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October 30, 2012

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It looks like you have paid your own way through school with student loans and being aggressive about paying it down. In addition to starting your career later than most people, the 31K in retirement is not too bad.

Honestly, I do not think you can retire that young unless you really work on increasing your salary by leaps and bounds. It takes a lot of investments outside retirement plans to cover the 17 years betweens 50 and 67.

Generally, it appears you have lifestyle inflation. Entertainment is very high, and I fear that also means your son is not the center of your "enter-attention." They need TLC at this critical time in their life.

Give us more perspective on your plans for the future, particularly regarding your philosophy towards funding your son's educational future, plans for more children, wife's career, etc? This all effects retirement age.


Looks like you are doing pretty well. With your employer contributing 7.5% to your 401k without any matching(that is an amazing retirement benefit), why not fund another 2.5 at least and go 10% in?

On a side note, paying for cars in cash appear to be a big thing in the PF world since nearly everyone has that as a goal(myself included). We must all really hate those auto loans.

I think you might want to re-evaluate spending $950 a month on gifts, entertainment and, oh yeah, more gifts. All that spending is in addition to your fun money ($250) and all the spending you do on your son. It doesn't add in K's birthday party or gift. It also doesn't include Cable, Netflix, Amazon or Little Gym (all of which I might include under the heading of "entertainment" and which add up to an additional $240)

If you really want to save up money to pay cash for your car and start saving money for retirement - I think you need to stop spending so much money on luxuries. I also think you need to stop splitting them out so much on your spreadsheet. That is a very good way of reducing (in your mind) what you spend on non-necessities because each expense looks fairly reasonable but once you add them up - it starts to look ridiculous.

You spend more on luxuries than you do on student loan repayment and you categorize your student loan payment as "aggressive". Your luxury budget is even more "aggressive" than your student loan repayment budget. Especially in light of the fact you aren't contributing anything personally to retirement and right now you aren't saving any money towards short term savings either (the car idea).

How about slashing your entertainment, fun money, and gift money in half? Then take the $500 you would save and put that towards your company retirement plan. That has two benefits - increases your retirement savings and also decreases your taxable income (saving you on taxes). You might even find the tax savings effectively gives you the same amount of money in your pocket that you have right now.

Now, really look at the rest of those line item budget expenses. Do you really need to have $250 in fun money every month? Do you need to pay a cleaning lady $150 to clean your house (your wife stays at home). That would be $400 to put towards the new car starting right now. You would have $20K in 4 years saving that money instead of spending it on ephemera.

I think there is an awful lot of fat in this budget, especially for someone who has a totally unrealistic early retirement plan. You will not be debt free in July 2013 - you will still have a mortgage payment you are required to pay. And you are already planning on increasing your spending (more children, bigger house). You need to start looking at this with e true idea of your expenses and a more realistic idea of what it takes to retire early. Have you thought about the fact your will have three children starting college at the same time you currently plan to retire? Have you thought about how you will access your retirement money pre-59 1/2? Especially if it is still all in your company's retirement plan? Have you thought about the fact you you plans to save are all in the future - which makes them possible (theoretically), but not even close to probable?

I think you need to seriously re-evaluate and get real with yourself.

My biggest question up front is how you plan to retire at 50 when you don't seem to have a complete plan in place. You point out yourself education is extremely important in personal financial management, but the rest of your profile does not reflect this.

Sash stole a lot of my other comments - the combined cell phone bill and cable at $270 per month seems high to me, but I'm not familiar with the area you live in. Don't most comprehensive plans nowadays offer a more affordable package? Adding this to the $600 entertainment monthly budget and other "fun" or "gift" expenses suggests you have a lot more flexibility than may be the case. One other question, is the maid necessary when one of the spouses stays home? Again, it's not for any one here to speculate on your personal circumstances. I'm not a proponent for living a spartan lifestyle just for the sake of saving, but you might take a closer look at balancing future goals with short term goals and present activities.

That came out a little critical now that I look at it. Overall it looks like you and your family are enjoying a lot of success and on your way towards enjoying a comfortable retirement. Congrats on the 18 mo old!~
A very detailed budget indeed, and an interesting profile to read. Thanks for sharing

I'm with Sasha and would add that to fund that level of lifestyle in retirement, you'll need an extraordinarily high amount of savings. If you reduced your yearly expenses, you reduce the amount you need to have saved by orders of magnitude.

This budget is overly complicated. I'm also a very detailed person, so I understand why it is this way, but you have very broad items, like Utilities and then very fine items, like Air Filters. Why not have a category called Vehicle Maintenance and leave all things maintenance in there, including filters? Take the complexity out of the budget and focus on the overall trends unless you like pouring hours into managing it.

I agree with others that entertainment set at $600 is excessive, especially when you are paying $1250 a month in debt. Why not cut that in half at $300 and dump the remaining $300 into debt repayment?

A 7.5% contribution from your employer is great, but if you switch jobs in the future and most people do at some time, if you don't get in the happen of saving by yourself, it will be a wake up call.

MC

I've come back to explain my thinking a little more in depth. Right now, you have a plan for the $1250 you are paying in student loans each month. After the loans are repaid you are planning to save that money for a new car. And then, once you buy the new car - you are planning to save that same amount of money towards retirement. I know $1250 can seem like a lot of money.

The problem with that plan is that after you buy the new car, you are going to need to save up for the next car. Because the car you by will eventually need to be replaced. And you will still need to save for retirement (continuously). And, if you really want to buy a bigger house in the future, you need to be saving for your downpayment and for your higher maintenance and mortgage costs. And if you are planning on having more children, that will be more diaper and Little Gym costs. But all you have (in your current plan) is re-allocating that same $1250 as your wants and expenses increase more and more. That $1250 isn't going to go very far when you really start adding up all the new expenses you have planned. And how you then think you will have money to retire at 50 is baffling.

Look, I understand how a 6 figure salary can seem like a lot of money. And how each expense can seem totally reasonable. I am trying to help you see that your plan is not sustainable now, rather than when the weight of your lifestyle inflation makes your new expenses seem impossible to carry, and you wonder how you are spending more than you are making every month.

Right now, you are living exactly to the limit of your income without saving anything. I don't count your employers contributions because as others have said - if you leave your employer your retirement contributions will go down to $0. It will never get easier to save the longer you spend everything you bring in. You need to first start living under your means in order to get into the habit of not spending everything you earn. Only then will you start to really save and build wealth.

I would really try to figure out how you can start maxing out your 401(k) - the full $17K a year in addition to your employers contribution. Figure out how to do that before you start buying more depreciating assets (like a car). After you figure that out, then buy a car from the savings you are accumulating from reducing expenses. After that, figure out how to fully fund 2 IRA accounts each year (one for both you and your wife). Make those Roth accounts so you can take money out if needed for emergencies without penalties. Once you are contributing that $27K a year to retirement, then think about how you might be able to afford the bigger house on the salary you have left.


Hi MC,

Congrats, you are off to a great start. Debt is under control, good amount of emergency fund and also good income level.

As with the other comments, your budget has plenty of room for improvement to save even more. Here is my take.

(1) Consolidate and reduce the number of categories. As pointed out by other commenters, your budget has too many categories. The amount may look managable, but if you combine them, it adds up.

Here is my 1st attempt:
Category Monthly Yearly
Car $488.80 $5,865.60
Debt $2,753.83 $33,045.96
Fun $1,172 $14,061.72
Gifts $411 $4,927.68
Groceries $710 $8,520.00
House $262 $3,144.00
Insurance $19.15 $229.80
Medical $50 $600.00
Others $20 $240.00
Retirement $0 $0.00
Service $96 $1,152.00
Utilities $530 $6,355.80

(2)Reevaluate your "Fun" and "Gifts" expenses. Looking at the "summarized" budget, "Fun" and "Gifts" total to around $19,000 per year. I think that is too much. You can easily adjust it and allocate more to pay off your student loan early or car fund.

(3)Consider contributing to 529 accounts. If you plan to support your child (and future children) for their education, the earlier you start, the better to take advantage of compounding interest. Even if you contribute $1000 per year. It's better than nothing and the savings will add up.

Thanks for sharing and good luck,
CW

I agree with most comments here that your expenses need an overhaul or your income needs to increase quite a bit if you intend to retire by 50 "going hard core at our retirement (15k or more a year)" at your current lifestyle.

I am a stay at home mother to a 2 year old. My husband makes right around 50k gross. This year we had another 10k in bonus. So right around 60k and we maxed out our retirement contributions (17k from us no company contributions) while still putting money into short term savings, car savings, travel savings, and a small gift fund. Granted we have no other debt and our gifting is much reduced from yours, but still. I don't even consider our savings hardcore for our income. You have a lot of expensive luxuries in your budget - nothing wrong with that but your expressed aspirations seem to be at odds with your reality.

Detail in a budget is generally a good thing until it's used to obscure the bigger picture. At least group the very detailed categories into large over arching categories: gifting, car expenses (to include gas, maintenance, saving for a new one,) child expenses (activities, supplies, possible daycare/babysitting, education,) housing costs (utilities, maintenance, mortgage)

Cable 165 - This seems high. We have satellite and some specialty sports channels and still only come in at about half your costs.
Phones 200 - From your bill total, I'm assuming you both have expensive phones with high data plans. Is this actually necessary? You may want to shop around other carriers for cheaper plans.
Gifting (combined 420) - Nothing wrong with this as long as you are able to achieve your goals in other areas.
Maid 150 - as a stay at home parent I can see how this would be nice. freeing your wife from some cleaning/housework to spend more time with your child and future children. But is is necessary while you are "getting out of debt?"
Air Filters and Carbonite - need to be moved into whatever over arching category they belong in - house maintenance?
Tolls - I would personally include this in the fuel for the car category, but whatever
Gas for House 50 and Utilities 275 - these should probably be combined but aren't maybe because they come as separate bills? basically these are the same thing
Costco 70 and Amazon 6 - what are you buying? food? toiletries? gifts? put them in the appropriate category so you can see your TRUE totals
Entertainment 600 - like others, this is high. Even a little bit trimmed from this would help you fund other goals.
Child Expenses: Little Gym 67 Supplies 100 Gifts 30 Party 40 - Children need your time and attention more than they need things. If you want 1-2 more children are you planning ahead for the added expenses? What about educational expenses?
Life Insurance - Does this include coverage on your wife? Especially since you have a young child at home with her and are wanting more.
Where does your wife's occasional income go?

I think you are going to have to save very aggressively to be able to retire by 50 and live the same life. Have you run the numbers to see if it is possible given your situation and goals?

Another vote for consolidating categories. I actually did this preliminarily in excel in categories similar to what I would use and it was very eye-opening.

For example:
Mortgage - $1503.83
Car expenses (insurance, gas, tolls, maintenance, filters) - $500.80
Entertainment/Discretionary (cable/entertainment/fun funds/ACL/Netflix/etc) - $1092.81
Groceries and household expenses, including maid - $997.00
Gifts (across all gifts categories, including K birthday stuff) - $420
Etc.

Those last three categories are very high, considering your goals and expanding family. You'll need to prioritize a lot to make this all work. You make a high enough income to reach your goals and have some luxuries... but not this many. I think it's fine to have a maid if that's important to you and your wife's sanity. Same with generous gift giving, eating out, etc. But you can't do all of those things and also reach the goals you have.

Are you putting money in savings or anything, or do you rely on bonuses, etc. to keep your emergency fund stocked? What about saving for kids' education?

Can you be more specific about how you plan to retire by 50? Maybe you have more going on that we don't know about, like a large expected income bump coming up?

I'm going to say first that you're doing well overall. HIgh income, low debt and pretty good savings rate. Thats all good. You're certainly doing a lot better than most people.

But theres room for improvement for sure...

Right now you have expenses listed of roughly $6500. You spend about 50% on 'needs' category (mortgage, gas, food, etc) you spend about 30% on 'wants' (cell phone, cable, entertainment, gifts) and you put 20% into your student loans. Thats not bad really. You do spend a lot on discretionary 'want' items but as a % of income its not horrible and you are putting 20% of spending into debt which is good.

Doesn't look like you have enough life insurance. $20/month is probably not getting you more than $500k coverage. I'd think you probably want more like $1m coverage for you and $500k for your wife.

I'm assuming that the $37k difference between the $115k income and $78k spending listed plus whatever money your wife brings in is going to taxes and other paycheck deductions but we might be missing some money.

I don't think you're on a trajectory to retire at 50. If you keep saving at your current rate you're putting about 20% into savings/retirement including your employer 7.5% 401k money. Thats not bad. But its not really enough to retire at 50. Especially not if you're thinking of 1-2 more kids and an upgraded house in a few years. If you are serious about early retirement then you need to go do the math and figure out how that will realistically happen, right now its not going to happen.

I'm not going to nitpick your individual spending. If you want to cut your luxury spending then you can find places to do so. If you don't want to then make sure you plan for future with more kids and keep your spending in check and keep the savings rate as high as it is. I could see you having a couple kids and a bigger house a few years from now and expanding your spending along with it so don't let that happen.

I'd also get a bit larger emergency fund. $30k seems like a lot but you'd burn through that in a few months at your current rate.

Saving for your kids college is also a good eventual goal.

MC - I just ran some quick numbers on your retirement plans. I'm assuming that your a) your salary will stay constant at $115k, b) your company will continue to make 7.5% annual contributions, and c) you are able to put aside $15k per year every year beginning in 2 years (age 33).

With this plan, if your combined retirement totals grow at an 8% annual rate, you will have just over $1 million at age 50, right in time for your second and third kids to hit college. At 6% growth, you'll be at $850k.

Are you comfortable with that amount to last you and your wife (and possibly supporting your kids) for 30-40 years? You probably expect your income to rise at least modestly over the next 19 years, but you also want more children and a larger house. Also, your profile suggests you will put all retirement savings on hold for 2 years to purchase a new car (presumably costing about $30,000) - as sasha points out, if your strategy for any out-of-standard-budget purchases is to halt retirement savings, your $15k per year target will not be met very often.

I agree with above comments that your discretionary spending is way higher than it needs to be. Especially look at the gifts category...$5,000 a year seems very excessive.

A lot of people have already touched on the salient topics - no retirement contribution, high luxury spending, etc., but I just wanted to point out that you cannot access your 401-k before 59.5 years of age without a 10% penalty. How will you live the almost decade long time without accessing your largest form of retirement savings to date?

Also if you are planning to have 3 kids presumably you will help with their college right as you plan to retire. This does not seem like a sound plan. It is far more likely you will work until 62 or better yet 67 and then you will have both lots more in retirement and access to SS and Medicare.

Good luck from a fellow engineer.

I agree with JY, Jonathan is counting retirement assets when you reach 50. You have to run a spreadsheet of investments outside of retirement to avoid those costly penalties. If you put away $1250 per month in a non-tax sheltered account starting at age 33 and average an optimistic growth of 8%, you'll have about $600K in investments by age 50. At safe withdrawal rates, you'll take home about $24,000 per year. This is well below the living you are accustomed to which today is about $84,000 per year in circa 2012 dollars.

You are 60K in the whole with your current plans. Either meet your early retirement goal by saving much more money now and in the future or move your retirement age to a later time.

Every time the early retirement topic comes up here many people are quick to point out that you cannot withdraw funds from a retirement plan prior to age 59.5 without a 10% penalty.

This is simply not true.

http://en.wikipedia.org/wiki/Substantially_equal_periodic_payments

It is very straight forward to get regular payments out of your retirement plan early if you follow the formula to take substantially equal periodic payments.

Apex, 72t can be financially disastrous if one makes a math error. 10% penalty every year since commencement plus interest of 4-8%.

72t is not the only way to access before 59.5

457's allow distributions at 55 penalty free

not to mention Roth contributions at any time

@MC
We retired in 1992 when I was 58 and my wife was 59. We both enjoyed our jobs but as a result of the Cold War ending, I (along with all salaried employees in the aerospace company where I was an engineer) were offered a Golden Handshake to retire in 9/1992 that was hard to resist, and fitted in well with our future plans. We had started our family about 4 years earlier than you and by 9/1992 our 3 children were 29, 32, and 34, long gone, and totally self supporting. We were also able to retire debt free, and each received a nice pension before also taking our SS at age 62.

When you retire in your 50's you are in the prime of your life, generally are very active and healthy, and need to have a sound plan on what you want to achieve during the next phase of your life.

For us it was easy, we both wanted to travel extensively all over the world and from 1993 through 2010 we did just that. We took 2 or 3 trips every year for many years, then cut back to just one trip per year before ending our foreign travels in 2010 after my wife had undergone two hip replacements. During those 18 years we were able to empty our bucket list and have many wonderful adventures in a lengthy list of countries.

Even though our investments were a modest $320K when I retired, they continued to grow every single year during retirement for two reasons -- 1) The Internet coming along just as I retired had an unprecedented positive effect upon the economy, and the NASDAQ market in particular, and 2) I took steps to learn what it takes to become a very successful and active investor and achieved an average annual growth rate of 16.92% over the last 20 years including a permanent shift into 100% income investments near the end of 2007.

Unfortunately we are now still in a serious recession, have high unemployment, 20+ million people out of work, and a national debt that has mushroomed to over $16 trillion so I would never expect the next 20 years to be anything like the previous twenty. This is going to make planning a very early retirement a lot more difficult than it used to be. But in the current environment I can't see taking such a retirement without formulating a well thought out financial plan.

@Luis

Yes, there are stiff penalties for doing it wrong. There are also stiff penalties for getting Required Minimum Distributions wrong after age 70.5 too and you have no choice but to do those.

If someone isn't sure of the math they should get an accountant who understands the details of the law.

It's not a very high hurdle if you need the money. It is certainly not a reason to suggest you cannot get the money.

Hi MC,

Good on you for posting your profile.

I agree with everyone else with increasing your gap. You are spending $6500 per month (including student loan repayments) and I'd guess that your after tax income is only $7200 - $7500... that is not much of a gap at all.

What is your current net worth, and your target net worth at age 50?

I hope you can make some very big career moves because you should be looking to earn 3-4X what you are making today while keeping your expenses the same... that is the way to accumulate wealth.

It can be done- my monthly expenditures are less than 50% of what you have listed and I am earning roughly 2.5 - 3 times what you have listed (you can check out my profile)... and it looks like we have one in the oven, so congratulations on your 18 month old.

You are correct to put first things first- pay off student loans then your house, buy cars in cash, start investing more... I also agree with many of the commenters that you should get aggressively cut your expenditures. Some of the best things in life don't cost much at all...

Best regards,

-Mike

I think all the points were covered. I will say that just starting to save 15K in your early 30s and thinking you're going to retire at 50, or even 60, is NOT aggressive. Not even close...especially when you're earning 6 figures.

My life situation is different, but just to give you an example of a more realistic plan.

I'm 42, single, no kids. I make just under 47K per year (gross). I have 200K saved in retirement accounts and should get some kind of public sector pension at age 55 (assuming our economy isn't totally down the drain by then). I'm projecting 9% returns on my funds and I save about $12,720 per year in my 401k type plan. I should have around 950K by age 55 1/2. Plus my pension. Honestly, I don't think even as a single person I would retire at 55 if I wasn't going to get a pension in addition to my retirement savings. I don't even think retiring at 60 is realistic for you based on your other goals.

Something's gotta give. For a a lot of people, that ends up being their retirement savings. Putting off the retirement savings is almost always a bad idea. You really can't count on having that high paying job through your 50s. I have seen A TON of smart people laid off from good paying jobs RIGHT AROUND AGE 50, and even those who find decent employment after being laid off, most never make what they were making. DON'T THINK THIS CAN'T HAPPEN TO YOU!

Great reader profile, I know people want to scare you because you are not saving enough and it can be hard to get criticism from the outside. I think you are doing good but because of your great income you could be doing great. You mentioned that your mortgage is about 1500, mulitply this by 6 months and you get 9K. All you really in an emergency fund right now is about 9-14K. Take the leftover money and pay off the student loans asap, take the other left over emergency funds and do a Roth IRA immediately. This will get you to be debt free faster and will help you reach your other goals sooner as your income might not be around forever. Take advantage now and be relieved sooner.

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