Looking for gut check on current savings rate

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jharkin
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Location: Boston suburbs

Looking for gut check on current savings rate

Post by jharkin »

6 moth update - see post #40 below. Income increased to 330k+ making the question moot. We now have enough to keep saving at max rate + cashflow current projects and travel. Thanks for all the input.




TL/DR SEE QUESTION below - I'm looking for a gut check on current savings vs. spend rate.


Emergency funds: ~ 9mo in cash (sum of various sinking funds for near term expenses like car, vacation, renovations)

Debt: N/A other than mortgage (see below)
Tax Filing Status: MFJ
Tax Rate: just on the edge of 24% Federal / 5% state
State of Residence: MA
Age: 45 & 44
Desired Asset allocation: 65/35

Current portfolio (round numbers)
All of it is invested in Vanguard or equivalent index funds – roughly 65% stock/35% bond @ 0.10% av ER - ramping down to be around 50/50 at retirement
We fill pretax with bonds and tilt equity to Roth
His 401k -600k
His Roth – 100k
Her govt 457b – 25k
Her 403b (TIAA Trad annuity, prior job) – 50k
Her Roth – 50k
Her state pension cash value – 25k
HSA – 25k
=================
Total: 875k

Other assets
529 – 20k
House – value 900k, owe 500k @2.75%
2 late model cars free and clear

New Contributions
His 401k – Max + 6% employer match = 30k
Her govt 457b – just started, maxing = 19.5 k
Her 403b – not utilizing
Her pension - 8k
Roth – max x2 = 12k
HSA – max = 7.2k
529 - 4k
post tax - anything thats left over (not much usually beyond keeping the EFund full)
===============
Total =~ 80k+ (30+% savings rate)


Total gross income ~ 250k (both jobs very secure)
Total expenses = 80k fixed (includes all base expenses, mortgage and prop tax) to 110-120k if we include entertainment, travel, car replacement fund, kids extra curriculars, misc spending on clothes, gifts, etc etc.


Retirement plans
Current age is 45. Target retirement is 57-58 (when kids finish undergrad, neither of us has any desire to stop sooner we like our work)
Plan to mostly cashflow college years (2 kids), cut contributions to min if needed for those years.
Planning to live in current house until 60 or so then sell and downsize.

Once the house is paid off and kids are out, fixed expenses will drop to only ~40-50k. Im using 85k for planning with lots of travel, etc.

Projected fixed retirement income is below:
His SS ~40k @ 70
Her SS ~15k @ 62
Her TIAA annuity ~5k @ 65 (no COL)
Her pension -~40k @67 (COL)

I think this will easily cover everything post 70 ??, so portfolio needs to pay for about 15 yr of early retirement. In our state SS and pension are state tax free 😊 We also have heavily subsidized ACA plans and my wife can get state govt early retiree health for us, so pre-medicare premiums should be modest.



So here is my question – I’m basically looking for a gut check if its OK to back off a bit on tax advantaged contributions to cover more near-term expenses put more into taxable&college savings.


I’ve been following BH for years and think I have the portfolio setup down. I answer lots of threads but haven't posted a plan review yet. I’ve been putting the pedal to the metal trying to max everything but its put us in a short term cash crunch. The kids are getting to the age they have expensive extra curriculars and the house needs some major deferred maint work (ext paint, HVAC replacement, driveway repaving, replacing some rotten windows etc.) and I’d rather do it all now rather than spend the same/more later just to do that to make it sellable when we move.

Every way I run the numbers says that continuing to max will have us on track to have 2-3MM liquid and a NW pushing 4MM by 57 even with minimal 2-3% real market returns and I don’t know if we could spend that if we tried. Firecalc shows 100% success for any retirement after age 54-55, even if I plug in a big 400k one time withdrawal to cover tuition. Even the VPW spreadsheet says I only need to be saving around 50k/yr to maintain our current income level indefinitely.

But today we are stretched coming up with the 30-50k its going to cost to cover some house projects without depleting the EFund.

Gut check- I think its safe for us to actually cut back a bit on savings for the next 5 years to spend a bit more today on the house projects and start putting more in the 529s and build a taxable cushion for early retirement. I would propose to cut by reducing my 401k to match only but keep my wife’s contributions (she started saving later so I’d rather weight more contributions to her accounts).


Other minor questions:
* We only get $2k/yr deduction on the 529. Should we invest more, or just pay the rest from cash (kids 8 years to college)?
* My wife has a state gov 547 and a 403b (mostly insurance companies). We chose to fund the 547 only for early retirement flexibility. Its a good plan, state gov backed with near vanguard like funds. Keep doing this or is there some reason I should look at the 403b?
* She has an old 403b at TIAA. We left the money there and put it in TIAA Trad and treat it as part of our bond allocation. Any reason not too?
* My wife started saving much later than I did. I think if we reduce any contributions it should be on my side and leave hers maxed. Let me know if I am off base?
Last edited by jharkin on Tue May 03, 2022 8:15 am, edited 3 times in total.
Topic Author
jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

Update to add - I'm not thinking anything drastic... Just cutting tax deferred back from 80ish to 65-70k for a few years to get some big projects done.

I know first world problems and probably doesn't matter much long term but I have developed the typical BH reticence to reduce savings rate....
chassis
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Re: Looking for gut check on current savings rate

Post by chassis »

Reasonable questions. You can model your financial plan in at least three ways:

1. Portfoliovisualizer "Financial Goals" example
2. RPM spreadsheet
3. Your own home grown detailed model

This will allow you to model variable saving rates, or "withdrawals" from your portfolio at points in the future.

I see your question as, "Can I forego saving in exchange for future consumption?" I would do the math to create data to answer the question.
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Watty
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Re: Looking for gut check on current savings rate

Post by Watty »

jharkin wrote: Sun Oct 24, 2021 2:23 pm House – value 900k, owe 500k @2.75%
How many years until the mortgage will be paid off?
jharkin wrote: Sun Oct 24, 2021 2:23 pm Projected fixed retirement income is below:
His SS ~40k @ 70
Her SS ~15k @ 62
Her TIAA annuity ~5k @ 65 (no COL)
Her pension -~40k @67 (COL)
See this web site for a suggested Social Security claiming stragety.

https://opensocialsecurity.com/

Make sure that your expected Social Security and pension amounts are for if you retire early.
jharkin wrote: Sun Oct 24, 2021 2:23 pm Once the house is paid off and kids are out, fixed expenses will drop to only ~40-50k. Im using 85k for planning with lots of travel, etc.
The $40 to $50K may be on the low side when you consider things like property taxes, house insurance, car insurance, income taxes, home maintenance, Medicare premiums and supplements, etc.

Be sure to read all the details on how the pension COL is calculated since they can sometimes be tricky.
jharkin wrote: Sun Oct 24, 2021 2:23 pm So here is my question – I’m basically looking for a gut check if its OK to back off a bit on tax advantaged contributions to cover more near-term expenses put more into taxable&college savings.
Assuming that you will still get your wife's pension if she dies first then between the pension and Social Security once you are 70 you will have an inflation adjusted $80K a year even if one of you dies. While you are both still alive you will have about $100K in income, but some of it is not inflation adjusted.

You are doing fantastic.

As you mentioned you mainly will need to bridge the income gap between when you retire and when you have all that other retirement income, about 12 years. When you get to be 57-58 is your portfolio is a bit light then even delaying your retirement for six months will make a HUGE difference in your calculations since that would give you six months more income and reducing the gap to 11.5 years is significant when you do the math.

You also did not mention downsizing once the kids are out of the house. One of the big considerations when you bought your current house was likely the commute and school quality but once you retire you will not need to worry about those. You may also not need a big family home.
jharkin wrote: Sun Oct 24, 2021 2:23 pm I would propose to cut by reducing my 401k to match only but keep my wife’s contributions (she started saving later so I’d rather weight more contributions to her accounts).
In your combined tax bracket I would cut back on the Roth contributions instead. Once you retire you may be able to do Roth conversion in a lower tax bracket.

Even if you do not do Roth conversions you will likely be in a lower tax bracket when you are retired anyway. It has been a while since I have played with the numbers but as I recall a couple with $40K in Social Security and $20K in taxable income will owe no federal income taxes.
jharkin wrote: Sun Oct 24, 2021 2:23 pm Emergency funds: ~ 9mo in cash ......

But today we are stretched coming up with the 30-50k its going to cost to cover some house projects without depleting the EFund.
With two "very secure" incomes and the money in the Roth funds you may not need a large emergency fund so you may want to reconsider that. Some people even plan on using their Roth fund as an emergency fund if there is a significant emergency.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

In an emergency, like a job loss, you would cut back on spending on replacement cars and vacations but I would consider those funds to be separate from your emergency fund.
Craig2020
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Joined: Mon Sep 07, 2020 8:01 am

Re: Looking for gut check on current savings rate

Post by Craig2020 »

Looks like you are making a ton of good financial progress! Great job. A few thoughts below.

-- 529 contributions: Reviewing your post details and googling your state. It looks like married filing jointly can deduct up to $2,000 per year for 529 contributions at a state tax rate of 5.1%. For easy math, that is about $100 in your pocket each year. That does not include the benefits of not paying capital gains at time of use or the fact that there is not the dividend tax drag like taxable accounts have while in the accumulation phase. Given you still have 12 years until your youngest finishes undergrad and you have a ways to go for covering college costs - I think it is smart to keep contributing. At minimum I would keep putting in the $2,000 per year.

-- Roth IRAs Vs Traditional 401k - 457- 403b: You will need to do the tax analysis to know where you fall to determine if you should be putting in Roths Vs getting tax deductions now. The only thing I would add is that if you are debating putting money into taxable instead of a Roth IRA, I would be a bit hesitant. Roth IRA contributions (not growth) can be taken out without penalty or tax contributions, so they could be a pseudo-college or pseudo-emergency savings type vehicle.

--Regarding HSA: If you end up taking the time to save receipts and such you can choose to forgo getting reimbursed real time Vs using later. While a modest hastle from an administrative standpoint, you could use an HSA in this manner for a pseudo-college or pseudo-emergency savings type vehicle too.

Again, you seem to be winning at financial life. I won't way into if you should or should not spend more in the near term. That involves a lot more thought than just finances.

--
KlangFool
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Re: Looking for gut check on current savings rate

Post by KlangFool »

OP,

1) How old are your kids and how many?

2) Why are you doing after-tax contribution to the 529 when you have additional room in your 403B?

3) Why do you need the 529 when you have enough money in the Roth contribution plus your annual savings to pay for the college education?

<< Update to add - I'm not thinking anything drastic... Just cutting tax deferred back from 80ish to 65-70k for a few years to get some big projects done.>>

4) Is it worthwhile to pay 29% taxes for those projects? Add another 29% taxes on those 15K to 10K of expenses.

5) Why you cannot cut 10K to 15K from your current 110K to 120K of annual expense to get the project done?

6) Assume annual expense of 120K, you need 3 million. You have 875K now and you save 80K per year.

With an average annual return of 5%, you reach 3 million in 12+ years.
With an average annual return of 7%, you reach 3 million in 10+ years.

Starting Net Worth $875,000
Annual Savings $80,000
Years
Annual Return Rate 8 9 10 11 12
5.00% $2,056,702 $2,239,537 $2,431,514 $2,633,090 $2,844,744
6.00% $2,186,414 $2,397,599 $2,621,455 $2,858,743 $3,110,267
7.00% $2,324,197 $2,566,891 $2,826,573 $3,104,433 $3,401,744


If the annual savings is 65K per year,
With an average annual return of 5%, you reach 3 million in 13+ years.
With an average annual return of 7%, you reach 3 million in 11+ years.

Starting Net Worth $875,000
Annual Savings $65,000
Years
Annual Return Rate 11 12 13 14
5.00% $2,419,988 $2,605,988 $2,801,287 $3,006,351
6.00% $2,634,168 $2,857,218 $3,093,651 $3,344,270
7.00% $2,867,679 $3,133,417 $3,417,756 $3,721,999

7) But, the problem is

A) It is not 10K or 15K per year. You pay 29% taxes on those expenses.

B) Depending on the age of your kids, you cannot save at current pace when your kids enter college.

In summary, you can calculate and work out the numbers to see whether it is worthwhile for you.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
KlangFool
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Re: Looking for gut check on current savings rate

Post by KlangFool »

OP,

Besides not cutting the 401K contribution, I would suggest you stop 529 contribution and contribute to 403B instead.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
SnowBog
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Re: Looking for gut check on current savings rate

Post by SnowBog »

Life is full of choices and tradeoffs. With a 30%+ savings rate, and the willingness to work longer, you can likely dial back on savings.

But I think KlangFool makes a great point in that it appears your savings right now are all tax advantaged accounts. Cutting back on those means increasing taxes now (pre-tax) or in the future (Roth).

So it's not as simple as cutting back $15k on savings, as you'll be paying tax on that amount.

If KlangFool's math was right, paying 29% would be about $4,400 in taxes (on $15k), leaving you with about $10,600 left for your project.

Is that worth it to you?
Ron Ronnerson
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Re: Looking for gut check on current savings rate

Post by Ron Ronnerson »

You’re doing really great but a couple of things come to mind as I read your post which you may wish to consider. You said that you receive subsidized ACA plans. Have you checked to see how an additional $100 of income affects the size of your subsidy? Whatever that amount happens to be for you is basically an additional percentage that you need to add to your marginal tax bracket. This amount can vary considerably year-to-year and based on income, location, and the specific plan you have. If you haven’t done the calculation, I’d highly recommend it because then you can make an informed decision about just how valuable your tax-deferred space really is.

I am not sure if you are able to drop your AGI below $150k but the marginal tax rate on income somewhat above that amount is high this year. For example, someone with 2 kids who has an AGI of $150k as opposed to $160k would receive an additional $250 in child tax credit, $500 from stimulus check 2, and $5600 from stimulus check 3. If you add in a tax bracket of 24% for federal and 5% for state, an extra $10k of income results in only $750 in your pocket at an AGI of $160k. This is before factoring in potentially losing out on ACA premium tax credit. Personally, I see AGI in the range of $150k-$180k (for married filing jointly) as a sort of tax pit to avoid in 2021, especially for those people with kids. The marginal tax rates are ridiculously high due to loss of tax credits and stimulus checks.

Personally, I am not a fan of 529 plans when there is tax-deferred space available in a plan with decent investment options. The 529 is saving you almost nothing in taxes per year. While the money does grow tax-free, contrast that to a tax-deferred account such as a 403b which would save you 24% in federal income taxes + 5% in state taxes + x% for whatever additional amount you’d get in premium tax credit for ACA.

I would recommend transferring some of your emergency fund to I Bonds before November 1st. Then I would purchase another round of I Bonds in January. You can buy $10k per year in electronic I Bonds per social security number and the rates are much better these days than what's being offered on high-yield bank accounts. There is an I Bond Mega Thread on this forum with lots of information if you’re interested in earning a 7.1% guaranteed return.
Topic Author
jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

First off I want to thank everybody for the helpful replies! For some reason I always shied away from a post like this expecting to be told I should sell the house and cars and go live in an RV driving a 1978 honda civic and eat ramen :)


Sorry... brain a bit fried. Just came back from scout campout with my little one and sleeping on the ground is not what I remembered it from 30 years ago :oops:


Anyway let me try and answer a few clarifying questions:
chassis wrote: Sun Oct 24, 2021 3:31 pm I see your question as, "Can I forego saving in exchange for future consumption?" I would do the math to create data to answer the question.
Thanks.. I have - Ive built my own very detailed personalized planning spreadsheet over a decade or so. I pulled in data from the forum backtest spreadsheet to model ranges of returns, used the forum SS calculator spreadsheet to double check the numbers from SSA.gov, incorporated n ACA calculator sheet, and built my own model for projecting ancd calculating future tax liabliites year by year including the SS tax calculations, IRMAA thresholds, etc.

All the numbers I throw at it show pretty much any scenario I can think of has me set by mid 50s even if I back off a bit. I've run FireCalc, i-ORP and used that VPW spreadsheet and get similar or even more optimistic results.... So *I* think the data says Im fine but it helps to get a confirmation from the forum!
Topic Author
jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

More answers:

Watty wrote: Sun Oct 24, 2021 3:40 pm How many years until the mortgage will be paid off?

You also did not mention downsizing once the kids are out of the house. One of the big considerations when you bought your current house was likely the commute and school quality but once you retire you will not need to worry about those. You may also not need a big family home.
Thats the white elephant. We did the LenderFi routine a couple times last year to get 2.75 so reset back to 30 year. I usually like to pay extra but I actually stopped, thinking that at rates this low better to let it ride, build savings and just pay it off lump sum when we move.

To that point - the current house is big, and we WILL downsize either when the kids move out or within 5-8 years after. We could probably move to a home half this size or less... so I'm thinking better to carry the mortgage so when the time comes we have cash/equity to be able to buy the new place without the headache of 2 moves and payoff the remaining mortgage with sale proceeds. Dont want to have hte house all paid off only to have the headache of trying to open a big HELOC with no salary income or take a tax hit using IRA funds to bridge the move.

Watty wrote: Sun Oct 24, 2021 3:40 pm The $40 to $50K may be on the low side when you consider things like property taxes, house insurance, car insurance, income taxes, home maintenance, Medicare premiums and supplements, etc.

Be sure to read all the details on how the pension COL is calculated since they can sometimes be tricky.
Actually, if I take todays budget, back out all discretionary (travel,ent, renovations), savings, kids expenses I get something around 50k even including the 12k of property tax and 1500 in homeowners insurance. I figure by then the life insurance will be expired, no need to contribute to 529, etc.

I have some rough numbers of medicare, and yeah maybe I'm low on that so possible more like 60k as a floor? and 90k with travel, etc. Still seems reasonable?


We are not extravagant spenders, we don't do international trips multiple times a year or anything and we drive cars like mid range Hondas and trade them every 10 years.

Watty wrote: Sun Oct 24, 2021 3:40 pm In your combined tax bracket I would cut back on the Roth contributions instead. Once you retire you may be able to do Roth conversion in a lower tax bracket.

Even if you do not do Roth conversions you will likely be in a lower tax bracket when you are retired anyway. It has been a while since I have played with the numbers but as I recall a couple with $40K in Social Security and $20K in taxable income will owe no federal income taxes.
Interesting.. I think you are right and the numbers show that but i have such a hard time giving up on roth because of the flexibility ( i also consider it a second tier EF, with our cash + Roth we could actually manage something like a 2-3 year job loss if we had to)
Last edited by jharkin on Sun Oct 24, 2021 7:19 pm, edited 1 time in total.
Topic Author
jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

Howdy Klang !
KlangFool wrote: Sun Oct 24, 2021 3:58 pm OP,

1) How old are your kids and how many?

2) Why are you doing after-tax contribution to the 529 when you have additional room in your 403B?

3) Why do you need the 529 when you have enough money in the Roth contribution plus your annual savings to pay for the college education?

<< Update to add - I'm not thinking anything drastic... Just cutting tax deferred back from 80ish to 65-70k for a few years to get some big projects done.>>

4) Is it worthwhile to pay 29% taxes for those projects? Add another 29% taxes on those 15K to 10K of expenses.

5) Why you cannot cut 10K to 15K from your current 110K to 120K of annual expense to get the project done?

6) Assume annual expense of 120K, you need 3 million. You have 875K now and you save 80K per year.
1) 2 kids, 10 years old. They go to college in 8 years. In my planning sheet I have worked in a rough estimate of 100k/year for 4 years to put htem through undergrad. All of my estimates include that. My wife is of the opinion they can take out loans (we both did, parents not able to pay much at all)

2) I have additional room all over. We actually have so much available space we probably couldn't eat if we used it all (my employer provides mega backdoor up to full 59k and wife has 457/403b plus HSA, Roths, etc - something like 120k of space). We picked the 457 first over 403b for her because the 403b providers don't seems so great and 457 is a govt. backed plan with funds cheaper than vanguard and she can draw from it without the 10% penalty or having to do 72t for early retirement.

3) You have mentioned this to other posters before - would you actually take money out of a Roth IRA to pay tuition? I figured it would be better to just cut back on 401k contributions and cash flow during those years if needed than actually take withdrawals.

4) Its projects that if I don't pay for that way I will pay for by taking a HELOC or raiding EF.. Some really need to be done (HVAC) and will probably help utility bills. Or put them off until they become really big problems later...

5) Thats a negotiation with my better half. A lot of it is my kid growing so fast I buy him a new wardrobe every 6 months and he has been through 3 sizes of bicycle in 2 years and how the heck did the fees for all the sports, band, boy scouts and after school events get so expensive. Rest of it are saving so we can buy new cars cash every 10 years and a couple big trips with the kids that we had been putting off during covid - experiences my better half strongly feels we should do with the kids and our parents now (i.e. one plan is the western national parks) before they get to be teenagers and don't want to hang out with mom and dad anymore. Both her and my parents have had major health issues recently (late 70s - you can guess) so its making us think that now is the time to do some important family experiences with them and not keep putting things off for someday that may never come.

6) I do NOT assume an annual expense of 120k. Thats what we spend supporting 2 kids with lots of expenses and the 2 cars and 4BD/3BA house to go with it. When we are retired and the kids are self supporting we wont need much of htat and will downsize accordingly. Thats how I calculated a range of 50k (rice and beans) to 90k (lots of travel) retirement expense.
KlangFool
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Re: Looking for gut check on current savings rate

Post by KlangFool »

jharkin wrote: Sun Oct 24, 2021 7:10 pm Howdy Klang !

3) You have mentioned this to other posters before - would you actually take money out of a Roth IRA to pay tuition? I figured it would be better to just cut back on 401k contributions and cash flow during those years if needed than actually take withdrawals.

4) Its projects that if I don't pay for that way I will pay for by taking a HELOC or raiding EF.. Some really need to be done (HVAC) and will probably help utility bills. Or put them off until they become really big problems later...
jharkin,

3) I do not have to. I have a big taxable account. I do not have enough room in my tax-advantaged accounts. In your case, if you can cut back your 401K contribution to pay for college education, why would you choose to pay taxes NOW and contribute to 529?

4) Why HELOC and/or EF is not a better idea than paying 29% taxes?

KlangFool
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

Ron Ronnerson wrote: Sun Oct 24, 2021 6:25 pm You’re doing really great but a couple of things come to mind as I read your post which you may wish to consider. You said that you receive subsidized ACA plans.
Sorry I must not have been clear -

Today we are on my employers HDHP. (and funding HSA).

When we retire, if we stay in state we have two options:
1 - We could go on the retiree health plan from my wife's govt' job. Premium about $10k in today's dollars.
2 - We could use ACA. I plugged some made up number into the KFF.org calculator (age 55, 400% fpl) and it says the premium cap for a Silver plan at that income level in mass is $5800/year. so I plugged that number + 10k OOP into my calculations. (assuming that we limit Roth conversions to stay under those caps)
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

Anyway - thanks for all the feedback. I have some things to think about.

More background - neither I my nor my wifes families are well off other than us... we came from humble backgrounds and though our 20s and 30s had lots of debt (school loans, car payments, bought first house with PMI)... finally at the point where we have most of the debt gone other than the house and I guess I am just hesitant to take on more leverage... even though the numbers say it probably makes more sense to max pretax, leverage the house and consider roth later.

decisions!

Anyway I think a hear a strong consensus that 529 isn't doing us any favors so I'm going to scale that back to minimum and take another pass though the budget to see what we could trim or float on HELOC (forgot to mention we are also adding solar and I already did that on HELOC - left the numbers out as I was trying to fuzzy a bit to help maintain anonymity). And then decide what else to adjust.

Thanks all, you have helped me feel better about this. The numbers just seemed too good considering how much we struggled in the past so I had a hard time believing we really are in as a good a spot as it looks like we are........
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

Ron Ronnerson wrote: Sun Oct 24, 2021 6:25 pm
I would recommend transferring some of your emergency fund to I Bonds before November 1st. Then I would purchase another round of I Bonds in January. You can buy $10k per year in electronic I Bonds per social security number and the rates are much better these days than what's being offered on high-yield bank accounts. There is an I Bond Mega Thread on this forum with lots of information if you’re interested in earning a 7.1% guaranteed return.
I am going to backup a bit to ask a clarifier on this one. Most of my "emergency fund" is just the combined value of all our sinking funds for travel, car, etc... I stopped keeping a separate EF bucket a while back once I knew I had enough other assets in case of emergencies and we could always defer a vaction or car upgrade to use the funds if needed for more urgent matters.

Ive seen the discussions on IBonds before but didnt dip in because most of the above I need liquid and the bond rates where modest... but you got my attention at 7%. I just looked at Treasury Direct, it shows the blended rate currently at 3.54%. Where do you get 7% from?
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Re: Looking for gut check on current savings rate

Post by mervinj7 »

jharkin wrote: Mon Oct 25, 2021 12:07 pm
Ron Ronnerson wrote: Sun Oct 24, 2021 6:25 pm
I would recommend transferring some of your emergency fund to I Bonds before November 1st. Then I would purchase another round of I Bonds in January. You can buy $10k per year in electronic I Bonds per social security number and the rates are much better these days than what's being offered on high-yield bank accounts. There is an I Bond Mega Thread on this forum with lots of information if you’re interested in earning a 7.1% guaranteed return.
I am going to backup a bit to ask a clarifier on this one. Most of my "emergency fund" is just the combined value of all our sinking funds for travel, car, etc... I stopped keeping a separate EF bucket a while back once I knew I had enough other assets in case of emergencies and we could always defer a vaction or car upgrade to use the funds if needed for more urgent matters.

Ive seen the discussions on IBonds before but didnt dip in because most of the above I need liquid and the bond rates where modest... but you got my attention at 7%. I just looked at Treasury Direct, it shows the blended rate currently at 3.54%. Where do you get 7% from?
Expected announcement for rate in Nov is 7.12% annualized inflation.
https://www.depositaccounts.com/blog/in ... ngs-bonds/
SnowBog
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Re: Looking for gut check on current savings rate

Post by SnowBog »

One point of clarity, those are the annual rates of I Bonds, but they are good for 6 months.

So if you bought I Bonds before the end of October, you'd get 6 months at 3.54% (current rate), then the following 6 months at whatever the November rate is (expected to be 7%+). If you buy in/after November, you'll get the 7% rate for the first 6 months.

I Bonds do require a minimum of 1 year (or 11 months and 1 day is you time it right) holding, and you lose the last 3 months of interest if you sell before 5 years. But other than that 1st year, they are liquid and you can sell anytime you want. The "challenge" is they likely have a higher rate than you'll find elsewhere, and have annual purchase limits, so you may not want to sell them unless you have to.
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

SnowBog wrote: Mon Oct 25, 2021 1:04 pm if you bought I Bonds before the end of October, you'd get 6 months at 3.54% (current rate)
Wait... if I buy this week I get 6 months of interest? That seems too good to be true...

(EDIT - hold on I went and read I think i get it now... A new purchase gets the current rate for 6 months and then anything that rolled over between Nov-Apr gets taht rate for another 6 months. ahhh)



The rest I was aware of but hadn't bought any yet as the rates didn't seem compelling when I last looked a couple years ago.
SnowBog
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Re: Looking for gut check on current savings rate

Post by SnowBog »

jharkin wrote: Mon Oct 25, 2021 1:29 pm
SnowBog wrote: Mon Oct 25, 2021 1:04 pm if you bought I Bonds before the end of October, you'd get 6 months at 3.54% (current rate)
Wait... if I buy this week I get 6 months of interest? That seems too good to be true...

(EDIT - hold on I went and read I think i get it now... A new purchase gets the current rate for 6 months and then anything that rolled over between Nov-Apr gets taht rate for another 6 months. ahhh)



The rest I was aware of but hadn't bought any yet as the rates didn't seem compelling when I last looked a couple years ago.
Correct, you always get 6 months at the current interest rate. The difference is when the "new" rate takes effect. Buy in October, the Nov. Rate won't take effect until April, then you'll get 6 months of the Nov. rate with the May rate starting 5 months later. Buy in November and you'll get 6 months of the rates as they change (Nov. and May).
chassis
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Re: Looking for gut check on current savings rate

Post by chassis »

jharkin wrote: Sun Oct 24, 2021 6:49 pm First off I want to thank everybody for the helpful replies! For some reason I always shied away from a post like this expecting to be told I should sell the house and cars and go live in an RV driving a 1978 honda civic and eat ramen :)


Sorry... brain a bit fried. Just came back from scout campout with my little one and sleeping on the ground is not what I remembered it from 30 years ago :oops:


Anyway let me try and answer a few clarifying questions:
chassis wrote: Sun Oct 24, 2021 3:31 pm I see your question as, "Can I forego saving in exchange for future consumption?" I would do the math to create data to answer the question.
Thanks.. I have - Ive built my own very detailed personalized planning spreadsheet over a decade or so. I pulled in data from the forum backtest spreadsheet to model ranges of returns, used the forum SS calculator spreadsheet to double check the numbers from SSA.gov, incorporated n ACA calculator sheet, and built my own model for projecting ancd calculating future tax liabliites year by year including the SS tax calculations, IRMAA thresholds, etc.

All the numbers I throw at it show pretty much any scenario I can think of has me set by mid 50s even if I back off a bit. I've run FireCalc, i-ORP and used that VPW spreadsheet and get similar or even more optimistic results.... So *I* think the data says Im fine but it helps to get a confirmation from the forum!
Sounds like you have done your homework and you are good to go (back off savings and spend on "projects"). Congratulations.
Ron Ronnerson
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Re: Looking for gut check on current savings rate

Post by Ron Ronnerson »

jharkin wrote: Mon Oct 25, 2021 6:28 am
Ron Ronnerson wrote: Sun Oct 24, 2021 6:25 pm You’re doing really great but a couple of things come to mind as I read your post which you may wish to consider. You said that you receive subsidized ACA plans.
Sorry I must not have been clear -

Today we are on my employers HDHP. (and funding HSA).

When we retire, if we stay in state we have two options:
1 - We could go on the retiree health plan from my wife's govt' job. Premium about $10k in today's dollars.
2 - We could use ACA. I plugged some made up number into the KFF.org calculator (age 55, 400% fpl) and it says the premium cap for a Silver plan at that income level in mass is $5800/year. so I plugged that number + 10k OOP into my calculations. (assuming that we limit Roth conversions to stay under those caps)
Okay, that makes sense. I had thought you were saying you were on an ACA plan now but I see now that you're stating that it might be an option in retirement.
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

Thanks for the advice everybody.

For now I left the 401k deductions as is. I also took the tip to start consolidating all the various sinking funds for near term expenses that i have in MM @ 0.4% and rolling some of that into IBonds.

I went though the budget again and I think I actually *can* cash flow the projects we have planned. The big issue was I have this "buy a new car fund" I didn't want to repurpose due to an aversion to taking on new debt... but the reality is money is fungible and I can treat it all as a big bucket and use it as needed.


Longer term, something still gnaws at me. The way we are saving today we are on track to carry pretty large pretax balances past RMD time (I'm guessing 1.5MM+ at age 70) and have our SS fully taxable even if we do conversions to the edge of the ACA cliff up to 65, and then the top of the 12/15% bracket until RMD time. Also we will have a big college expense before we retire, and probably will carry the mortgage 3-5 years into early retirement before we downsize and move/pay it off.

I wonder if those factors argue that I should be shifting some of the contributions to Roth 401k and taxable now for better flexibility, in spite of the tax hit? thoughts?
SnowBog
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Re: Looking for gut check on current savings rate

Post by SnowBog »

You could look at the extended I-ORP tool and see what it recommends...

You may also need to think about doing more Roth conversions... Personally, I think we'll be better off without the ACA Subsidies - and doing higher Roth conversions instead. I think we'll come out ahead that way...

But I'm also thinking of alternating, like year 1 do much larger Roth conversion [no ACA subsidies], year 2 do ACA subsidies [limited Roth conversion], repeat...
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

SnowBog wrote: Wed Nov 03, 2021 8:02 am You could look at the extended I-ORP tool and see what it recommends...

You may also need to think about doing more Roth conversions... Personally, I think we'll be better off without the ACA Subsidies - and doing higher Roth conversions instead. I think we'll come out ahead that way...

But I'm also thinking of alternating, like year 1 do much larger Roth conversion [no ACA subsidies], year 2 do ACA subsidies [limited Roth conversion], repeat...
Yeah I was trying I-ORP the other day and the extended version kept throwing 502s. Let me keep at it.

Good idea on the alternating... or maybe just forgo subsidies altogether and convert right up to the 12% all the way though.... My state pretty heavily regulates ACA premiums so even with no help we will probably be in decent shape.

I think the numbers pencil out better to max pretax and convert later but something about having a mix of buckets in case something unexpected happens pre-retirement just makes me feel better.
KlangFool
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Re: Looking for gut check on current savings rate

Post by KlangFool »

jharkin wrote: Wed Nov 03, 2021 7:45 am
Also we will have a big college expense before we retire,
jharkin,

https://www.irs.gov/credits-deductions/individuals/aotc

But, because of AOTC, you can deduct $2,500 of tax credit at high marginal tax rate. There is no problem here\.

KlangFool
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

KlangFool wrote: Wed Nov 03, 2021 8:59 am
jharkin wrote: Wed Nov 03, 2021 7:45 am
Also we will have a big college expense before we retire,
jharkin,

https://www.irs.gov/credits-deductions/individuals/aotc

But, because of AOTC, you can deduct $2,500 of tax credit at high marginal tax rate. There is no problem here\.

KlangFool

Hi Klang:
What are the income limits for AOTC?

* To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
* You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
* You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).
Our MFJ MAGI last year was barely under 200k even with full 401k/457/HSA deductions... we barely scrape under the cutoff to do a direct roth contribution. Not a change in the hot place that we would ever qualify for AOTC. Our intention is to early retire the year after the kids graduate.

I notice you often tell bogleheads to look at the AOTC, Savers credit, EITC, etc when their incomes are obviously way to high, why is that?
KlangFool
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Re: Looking for gut check on current savings rate

Post by KlangFool »

jharkin wrote: Wed Nov 03, 2021 9:34 am
I notice you often tell bogleheads to look at the AOTC, Savers credit, EITC, etc when their incomes are obviously way to high, why is that?
jharkin,

Because their income may not be high forever. Especially when the kids go to college.

A) In the best case, they early retired when the kids leave for college.

B) In the worst case, they face age discrimination and they are permanently unemployed or under-employed.

KlangFool
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

KlangFool wrote: Wed Nov 03, 2021 9:44 am
jharkin wrote: Wed Nov 03, 2021 9:34 am
I notice you often tell bogleheads to look at the AOTC, Savers credit, EITC, etc when their incomes are obviously way to high, why is that?
jharkin,

Because their income may not be high forever. Especially when the kids go to college.

A) In the best case, they early retired when the kids leave for college.

B) In the worst case, they face age discrimination and they are permanently unemployed or under-employed.

KlangFool
Hi Klang:

A) I *may* but probably not as we would want the income still coming in while we are writing those massive tuition checks (even my modest mid-tier engineering university tuition has increased from 18k when I went to 50+ today). And to get any FAFSA benefit we would have to retire while htey are in HS due to the look back, that is too early.

B) I know you have had bad luck in telecom, but the private employer I work for and my specialized role is less volatile. My wife' job is almost bulletproof - she works for the public school system in a role that is mandated by law to always be filled. So I think our biggest risk is early ilness and I try not to loose sleep over that...
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

OK, so I got Extended I-ORP to run... weird results.

First I got the "cant calculate estate due to ACA limits" warning. So I just remove the ACA cap and let it run without. Now it calculated discretionary income of 150k/yr in today's money with 1.6MM estate at 92.

The most unexpected part is how it calculated contributions and conversions. It wants me to max roth contributions, but completely stop traditional at age 49 and go all in on full post-tax saving?? In draw down it wants me to empty the roths first and just let the pretax ride into RMD age.

NOT what I was expecting! I think I need to read the help and keep tweaking the inputs... I didn't know what to do with HSA so I added it to roth, and I don't see where to enter 401k match (mine is BIG).
SnowBog
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Re: Looking for gut check on current savings rate

Post by SnowBog »

jharkin wrote: Wed Nov 03, 2021 10:31 am OK, so I got Extended I-ORP to run... weird results.

First I got the "cant calculate estate due to ACA limits" warning. So I just remove the ACA cap and let it run without. Now it calculated discretionary income of 150k/yr in today's money with 1.6MM estate at 92.

The most unexpected part is how it calculated contributions and conversions. It wants me to max roth contributions, but completely stop traditional at age 49 and go all in on full post-tax saving?? In draw down it wants me to empty the roths first and just let the pretax ride into RMD age.

NOT what I was expecting! I think I need to read the help and keep tweaking the inputs... I didn't know what to do with HSA so I added it to roth, and I don't see where to enter 401k match (mine is BIG).
Two things to check...

I vaguely remember an "issue" where if you have a different AA by source (like 100/0 for Roth), that can skew the recommendations. So I generally just put the same AA in (60/40 in my case) for Roth/deferred/taxable.

Make sure you selected a Roth conversion option, as the default is none.

Those might give you a different result...

In my case, it goes from stop tax-deferred as you saw to do a little bit more for a few years, but stop before we plan to retire shifting the rest into taxable. I'm not personally convinced that's "right" for us... And i-ORP doesn't have a way to do things like alternate ACA/Roth - so it's picking a single path that might not be the best overall - but it thinks is better than other single paths...
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Re: Looking for gut check on current savings rate

Post by jharkin »

Yep I was that. I put a 12% conversion cap and it still only wants a few years of conversions.

I ran it again and added my employer match to the pretax max contribution. Also read the instructions and realized I should put mega backdoor into the allowable contribution for roth. Now it wants me to contribute ZERO to pretax and just go all in on roth and mega backdoor and put whatever is leftover into taxable. Still learning...


Yes I had a single glide path but in reality I like to put all bonds in the 401k and leave the roth stocks but like you saw the numbers get really odd if I try and slice it.
Last edited by jharkin on Wed Nov 03, 2021 11:30 am, edited 1 time in total.
chassis
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Re: Looking for gut check on current savings rate

Post by chassis »

@jharkin use the RPM spreadsheet. It’s excellent. You will likely find that Roth conversions are not in your best interest.
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Lee_WSP
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Re: Looking for gut check on current savings rate

Post by Lee_WSP »

I've only skimmed the replies and the OP, but I think this calculator may help give you a clearer picture.

https://portfoliocharts.com/portfolio/savings-rates/
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

ahh ... too many tools!


I realize now that when Ive played with I-ORP in the past I really didn't take the time to understand its working. Reading the help in detail I see I missed some key inputs yesterday. If I give it more fine grained tax values and glide paths its not so aggressively telling me to go all in on Roth, but is still more Roth contribution biased than I am right now. It also is giving more optimistic projections of available retirement income than I had figured on my own. And it doesn't even allow for increasing the annual contribution rate each year as our income goes up. My age 57 retirement target might be too conservative :beer

interesting... I will keep experimenting.
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

I know nobody is reading at this point but I continue to experiment.

I-ORP still wants me to double down on Roth... and is projecting if I don't we will have 2MM+ in traditional by retirement age. I think the tool sees that + my wifes pension and expects an RMD tax bomb and is trying to optimize that out.

But my gut still has trouble with this. Right now we are into the 24% bracket. If I switch pretax contributions to all Roth than that's going to push us deeper into 24% and down the road when the tax cuts expire in 2025 we would rocket into the 28%. I have a hard time seeing how paying that is better than waiting and converting in the 12 or 15% bracket after retirement. My own personal tool i developed that calculates for ACA PTC, IRMAAs, etc all tells me traditional is still better.


I also noticed that I have an interesting opportunity to hedge that I didn't realize. About 500k of the (now 620k) in my 401k is prior rollover that I am eligible to take in service distributions of. I *could* keep going full steam on pretax and in a year or two if I decide I wish I had more roth I think I could roll a bunch of this out into my Roth IRA the last 1-2 years before the tax cuts expire and still manage to convert it in 22/24%. Some rough numbers... I could probably do a last minute conversion of another 100-200k or so to the top of the 24% bracket the last couple years before it expires.


Intersting. Next up is to download the RPM and try to set that up.
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Re: Looking for gut check on current savings rate

Post by smitcat »

chassis wrote: Wed Nov 03, 2021 11:23 am @jharkin use the RPM spreadsheet. It’s excellent. You will likely find that Roth conversions are not in your best interest.
"@jharkin use the RPM spreadsheet. It’s excellent."
It is a really great tool and great advice - the Pralana tool is also very good.

"You will likely find that Roth conversions are not in your best interest."
We found that Roth conversions are very much in our best interest.
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Re: Looking for gut check on current savings rate

Post by smitcat »

KlangFool wrote: Sun Oct 24, 2021 7:49 pm
jharkin wrote: Sun Oct 24, 2021 7:10 pm Howdy Klang !

3) You have mentioned this to other posters before - would you actually take money out of a Roth IRA to pay tuition? I figured it would be better to just cut back on 401k contributions and cash flow during those years if needed than actually take withdrawals.

4) Its projects that if I don't pay for that way I will pay for by taking a HELOC or raiding EF.. Some really need to be done (HVAC) and will probably help utility bills. Or put them off until they become really big problems later...
jharkin,

3) I do not have to. I have a big taxable account. I do not have enough room in my tax-advantaged accounts. In your case, if you can cut back your 401K contribution to pay for college education, why would you choose to pay taxes NOW and contribute to 529?

4) Why HELOC and/or EF is not a better idea than paying 29% taxes?

KlangFool

"4) Why HELOC and/or EF is not a better idea than paying 29% taxes?"
401K contibutions are tax deferred, not tax free.

Are you assuming that each dollar contributed into the 401K would be a 29% deferral and that each dollar eventually withdrawn would then be at the 0% tax rate?
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Re: Looking for gut check on current savings rate

Post by SnowBog »

jharkin wrote: Sat Nov 06, 2021 8:23 am I know nobody is reading at this point but I continue to experiment.

I-ORP still wants me to double down on Roth... and is projecting if I don't we will have 2MM+ in traditional by retirement age. I think the tool sees that + my wifes pension and expects an RMD tax bomb and is trying to optimize that out.

But my gut still has trouble with this. Right now we are into the 24% bracket. If I switch pretax contributions to all Roth than that's going to push us deeper into 24% and down the road when the tax cuts expire in 2025 we would rocket into the 28%. I have a hard time seeing how paying that is better than waiting and converting in the 12 or 15% bracket after retirement.
For what it's worth, I'm in a similar boat, with similar thinking. I just can't justify the extra tax now.

In my case, some years between fed and state taxes, we are approaching 50% taxes. That would basically mean we could only save 1 of the 2 401k/403b contributions (or more likely cut back on taxable).

I guess ultimately I'm of the view that it's better to have more money saved and higher taxes later if that's what it means, than less money saved and lower taxes later. Especially when we plan to retire early, with numerous no/low tax years for things like Roth conversions. Even if that isn't the most "optimal" in the end, it will likely still be good enough for our needs.
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jharkin
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Re: Looking for gut check on current savings rate

Post by jharkin »

6 month follow up.

Thanks to the great resignation and massive tech salary inflation + both of us really busting out backsides at work - both the better half and I got blowout raises this year. I went from 180 to 250 and she went from 60 to 80 so we are looking at 330-350k income going forward. :beer

So basically the original question is moot. Now we can easily afford to keep maxing both my 410k and her 457 +backdoor roth, and I am going to start ramping up to eventually max the mega backdoor over the next couple years and throw maybe another 20k/yr into 529 and iBonds depending on whats left over. :) And we can cash flow the renovations with the leftover.

Oh and we will probably take the kids to Disney... have to live a bit for today as well.
Last edited by jharkin on Tue May 03, 2022 8:18 am, edited 2 times in total.
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Re: Looking for gut check on current savings rate

Post by HMSVictory »

GUT CHECK! :mrgreen:

Your current savings rate is excellent. I use the 1/3, 1/3, 1/3 ratio myself. 1/3 - savings, 1/3 taxes and 1/3 spending.

I'd plan to have the house paid off at least by your retirement start date (or sooner). I don't like having debt and yours is 2x your income so its going to take a while to get rid of that guy. What I did is dial back my bond holdings and paid off my house. I look at the mortgage as a big negative bond. Your doing great and there is no bad answer here. At the end of the story you want to have everything paid for and a big pile of money.
Stay the course!
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