Author Topic: Tear my retirement strategy a new one!!!  (Read 7705 times)

PabloHoney

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Tear my retirement strategy a new one!!!
« on: October 04, 2014, 06:58:30 PM »
I'm 35 and plan to retire in 10 years with an income around 40,000/year, so shooting for a stash of about 1,000,000. 

Current savings:
- 169,000 in Fidelity 401K, ~50% aggressive large caps, 30% small caps, 20% bonds
- 20,000 in wife's 401K
- 10,000 in Vanguard Traditional IRA (same distribution - from previous employer rollover)
- 26,000 in Etrade Traditional IRA  (same distribution - from previous employer rollover)
- 36,000 in Etrade ROTH IRA (about the same distribution as above)
- 17,000 in ETrade taxable rainy day account (bonds)
= Total savings of 278,000

Income
- Me: 136,000/year
- wife: 20,000/year (part time stay-at-home mom)

Expenses and debts
- House: Estimated value is 280,000.  We have a 10-year mortgage at 3.25%, currently with a balance of 200,000 (paid off in September 2024),   Monthly payment of 2,500. 
- Daycare: 1000/month
- Bills, utilities and whatnot: 400 (working on reducing this)
- After this, take-home-pay is about $935

Plan for existing assets
Balance the existing 258,000 into accounts as follows:
    - Rollover the 169,000 from Fidelity 401K to Vanguard Traditional IRA so I have access to Vanguard funds
    - Keep the ETrade IRAs
    - Keep the wife's 401K where it is (just because it's not worth the hassle of moving it at this point and is in a good balanced index fund)
    - Close the rainy day fund, move that into the Etrade Traditional IRA and open a Home Equity LOC for rainy days

  Allocate the 258,000 as follows:
    - 179,000 in Vanguard Traditional IRA
          - 132,000 - 51% - in VTSAX (Vanguard Total Stock Market Admiral - expense ratio of .05%)
          - 47,000 - 18% - in VTIAX (Vanguard Total International Stock Index Fund Admiral - expense ratio of .14%)
    - 0 current balance in Fidelity 401K (will receive future contributions though)
    - 20,000 in wife's IRA (keep it in the blended fund)
    - 43,000 in ETrade Traditional IRA
          - 23,000 - 9% - in TGMNX (TCW Total Return Bond Fund)
          - 20,000 - 8% - in PREMX (T. Rowe Price Emerging Market Bond)
    - 36,000 in ETrade Roth IRA
        - 36,000 - 14% - in FSTVX (Fidelity Spartan Total Market Advantage - expense ratio of .05%)
   
Plan for future contributions
1. Max out both of our 401K contributions at 17,500 apiece (wife contributes 100% of her income, I contribute about 14%), for 35,000 per year
2. Max out Roth IRAs at 5,500 apiece for 11,000 per year
3. Any remaining cash goes toward the house payments to get that paid off earlier
4. After 5 years, I'll begin rolling Traditional IRA over to Roth IRA in yearly chunks so that it has 5 years to fester (this strategy: http://www.madfientist.com/traditional-ira-vs-roth-ira/)

The future value calculator with a lump of 278,000, monthly payments of 3,833, with yearly 7% growth says I should have 1,200,000 in 10 years. 
http://www.calculatorsoup.com/calculators/financial/future-value-calculator.php

What can I do differently or better???
Thanks in advance for any help/advice!!!

The Butler

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Re: Tear my retirement strategy a new one!!!
« Reply #1 on: October 04, 2014, 08:34:16 PM »
Well, for one thing, the money in bonds is money that isn't really working hard for you.  If you're planning on earning 7% real return, that needs to be in equities as well.  Your allocation plan for the money in your Vanguard account is solid.  To simplify, you could rollover all your retirement accounts to Vanguard (with the exception of the ones for your current employers) and merge them.

The other thing that jumps out is your wife's income.  Of the 20K she earns, most of it goes to daycare!  If you have relatives nearby, that'd be ideal.  If not, is there any way she could negotiate some sort of work from home arrangement, at least for some of the time?  Depending on how you're spending the $1335 you've assigned to "whatnot" and the "take home pay" category, your savings might be even more.  What's your food budget like?  If you're regularly eating out or getting expensive prepared food, you could very well not break even on her working.

The most helpful thing would be to break down your last two categories to see what else can be trimmed.  If some of that could also go towards your investments/mortgage, you could get to retirement even sooner.

mxt0133

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Re: Tear my retirement strategy a new one!!!
« Reply #2 on: October 04, 2014, 08:46:00 PM »
Something to consider when doing the math on whether one should quit if they are just covering the cost of daycare is if they plan on going back to work or not.  I might be worth it to break even or be slightly cash flow negative to keep working if you will be going back to work full-time when the kids go to school.  You need to take into account your income potential when you do go back to work full-time.  Your income will more than likely be higher never having left the workforce and continue to build your resume.

Now regarding #4 "After 5 years, I'll begin rolling Traditional IRA over to Roth IRA in yearly chunks so that it has 5 years to fester".  The only benefit of doing this is that since you will have FIREd and have lower income you will pay lower taxes(or none at all) on the conversion amount that you would have if you were still working.  But according to your strategy you will still be working for another 5 years so, this strategy is not tax efficient.  You need a way to fund your time between your RE date and the time you can access your Roth IRA funds tax free.

PabloHoney

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Re: Tear my retirement strategy a new one!!!
« Reply #3 on: October 05, 2014, 08:09:48 AM »
My wife likes her job and is moving up in her company, so she does want to keep the continuity.  In my rounding of numbers, it reads like we're coming out slightly behind, but we're actually coming out slightly ahead with her job - plus she gets the employer match on 401K and we get some dental benefits.  We also like giving the little one the socialization of part-time daycare. 

mxt, your second paragraph makes sense and helps with a point of confusion I've had since starting to read about that strategy - so I'll basically want to wait on starting that strategy until I retire and I'll need to make sure I have 5 years worth of cash in a taxable account. 

Butler, I've done some reading here on whether to go with 100% stocks or to have some bonds. 
http://forum.mrmoneymustache.com/investor-alley/asset-allocation-100-stocks-for-how-long/
Maybe I'm uber-conservative, but the posts about having *some* bonds resonate more with me than the 100% stock perspective.  Since I'm on target to actually surpass my goal by 200,000, I'm inclined to have some bonds to keep things leveled out a bit - I haven't decided for sure yet though - maybe I'll throw in 10 or 15% bonds in 5 years or so.  I've had pretty good luck with PREMX and TGLMX - check out the return rates on those puppies!
I'm also definitely still looking at trimming down bills and expenses - I just discovered this blog 2 months ago and just recently hatched this plan - even sold a car in the last month to get rid of the payments!
http://forum.mrmoneymustache.com/ask-a-mustachian/should-i-sell-my-car-and-get-a-cheaper-one


Thanks again for the plan review and all of the insight!

The Butler

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Re: Tear my retirement strategy a new one!!!
« Reply #4 on: October 05, 2014, 08:46:23 AM »
Maybe I'm uber-conservative, but the posts about having *some* bonds resonate more with me than the 100% stock perspective.  Since I'm on target to actually surpass my goal by 200,000, I'm inclined to have some bonds to keep things leveled out a bit - I haven't decided for sure yet though - maybe I'll throw in 10 or 15% bonds in 5 years or so.  I've had pretty good luck with PREMX and TGLMX - check out the return rates on those puppies!
I'm also definitely still looking at trimming down bills and expenses - I just discovered this blog 2 months ago and just recently hatched this plan - even sold a car in the last month to get rid of the payments!
http://forum.mrmoneymustache.com/ask-a-mustachian/should-i-sell-my-car-and-get-a-cheaper-one


Thanks again for the plan review and all of the insight!

Right.  I'm not saying you need to keep 100% equities, only that 7% may be overly optimistic in a mixed stock/bond portfolio.  If you want to have assets in something more stable, that's fine, but it may reduce your return.  Less risk = less reward.

If you're already tackling your spending, then I think you're totally on the right track.

feelingroovy

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Re: Tear my retirement strategy a new one!!!
« Reply #5 on: October 05, 2014, 09:06:02 AM »
You should definitely check this, but I'm pretty sure that your wife's contributions to both the 401k and the IRA are limited to her earned income. Since she's only earning $20k, she can't maximize both.  I know there are spousal IRAs for SAH spouses with 0 income, but I would think she doesn't qualify.

PabloHoney

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Re: Tear my retirement strategy a new one!!!
« Reply #6 on: October 05, 2014, 01:26:59 PM »
Good point, feelingroovy. 
I guess I had assumed that to be the case, actually (that she wouldn't be able to go beyond her earned income).  I guess I was focused more on the order in which to fill the "buckets" and not such much whether we'd actually be able to fill all of them - if that makes sense.  She does get paid hourly and the actual pay varies (20,000 is pretty rough), so she may be be able to max it out, but not sure. 
If there's a way for me to fill it up for her after she's poured in all of her income, that'd be a nice bonus...but not counting on it.  I'll add a post once I've done the research.

PabloHoney

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Re: Tear my retirement strategy a new one!!!
« Reply #7 on: October 05, 2014, 02:54:37 PM »
Looks like if my wife puts 100% into 401K, she can't contribute to Roth IRA, unfortunately.  Here's the relevant bit:
http://finance.zacks.com/rules-spouse-roth-ira-contribution-5854.html


Minimum Income Requirements

Your contribution to any IRA is limited to the amount of taxable compensation you earn. Taxable compensation includes things such as wages and self-employment income you earn that is subject to income taxes. If your taxable earnings are less than the maximum contribution of $5,500 ($6,500 if you are 50 or older,) you can only contribute the smaller amount. However, if you and your spouse together have enough taxable earnings to cover both of your contributions, you can both contribute the maximum as long as your earnings don't exceed the income limitations.

kpd905

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Re: Tear my retirement strategy a new one!!!
« Reply #8 on: October 05, 2014, 04:19:50 PM »
She could still do the IRA after maxing the 401k, by counting your joint income.

However, if you and your spouse together have enough taxable earnings to cover both of your contributions, you can both contribute the maximum as long as your earnings don't exceed the income limitations.

« Last Edit: October 05, 2014, 04:22:35 PM by kpd905 »

PabloHoney

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Re: Tear my retirement strategy a new one!!!
« Reply #9 on: October 05, 2014, 05:27:21 PM »
Cool!  10-4.  Thanks kdp. 

wtjbatman

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Re: Tear my retirement strategy a new one!!!
« Reply #10 on: October 05, 2014, 05:39:37 PM »
kpd pointed it out already, but I'll just reiterate. If you're married and filing jointly, she can definitely contribute to an IRA.

That said, you make $140k a year, she makes 20k (of which 60% goes to pay for daycare?!), and she's keeping her job because she's "moving up"?? She better move up pretty damn quickly to make it worthwhile. Or else you're wasting a whole lot of parent/child interaction so your wife can go to work and basically break even. That's just my opinion of course.

PabloHoney

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Re: Tear my retirement strategy a new one!!!
« Reply #11 on: October 05, 2014, 06:16:16 PM »
Batman,
The wife is mostly keeping the job because she likes it. 
Daycare is 4 hours a day, 4 days of the week, which leaves lots of time for us to interact with her.  It's at a good venue where she learns a ton and interacts with lots of other kids (it's more of a pre-school than a daycare really). 
Thanks for sharing your opinion on parenting style, but it's well worth it to us.

foobar

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Re: Tear my retirement strategy a new one!!!
« Reply #12 on: October 05, 2014, 08:34:58 PM »
Are you numbers in 2014 dollars or 2024 dollars? 7% real is probably optimistic so I assume nominal dollars. Given that you are looking for about 50k, you might be a bit short. It is a small difference but when you start projecting out 10+ years you need to decide how you are going to account for it.

The wife job might not pay off now but in a couple of years when the day care goes to 0, she might appreciated not having to look for one.  If she enjoys it, sounds like a reasonable thing to do. Don't forgot to take the tax credit for the child care.

abhe8

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Re: Tear my retirement strategy a new one!!!
« Reply #13 on: October 05, 2014, 09:13:22 PM »
You pay a grand a month for part time day care for one kid??? That seems crazy high. I can pay 800 for the fancy Montessori day care by my work, and that is for 50 hours a week.

surfhb

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Re: Tear my retirement strategy a new one!!!
« Reply #14 on: October 06, 2014, 02:24:13 AM »
I think you're close but who cares?   You're only 35, have a great stache, a good job, a solid financial plan in place and a family who loves you.   

Continue how you're going and you'll be fine.    Yes....the child are is high but they'll be in school soon.   Just keep doing what you're doing and stoping thinking about time frames.   Enjoy life....please don't be so frugal and avoid a nice vacation or perhaps a good night out with the wife here and there

RapmasterD

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Re: Tear my retirement strategy a new one!!!
« Reply #15 on: October 06, 2014, 02:43:37 AM »
I think you're close but who cares?   You're only 35, have a great stache, a good job, a solid financial plan in place and a family who loves you.   

Continue how you're going and you'll be fine.    Yes....the child are is high but they'll be in school soon.   Just keep doing what you're doing and stoping thinking about time frames.   Enjoy life....please don't be so frugal and avoid a nice vacation or perhaps a good night out with the wife here and there

+1. Your daycare is high because daycare is high.

Scandium

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Re: Tear my retirement strategy a new one!!!
« Reply #16 on: October 06, 2014, 08:33:33 AM »
Why the short mortgage? Refi to a 30 year, pay the minimum and you'd get something like another $1000 a month to invest (or more. Too lazy to run numbers). You'd be FIRE way faster than if you throw money at a 3.25% loan that's tax deductible!

GGNoob

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Re: Tear my retirement strategy a new one!!!
« Reply #17 on: October 06, 2014, 08:44:50 AM »

Why the short mortgage? Refi to a 30 year, pay the minimum and you'd get something like another $1000 a month to invest (or more. Too lazy to run numbers). You'd be FIRE way faster than if you throw money at a 3.25% loan that's tax deductible!

+1


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PabloHoney

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Re: Tear my retirement strategy a new one!!!
« Reply #18 on: October 06, 2014, 09:16:25 AM »

Why the short mortgage? Refi to a 30 year, pay the minimum and you'd get something like another $1000 a month to invest (or more. Too lazy to run numbers). You'd be FIRE way faster than if you throw money at a 3.25% loan that's tax deductible!

+1

Well...the Mortgage-Refi Horse has already left the barn.  I just refinanced my mortgage away from a 30-year loan to a 10-year loan.  I really want the peace of mind of having all debt, including mortgages, gone by the time I retire - was originally planning on paying down extra on the 30-year to achieve this, but decided to refi to get the lower interest rate.  I'll only be paying the minimum on it now and investing the rest.  The raw numbers may not flesh this out as being the right way to go, but all considered, it doesn't seem to be a slam-dunk either way (see the blog post below - #2 resonates with me).  One thing I haven't mentioned is that I get good raises at my job - about 8% per year so far - which means my investment contributions are likely to keep going up in the next 10 years, perhaps as much as an additional $500 per month.

http://www.mrmoneymustache.com/2011/05/16/mmm-reader-case-study-the-man-who-didnt-realize-he-was-already-rich/

"2 Pay off your Mortgage over the next 5 years or so using your $28,000 per year savings rate. Then you are done with mortgages forever. This technically earns less return than just investing the extra money, but if you are conservative like me, you like to be out of debt earlier. If not, just invest extra and pay the mortgage slower.
At this point, you can subtract about $900/month from your monthly budget (the P+I part of your mortgage payment.. you still have to pay property taxes of course).
Your new annual living cost will be about $22,000. "

Scandium

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Re: Tear my retirement strategy a new one!!!
« Reply #19 on: October 06, 2014, 12:00:40 PM »
Why is debt bad? The bank can't call it or change the amount. I don't see why one option would make you more nervous than the other. You get peace of mind from having a huge portion of your wealth tied up in an illiquid asset, rather than having more money in a liquid one? I don't, but ok then..

I'll never understand people here wearing their underwear on both sides to save 8 cents, and then leaving 10s or 100s of thousand of dollars on the table because "touchy-feely, debt is uncomfortable".

Mother Fussbudget

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Re: Tear my retirement strategy a new one!!!
« Reply #20 on: October 06, 2014, 12:35:28 PM »
Overall looks like a sound plan.  Like you, I also prefer the peace-of-mind of having the bills (mortgage included) paid off in advance.

Do you know if your workplace offers an HSA plan for medical expenses?  That's another potential pre-tax investment vehicle that many people overlook.  (see http://www.madfientist.com/ultimate-retirement-account/)

PabloHoney

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Re: Tear my retirement strategy a new one!!!
« Reply #21 on: October 06, 2014, 02:55:06 PM »
I definitely see your point, Scandium.  If I could turn the clock back a couple of months, I might think it through a bit more.
I guess I see not having a mortgage in 10 years as a luxury I can afford.  Even though 3.25% is quite low and tax deductible, it's a guaranteed 3.25% that I'm getting and I know I won't have to deal with making the payments if/when the market takes a plunge post-retirement. 
I'm not arguing with the numbers or your Vulcan logic mind you, and agree with you that it is a touch-feely thing - I do want to feel good post retirement!  I can usually refi for free through my mortgage broker anyway, so I may adjust back at some point along the way.

Also, wearing underpants is an unnecessary expense and luxury - going commando is the truly frugal way to go!  I'm just sure to wipe myself once in a while with some of the neighbor's old newspapers and shake my trousers out once every third month or so. 

PabloHoney

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Re: Tear my retirement strategy a new one!!!
« Reply #22 on: October 06, 2014, 02:58:09 PM »
Also, I have officially adjusted my plan as originally stated to funnel any leftover cash into investments rather than debt based on feedback on this thread and have lots of other good things to consider, so much appreciated!

4alpacas

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Re: Tear my retirement strategy a new one!!!
« Reply #23 on: October 06, 2014, 03:31:36 PM »
Also, wearing underpants is an unnecessary expense and luxury - going commando is the truly frugal way to go!  I'm just sure to wipe myself once in a while with some of the neighbor's old newspapers and shake my trousers out once every third month or so.

Can't. Stop. Laughing.