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Learning, Sharing, and Teaching => Investor Alley => Topic started by: jsb394 on July 25, 2019, 07:31:32 AM

Title: Retirement planning with low monthly expenses
Post by: jsb394 on July 25, 2019, 07:31:32 AM
Hello everyone, longtime reader here. My wife and I have an interesting work situation. Our salaries are modest, but we are provided with housing and food. Our only monthly bills are our cellphones and daycare. This means we can pretty effortlessly save huge amounts of our income, which we do (about 50% of our earnings). Recently, though, I've been wondering if there are ways to plan for retirement and think about savings that would be more specific to a situation like this. The general wisdom/advice out there always factors in costs for housing and food, meaning I'm always sort of trying to cancel those variables out when I think about how any particular piece of advice advice applies to my own life.

I think I recently discovered one good example, though I could be wrong. I was thinking about our life after this job, when we'd have to pay for our own housing and food again, and I started thinking about the fact that our draw from our retirement funds would need to be significantly higher than our current monthly needs. That led me to conclude that for us, perhaps, maxing out a Roth every year makes most sense, because it would give us access to tax-free money to cover that difference (we do not plan to retire unusually early). Does that make sense? Another simpler example is that I don't think we need quite as high of an emergency fund as some people might, since even if one of us lost their job, we'd still have housing and food covered as a family. Finally, another thing I've been thinking about is the possibility of over-contributing to our 401k's, given that we're able to save so much. How much should I worry about that?

Along these lines, are there other tweaks to typical retirement wisdom that anyone can recommend? I'd like to maximize the value in these relatively unusual conditions and also avoid pitfalls. Thank you!
Title: Re: Retirement planning with low monthly expenses
Post by: Freedomin5 on July 25, 2019, 07:43:29 AM
Is your housing and food independent of your jobs?

We are in a similar situation where we get housing, tuition, and some food (lunch) covered as part of our work contract. We still need a decent emergency fund because if we were to lose our jobs, we would also lose housing and food.

And regarding calculation of the stash required to retire, itís trickier for us because we donít have a good estimate of expenses after FIRE. It will definitely be higher than our current expenses, but itís unclear by how much. We therefore just ballpark it based on our best guesstimates.
Title: Re: Retirement planning with low monthly expenses
Post by: terran on July 25, 2019, 07:54:42 AM
The only real difference, as you've pointed out, is that you'll have higher expenses in retirement because you'll have to pay for housing and food. This is just a more extreme version of what most of us have to deal with for employer paid expenses like healthcare. It does mean that the "save x% of your income and retire in y years" math doesn't work for you since your current savings/spending ratio isn't indicative of your after retirement income needs.

You could be right that Roth makes sense for you, and along similar lines that you could end up with too much in a tax deferred 401(k), but then again you could be wrong. It all comes down to marginal tax bracket now vs marginal tax bracket in retirement just like it does for everyone else. The reason you might be right is that your expenses (and therefore your withdrawals from various accounts) will be higher in retirement, so depending on how much you currently put in tax deferred accounts and how much you currently pay tax on you might end up with higher withdrawals than what you currently pay tax on. What is your current taxable income? Is the housing and food benefit taxed? How much do you have in tax deferred accounts now? How much do you currently contribute to tax deferred accounts? What are your expenses? How much do you expect to need to spend on housing in the location where you plan to retire? How much do you spend on food now (I know it's reimbursed, but you can still keep track of what you spend when you go to the grocery store)?

I'd actually say you need a larger emergency fund (at least the x months expenses sense). If you both have this housing benefit, I assume that means you work for the same employer? If so, it seems like there would be scenarios where you both lose your job for the same reason. You have a concentrated risk in one employer, and losing your job also causes your expenses to go up unlike most people.

The only other pitfall I can think of is not to let this situation cause complacency. A 50% savings rate is great and all, but it's probably the low-midpoint for mustachians, so given that it's helped along by your current situation, look for other parts of your life you can optimize.
Title: Re: Retirement planning with low monthly expenses
Post by: jsb394 on July 25, 2019, 08:44:02 AM
Thanks for the responses so far. To reply to some of the questions:

- the housing and food are tied to the jobs
- current taxable income between the two of us is about $105k
- housing and food benefit is not taxed
- we have about $70k in tax-deferred accounts so far (we're 33 and 35--started earning late because of graduate school)
- our main expense is daycare ($1k a month)
- we could retire to any location and would probably expect to spend at least $1.5-2k a month in rent (in today's dollars) when we do
- we still probably spend a little under $150 a month on groceries so that we can avoid constantly eating cafeteria food

Thanks again for all the good advice so far!
Title: Re: Retirement planning with low monthly expenses
Post by: terran on July 25, 2019, 09:00:35 AM
So with $105k income, $19k to 401(k) x 2 + $6k to IRA x 2, you have $55k of income. That puts you in the 12% federal tax bracket, which tops out at $103,350. Do you think you'll spend more than that in retirement? If not, then Roth is at best as good as tax deferred. The 10% bracket tops out at $43,800, so if you keep your retirement spending under that you'd be better off with tax deferred. This assumes that all of your income in retirement comes from tax deferred. If some comes from taxable accounts then you could spend more while withdrawing less from tax deferred.

Tax brackets are scheduled to go back to the pre 2017 brackets in 2025, so that would give a slight edge to Roth now while you're in the 12% bracket. If you expect to be in a lower/no tax state in retirement and you pay taxes in your current state, then this would give the edge back to tax deferred.

Basically, you're right around the income where it probably doesn't much matter whether you do tax deferred or Roth.
Title: Re: Retirement planning with low monthly expenses
Post by: jsb394 on July 25, 2019, 10:28:03 AM
Thanks, terran! That all makes sense. Do you think this kind of financial situation changes the calculus for buying a home? I know the general wisdom around here is that renting can be better than buying. Does anything about a situation like this make home buying more attractive?
Title: Re: Retirement planning with low monthly expenses
Post by: terran on July 25, 2019, 10:40:46 AM
You certainly shouldn't buy a home if the alternatives are pay for a house or get free rent.

If the employer pays for housing even if it's a house you own then I would say it very much depends on the details of the program.
Title: Re: Retirement planning with low monthly expenses
Post by: BicycleB on July 25, 2019, 01:56:09 PM
Supporting all comments so far.

Just offering the idea that in your shoes, OP, I'd use that $2,000/mo estimate of future housing cost and make calculations as if I received $2,000/month of tax free income that was used for housing. I would then automatically be able to make standard MMM calculations about time to retirement.

So if your take home is 94k (roughly 105k less FICA and minimum federal income tax), with savings of 47k and visible spending 47k, I'd calculate that spending was 71k (47k+24k); income was 119k (95k +24k); savings 47k, savings rate just under 40%. This calculation would assume that my goal was to save enough to spend 71k, the amount it takes to replicate current lifestyle plus make a $2,000/mo housing payment.

Strictly speaking, at 71k spending, I'd add some factor to account for income taxes. But you get the idea.
Title: Re: Retirement planning with low monthly expenses
Post by: Freedomin5 on July 25, 2019, 03:54:49 PM
We have similar work contracts and benefits as you, and the only reason we bought a home is so that we can rent it out, with the rent covering the mortgage, HOA fees, and taxes. We work as expats, so we bought a small condo in our home country. It works for us because we have family there who can act as our property manager. That way, we wonít be priced out of the market when we return. Is it the best use of our money financially? Probably not, but it gives us peace of mind and is based on advice from many other expats whose housing was provided while living abroad.

The other reason when it might make sense to buy is if your current work contract will pay your mortgage in lieu of rent. Iíve heard of people having a family member or family corporation purchase a place, and then they would rent the place from their family member and have the company pay the rent, if the company wonít pay the mortgage. This would only make sense if the mortgage payment and all related housing costs are less than your housing stipend. (We did not do this because our contracts pay rent but will not pay mortgage or give a housing stipend.)