Reader Case Study - Questions/Advice for 2020!

[philli14]

Hi all,

A few questions that I would love to get some input on. I figured a case study would be most helpful to get a number of questions answered.

Background
26M, single, renting in VA, no dependents, standard deduction
78k gross salary, additional 2k-5k in possible income from churning, bonuses
Average 1.5k monthly expenses (I can explain in more detail if pertinent)

100k NW:
19.5k Roth IRA
30k Brokerage
7.5k HSA
21.5k Simple IRA
21.5k cash (running a bit high right now, preparing for Jan transfer to IRA. I keep ~15k in cash in order to churn bank accounts)
0 debt

AA:
100% equities (75% total US, 25% total international), excluding cash

Goal
FI ASAP. Ideally before having kids. Targeting a 40k annual spend, need 1M for a 4% SWR. May or may not RE once I hit FI, depending on if I’m still enjoying my job.

2019
Maxed out HSA (3.5k), Roth IRA (6k) Simple IRA (13k) and had an additional 18k in post-tax that went into brokerage and savings accounts.

2020
Things that changed:
I moved to VA, got a new job.
My new employer offers a 401(k) instead of a Simple IRA. Details below.
My new employer has a different HSA provider. Details below.

So, here is my rough plan for 2020, with some questions built in:

1) Traditional IRA this year instead of Roth. Will transfer money 1/1/2020 and invest per my AA.
2) Contribute 6k to 401(k) in January and February as 2019 contributions to reach the max of 19K (13k Simple IRA, 6k 401k) for 2019 I can do this, right?
3) Max HSA (3.55k)
4) Max 401(k)
5) Shovel monthly remainder into Brokerage monthly

According to my estimates, I should have a comfortable buffer of at least $500-$1500 monthly that I’ll be able to put into brokerage. However, I have some concerns/considerations:

(1) 401(k). Through John Hancock. There is no match. No after-tax 401(k). There are poor investment options, with my options being:

Equity funds:
- MITHX (http://www.viewjhfunds.com/usa/C05/mifa/) 1.06%
- DFFVX (http://www.viewjhfunds.com/usa/C05/duta/) 1.22%
- DFSTX (http://www.viewjhfunds.com/usa/C05/duta/) 1.22%
- JESVX (http://www.viewjhfunds.com/usa/C05/smva/) 1.55%
- GTSVX (http://www.viewjhfunds.com/usa/C05/scoa/) 1.31%
- GOIOX (http://www.viewjhfunds.com/usa/C05/igra/) 1.24%
- PRBLX (http://www.viewjhfunds.com/usa/C05/peia/) 1.37%
- RWMEX (http://www.viewjhfunds.com/usa/C05/wmia/) 1.14%
- JIBCX (http://www.viewjhfunds.com/usa/C05/bcfa/) 1.19%
Target Dates
- JCHOX (http://www.viewjhfunds.com/usa/C05/czla/) 1.03%
- JRETX (http://www.viewjhfunds.com/usa/C05/lxla/) 1.24%

Am I correct in wanting to max the 401(k) despite the fees being so high? I’m maxing out all other tax-advantaged accounts, so the alternative is to pay income tax and put what’s leftover into Brokerage. If so, I’m leaning towards MITHX, JCHOX or JRETX. Any advice regarding what my best option might be would be appreciated. Of course, if/when I leave this employer I would rollover immediately into an IRA at Fidelity or Vanguard.

(2) HSA. My former HSA is through Fidelity - no fees and excellent investment options. I can continue contributing to this if I want, but my understanding is that I won’t benefit from FICA exemption if I contribute myself then deduct later. Is this correct? My current employer’s HSA is through HealthEquity and appears to have decent investment options (https://healthequity.com/indexinvestor/). Fees include a $2.95 monthly admin fee and a 0.033% monthly investment fee. So I essentially have two options:

(1) Contribute to my old HSA. Miss out on FICA benefit, but account has 0$ in fees and I would invest in FZROX (0.00% ER)
(2) Contribute to a HSA. Save (6.2%? 7.65%?) on FICA. Pay $2.95 monthly fee, 0.033% monthly investment fee and 0.05-0.015% in ER on my vanguard fund of choice

Thoughts? What are the rules on an HSA to HSA transfer? Would an annual transfer from one to the other be worth it? Can’t find anything on HealthEquity site about fees for transferring.

That just about sums it up. I’m very fortunate to be in the position that I’m in, but I still feel like I have some room for improvement to maximize efficiency. I really appreciate your time and input. Anything else I’m missing? Glaring omissions? Glaring misunderstandings?

Thanks in advance!!

[freya]

Wow, you are doing an amazing job for age 26!!!

A question:  do you plan to do any self-employment work after retiring?  The main unknowns here are that you're trying to plan for a very long retirement, given your age, and having a side gig would be helpful as extra insurance - plus if it does well, you could switch to it long before being officially FIREd.  Also, the 4% safe withdrawal assumes a 30 year retirement with nothing left over at the end...you might want to rethink that.  Do some simulations on, say, cfiresim and see what comes up.

On to your specific questions.  First, the 401K...wow, that really blows.  I would without hesitation go for the two funds with the lowest ERs, but I would also give serious consideration to bypassing the 401K entirely and maxing out your traditional and simple IRAs instead.  John Hancock is a nightmare, between the high fund fees and the annual "administrative" fees on top of that (which can be >1% - you should find out how much).  Over 10 years, that 2% a year will end up eating away 20% of your contributions.  At your tax bracket, this is greater than the tax you're trying to avoid on the $6K difference between the simple IRA and 401K max.

If the simple IRA is not an option, then perhaps you can complain to your HR dept about the high fees (provide specifics) and see if they could be induced to consider alternatives.  Also see whether in-service rollovers are permitted.

For the HSA, I would probably skip the company's HSA plan and contribute the full amount into your Fidelity HSA every January.  Here's why: 

- Since you are not planning to work for too many years, you are on the steep part of the Social Security curve where every dollar you contribute to SS brings you a lot more in eventual SS income than will be the case several years on.  Thus, your FICA tax should be considered an investment of sorts.

- The Medicare tax you'll avoid is about $40/year, which is less than the fees you'll be paying at that crappy HSA plan.

- When you contribute the max amount immediately, in January, you get on average an extra half-year of compounded gains compared to dribbling it in on a per-month basis.

- I bet that HSA plan doesn't have anything like the Fidelity zero ER, commission-free funds.

- Last but not least...I'm a major fan of simplicity.

[terran]

No, 401(k) contributions have to come from payroll deductions in the year for which you want to make the contribution, so you won't be able to contribute in 2020 for 2019.

That is a pretty bad 401(k). Here's some information that might help you think about that: https://www.bogleheads.org/wiki/401(k)#Expensive_or_mediocre_choices

[MDM]

2) Contribute 6k to 401(k) in January and February as 2019 contributions to reach the max of 19K (13k Simple IRA, 6k 401k) for 2019 I can do this, right?

Sorry, no can do.  401k contribution limits are strictly on a calendar year, unlike IRAs.

(1) 401(k). Through John Hancock. There is no match. No after-tax 401(k). There are poor investment options.... Am I correct in wanting to max the 401(k) despite the fees being so high? I’m maxing out all other tax-advantaged accounts, so the alternative is to pay income tax and put what’s leftover into Brokerage.

See To 401k or not to 401k? That is the question. for some thoughts on high fee 401ks.

(2) HSA. My former HSA is through Fidelity - no fees and excellent investment options. I can continue contributing to this if I want, but my understanding is that I won’t benefit from FICA exemption if I contribute myself then deduct later. Is this correct?

Yes.  Probably not a big difference between your HSA choices.

[philli14]

Wow, you are doing an amazing job for age 26!!!

Thank you - mostly good fortune and privilege, I only deserve credit for not screwing up an amazing hand dealt to me.

A question:  do you plan to do any self-employment work after retiring?  The main unknowns here are that you're trying to plan for a very long retirement, given your age, and having a side gig would be helpful as extra insurance - plus if it does well, you could switch to it long before being officially FIREd.  Also, the 4% safe withdrawal assumes a 30 year retirement with nothing left over at the end...you might want to rethink that.  Do some simulations on, say, cfiresim and see what comes up.

Knowing myself, I will probably have some self-employment work in some capacity after retiring. This is purely speculation at this point, so I will retire with the assumption that I won't be bringing in any side gig income. I do plan on exploring some of those possibilities as I near RE, but for now I am focusing on my current job.

I've done cfiresim calculations. My current annual expenses are under 20k, and my plan is to retire with a 4% WR at 40k spend (in other words, 2% WR at my current, bare minimum expenses). Always a good point to bring up, so thank you. I will continue to read the great discussions that you fine folks partake in regarding AA's, WR's, cfiresim's, etc.

On to your specific questions.  First, the 401K...wow, that really blows.  I would without hesitation go for the two funds with the lowest ERs, but I would also give serious consideration to bypassing the 401K entirely and maxing out your traditional and simple IRAs instead.  John Hancock is a nightmare, between the high fund fees and the annual "administrative" fees on top of that (which can be >1% - you should find out how much).  Over 10 years, that 2% a year will end up eating away 20% of your contributions.  At your tax bracket, this is greater than the tax you're trying to avoid on the $6K difference between the simple IRA and 401K max.

If the simple IRA is not an option, then perhaps you can complain to your HR dept about the high fees (provide specifics) and see if they could be induced to consider alternatives.  Also see whether in-service rollovers are permitted.

Sorry for not being clear. Simple IRA is no longer an option.. It's 401(k) or nothing. I have been considering approaching HR, and you may have given me a little push to say something. Great point about inquiring about admin fees on top of the fund fees. I'll add it to my list.

For the HSA, I would probably skip the company's HSA plan and contribute the full amount into your Fidelity HSA every January.  Here's why:

You sold me. Great points. Thank you very much for your input.

No, 401(k) contributions have to come from payroll deductions in the year for which you want to make the contribution, so you won't be able to contribute in 2020 for 2019.

That is a pretty bad 401(k). Here's some information that might help you think about that: https://www.bogleheads.org/wiki/401(k)#Expensive_or_mediocre_choices

Sorry, no can do.  401k contribution limits are strictly on a calendar year, unlike IRAs.

...

See To 401k or not to 401k? That is the question. for some thoughts on high fee 401ks.

Gahhhhh that's a bummer. Thank you both for clarifying, that certainly changes things.

Whether to 401k or not.. I've read through both of those resources before, and I think it is time I revisit them both. Thanks for posting and for your input.

A reasonable rule-of-thumb is to consider investing in a taxable account if the product of the extra costs and the number of years you will stay in the plan exceeds one and a half times your combined federal and state tax rates on qualified dividends over your working career. That is, if you pay 1.70% expenses rather than 0.20%, and you pay 15% federal tax on qualified dividends, plus 5% state tax, you should still invest in the plan unless you are reasonably certain that you will stay with the employer for more than 20 years for a net loss of 30% (actually 26% because of compounding). If you pay no state tax, you should still invest in the plan unless you are reasonably certain you will stay more than 15 years.

Having a difficult time wrapping my head around this. I've opened up some of the calculator tools linked in the MMM thread you posted. I'll play around and see if I can get nice objective proof that one is superior to the other.

Thank you all, again, so much.

[MDM]

Having a difficult time wrapping my head around this. I've opened up some of the calculator tools linked in the MMM thread you posted. I'll play around and see if I can get nice objective proof that one is superior to the other.

Much depends on how long your stay at the new employer will be....

[philli14]

Having a difficult time wrapping my head around this. I've opened up some of the calculator tools linked in the MMM thread you posted. I'll play around and see if I can get nice objective proof that one is superior to the other.

Much depends on how long your stay at the new employer will be....

Yeah I see that's a pretty big factor. I'll run the numbers with a couple of different assumptions. Thanks again.

[zolotiyeruki]

You may have already thought this through, but given your current trajectory, you'll need to cover a LOT of years before your tax-deferred accounts can be accessed penalty-free (if we ignore SEPP).  Ideally, you should have at least 5 years of expenses in your brokerage account at the same time you hit the Magic Number in total savings, so you can hop on that glorious Roth Ladder.

[philli14]

You may have already thought this through, but given your current trajectory, you'll need to cover a LOT of years before your tax-deferred accounts can be accessed penalty-free (if we ignore SEPP).  Ideally, you should have at least 5 years of expenses in your brokerage account at the same time you hit the Magic Number in total savings, so you can hop on that glorious Roth Ladder.

Thanks for chiming in. This was something that I did not consider.. I understand why I would need 5 years of expenses not locked up in a retirement account, so I can ladder properly and penalty free. It was always my assumption that an aggressive timeline for early retirement would only really be achievable through a lot of brokerage investing anyways, so it wouldn't be an issue. However, I certainly appreciate the heads up and will add it to my planning accordingly. Cheers!!

[JMS]

Also, the 4% safe withdrawal assumes a 30 year retirement with nothing left over at the end...you might want to rethink that.

Does it really? That would mean if you were FIRE at 55 years old, you'd still have a high chance of running out.  I need to rethink my plan if that is the case!

[waltworks]

Also, the 4% safe withdrawal assumes a 30 year retirement with nothing left over at the end...you might want to rethink that.

Does it really? That would mean if you were FIRE at 55 years old, you'd still have a high chance of running out.  I need to rethink my plan if that is the case!

No, in fact, it does not assume that. In the vast majority of cases at 30 years out, a 4% WR will lead to a higher (inflation adjusted) balance than you started with. The cases that fail are almost all sequence of returns issues where the market crashes right after you RE. Most of the success cases leave you fantastically rich, not right at zero in 30 years.

Now, you still have a *chance* of running out of money. But it's a small chance, and it's pretty easy to mitigate if you even vaguely want to bring in any form of income at all in RE. 

-W

[shuffler]

... you'd still have a high chance of running out.  I need to rethink my plan if that is the case!

Don't assume that a longer term (say, 40 years?) means a "high" chance of failure.
The failure cases are largely driven by a small handful of start-years that already fail in the 30-year window.
I'd suggest you run some calculators and compare the 30-year success-rate of a scenario vs. the 40 (or whatever) year success-rate.

if you were FIRE at 55 years old

Don't forget to factor in the chance that you'll die.

(Like that calculator?  Check out the thread!)

[JMS]

... you'd still have a high chance of running out.  I need to rethink my plan if that is the case!

Don't assume that a longer term (say, 40 years?) means a "high" chance of failure.
The failure cases are largely driven by a small handful of start-years that already fail in the 30-year window.
I'd suggest you run some calculators and compare the 30-year success-rate of a scenario vs. the 40 (or whatever) year success-rate.

if you were FIRE at 55 years old

Don't forget to factor in the chance that you'll die.

(Like that calculator?  Check out the thread!)

Wow this is amazing.  I don’t have time at this minute to look at it in enough detail but the death rate is a stark reminder!

Thank you

[BrianT]

Wow, you are doing an amazing job for age 26!!!

Thank you - mostly good fortune and privilege, I only deserve credit for not screwing up an amazing hand dealt to me.

I'm glad you called this out. I have one particular coworker that won't recognize this.

[freya]

Also, the 4% safe withdrawal assumes a 30 year retirement with nothing left over at the end...you might want to rethink that.

Does it really? That would mean if you were FIRE at 55 years old, you'd still have a high chance of running out.  I need to rethink my plan if that is the case!

No, in fact, it does not assume that. In the vast majority of cases at 30 years out, a 4% WR will lead to a higher (inflation adjusted) balance than you started with. The cases that fail are almost all sequence of returns issues where the market crashes right after you RE. Most of the success cases leave you fantastically rich, not right at zero in 30 years.

Now, you still have a *chance* of running out of money. But it's a small chance, and it's pretty easy to mitigate if you even vaguely want to bring in any form of income at all in RE. 

-W

I think you just said exactly what I said using different words.  The Trinity study considered "success" to be not running  out of money after 30 years, which means "failure" is defined as running out of money in less than 30 years.  The 4% SWR was the point where the chances of failure are near zero.  That's why you have to be cautious about extending the time horizon past 30 years, because your chances of failure goes up.

Just goes to show that knowing math (and how probability works) is a valuable life skill.

[netloc]

See this thread for some perspectives on the Health Equity HSA.
https://forum.mrmoneymustache.com/ask-a-mustachian/health-equity-for-hsa/

You can contribute to your company's plan, and then periodically transfer it to Fidelity. HSAs are not like a 401k where you must keep your contributions with the employer-sponsored plan until you leave the employer.

[waltworks]

Just go here to visualize:
http://engaging-data.com/will-money-last-retire-early/

You can easily see that in the vast majority of "success" cases you'll have more money than when you started after 30 years.

-W

[terran]

Also, the 4% safe withdrawal assumes a 30 year retirement with nothing left over at the end...you might want to rethink that.

Does it really? That would mean if you were FIRE at 55 years old, you'd still have a high chance of running out.  I need to rethink my plan if that is the case!

No, in fact, it does not assume that. In the vast majority of cases at 30 years out, a 4% WR will lead to a higher (inflation adjusted) balance than you started with. The cases that fail are almost all sequence of returns issues where the market crashes right after you RE. Most of the success cases leave you fantastically rich, not right at zero in 30 years.

Now, you still have a *chance* of running out of money. But it's a small chance, and it's pretty easy to mitigate if you even vaguely want to bring in any form of income at all in RE. 

-W

I think you just said exactly what I said using different words.  The Trinity study considered "success" to be not running  out of money after 30 years, which means "failure" is defined as running out of money in less than 30 years.  The 4% SWR was the point where the chances of failure are near zero.  That's why you have to be cautious about extending the time horizon past 30 years, because your chances of failure goes up.

Just goes to show that knowing math (and how probability works) is a valuable life skill.

Agreed, this is just the glass half empty vs glass half full way of saying the same thing. I'd rather over save and have a better chance of not having make drastic changes. Other people would rather retire sooner since they'll still probably have more money than they'll ever need. Here's another good resource that discusses SWR for longer time periods and the effect of various forms of flexibility on the failure cases: https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

[philli14]

See this thread for some perspectives on the Health Equity HSA.
https://forum.mrmoneymustache.com/ask-a-mustachian/health-equity-for-hsa/

You can contribute to your company's plan, and then periodically transfer it to Fidelity. HSAs are not like a 401k where you must keep your contributions with the employer-sponsored plan until you leave the employer.

Great read - thanks for sharing that. I will have to determine if periodic, manual form submissions to Health Equity to have the balance transferred to my other HSA is a hassle worth going through to save FICA. I didn't even know this would be an option, so it is another thing for me to think about. Thanks!!

As far the other replies, I love the lively 4% rule discussions. Having read through the "Stop worrying about the 4% rule", I still feel comfortable calling myself FI once I can sustain myself on a 4% WR.

Thanks again to all who have chimed in.

[freya]

Actually, waltworks might have a point if "failure" scenarios under the 4% SWR rule are all due to big market drops right at the start of retirement, rather than partway through.  If that's true, then instead of decreasing SWR (i.e. increasing the total nest egg) you could simply buffer yourself by starting out with a cash holding of X years expenses in addition to the nest egg, where X is the number of years from start of retirement in which a market drop could cause a failure. You'd have to check the value of X for your specific portfolio.

This may be why portfolios that include a substantial cash allocation actually perform better during retirement than portfolios that may have an average higher CAGR.  They give you a smaller chance of winning the lottery and ending up with a portfolio value going to the moon, but if your goal is to reduce the time needed to amass a safe nest egg that would seem to be a worthwhile tradeoff.

re the HSA...you'd have to consider the fees associated with the company plan (including transfer fees) and the future loss of Social Security income due to not paying FICA, plus the opportunity cost from not putting the entire amount into the HSA in January every year.  And the transfers are a royal PITA because they usually require mailing in paper forms and then making multiple phone calls because about half the time those forms get lost and have to be re-sent.   I was SO happy when I decided to skip it and just use my own Fidelity HSA!

[waltworks]

It's a relatively simple thought experiment to understand why portfolio failures happen early and SOR matters.

Let's say you expect the stock market to return an inflation adjusted 7% annually over the course of your retirement (whatever length that might be). But you're only going to withdraw 4%. Now, if you get an even, predictable 7% every year, obviously you're more than safe enough (in fact, you could withdraw a little more than 7% per year!)

The problem is that the 7% includes years of plus or minus 30% every once in a while, as well as sequences of years of -4,-8,-6, -2,-12 or something along those lines. If your $1 million nest egg takes a 30 or 40% haircut in the first few years of your retirement, and you're still methodically withdrawing 4% each year, you can be looking at the next 30 years being really tough, because your portfolio is now much smaller and won't be benefitting much from the good times to come.

In a generic year (+7%, withdraw 4%) your total portfolio is growing. Over many years it grows a LOT. It's very likely that you end up with way more money than you started with in the 4% rule scenario. When you fail, you fail early on.

-W

[freya]

OK you got me interested in this, so I checked to see if Firecalc would let you run a simulation and then export the year by year data.  I ran a hypothetical situation of $40K/year spending and a $1M nest egg with FIRECALC's default portfolio (for numerical simplicity - and yes that's a 4% withdrawal plan).  Retirement duration was 30 years.

The start years that ended up with negative values at the end (i.e. you ran out of money before the 30 years was up) were all in the time frame of 1965 - 1973.  That was 6 start years out of 119 (5%).  In all but one case, the portfolio dropped in value after either year 1 or year 2.   In one case (1967) the portfolio stayed above $1M for 7 years, then took a big dive in year 8.  Once this happens, the portfolios often don't recover.

For those hoping to live off portfolios past 30 years:  In an additional 14 years, the portfolio ended up below its starting value of $1M, meaning it might not make it to 40 years or beyond.  That's a total of 20 years out of the 119 (17%).  These start years were mostly earlier in the 1960s, 1903-1929, and 1937.  In most cases there was a drop in the first 2 years, but several cases did not drop until later (year 11 in the case of 1964).

So waltwork's theory is somewhat correct, but it is still possible to get quite far into retirement before running into trouble.
 I'm now more than ever convinced that keeping a healthy cash buffer is the key.  You have to have some way to avoid having to sell volatile assets in down years.  Probably also a good idea to design your retirement plan to include discretionary expenses like travel that can be cut back if necessary.

[waltworks]

So waltwork's theory is somewhat correct, but it is still possible to get quite far into retirement before running into trouble.
 I'm now more than ever convinced that keeping a healthy cash buffer is the key.  You have to have some way to avoid having to sell volatile assets in down years.  Probably also a good idea to design your retirement plan to include discretionary expenses like travel that can be cut back if necessary.

It's not *my* theory. You can find this discussed ad infinitum both here and at other personal finance (bogleheads, etc) sites. If you make it the first few years, you're almost certainly good.

The holding cash strategy is one option. If you play with the portfolio visualizer I linked earlier, you can also use flexibility (ie spend less/earn a little) to avoid a lot of failures. For example, a $1 million portfolio with a standard 4% WR, starting at age 40 and ending at age 90, fails about 15% of the time. Bump your spending flexibility to 10% (ie, you can drop to $36k/year if needed, or earn $4k that year) and you're at 98% success.

If you are really flexible, you can bump up your WR a lot, too. If you can do 25% flexibility you can safely withdraw 5% per year and still be at 93% success. I personally like weird jobs, so when I do my planning, I set my flexibility to 50% (I'm willing to go get a part time job that pays $20k/year or so, as well as cutting back on our annual ~$40k spend). That allows a >90% success rate with only $560k in investments - over 7% SWR.

The thing to remember about the 4% rule is that it assumes an Internet Retirement Police sort of sit around and play cards form of retirement where you never so much as pick up a dime off the sidewalk. If you talk to the folks in the post-FIRE forum, you'll notice that almost all of them are still earning money somehow - often just with a side gig/monetized hobby/community service work that they get paid a little for/etc. They/we are all probably going to end up stupidly rich, because we worked too long.

-W

[philli14]

re the HSA...you'd have to consider the fees associated with the company plan (including transfer fees) and the future loss of Social Security income due to not paying FICA, plus the opportunity cost from not putting the entire amount into the HSA in January every year.  And the transfers are a royal PITA because they usually require mailing in paper forms and then making multiple phone calls because about half the time those forms get lost and have to be re-sent.   I was SO happy when I decided to skip it and just use my own Fidelity HSA!

Again, all worth points that I didn't even think about. My initial gut response is that it's not worth the effort. Something so simple and easy about maxing my HSA in January, at Fidelity, and being done with it. I think I'll go that route, with the extra points you made.

Thanks so much!