance. Let's say 400$ on food, 200$ on allowance, 100$ on misc. and round to 8k/year. This reduces the initial money that needs to be set aside down 140k, to produce 25*15k = 375k in 15 years.

Solve for A:  (15-A)*60 = 185 +102*A   ->   A = (15*60 - 185) / (60 + 102)     ->    A = 4.4    (4 years 5 months)


Then we should also account for growth on the remaining 185k (approx 55k in 4 years) and growth on the invested savings over those 4-5 years until retirement (ballpark 45k in 4 years):

Rough math accounting for those facts:  A = (15*60 - 115 - 55 - 45) / (60 + 102) = 4.2 years  (4 years 2 months)


I don't have a good way to account for saving the extra 14k while you have 2 SS incomes, so this plan does leave you with a extra money from that, and you'll also have the principle from the 375. This plan also doesn't account for taxes (hopefully low).

But tl;dr - 3.5 years was ambitious, but 4-5 years is a very solid plan and you could go lower if you dropped your spending.


(Hope all this math isn't annoying anyone - it's just fun to work out FIRE scenarios on real numbers... my own are so amorphous to make anything but "spend little, save lots" silly at this point).
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 11, 2018, 10:55:22 AM
After you retire, you will no longer have the employer wage income.  This will leave you with income from two broad categories:  1) interest, unqualified dividends, and wages from side jobs, and 2) interest and dividends.  If you make less that $90K, income in category 2 is tax free - so you only have to pay income tax on category 1.
Probably "...and 2) long term capital gains and qualified dividends" is what was meant, as that would be correct.
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 11, 2018, 11:08:02 AM
Some good math there!
You can cut slice this a dozen different ways but this is good food for thought.
Title: Re: How screwed are we for early retirement?
Post by: Ben Kurtz on May 11, 2018, 11:20:45 AM
The bolded text is incorrect.  Roth contributions can be withdrawn at any age/at any time, penalty and tax free.

https://www.rothira.com/roth-ira-withdrawal-rules

To slice the salami a little thinner, you can indeed withdraw regular Roth IRA contributions any time tax and penalty free at any time. And by "regular Roth IRA contributions" I mean when you pull out your checkbook and send a check to Vanguard with your Roth IRA account number in the memo line.

But Roth IRA "contributions" that arrive by way of a conversion from a deductible tIRA or deductible 401k are subject to a 5 year seasoning rule. And since the OP said their family might be MAGI'd out of regular Roth IRA contributions, this is the more salient point.

I would imagine the rule for backdoor Roth IRA contributions must be similar to regular Roth IRA contributions, given that you can withdraw principal/basis directly from a non-deductible tIRA without tax consequences anyway, so there is nothing for the 5 year seasoning rule to protect. But I don't remember the actual text of the rule off-hand.
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 11, 2018, 11:40:00 AM
I would imagine the rule for backdoor Roth IRA contributions must be similar to regular Roth IRA contributions.
Yes, similar but not identical. 

When looking at withdrawals from Roth IRAs,

See
http://retirementlc.com/wp-content/uploads/2017/07/2017-07-06-Roth-IRA-Distribution-Ordering-Rules.pdf
http://fairmark.com/forum/read.php?2,54159,85510#msg-85510
for more.
Title: Re: How screwed are we for early retirement?
Post by: Check2400 on May 11, 2018, 12:27:59 PM
@politenessman ,

You've opened up a Pandora's Box on Roth/mega/etc.  While @Laura33 is right that it is likely more than 'just' 10K in growth tax savings, I am going to give you permission to acknowledge that it is 'only' 10k. 

The reason I, anonymous internet person you don't know, give you permission to minimize those very real savings is because you originally asked if the forums thought you could be done by 62 instead of 67, and you've been given quite a bit of information on optimized savings, instead of a simple analysis of your savings as is.  I posted my opinion, and Novik broke it out a bit more, but the consensus is that 62 would be too long, and you should be done no later than 58.  6 years!!

So, congratulations!  You came for a case study and I think that the emphasis on such nominal optimization shows that you are in a great great spot for the vast vast bulk of your goal. 

Things we know:
1) storage is a diminishing expense as a very understandable crutch while moving to a new location and resettling your life
2) Travel costs are a mutually beneficial shift of salary to lower expenses and payroll
3) housing isn't in the short term plans

The question now is, how do you plan on implementing the savings for the next six years?  Do you have a Vanguard funds picked out?  What is your risk personality, especially so close to retirement and ten years into a bull run in the markets for stock/bond allocation?  Is your level of spending at a sustainable amount on a go forward basis? 

To put it another way, as a semi involved forum poster, I dislike when the forest is lost for the trees.  You're in a great spot, but only if you take the steps to implement.  It seems like you may be getting analysis paralysis with the backdoor IRA decisions, and I don't want that to happen at the expense of getting money into taxable accounts now. 

So, what do you think your next steps should be?

Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 11, 2018, 01:25:40 PM
A most excellent set of questions.
My next steps are:

Roll my old IRA into my 401k - I have started that process
Once the car is paid off (September) start putting 4-5k into some sort of savings
I don't have funds picked out yet but I am starting to do research (based in great part on what I read in this forum)
I'm ok with some risk in my savings, as I have a relatively low risk 401k.

Quote
analysis paralysis
Sometimes you just have to make a decision on an incomplete data set and go with it. I'm ok with that.
Title: Re: How screwed are we for early retirement?
Post by: freya on May 12, 2018, 08:29:15 AM
Just to be clear and then leave the Roth issue alone...backdoor Roth contributions are technically conversions, so they can't be withdrawn for 5 years.  The reason for going hog wild on the Roth IRA deal is that I perceived that the OP is already running a tight ship as far as expenses go, and that, the best route to increasing savings is to reduce taxes and protect the investments that will soon be appearing.

How about this for next steps:

1) Look into whether you could benefit from opening an HSA, by researching costs & premiums for your current health plan vs and high deductible plan.  Generally, the HSA is the better deal if you're high income.

2) Open a high-yield online savings account - here's a list to start researching:  https://www.nerdwallet.com/blog/banking/best-high-yield-online-savings-accounts/.

Move the $10K in savings there, and you'll throw new savings there as well.  Grow this account to 1 year expenses for your emergency fund, then you can start thinking about investments.
Title: Re: How screwed are we for early retirement?
Post by: MDM on May 12, 2018, 09:56:19 AM
Just to be clear and then leave the Roth issue alone...backdoor Roth contributions are technically conversions, so they can't be withdrawn for 5 years.
If it were a conversion of pre-tax money from traditional to Roth (for which tax was paid at the time of conversion), the 5 tax year period applies.

Conversions of post-tax money from traditional to Roth (for which tax was not paid at the time of conversion, e.g., a backdoor Roth) may be withdrawn without tax or penalty at any time - after direct contributions and any taxable conversion money has been withdrawn.

See http://retirementlc.com/wp-content/uploads/2017/07/2017-07-06-Roth-IRA-Distribution-Ordering-Rules.pdf and http://fairmark.com/forum/read.php?2,54159,85510#msg-85510.

For IRS-speak, see Recapture amount subject to the additional tax on early distributions (https://www.irs.gov/pub/irs-pdf/i5329.pdf):
Quote
Generally, an early distribution is
allocated to your Roth IRA contributions
first, then to your conversions and
rollovers on a first-in, first-out basis. For
each conversion or rollover, you must
first allocate the early distribution to the
portion that was subject to tax in the
year of the conversion or rollover, and
then to the portion that wasnít subject to
tax. The recapture amount is the sum of
the early distribution amounts that you
allocate to these taxable portions of
your conversions or rollovers.
Title: Re: How screwed are we for early retirement?
Post by: pbkmaine on May 13, 2018, 02:27:28 AM
For the backdoor Roth, find a CPA who is familiar with this strategy and pay for an hour of their time to discuss it. As you have probably gathered from the posts above, itís complicated and you need to do it right.
Title: Re: How screwed are we for early retirement?
Post by: RelaxedGal on May 16, 2018, 08:47:23 AM
As Check2400 said, you're in good shape and everything else is just nit picking.

Which, of course, I'm going to do because everyone has opinions on the internet.

Congratulations on the move, downsizing, full time telecommute, improved eating, improved exercise, and general awesomeness!
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 16, 2018, 09:35:15 AM
  • You said you each have $24,000 going to retirement, but didn't break out the additional employer match.  Woo!  You're actually doing better than posted.

We are both maxing out our 401k contributions and at our age, that is about 24k apiece.
I get a small match, I think 50% to 3% or similar. I think DW gets 100% to 6% or something along those lines. I know her match is so much better than mine.

We did gather the social security info and its about the same for both of us:

 Age   Monthly Allowance
 70   $ 3095
 67   $ 2397
 62   $ 1562

In addition, and I forgot to mention this in the initial post, I was born in the UK and didn't move to the US until I was almost 40. This means I am eligible for a UK government pension. In addition I have a small private pension too. I'm not sure yet when or how much these will be. I suspect as follows:

Gov Pension      $ 200/wk
Private pension $500/yr

I think this should kick in at 65 but I need to confirm. There may also be complexity around the fact that I am out of the UK.

That $200/wk might be very useful!
Title: Re: How screwed are we for early retirement?
Post by: nereo on May 16, 2018, 10:57:32 AM

We did gather the social security info and its about the same for both of us:

 Age   Monthly Allowance
 70   $ 3095
 67   $ 2397
 62   $ 1562

In addition, and I forgot to mention this in the initial post, I was born in the UK and didn't move to the US until I was almost 40. This means I am eligible for a UK government pension. In addition I have a small private pension too. I'm not sure yet when or how much these will be. I suspect as follows:

Gov Pension      $ 200/wk [$867/mo]

Well this makes things decidedly more rosy for you and your DW.

If we go with the *earliest* you can take SS, at age 62 you will have $3,124/month, which will get bumped up to $3,991 when you turn 65.  IIRC this represents ~68% of your admittedly high spending target.

If you wait until each of you turns 67 you will have >100% of your spending covered by SS and your pension.

This means you need only to have enough saved to bridge the gap between now (age 52 for you / 55 for dear wife) and age 67.  That's 15 years.
To quit today at a $5k/mo spend rate you would need $1MM (93% success rate), or $775,000 if you drop your expenses to $4,000.  So you aren't there yet.

But the brilliant silver lining here is that every year you get closer to SS and your pension you need less and less.  In 5 years you will need just $550,000 to keep that very high $5k/mo spending rate.  In 7 years you'll need just $425,000 (all for >90% success rates).

Then there's the option to 'scale down'.  You have enough assets now that you could glide into retirement just fine, provided you made at least enough to cover expenses for the next few years.  That means either one of you could quit, or you could both go part time (if possible).  With market gains you could go part-time today (earning min. combined $60k/year), continue this for 3-5 years and then pull the plug entirely.

Of course with all this you will want to consider what happens if one of you dies earlier than expected, but you don't have a retirement problem, you have a 'bridging the gap between traditioanl retirement and today' problem.  It's a good one to have.


Title: Re: How screwed are we for early retirement?
Post by: reeshau on May 16, 2018, 01:08:05 PM
In addition, and I forgot to mention this in the initial post, I was born in the UK and didn't move to the US until I was almost 40. This means I am eligible for a UK government pension. In addition I have a small private pension too. I'm not sure yet when or how much these will be.

Be careful with your social security calculations.  The UK is a treaty country for social security benefits.  This can be helpful in cases with work histories not long enough to qualify for social pensions, but in some cases, it's not necessarily good news.  At the risk of realizing this bad news, you can schedule an appointment at a social security office, and bring information about your UK work history.  They can then do a custom calculation on your benefit net of the impacts of the treaty.

To quote from https://www.ssa.gov/international/Agreement_Pamphlets/uk.html :

"A U.K. pension may affect your U.K. benefit
If you qualify for Social Security benefits from both the United States and the United Kingdom and did not need the agreement to qualify for either benefit, the amount of your U.S. benefit may be reduced. This is a result of a provision in the U.S. law that can affect the way your benefit is figured if you also receive a pension based on work that was not covered by U.S. Social Security. For more information, visit our website, www.socialsecurity.gov , and get a copy of our publication, Windfall Elimination Provision (Publication No. 05-10045). If you are outside the United States, you may write to us at the address shown in "For more information" section."

(please don't skewer me on the above paragraph.  Yes, it says a UK pension may affect your UK benefit, then goes on to talk about how a UK pension may affect your US benefit.  That's why I quoted it--it's a government brochure.)
Title: Re: How screwed are we for early retirement?
Post by: politenessman on May 16, 2018, 01:19:25 PM
I've only skim read that but it looks like it is geared towards people who are, for instance, UK citizens working in the US and paying taxes here, and vice versa (I have some friends who do this).

That is not my situation. I've been working in the US since 2000 on a green card and became a citizen in 2008.
Prior to that I worked only in the UK and paid UK taxes etc.

I suspect my UK pension will not be full value due to me only working 14 of 44 years expected (However I was earning at a high rate, so I have paid in a considerable amount). According to US social security, I am eligible for the full amounts as described above.
Title: Re: How screwed are we for early retirement?
Post by: nereo on May 16, 2018, 01:27:38 PM


That is not my situation. I've been working in the US since 2000 on a green card and became a citizen in 2008.
Prior to that I worked only in the UK and paid UK taxes etc.

Just wanted to add - the SS benefits that are listed on the SS website are projections of what you will get - they assume to some degree that you continue working at roughly the same wages until retirement age.  There are methods for estimating exactly what you would get if you stopped earlier but if you have a 20 year working history much of your benifit is already 'baked in'. 


*SS requires a 40 'credit' work history to qualify, which any full-time earner can with 10 years employment.  Your maximum benefit is calculated on your best 35 years.  If you don't work at all you get zeros for those blank years.  Its one small reason why working part-time can provide another benefit (in addition to allowing you to not touch your nest-egg while having a much reduced schedule).
Title: Re: How screwed are we for early retirement?
Post by: reeshau on May 17, 2018, 06:58:42 AM
I've only skim read that but it looks like it is geared towards people who are, for instance, UK citizens working in the US and paying taxes here, and vice versa (I have some friends who do this).

That is not my situation. I've been working in the US since 2000 on a green card and became a citizen in 2008.
Prior to that I worked only in the UK and paid UK taxes etc.

I suspect my UK pension will not be full value due to me only working 14 of 44 years expected (However I was earning at a high rate, so I have paid in a considerable amount). According to US social security, I am eligible for the full amounts as described above.

Any of the above situations can / are impacted.  The reason I am aware of this is that I, a US citizen, am about to start a 5 year stint in Ireland. (Ireland also a treaty country, but these are all negotiated one-to-one, so while there are typical clauses, the specifics can differ)  As nereo points out, this will put "zeros" in my US social security benefit calculations.  However, my Irish years, accumulating some credits with them, but not enough for a benefit, will end up adding to my (reduced) social security--in essence, Ireland will fund some of my US payout.  But, if I end up staying 10 years, long enough for some Irish benefit, then my SS may be *further* reduced because of that Irish support, given directly to me.

There is a web page on the social security site that describes how this is calculated.  It's not an easy calculation, but worth understanding if you are counting on this money at some phase of your life.
Title: Re: How screwed are we for early retirement?
Post by: politenessman on July 23, 2018, 07:50:50 PM
I thought I would update you lovely people, just because I have been making progress:

The savings and investments
The roll over of my Chase IRA (created with old and dusty 401k monies from ages past) is almost complete; once Fidelity get the money in the right account. I did speak with the retirement advisers at Fidelity and they gave me the run down on the mechanics of the Roth IRA and how to fund it so I am clear on that and have opened both an IRA and Roth IRA account to get that moving.

I did some research and while I see the appeal of Vanguard, I have all my accounts with Fidelity as my 401k is there. However I did take note of the advise with regards the types of funds to invest in, the mix and so on. I have changed my mutual fund selection for the 401k, to S&P 500 mutual funds, with a small amount a growth fund that I am fond of.
(For my 401k there is no total market fund available, the S&P500 is as close as I can get, and it is low cost - FUSVX @ 0.035%)

I have also started to fund the tIRA with a view to rolling that money into the Roth by the end of the year. So far I have about $750 in there.
In addition I have opened an individual investment account for all the money that can not go into the IRA. I have about $450 in there - I'm using it like a change jar.
(Because the value is low, I am using ETFs - iTOT which trades for free on Fidelity)

The emergency funds were split - $5k in chase at 0% interest, and the remaining 5K moved to Amex Savings @ 1.7%.

The spending
As I suspected, we are not spending $1000/mth on groceries now that we are not eating out. It looks like we have reduced our monthly spend from $4k down to about $3,300, but I want to get a couple more months under our belts before we call that definitive.
There are still some things we can do with regards the spending that we will likely do as the year rolls on.

In addition, we will be looking into an HSA at the end of the year when DW gets her benefits elections.

I am making good progress on getting the small car loan paid off - currently I am paying it down at about 2500/mth and apparently I get a ~$2000 refund from trading in one Subaru for another so that will help (when it finally gets here). The $2500/mth is less than I intended but the wife has traveled more than anticipated recently, plus some of the funding activity above has taken some of the funds. I am however still on target to have this paid off before the end of the year.

And that is my current focus; car loan gone by the end of the year and Roth IRA fully funded. It is an achievable target.
Next year the plan is to increase the emergency fund up to ~25k, fully fund both our Roth IRAs (DW has one now too), keep fully funding the 401ks, and what ever savings we have left over goes into the individual investment account. At least initially the plan is to invest in index funds - either total market or at the very least, S&P500.

So that is where we are now. I took what you guys told me, I did some reading, and a lot of math, put a plan together and have started to execute on it, so thank you all for helping me get this far.

As for when we retire; we aren't sure about that yet. Its not so much the money as it is when we want to stop what we are doing now. Our best guess at this time maybe in 6-8 years. I like what I do and if it continues to be fun, then I will continue to do it!
Title: Re: How screwed are we for early retirement?
Post by: reeshau on July 24, 2018, 01:41:22 AM
So that is where we are now. I took what you guys told me, I did some reading, and a lot of math, put a plan together and have started to execute on it, so thank you all for helping me get this far.

Of all the discussion points, options, etc. this is the real purpose, to me.  Congratulations on finding a direction, purpose, and peace, and good luck in the execution.
Title: Re: How screwed are we for early retirement?
Post by: UnleashHell on July 24, 2018, 05:16:44 AM
Re the pensions.

US: it does assume that you'll carry on working until you retire to get that amount. However the amount you get per year for each extra year working is tiny due to how the inflection points in the calculations work. Inflation will have a bigger effect on your financial picture than extra years into your SS payments.

UK Pension: will be reduced as you didn't work the full amount of years. From memory 15 years in the UK will get you about 60% to 70% of the full UK pension (which isn't awesome in the first place).

It will need to be declared in the US and will reduce your SS amount by up to 50% of the value of the UK pension.
so if you get $100 from the UK then it'll reduce the SS by $50.


However it then depends on how long you've worked here (again this is from memory of when I looked it up)
for every year you work in the US from year 20 to year 30 then the amount of the reduced is decreased by 5% so 20 years will get you a 50% reduction in the offset. 21 years changes the offset to 45% etc until you reach 30 years when the offset is 0.


Of course all this can change as soon as either the UK or the US changes the tax rules they apply to pensions and SS.

Given the amounts involved at that stage then its probably better to work an extra few months and grow the stash which will offset the amounts involved completely.

I checked it out because my work history is very similar - UK until 2000 then over here working.
Title: Re: How screwed are we for early retirement?
Post by: John Galt incarnate! on July 26, 2018, 12:01:04 PM

Your grocery costs are insane for 2 people, even considering the dogs.


I concur.

Title: Re: How screwed are we for early retirement?
Post by: politenessman on July 26, 2018, 12:07:55 PM

Your grocery costs are insane for 2 people, even considering the dogs.


I concur.

You may have missed this bit in a more recent post
Quote
As I suspected, we are not spending $1000/mth on groceries now that we are not eating out.
We seem to be running at about 400/mth including eating out, and feeding the dog
Title: Re: How screwed are we for early retirement?
Post by: John Galt incarnate! on July 26, 2018, 12:16:55 PM


You may have missed this bit in a more recent post
Quote
As I suspected, we are not spending $1000/mth on groceries now that we are not eating out.
We seem to be running at about 400/mth including eating out, and feeding the dog

Ah!

That's MUCH better (yes I did miss it).
Title: Re: How screwed are we for early retirement?
Post by: politenessman on January 04, 2019, 06:02:07 PM
I just wanted to update this:
Car is now paid off so we enter 2019 debt free
I have also been monitoring the monthly spend and it looks like we are running at about a total of $3300.
We are not the most frugal of folks, but at the same time we don't go overboard either.
We did both manage to max our 401ks out ($24,500 each) and put some more cash aside.
All in all, we are quite pleased with 2018.

Goals for 2019 is to get the wife a new job (she was laid off last year), and save a deposit for a house. We have figured out that if we do this right, we can shave off about $600k from our savings goal, making our retirement a lot more comfortable.
That only works if we buy the right way though ... it will be interesting to see how it all pans out