Author Topic: Maximizing a Career Change: 2.5x income, new debt, and a return to Staching  (Read 1404 times)

RePatriot

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    Apologies in advance if this is rambly or disorganized, as I'm trying to balance not doxxing myself with supplying sufficient information. I can also post the spreadsheet if helpful.
Life Situation: MFJ, 1 working (salaried, W-2), 1 fulltime SAH, 1 dependent (planning on 2-3 more over the next 5-6 years).
Gross Salary/Wages: These numbers are inclusive of salary and bonus. I work for a large law firm, so bonus is pretty well guaranteed so long as I hit standard billable rates, and the compensation scale is standard across the industry. Because my position is subject to both the whims of the business cycle and a remarkably high rate of burnout, we're not trying to build a life dependent on this rate of income. We are aiming for a minimum of 3 years in my current role, leaving only if it is costing my health or our marriage.

2023 (started mid-September):
Earnings - $72,707
Taxable Reimbursed Expenses - $3,124
Grossed-up Reimbursed Expenses - $18,727 

2024 - $245,000
2025 - $265,000
2026 - $317,500
2027 - $385,000
2028 - $455,000
2029 - $495,000
2030 - $535,000

Individual amounts of each tax advantaged investments:

2023:
Roth 401k: $15,000
Roth IRA: $6,500
Spousal Roth IRA: $6,500
Family HSA: $3,000 (prorated contribution as wife was on Medicaid until July 31, 2023, more on this below)

2024:
-Trad. 401k: $23,000
-Roth IRA: $7,000
-Spousal Roth IRA: $7,000
-HSA: $7,700 + $600 employer contribution
-Health Insurance (including Vision and dental): ~$9,000

Adjusted Gross Income: $205,300

Taxes:
2023: Uncertain (I don't fully understand the gross-up and other taxable comp impacts as of yet), but definitely over withheld as of right now (to the tune of potentially ~$10k, as HR withholds based on yearly base salary, of which Iíve only earned 25% in 2023). Planning on putting return towards debts.
2024: $26,848 (assuming here Iím not itemizing. Havenít started looking into this yet)

Current expenses:
Keeping these skeletal because we have only recently moved to a major Texas metro and donít have a strong understanding of our spending (yet, Iíve previously tracked spending and will return to doing so). I also know that we are quite spendy right now (especially on the grocery bill), but this has been a bit of a celebratory period after 3 years of broke college life. So, the below are worst-case scenario for the following year, provided on a per-month basis.
Rent: $2,700
Utilities: $425 (estimations from averaging summer and winter bills)
Food: $1,000 (inclusive of alcohol and ordering out, at roughly $150~$250/mo)
Life Insurance: Both my wife and I have $500k of coverage for $369 year/person. Iíve purchased an additional $1.5m in coverage for $150/mo. for a 20 year term starting in 2023 after becoming the sole breadwinner.
Car Insurance: $161
Car maintenance: $166
Beautician/Personal Grooming: $100
Dentist: $100
Dry Cleaning: $50
Pets: $312 (Dog is currently on $212/mo food as we try to diagnose and treat allergies and skin problems)
2 Cell Lines: $200 (sticker shock on this, I think we likely had an introductory rate that expired without me noticing)

Assets
:
2 fully paid cars, one of which will need to be replaced in the next year or two.
Cash: $2,183
Taxable: $25,292
Tax deferred: $150,137
Roth + HSA: $64,601

Liabilities:
Credit Cards: $3,000 in balance transfer, 0 APR until 2025. $21,000 at 21.24% APR. this was incurred during the period where neither spouse was working and we moved cross-country.
Affirm loan for furniture purchase: $2,894 at 25% APR
Student Loans: Note, due to an error on either the servicer or schoolís side, my loans are currently under In School/Deferment status until 2025. I currently have no minimum payments due, but interest is accruing on the deferred loans. After calling both the school and servicer to try and get this situation resolved, we are in a Spiderman meme standoff where neither is taking responsibility or initiative to fix the erroneous status (though this is likely the schoolís fault, as a large cadre of my classmates are in the same boat, despite having different servicers). Each is claiming the other is the only party that can correct the status.
$20,500 Ė 4.3% (In School)
$1,983 Ė 5.3% (Deferment)
$20,500 Ė 5.28% (In School)
$22,694 Ė 6.28% (Deferment)
$20,500 Ė 6.54% (In school)
$24,502 Ė 7.54% (Deferment)

Other Background: I believe that 2023 is likely to be our lowest income year (including in retirement), as I started working mid-September. Thus, I focused our contributions on maxing out our Roth space. Some of this was funded via the sales of our taxable assets in this year (2022/2023 IRAs and 2022 HSA), while the 401k was funded via paycheck contributions. Having not really had any debt in the past, I underestimated our need for cash flow to service the debt. Weíre looking to basically squeak over the line into 2024, and get our financial house in order.
I understand that forum culture includes a bit of shaming and ribbing around dumb mistakes and spendy choices, and Iíve accumulated quite a few of both in the past year. Between a newborn, moving, and trying to maximize my last months of freedom before starting an extremely demanding career, I have done a lot of equivocating and self-dealing around financial choices, resulting in a pretty dumb financial picture. I will take my lumps and I welcome the input, but I am also trying to avoid the woe-is-me feelings and get this shit fixed ASAP.

Specific Question(s):
My wife and I are lapsed Mustachians looking to return to the fold. While we have been horrendously spendy in 2023, I donít doubt our ability to pivot and cut back our discretionary spending in 2024. That is, I donít think building up cash on hand will result in cash leaving hand stupidly. Because weíve taken a big jump in income, I want to make sure my plan of attack is sound, while still taking into account my own psychology and need for peace of mind.
Post-tax takehome in 2024 is ~$16,500/mo. The current plan of attack:
1. Kill the spendy habits, return to monke mustachianism.
     a. Reduce grocery bill substantially
          i. All food and drink at home
     b. Discretionary spending minimized
          i. Beauty, clothing, and other discretionary spending minimized.
          ii. Cheap/free, active dates and family time
2.   Minimize tax advantaged investment contributions in the near term, such that by end of March, we:
     a. Stash $10k in emergency fund
     b. Pay off credit card debt completely (Introductory APR expires 4/4/24)
     c. Pay off couch loan completely
3. In the remainder of the year:
     a. Cash Savings:
          i. Build up emergency fund to ~$25,000
     b. Maximize tax advantaged investments:
          i. Family HSA- $7,700 + $600 ER contribution
          ii. Trad. 401k-$23,000
                   1. I am currently investigating the possibility of a mega backdoor roth for additional investment funds in 2024 and beyond
          iii. Roth IRA + Spousal Roth IRA- $14,000
      c. Student Loan repayment:
           i. Minimum payments: Approx $1,230/mo, for a yearly total of $14,760
      d. Begin charitable donations and 529 funding for family members (totaling ~$4,000 in 2024)[/li][/list]

The Questions:
1.   Generally: are there any tax inefficiencies in the above plan? We had previously been decent earners (combined $100k income with a 45-55% savings rate). We are now moving into a one earning/one working at home relationship, and have taken a pretty substantial jump in income. We are on the cusp of some pretty important cutoffs for income tax purposes, so I want another set of eyes to check my work.
2.   Student Loans: The common wisdom when I was more dialed in to MMM was that the closer interest rates on debts were to 7%, the more likely preferentially paying off those debts instead of investing was the sound choice. Given current interest rates, should I be thinking about the student loans differently (I know the interest rate environment doesnít impact my repayment schedule directly)? Iím currently thinking of paying off those loans with over 6% interest (starting with the highest interest rates) after clearing out the credit card debt, but let the others ride.
3.   Roth Conversions in 2023: Iíve sold some of our taxable assets to maximize Roth space in 2023 and 2024. Iím thinking that a simple metric for any other conversions in 2023 is converting up to the point where (2023 income) + (2023 traditional to Roth conversions) = (Predicted income in retirement). Let me know if I am missing any considerations here.
4.   Mega Backdoor Roth 401k in 2024: Iíve asked a few coworkers about after tax contributions to the 401k, but none seem aware of the strategy. Vanguard is the 401k provider.
                       a. Does this strategy have any ripple effects on other aspects of tax planning, assuming I can immediately rollover after-tax contributions to Roth?
                       b. Has anyone utilized the one-off advising services Vanguard offers? Would it be worth meeting with one of their advisors for tax planning purposes?
5.   Backdoor/Rollover IRAs: in 2025 and beyond, I may need to contribute to non-deductible tIRAs, and then rollover those contributions to Roth IRAs. From what Iíve read of the mechanics here, it may be simpler/more cost effective if I rollover current traditional IRA holdings to my current 401k.
             a. Is it simpler/more tax efficient if I don't have any tIRA holdings in 2025? I can get started on this in 2024, as Iím fine with my current 401k offerings, and could rollover there if so.
             b. Spouse has tIRA holdings pf $32,144. Should I roll this over to a Roth in 2023, as it has no other place to go? Or will the basis rules not make an impact here?
             c. Can anyone provide resources for understanding this strategy? Everything Iím reading is over my head right now.
« Last Edit: December 09, 2023, 08:51:41 AM by RePatriot »

Sandi_k

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You cannot convert a traditional IRA to a Roth if you have an outstanding IRA without major complications and pro-rating percentages.

I would:

- Pay off the CCd first
- Pay off the couch loan next.
- Convert DW's IRA to Roth; the entire amount will add itself to your taxable income, so do it in 2023, not 2024.

For more explanation on the Back Door Roth process, I like Investopedia:

https://www.investopedia.com/terms/b/backdoor-roth-ira.asp

For the student loan - reach out to your Congressperson. Nothing they like better than making their constituents pay back money. ;)

Once those steps are complete, come back for more guidance.

Best of luck! Figuring out a game plan is more than half the battle.

lhamo

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What is your long-term plan workwise?  If you are anticipating a fairly early retirement, I would focus on putting as much as you can into traditional retirement plans while your income is so high, plus saving up a decent cash cushion for the first five years of FIRE.  You can start your Roth conversion ladder once you don't have such a high income and move that money from your taxable to tax free bucket in a more tax efficient manner.

Remember you now have until age 75 before traditional IRA RMDs kick in.  So if you work until age 50ish you still have 25 years to convert the bulk of what you have in traditional retirement accounts.

RePatriot

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You cannot convert a traditional IRA to a Roth if you have an outstanding IRA without major complications and pro-rating percentages.

I would:

- Pay off the CCd first
- Pay off the couch loan next.
- Convert DW's IRA to Roth; the entire amount will add itself to your taxable income, so do it in 2023, not 2024.

For more explanation on the Back Door Roth process, I like Investopedia:

https://www.investopedia.com/terms/b/backdoor-roth-ira.asp

For the student loan - reach out to your Congressperson. Nothing they like better than making their constituents pay back money. ;)

Once those steps are complete, come back for more guidance.

Best of luck! Figuring out a game plan is more than half the battle.

Thanks for the link! From what I'm reading and what you're saying, having no/minimal tIRA holdings when performing a Backdoor Roth conversion simplifies things significantly. Considering I don't anticipate having less than 2023's salary in retirement, a conversion of DW's tIRA in 2023 is likely to be a net positive, even if the Backdoor "loophole" is closed by 2025.

I have a strong grasp of the debt repayment side of things. Just gotta knock those out quickly.

What is your long-term plan workwise?  If you are anticipating a fairly early retirement, I would focus on putting as much as you can into traditional retirement plans while your income is so high, plus saving up a decent cash cushion for the first five years of FIRE.  You can start your Roth conversion ladder once you don't have such a high income and move that money from your taxable to tax free bucket in a more tax efficient manner.

Remember you now have until age 75 before traditional IRA RMDs kick in.  So if you work until age 50ish you still have 25 years to convert the bulk of what you have in traditional retirement accounts.

Long-term work plans are not solid right now. I'm not anticipating an extremely early retirement, but more likely a cut back to part-time or moving to work I find more fulfilling after a ~7 year period of accumulation. Making it 7 years at a large firm is very atypical however, so I'm trying to build a life that is not dependent on the big salary jumps. Financially, I anticipate being above the $250k mark for my career, even if I transition out of the big firm world.

We are focused on putting as much as possible in traditional retirement plans, but that space will be easily filled, even while repaying our debt and covering life expenses. the only traditional retirement vehicle available in 2025 is going to be the 401k, so I'm trying to plan in advance for Backdoor Roth conversions, as above. However, your note regarding RMDs has given me some more to think about. Thank you!

VanillaGorilla

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Wow, congratulations on the great new job! Things are changing!

A few random thoughts:

- Are you underestimating your tax liability? I think your federal bracket should be 24% and you'll owe $50k or so in 2024.

- I am uncomfortable treating my health insurance as an investment vehicle (HSA). High deductible insurance plans make me nervous unless you're a young healthy adult. I prefer to maximize my health insurance for health.

- You might want to double check, but you might no longer quality for Roth IRA contributions.

- Brainstorming mega backdoor roths etc is great, but your debt is an emergency. Your loans are accruing interest every month! Emergency!

I would set short term goals: prioritize building a small emergency fund, getting a 401k match, paying off your credit card, then paying off the student loans asap. Student loans are the worst liability to have after credit cards and being indebted to the mob. I know several intelligent adults who have ignored student loans for ages, for "reasons", and it never ends well. You can easily buckle down and pay off all your liabilities in the next year, setting you up nicely for all the big life changes that will likely come in the next few years, whether that's more children, more moves, buying a house, career changes, or whatever else comes your way.

Debt is #1. Investing comes later. Playing neat investing tricks comes even further after that.

RePatriot

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Wow, congratulations on the great new job! Things are changing!
Thank you! Having my wife be FT SAH has been a very long term goal of ours (since we we started dating 10 years ago),
 so to finally be here is immensely rewarding. It is also a bit scary, as I'm now solely responsible for the financial future of our family.


A few random thoughts:

- Are you underestimating your tax liability? I think your federal bracket should be 24% and you'll owe $50k or so in 2024.
That figure is per the case study spreadsheet, and I just did a double check on the IRS withholding calculator. Filing MFJ with 1 dependent qualifying for the child tax credit (less a maxed t401k and family HSA) puts our 2024 tax liability much closer to the $30k range than $50k.

- I am uncomfortable treating my health insurance as an investment vehicle (HSA). High deductible insurance plans make me nervous unless you're a young healthy adult. I prefer to maximize my health insurance for health.

I don't love it either, frankly. However, the other insurance plan options available are not much better. All things considered, the HSA tax advantages more than cover the differences in out-of-pocket spend in the case I actually need to utilize the insurance.

- You might want to double check, but you might no longer quality for Roth IRA contributions.

2024 is the last year I will be able to make Roth IRA contributions without utilizing a backdoor strategy. My gross income of $245,000 - $23,000 in t401k investment = an AGI of $222,000, which is beneath the MFJ Roth income limit of $230,000.

- Brainstorming mega backdoor roths etc is great, but your debt is an emergency. Your loans are accruing interest every month! Emergency!

I would set short term goals: prioritize building a small emergency fund, getting a 401k match, paying off your credit card, then paying off the student loans asap. Student loans are the worst liability to have after credit cards and being indebted to the mob. I know several intelligent adults who have ignored student loans for ages, for "reasons", and it never ends well. You can easily buckle down and pay off all your liabilities in the next year, setting you up nicely for all the big life changes that will likely come in the next few years, whether that's more children, more moves, buying a house, career changes, or whatever else comes your way.

Debt is #1. Investing comes later. Playing neat investing tricks comes even further after that.

I agree that in setting priorities for financial "offense", it goes 1) emergency fund 2) debt 3) basic tax advantaged investment strategies 4) everything else. I am NOT trying to major in the minors here because neat strategies are sexy and fun. Instead, I'm considering the long term tax and investment implications of becoming a much higher earner than before. The "basics" of priority 3 shift once you earn over certain cutoffs written into the tax code, so I want to make sure I am understanding these correctly.

Our debt is top priority and is a near term emergency. But in the long term, while (rather than after) I pay the CC and furniture loan debts off, I want to ensure I have paved the way for maximizing investment and tax strategies in 2023, 2024, 2025 and beyond. The student loans (especially those over 6% interest) are a priority. Considering I'll only be able to contribute to a backdoor Roth (without complicating my tax situation significantly) if I make some moves this year, I'm asking these questions to better prepare, not to ignore the debt. Maybe I'm coming off as minimizing those debts, but that might be because I have confidence in our ability to hammer those loans into submission quickly.

Seems the thread consensus is: in 2023, rollover the DW's tIRA into a Roth, and start rolling over my tIRA's into my current 401k; in 2024, 1) knock out the CC + loan debts ASAP 2) build up an emergency fund 3) max out 401k + HSA + Roth IRAs 4) throw extra $$$ at the student loans. I'm still thinking the $60k-ish in 6%+ is the emergency portion of this and will be the goal for 2024, but I can also reevaluate if I'd rather just knock the rest out while we're on a roll, then take that debt repayment portion of the monthly spend and start socking it away.

lifeisshort123

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In response to your questions:
1. Great goal for mustachianism.  Can you actually go to not eating out at all? Always better to have a realistic plan than something so austere you won't do it.
2. I'd focus on paying off the credit card at 21% ASAP.  Even over the $10k in emergency fund.  Maybe put $2k or $5k in there to make you feel good.
3. Focus on getting those big accounts done - emergency fund, HSA, Trad 401k
4. Do you qualify still for a ROTH? If so, is this your last year?

Maybe I shouldn't say this, but I feel like right now you are trying to solve many things for the long term.  I understand you are now earning a great income.  At the risk of overstepping, I would just say, don't feel like you have to take on everything today.

In the immediate future, you have $21k of credit card debt you need to pay off.  I get it, that's less than 1 month of your take home pay, but focus on first getting that done.
Then pivot to paying off your other debts based on their interest rates.  Your employer may allow you to receive a benefit or take some of your compensation in pretax dollars to cover about $5k of the student loan bill.  That's worth taking a look at seeing if they offer.

I'd focus on getting debts out of the way.  I get it, you want to do it all, but please take it step by step.

Laura33

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Financially, I anticipate being above the $250k mark for my career, even if I transition out of the big firm world.

What's the basis for that assumption?  IME, legal salaries are kind of binary -- you get the big bucks at a big firm, or you make like $60-120K for the government or a nonprofit.  Looking to go in-house?  There tend to be lots of options there, but again IME, don't count on that allowing you to cut back on work hours much (at least for the ones that pay high salaries).

I really like your plan and think you have a great start here; yeah, the CCs are unfortunate (and borrowing $$ for furniture?? eyeroll please), but sometimes we learn lessons the best by doing things wrong the first time through.  And you've got a good-enough salary to knock those out quickly.  A few other thoughts I had:

1.  I second the notion of not setting a "zero eating out" goal.  Yes, you are former Mustachians, so you know what it is like to actually live that way, which puts you a major leg up on many.  On the flip side, you've never been parents before, and your DW has never been a SAH before, so you can't just revert back to what you used to do, because your life is different now.  Those kinds of changes come with their own struggles, and she may well find that things like weekly coffee-shop dates or mommy-and-me events are really critical for maintaining sanity and making friends in the new area.*  And things like cooking from scratch may periodically give way to "hey, look, there's a frozen pizza in the freezer" (colic, I'm looking at you).  It's great to have all of the plans and ideals, but you also don't want your DW to feel like she's failing just because she needs the occasional Starbucks, you know?

2.  Once you get the CCs paid off and all those other priorities in line, I'd suggest a much larger emergency fund (and/or accessible after-tax investments).  You are sole breadwinner, in a very boom-and-bust industry.  And if things go well, you're going to have several additional little people depending on you in a few more years.  I think you want probably 6 months for a longer-term EF, since you don't have a second job to fall back on. 


*When my DD was little and I was waiting for daycare to kick in, I joined a gym, because they offered 1.5 hrs/day of childcare for $2.50.  I went every day.  Sometimes I worked out, other times I just sat in their cafe for an hour and a half of glorious alone time.

RePatriot

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In response to your questions:
1. Great goal for mustachianism.  Can you actually go to not eating out at all? Always better to have a realistic plan than something so austere you won't do it.

In part, the no eating out goal (and other austerity measures of pushing clothing or other discretionary purchases into the future) are to get back to a style of budgeting that has worked well for us in the past. I'd like to pay the essentials directly out of the account where my paycheck is deposited, and deposit my wife's discretionary, no strings attached money directly into hers. We've tried forward facing budgets in the past, but always found that it was much easier to focus on managing the big pieces of our financial picture (preferentially investing and saving, keeping housing, transportation, and grocery expenditures reasonable) and then keeping a bigger cash pad for the infrequent expenses (replacing tires or a sick dog's vet visit). I then do spending breakdowns at the end of the month when paying our CC's, and if I notice our habits are getting out of line with our goals, we adjust. We'll be doing our budgeting mostly the same in the future, but I think DW would rather just look at her account and see what she has, then make choices from there.

The last thing I want is for DW to feel beholden to me for money, so I'm trying to race to a place where we can manage our finances the same way we've done successfully in the past. That being said, we can definitely loosen up a bit here, and won't be beating ourselves up if we have to grab some take out.

Financially, I anticipate being above the $250k mark for my career, even if I transition out of the big firm world.

What's the basis for that assumption?  IME, legal salaries are kind of binary -- you get the big bucks at a big firm, or you make like $60-120K for the government or a nonprofit.  Looking to go in-house?  There tend to be lots of options there, but again IME, don't count on that allowing you to cut back on work hours much (at least for the ones that pay high salaries).

I really like your plan and think you have a great start here; yeah, the CCs are unfortunate (and borrowing $$ for furniture?? eyeroll please), but sometimes we learn lessons the best by doing things wrong the first time through.  And you've got a good-enough salary to knock those out quickly.  A few other thoughts I had:

1.  I second the notion of not setting a "zero eating out" goal.  . . . you also don't want your DW to feel like she's failing just because she needs the occasional Starbucks, you know?

2.  Once you get the CCs paid off and all those other priorities in line, I'd suggest a much larger emergency fund (and/or accessible after-tax investments).  You are sole breadwinner, in a very boom-and-bust industry.  And if things go well, you're going to have several additional little people depending on you in a few more years.  I think you want probably 6 months for a longer-term EF, since you don't have a second job to fall back on. 

As far as the career goes, I don't anticipate leaving this big city. I also plan on going the distance at the firm I'm at (3 years at least, shooting for 5-7), though some of this is definitely beyond my control. As far as exit options, the exit opportunities get increasingly attractive the more biglaw experience you have. Once you crest that 5 year mark, your chances of exiting into an even more lucrative position are decent, or you can take the paycut and get some hours back. If that isn't the case when I decide to leave (or the job market shifts dramatically and I've got no place to go), well, that's why were saving like crazy while I'm making great money. Even if I end up being wrong, it'd still be advantageous to convert DW's tIRA in 2023, considering the unavailability of IRA options in 2025 and beyond, correct?

I your point on the EF is well noted. That will definitely be the goal for 2024 and beyond (probably reevaluate the size of cash savings around bonus season). Industry standard is a 3 month "severance" package (usually this means you are still nominally working for the firm, including being posted in the directory, to aid your job search), but I'll consider that a bonus. I'm also pretty confident the firm I'm at will weather a downturn better than most, but again, won't be relying on that. We're currently utilizing a BoA savings account earning terrible interest, so I'll need to explore cash placement options once the savings get a bit of fattening up.

As far as the couch loan, our last one had a prodigious cheese odor from being covered in breastmilk and spit up before sitting in storage prior to delivery by the moving company. Maybe not the wisest dollars we've spent, but happily parted with nonetheless.

 

Wow, a phone plan for fifteen bucks!