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- How Has Covid-19 Affected Your FIRE Journey? Part 1 - May 11, 2020
It’s Friday and you know what that means! Time for another Reader Case.
This week I’m writing from the Netherlands, where after coming down from the high of Chautauqua, we decided to stay with a friend for a week and play with her adorable kids.
One thing I’ve noticed about kids is that they have a tendency to suck you into a vortex with their adorableness. Even though I was only there for a week, it took a bit of time to come back to the real world and be my productive self again.
Despite not being as productive, I had a great time being a 5-year-old’s personal hero. And all I had to do was draw some Pokémon pictures and have deep discussions with him about PAW Patrol. When it was time to leave at the end of the week, he actually broke down crying, locked his arms around my waist and asked me not to leave. AWWWW! Kids have such low standards. It’s awesome.
That being said, it’s easy to see how great kids are when I’m not the one who has to do all the work of the cleaning, cooking, putting them to bed, dealing with temper tantrums, etc. So seeing how much hard work my friend and her hubby put in to raising her lovable children, I just want to say a huge thanks to all the Mom and Dads out there for all that you do. You are amazing.
Anyways, now that all the mushy stuff (eww) is out of the way, Let’s get to the numbers.
I was hoping you could analyze my position. Love you guys and highly respect your advice, keep up the amazing work on the blog-I’m obsessed! I unfortunately never realized retiring early was a possibility before so I didn’t start saving for retirement until 5 years ago. I’m currently 32.
Here’s the details:
Yearly gross salary: $73,016
Currently I contribute 25% + a automatic agency contribution of 1% + 5% matching. (This is currently the max allowable) this all goes into my tsp (fed gov retirement plan). In my tsp I currently have $50,714.
I also contribute to a brokerage account and a stand alone traditional IRA, currently those accounts have $13,824 balance. I reinvest all my dividends to avoid capital gains tax. I have these funds balanced between index etf funds (total market, domestic, international, emerging, REITs, us treasuries, tips and a small portion in bonds). I have $14,575 in cash (thinking this is too much to have in cash not making money for me?) This is my emergency fund/cash flow(12k) and the rest had previously been my savings for a house (silly me). I have no debt! (Yay!-thanks to Dad I was raised Uber frugal and paid off all those nasty American student loans aggressively).
Monthly net income: $2378
Rent:650 will likely be increasing to $1,000 (Chicago rent prices and moving in with my boyfriend as I’m tried of living like a college kid with 2 roommates)
Miscellaneous ( gym/ healthcare copayments) 300
Only asset is a 2015 Mazda 3 hatchback
I’d love to be able to retire at 45. I’m open to working part time to make extra cash if needed. I’m trying to do my planning with the assumption that #45 (aka the big Cheeto aka trump) will eliminate social security. I also try to contribute my full tax refund typically 2k per year directly into retirement as well as any left over cash I have after expenses each month but there isn’t always any left over…
Love you guys! You are my inspiration! Thanks for changing lives by doing what you’re doing!”
So from first glance, with zero debt (woohoo!), low rent, a high tsp contribution rate, and low expenses, it looks like Rb45 is doing really well! But since people complain all the time of not being able to retire early without a 6-figure salary, will her salary really be enough for her goal of retirement in 13 years, by the age of 45?
Let’s find out.
|Total Annual Income (after-tax)||$28,536/year|
|TSP contributions (including matching)||22,634.96/year|
|Total Annual Expenses||$1000+ $400 +$116+ $300 +$300 = $2116/month *12 = $25,392/year.|
|Total Assets||$50,714 + $13,824 + $14,575 = $79,113.00|
Okay right away, I can see there’s something wrong with how much tax she’s are paying. She contributes 25% to her TSP which reduces their taxable salary from $73,016 to $54,762. And yet she’s paying $26,226 (or 34%) in taxes?!
Even if we assume she’s maxing out her traditional IRA at $5500/year, she’s still paying $26,226 – $5500 = $20,726 or 28% in taxes.
This seems way too high. Knowing that she lives in Chicago, when I put in her numbers in the tax calculator, I get:
And yes, I know it’s weird that I put the TSP into the “Itemized Deductions” bucket. It’s because the if I put the TSP in the 401(k) field, the calculator disallows further IRA contributions because having access to a 401(k) limits what you can deduct from an Individual IRA. However, a TSP doesn’t do this. It’s a bit of a stupid hack, but the point is, this shows there’s something wrong in RB45’s after-tax income. It should be in the $50k-$60k range, yet they’re reporting it $28,536.
So she’s are either over-paying taxes or forgetting money she put away into another retirement account. So my first piece of advice is to go FIND that extra money. Something’s missing and that’s bad.
Second piece of advice. What about 401(k)? Rb45 should check to see if her company is one of those government agencies that allow you to contribute to both 401(k) and TSP. Some readers who’ve written in have been able to qualify for both, meaning they’re able to save taxes like crazy by taking advantage of both accounts.
So I think her situation is even better than it seems, but if we look at worst case and use her existing numbers, she has an awesome savings rate of 50.38%, a yearly expenditure of $25,392, which will require a portfolio size of: $634,800.
In order to get this portfolio with a conservative 6% return over the long term, with her currently contribution rate and maxing out her traditional IRA each year, it should take:
12 years! So she’ll be able to retire at 44, beating her early retirement goal by 1 year!
Now, keeping in mind that we generally recommend setting aside as least 6 months of living expenses (or $12,696 in this case) for emergencies, so it’s great she currently has this already in cash.
Even when she reaches her goal by 2028, I would continue to work for 1 more year until the age of 45 so she can have some money set aside for a cash cushion.
Now, if she were to find the “missing money” and actually pay only 19.7% tax as indicated by the tax calculator, she’d have a monthly net income of $4885 instead of $2378, which would increase her savings rate from 50.38% to 70.73%, and shorten her time to retirement by:
4 years! She’d be able to retire by 40! Unless there’s some deduction we don’t know about, this would be a FANTASTIC time to go over her taxes and figure out how she can shorten her TTR from 13 to 8 years.
What do you guys think? Do you think Rb45 is in good financial shape to retire by 45?
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