Ok, so I am going to try this budget thing

**swaymonae** · 03-17-2009, 08:37 AM

Move your EF to a higher interest account.. HSBC I think still offers 1.85, or maybe a Money Market Account, not fund..

I don't really see anything other than that that needs to be changed, except contribute even more to 401K, and an MMA or higher interest savings..

I def think there are some things you can do about your electric bill.. buy energy efficient items, unplug heavy equip when not in use, and don't leave things plugged in for long periods of time that you don't use often.. they continue to suck out electricity.. And I imagine you don't turn off lights and tv's very often?? Get in the habit of always turning something off when it's not in use..

You have a lot of assets, and don't owe much.. that's great

**creditcardfree** · 03-17-2009, 08:39 AM

I say save more...did you know you are probably eligible for a SEP IRA as a self employed individual? You can sock quite a bit away in these types of accounts. They can be set up with any mutual fund company. Here's a link to an article I found from a year ago that should get you started.

I'd also look into paying off the house a little earlier, too!

**jIM_Ohio** · 03-17-2009, 08:52 AM

Monthly Income (with bonuses) after taxes and 401k: $10,434

You need to list gross income for some numbers to be best calculated.

You also need to list 401k contribution amount and also list as percent of gross.

**noppenbd** · 03-17-2009, 08:58 AM

Originally posted by KTP View Post

Assets: Home, valued at $370,000, owe $225,000. $50,000 HELOC, 0 balance. Cars (assets?) 2003 Mazda Prot 5, 2005 Hyundai Tuscan, 2008 Toyota Tundra 4WD truck, all three paid for. 401k with about $140k in it (used to be over $250k

)

Contributing $16,500 to spouse's 401k, I am self employed but currently doing home remodel and other things so little income on my side). Ineligable for Roth or deductable IRA

Ok, on to the budget:

Already established a $30,000 EF parked in bank at 0.1% interest!

Monthly Income (with bonuses) after taxes and 401k: $10,434

Mortgage + taxes/ins. (5.35%): $2156 (includes $300 extra to principal)
Electric (average): $350
Water/Garbage: $55
Car Insur.: $209
Other Insur: $46
Cable/Phone/Internet combo: $140
Cell Phone: $38
Propane: $20

Auto Gas and Maint.: $400
Food (normal groceries): $600
Dining Out: $200
Entertainment: $400
Home Improvement: $200

Residual after expenses: $5620

You need to look at saving more off the top. This will help you with the early retirement goal as the money will be gone before you see it. I would be contributing the max to a nondeductible IRA to convert to a Roth in 2010. Have the money taken directly out of wife's paycheck if possible. You can each contribute $5K for 2008 (if taxes not done yet) and for 2009. I would actually consider amending 2008 taxes to do this. In 2010 you can convert the nondeductible IRA to a Roth with 0 tax consequences.

This will not be enough though, you need to save a whole lot more than that to meet your goals. In another thread you said your goal was to save $70K a year besides the 401k. This works out to $5800 a month. $800 of that should go into the nondeductible IRAs. The other $5K should be autodrafted out of your checking into a brokerage account, preferably on the same day your wife gets paid. Since you need it in about 7 years I would invest it in a balanced portfolio of S&P 500 index fund & either TIPs or muni bonds. At your income muni bonds probably make more sense since they are tax free.

To make the $5800 every month you will need to trim some out of your budget. Others will have better suggestions on that, but I would look into lowering the food bill ($800 a month for two people is very high). Maybe you cut the Entertainment in half. If all else fails, I would suggest cutting out the extra principal payment as your mortgage rate is quite good.

**KTP** · 03-17-2009, 09:15 AM

To Jim:

Wife's gross is about 180k, contributes 9% ($16200) to 401k, first 3% is matched by employer (so 21600 a year goes into 401k). Now you see why I am sick that it only has 140k in it and she has been contributing for more than 10 years. I feel bad since she let me manage it, but I split it up evenly between 5 of the available 7 funds, midcap, large cap, index, global, and bond. Oh well.

Needless to say, she isn't super excited about investing more into retirement funds, seeing as how ~200,000 in contributions has built up a nice nest egg of 140,000. The idea of non-deductable IRA isn't super exciting, even if rolled over into a Roth IRA. A lot of work for only 20,000 investment (less than 1 year of her 401k contributions). Unless maybe you can do this rollover multiple times? Still, it is worth considering, although I bet our government will start taxing roth distributions for so called "wealthy middle class" in a few years when they figure out that they also need to budget. I am more of a fan of "get your tax breaks now" than trust the government to give me one in 20 years.

yes, in the other thread I said we wanted to save 70k a year. We are very close to that with this budget, maybe a trim here and there (nix the cell phone, cut down on driving, get cheaper auto ins.) and we will get there.

I am thinking of looking into the Vanguard tax managed funds. They have pretty low fees and try to generate little or no capital gains while you hold the funds. Another option would be the Vanguard municipal bond funds. Pretty low risk, and they have been returning 4% to 6% even in this crappy market. Have to make sure they don't invest in CA bonds

Thanks for the advice!

**jIM_Ohio** · 03-17-2009, 09:42 AM

Originally posted by KTP View Post

To Jim:

Wife's gross is about 180k, contributes 9% ($16200) to 401k, first 3% is matched by employer (so 21600 a year goes into 401k). Now you see why I am sick that it only has 140k in it and she has been contributing for more than 10 years. I feel bad since she let me manage it, but I split it up evenly between 5 of the available 7 funds, midcap, large cap, index, global, and bond. Oh well.

Needless to say, she isn't super excited about investing more into retirement funds, seeing as how ~200,000 in contributions has built up a nice nest egg of 140,000. The idea of non-deductable IRA isn't super exciting, even if rolled over into a Roth IRA. A lot of work for only 20,000 investment (less than 1 year of her 401k contributions). Unless maybe you can do this rollover multiple times? Still, it is worth considering, although I bet our government will start taxing roth distributions for so called "wealthy middle class" in a few years when they figure out that they also need to budget. I am more of a fan of "get your tax breaks now" than trust the government to give me one in 20 years.

yes, in the other thread I said we wanted to save 70k a year. We are very close to that with this budget, maybe a trim here and there (nix the cell phone, cut down on driving, get cheaper auto ins.) and we will get there.

I am thinking of looking into the Vanguard tax managed funds. They have pretty low fees and try to generate little or no capital gains while you hold the funds. Another option would be the Vanguard municipal bond funds. Pretty low risk, and they have been returning 4% to 6% even in this crappy market. Have to make sure they don't invest in CA bonds

Thanks for the advice!

180k save 20% (minimum) is 36k per year

Put first 16500 into 401k (9%)
Put next $5000 into a traditional IRA (3%)
Put 3% into a "retirement fund" in a taxable account- this would be $5400 per year.

Put 5% into short term savings ($9000 per year)

If you want to save another $34000 per year- go for it, but what I outlined above is the minimum. I would stick to the traditional IRA and not convert to Roth in 2010 (because of taxes)- just wait and deal with that when taxes are lower in retirement.

Savings needs to be based off of gross pay (by percent) because that same gross pay establishes your standard of living, and some savings (like 401k) is done pre-tax.

Even if you have a fully funded EF, I would still put 5% or 25% of total contribution to cash.

Meaning if you save 20% (my base recomendation), 1/4 of that, or 5% goes to cash.

If you are saving 70k, put 1/4 of that to cash. Logic being that when markets are volatile, 1/4 of what you are saving is stable.

Once you have ~2 years expenses in cash, consider adding a muni bond fund or similar conservative investment to the cash allocation. Saves on taxes and provides a slightly higher return.

**DebbieL** · 03-17-2009, 10:01 AM

Your grocery bill seems high to me for just 2 people. I live in an extremely high cost of living area and don't spend that much monthly for our household (2 adults, 1 teen). In Canada, I find the groceries are more expensive (particularly where I live) than in the US. The only place I've been in the States that had higher grocery prices in general was Hawaii (and even there the meat and dairy is cheaper than where I live). There could be some potential savings there. Entertainment seems high to me too, but then again everyone has different priorities.

**noppenbd** · 03-17-2009, 10:06 AM

Originally posted by jIM_Ohio View Post

Put next $5000 into a traditional IRA (3%)
I would stick to the traditional IRA and not convert to Roth in 2010 (because of taxes)- just wait and deal with that when taxes are lower in retirement.

They can only contribute to a traditional IRA now on a nondeductible basis (income is too high for deductible). Therefore 100% of IRA contribution is post-tax. When they convert to Roth they would owe almost nothing. If they do this for 2008, 2009, and 2010 that is $30K sheltered from taxes forever ($5K per person per year).

Yes it is possible tax laws could change to make Roths less desirable. However, I would not plan based on the possible. Cap gains rates could also change for the wealthy, and muni interest could be taxed. OP needs to change the mindset of "why bother" to get every possible break, if he wants to retire in 7 years.

**KTP** · 03-17-2009, 10:24 AM

I would have to hit up the EF for the $10000 to fund a 2008 non-deductable IRA contribution for the two of us if I have to do it before April. Would I have to file an amendment to our 2008 taxes (did them in Feb) since the IRA would not change what we owed?

I still don't see the big difference in investing 30000 in a non-deductable IRA vs investing 30000 in tax free muni bonds, except as you say that the muni bond laws could change. I guess having it converted to a 30000 Roth would mean I could put the money in a higher yield/higher risk investment and would be tax free no matter what it was (a nice option, I agree). I will talk this over with the wife.

My target goal is 1,000,000 after all assets are sold. I am hoping for seven years but willing to stretch to 8 or 9 years. 9 years at 70,000 is 630,000. Add another 300,000 from the sale of the house and other assets and we would be almost there with zero real growth. I think seven years is going to take a bit of luck with the equity part of our investments to realize. Alternative is that we do some part time contract work during some of the post retirement years.

Debbie: We entertain a bit (board game nights and poker parties and such) and enjoy cooking complex dinners for our guests (and us). If you consider the food to be a hobby, then the $600 makes more sense I guess.

**jIM_Ohio** · 03-17-2009, 10:56 AM

Originally posted by noppenbd View Post

They can only contribute to a traditional IRA now on a nondeductible basis (income is too high for deductible). Therefore 100% of IRA contribution is post-tax. When they convert to Roth they would owe almost nothing. If they do this for 2008, 2009, and 2010 that is $30K sheltered from taxes forever ($5K per person per year).

Yes it is possible tax laws could change to make Roths less desirable. However, I would not plan based on the possible. Cap gains rates could also change for the wealthy, and muni interest could be taxed. OP needs to change the mindset of "why bother" to get every possible break, if he wants to retire in 7 years.

It would still be "almost nothing" taxed at 33 or 35% (or more) plus state taxes.

**jIM_Ohio** · 03-17-2009, 11:01 AM

Originally posted by KTP View Post

I would have to hit up the EF for the $10000 to fund a 2008 non-deductable IRA contribution for the two of us if I have to do it before April. Would I have to file an amendment to our 2008 taxes (did them in Feb) since the IRA would not change what we owed?

I still don't see the big difference in investing 30000 in a non-deductable IRA vs investing 30000 in tax free muni bonds, except as you say that the muni bond laws could change. I guess having it converted to a 30000 Roth would mean I could put the money in a higher yield/higher risk investment and would be tax free no matter what it was (a nice option, I agree). I will talk this over with the wife.

My target goal is 1,000,000 after all assets are sold. I am hoping for seven years but willing to stretch to 8 or 9 years. 9 years at 70,000 is 630,000. Add another 300,000 from the sale of the house and other assets and we would be almost there with zero real growth. I think seven years is going to take a bit of luck with the equity part of our investments to realize. Alternative is that we do some part time contract work during some of the post retirement years.

Debbie: We entertain a bit (board game nights and poker parties and such) and enjoy cooking complex dinners for our guests (and us). If you consider the food to be a hobby, then the $600 makes more sense I guess.

KTP- I think you are confusing issues- I suggested an IRA because it shelters earnings from taxes, and it makes sense to use any tax shelter you can find when wifey earns 180k.

Whether you buy stocks or bonds depends on a different set of questions and planning.

I know you have a desire to sail the world from age 44-65? or something like that.

State the goal
state what you have invested already (401k, EF, other)
state how much you can invest going forward

state how much risk you want to take (or do not want to take) with any portion of the money.

Then we can look at where are the best tax advantages for you. It might be muni bonds in a taxable account and stocks in the IRA, might be stocks in the taxable account and inflation bonds in the IRA.

More than one way to put the puzzle together, just tell me the pieces I am working with.

Remind me of retirement income requirements as well. Will either of you be eligible to collect SS? At what ages? What is the benefit...

**KTP** · 03-17-2009, 11:28 AM

Ok, here goes:

Goal: See the USA in our chevro...er, toyota tundra for 1 to 2 years. Just travel around and sail in various locales, maybe spend the summer in Alaska. After that, sell our small trailorable sailboat and truck and take our big sailboat around the world for a number of years (forever? who knows).

Start this asap after 7 years. The 1 to 2 years spent in the USA without a mortgage, mostly camping or sleeping on our sailboat should be pretty minimal expense...maybe healthcare + 30,000? I don't anticipate this would reduce the principle in our savings..might even grow a tad. We really enjoy hiking, camping and sailing, and have spent weeks out roughing it before. Will have to stay in a hotel a few times a month to get a real hot shower

Current investments:

140k in wife's 401k
10k in a rolled over 401k from my last job.
30k in EF
15k in some various stocks and SPY shares
A ton of underwater stock options that expire in 2012...market recovery anyone??? Could have sold them last year for about 60k, but what is that saying about wishing in one hand and doing something in the other and seeing which one fills up first?

I can see us readily having the 70k a year to invest plus continuing the cap on my wife's 401k. Also will generate a bit more by gradually selling a ton of crap we have bought over the years that will not fit into sailboat. I am not expecting a large raise from wife's employment, just standard cost of living stuff. She is pretty maxed in her field unless she goes into management.

I am willing to risk that 50% of what we save may lose half it's value, the other 50% I want to maintain at least the principal. Thus if we save 1,000,000 over 9 years, I want a guaranteed or close to guranteed 750,000 out of it. We could reduce our cost of living to get by on 750,000, or work a bit a few years after we sail for a few years.

Wife has maxed SS every year for at least the past 12 years...been paying in for 20+ years. I don't have enough credits yet to qualify for benefits...maybe need to work 4 to 5 more years or so?

**jIM_Ohio** · 03-17-2009, 01:19 PM

I assume the investments have 7 years to grow?? What are your ages? I am guessing ~40?

The 150k invested at age 40 is "behind"- even if it doubled in 1 year (300k), 300k for a 40 year old couple with ~50k of expenses is behind (I would expect age 40 to have 350k saved before age 44 (for retirement at age 60).

Adding $16,500 to this will help, but that is more "catch up" to where you should be, and does not account for early retirement. Is the $16,500 part of the 70k or seperate from the 70k?

BTW- the goal I would have for retirement at age 60 is 25X expenses (if expenses are 56k then 25X that is $1.4 M)

Using my basic compounding chart here are the markers for a 9% average annual return:
Age 60 $1.4 M
Age 52 $700k
Age 44 $350k
Age 36 $175k

Meaning once you hit one of those age/amounts compounding will do most of the work and current contributions could be diverted for other needs.

If we change the math (for early retirement) using 33X (withdraw lower percentage so money lasts longer) and factor in the 70k (I am assuming total deposits of 70k)

33X 56k=$1.85 M

Age 55 $1.85 M
Age 47 $925k
Age 39 $412k
Age 31 $206k

Again, I am assuming you are about 40 right now... and you don't have 400k right now (invested).

If you invest the 70k for 7 years (490k) and add that to the 150k you have now (640k total) you will still be shy of the Age 47 goal... factor in 9% compounding

year 1 150k 9% 70k deposit 240k at end of year
year 2 337k... year 3 444k... year 4 560k... year 5 825k... year 6 (age 46) 976k.

The issue I am pointing out is that you will have "saved" enough within 6 years, but it will still need 8 years to GROW to be enough to sustain your whole life.

This is assuming 56k of annual expenses (from other thread)
If expenses vary, I would suggest using a complex draw down calculator (see my blog link in signature) and plug in the varied withdraws (30k first 7 years then 56k for remainder). Add in SS for one spouse at age 62, then add in second spouse at age 70 (one take it early one take it late).

Keep all success rates above 80% (using Monte Carlo simulators).

More than likely you will see the $1.85 M goal I set get knocked down to around $1.6 M (so instead of growing for 8 years you might only need to let it grow for 6 years or something like that).

Then you could do more math- add in the 70k for the years of growth only and the 6 year wait might get reduced to 4 or maybe 5.

**jIM_Ohio** · 03-17-2009, 01:37 PM

KTP- a few more points- assuming you found a way to get the $1.8 M saved up (its possible, you might be delayed 9 years instead of 7 or something like that), here would be draw down plan I would outline (tweak based on your risk tolerance):

Put 9 years expenses ($270k=30k*9 years...) into the following

3 year CD=30k
2 year CD=30k
1 year CD=30k
1 year in cash=30k
5 different 30k treasury bonds (probably TIPS) for 30k each.

Logic- 100% chance you have enough money to make it thru next 9 years, There are some tax issues here, but stability of principle is much more important.

You need 56k generated by remaining (1.8M-270k=$1.5M).

4% of 56k is $1.4 M
I would then invest $1.4 M in a 40-60 portfolio built out of:
muni bonds (whatever portion of this is taxable- probably around 60%- could be all muni bonds).

$100,000 would then be invested in a diversified pool of equities. 75% US total market and 25% foreign market type portfolio (index or managed funds- does not matter).

I would be more comfortable witht the 100k portion being higher, (56k is 56% of that- so it's not likely the 100k could generate a years worth of income anytime soon).

You let the 100k ride out all market conditions- when it has more than 100k, you take out the profit. When it has less, you cut back expenses.

The 40-60 portfolio should generate 56k in income without much issue. As you need to increase the 56k, you have to look for 2-3 things
1) is the 40% equity position giving you enough increase to generate more dividends/interest to account for inflation?
2) is the 100k growing enough to account for inflation?
3) is the interest on the CDs/TIPs accounting for your personal inflation?

Ok, so I am going to try this budget thing