Updated Savings Plan

Sitting down and looking at my projected savings numbers for this year as I was doing my tax return last weekend, I started to realize a bit the enormity of how much I should be able to save this year. Assuming that I don’t get a raise, my RSUs vest at a medium stock price, and I don’t itemize my taxes, I should be able to increase my net worth by $100,000 this year. If you use the 52-week high stock price for my RSU vests and add in a 3% raise and itemizing, that’s looking at closer to $115,000. These numbers absolutely astound me considering that only three years ago, my *gross* income was less than what I am estimating to increase my net worth by this year and I bought a new car in cash that year, so my net worth didn’t go up by much despite my income (~$22,300). And a year before that? I was in college.

Some crazy part of me just wanted to throw every last cent at the mortgage. But then I started looking at the numbers. Here’s what my plan was to save this year:

  • $17,500 Max out the Traditional 401(k)
  • $2,000 Max out Health Savings Account for the plan year (rest of the $3,250 will go in next year, in 2014)
  • ~$1,000 Roth IRA front door for 2012
  • $5,400 Emergency fund aka cash savings
  • $40,700 Five year mortgage pre-payment
  • $6,000 Mortgage principal from regular payment
  • $25,000 Extra savings (assuming no raise, RSUs vesting at a medium stock price and I take the standard deduction)

If I have $25,000 or so in extra savings room after accomplishing all of that, then maybe I should do the backdoor for the Roth IRA for 2012, since that’s giving up about ~$4,000 in tax-advantaged savings room, forever. I could end up working at a start-up with a bad retirement plan and wanting to roll over my old 401(k)s to a Vanguard Rollover IRA instead of into the new 401(k), so I might not have many years where I can do the backdoor Roth IRA contributions. That leaves me with $21,000 in extra savings. That’s still a lot of extra savings, so I started looking at my other options.

Buying Series I Savings Bonds from Treasury Direct is a bit of an appealing option when I see how much I’m paying in taxes now on the interest in my savings accounts and I could defer that interest until maturity (up to 30 years). The catch is that I don’t want to bunch up paying tax on their interest payments in a year with high income because then I could just be paying more in taxes than I would have to begin with. On the other hand, for now, they’re paying more in interest than my savings accounts are. I had been considering moving part of my emergency fund into CDs. One way to look at the i-bonds is that they’re a sort of 5 year CD with interest rates tied to inflation instead of stuck for 5 years.

I did a bunch of reading:

I’m also on the fence with my rewards checking account now that I have credit cards that have cashback/points. The rewards checking account was perfect back when it was paying me to do what I was already doing and even if I don’t make N debit card transactions per month, it’s not a bad checking account either since it has no fees. So my current plan is to buy $5,000 of i-bonds with the buffer I was keeping in my checking account, which doesn’t really affect the extra savings amount, come to think of it. I’m also going to give up on the rewards checking account starting in April – I’m already too far into it this month that I might as well keep going now. It’s going to be tight getting my N transactions in with my debit card by the end of the month, but I think I’ll make it by the end of the month. The cashback cards aren’t honestly that worthwhile either with how little I’m spending, but at least they’re rewarding me for what I would have been doing anyway.

These two changes have meant an adjustment in my asset allocations for the year. Very little, if any, of my 401(k) money will end up going to the Total International Stock Index fund. With the i-bond purchases, less of it needs to go to the stable value fund as well.

My target asset allocation at the end of 2013 will now be:

  • 31% S&P 500 Index
  • 6% Extended Market Index
  • 37% International Stocks
  • 26% Fixed Income (My age at the end of the year + the number of multiples of $100,000 I have in investments)

Based on this, let’s calculate my ideal portfolio at the end of 2013 and compare it to where my portfolio is now:

Current Ideal EOY Difference
S&P 500 $25,700 $36,921 $11,221
Extended Market $6,600 $7,146 $546
International Stocks $31,800 $44,067 $12,267
Fixed Income $19,500 $30,966 $11,466
total $83,600 $119,100 $35,500

I’ve updated my 401(k) contribution allocation as follows:

  • 74% Vanguard 500 Index fund
  • 15% Vanguard Total International Stock Index Fund
  • 11% Vanguard Retirement Savings Trust

Some more thoughts:

  • I’ll hit the five year mortgage pre-payment amount by sometime in July.
  • I’m going to wait until my last bonus of the year hits to make my non-deductible Traditional IRA contribution for 2013 and then I’ll convert the 2012 and 2013 amounts in one go. I’ve invested the 2012 amount in Vanguard Total International Stock Market Index Fund Investor Shares for now.
  • I’m not sure whether I’ll buy my remaining $5,000 in I Bonds for the year out of my savings account (counting it as moving that money into a 5 year CD) or buy them out of cash flow.
  • That still leaves another $20-35,000 in funds to save/invest.
  • At that level of savings, there are so many good options to choose from. I’m hesitant to invest money that I could throw at the mortgage in a vehicle that is neither tax-advantaged nor guarantees the principal. So I’ll most likely throw the majority of that extra savings at the mortgage this year, even though another part of me doesn’t want to wait until the mortgage is fully paid off to invest in index funds outside of my retirement accounts. I estimate that if I only make extra principal payments on the mortgage through the end of this year, I will not see a cashflow impact when the mortgage rate resets in 2018 since it’s effectively a recast to a higher interest rate.
  • One option I’m considering is to invest my Social Security tax break in the last half of the year (I’m estimating hitting the maximum income by July or August) and keep chugging along at the mortgage with the rest of my funds.
  • I’ve also contemplated buying Series EE Bonds, but I’m hesitant about the 20 year wait to get the “good” interest gains from them. I’m only in my mid-twenties – I can’t see twenty years into the future!

Savings plans are always a work in progress and I’m sure this won’t be the last time that I fidget with mine this year!

Readers, how is your 2013 savings plan going so far? Have you made any adjustments?

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38 thoughts on “Updated Savings Plan

  1. We haven’t really made any adjustments yet but our plan is also not quite as specific as yours.

    With respect to mortgage prepayments and taxable index funds, we do a little of both as I don’t want to have too much of our net worth tied up in our house. Wanted to mention that in case it’s something that is appealing to you, I doesn’t need to be either/or.

    • Originally when I looked at buying, my income was a bit lower and paying it off in 5 years wasn’t really feasible, but now that it is, it’s really tempting to try to do that, when in reality, I don’t want to have too much of my net worth tied up in my condo. I don’t think it would take that long to sell, but you never really know.

      Doing both is appealing, it’s just a question of how much. Do I want to make sure I’m saving 20% of my gross for retirement? Well, the Roth IRAs and 401(k) hit that, even just with my base pay. That’s why I came up with the idea of investing my Social Security tax break. I’m also finally starting to feel like the mortgage is more manageable, which makes it easier to take the risk of investing in index funds instead of paying down the mortgage.

      • With the stock market doing so well, it’s also tricky because our investments are doing so well. Maybe it’s not such a bad idea to put more money towards the mortgage right now!

        • Very true and that is for sure a vote to dollar cost averaging all year round, on a regular schedule, every year! If I was to put some money into taxable index funds each month, I would do it via direct deposit.

  2. Does your company force you to rollover your 401k funds after you leave? If you have a good low cost plan, I would just leave it there. 401(k) has better creditor protection in some states.

    • They have a quarterly fee if you leave the funds there after you leave. Depending on the balance I have, with the low expense ratios (better than Admiral shares), it might make more sense to just leave the money there. It’ll all depend on my balances. If I stay here another year or two and continue to max it out, it could very well make sense. If I go somewhere that has a good 401(k) plan, I would most likely roll in there.

  3. There is no advantage to front door roth ira vs backdoor roth ira at any income once your taxable IRA is already emptied. If you plan on doing backdoor roth ira at all you should just do the entire amount as a backdoor roth ira which will slightly simplify your taxes vs doing both and keep you from having to worry about income cap. In addition there is a slight advantage (though hopefully one you don’t need) to backdoor roth ira over a regular roth ira if you avoid gains, as I don’t believe it has to be open for 5 years before you can withdraw your contributions penalty free.

    In addition, (I think I wrote this in a previous post, but it never showed up on the site) – if your 401k is structured the right way you could put the difference between 51k and your total employee+ employer 401k contributions into a Roth IRA – this method will work regardless of whether you have money in a taxable IRA. It is basically the 401k equivalent of a backdoor Roth IRA.

    • The advantage to front door IRA is that you can withdraw your contributions at any time without penalty and that you don’t have to note any of the funds on the form 8606. With conversions, there’s a 5 year wait.

      I apologize that your previous comment didn’t show up on the site – it must have gotten caught in my spam filter. My 401(k) is not structured like that – it automatically stops taking contributions once I reach the $17,500 maximum.

      • Thanks. For conversions, if it is 100% basis you can withdraw immediately, only taxable conversion has a 5 year wait – see this fairmark article: http://www.fairmark.com/rothira/distrib.htm. There is also priority of withdrawal, which is in the following order:
        1. Contribution – must have had roth ira open for 5 years for no penalty
        2. Conversion A (oldest): Taxable – must have done conversion 5 years ago for nor penalty
        3. Conversion A. Nontaxable – immediately available with no penalty
        4. Conversion B Taxable
        5. Conversion B Nontaxable…

  4. Wow, thanks for the double mention haha. I thought I was doing well saving 1-2k a month extra on top of everything but you’re rocking it. I think if I had extra money, I’d probably be a little more risky with it: things like Lending Club, real estate investments and maybe even individual stocks.

    • You’re welcome – your posts were super helpful :)

      Thanks! Nope, don’t want to be more risky. Just stick to the plan and perhaps I can retire by 30! In fact, I’m taking slightly less risk as my investments expand. Most of this is bonuses…but I am saving over $2,000/month on top of maxing out my 401(k) and HSA and later in the year, I’ll max out Social Security, at which point, I’ll be able to save almost $3,000/month.

      I’ve talked to friends who have used Lending Club and it just seemed like a tax headache. If my mortgage was paid off, I would probably take a gamble and keep some of my RSUs each year. Real estate investments require me to know I’m staying in this city for a long time and to want to be a landlord. No thanks!

      • Well at least it’s a good thing you know what you want. I’m in a similar boat as you but I don’t want to completely retire. I’d rather semi-retire to something I love doing. I like working but my optimal work day is 3-4 hours :)

        • I don’t know that I want to completely retire either, but I think that being able to financially would be a huge psychological boost, if that makes any sense. I think my optimal day is around 3-4 hours too, it’s just hard to find that in a corporate setting. Or maybe I am just not looking in the right places. I am doing something I love doing…or so I thought until you threw the corporate world at it. I just want to write code! I don’t care about actually launching stuff and goals and upwards management, haha.

  5. Your commitment to saving and your ridiculous income level is an inspiration to me… Have you figured out how many years are going to work? or are you going to start your own business at some point. It seems like the sky’s the limit.

    • Thanks! Not sure how many years I’m going to work, no. I’m already past the 3 year marker. I think that 10 more years is probably easily achievable and 5 a tad unlikely, at least by myself. Perhaps I will end up marrying someone with great financial assets and be financially independent by 30! I might at some point start writing software for myself, if I could find the right partners and the right idea.

  6. I might have missed it somewhere, but I was wondering if you invest in municipal bonds considering you seem to have such a high tax liability. As for our savings and investments, they are in an ugly online savings account and even uglier CD’s. I have had such bad luck and have seen two crashes that I’m terrified of investing…although I have just started looking to dip my toes back into the stock market…maybe…

    • No, I don’t invest in municipal bonds. How would I go about getting started with that? So far, I’ve kept most of my savings in tax-advantaged vehicles other than my cash reserves, which are reasonably small for my overall asset level. Part of the reason I want to pay down my mortgage is that I’ve seen the crash that just happened and I want to make sure that I wouldn’t be stuck underwater in a place.

      • Any broker can help you buy municipal bonds but please research them carefully as they can go bankrupt like stocks. The reason I thought you should know about them is that they can generate tax free interest, which might help out with your tax liabilities.

        We paid off our home a few years back and it has been quite liberating, however I feel we are spending too much on lifestyle inflation because of that. It might be because we sacrificed quite a bit to accomplish the mortgage payoff that we feel entitled to more fun… Don’t lose focus and beware of lifestyle inflation, especially with your income.

        • Cool, I was able to find some municipal bonds on the Vanguard site. I’ll think about that later, but I think that I have more than enough tax-advantaged room for fixed income and probably will until the mortgage is paid off.

          I’m not really sacrificing to pay the mortgage off with my plan, so hopefully I won’t experience too much lifestyle inflation when it’s gone.

  7. Holy Moly!!! Girlfriend you are on a roll!!! You are saving up cash like it’s going out of style! So awesome! Our savings plan is to max out our 401’s this year and pay off our house (we have 73k left) then next year…..we are saving any extra dime we can find to retire early!

  8. I too am stunned by your income level given your age. I am in the software industry as well, but I haven’t seen the kind of compensation you are seeing. I know you can’t give too many specifics, but I would be interested in any insight on how you found yourself such a lucrative gig.

    • I’m not really sure how I landed such a lucrative gig either. My base salary is pretty good, but a lot of my compensation comes from deferred compensation from my first few years. Most of that “extra” savings is because my deferred compensation is doing significantly better than expected. That’s why I’m trying to make sure that I just bank it and don’t spend any of it.

      I also think that pay is quite different in different areas.

  9. Yep..Variable comp is key. I need to keep that in mind for my next gig. A bonus or some sort of variable comp of 20% or so can make a huge difference. Thanks.

  10. I think investing in bonds is waste of money from the long term perspective. If you assume working for another 30 years, your salary is your bond. If your pay is let’s say 60k a year, it is same as if you purchased 30 year bond at 1,800,000 dollars and from this bond amount you are receiving 60k yearly coupon. If you have 1,8 million in bonds (your salary) and only 100k in stocks, you are totally exposed to bonds and nothing in equity. Invest in stocks as much as you can and forget bonds. In 30 years long run you will not lose. Stop listening to those creeps and doomsters who are scaring people that being 100% in stocks or even 200% in stocks is dangerous. It is not. Just look at any 30 year chart.

  11. My savings goals for 2013 have, thus far, been extremely low because I didn’t earn a pay cheque while on leave and I bought a house which naturally involves throwing thousands of dollars into the endless pit of alleged “equity” and consumption — huge downpayment, utilities deposits, snow shovels; the list is just endless. I’m going to again aim for $2k a month, but I’ll probably toss a lot of that money against my mortgage which is still a whopping $99,500.

    • Will you recoup the utilities deposits after a year? That’s what I remember from places where I had to put down deposits. I wish my mortgage was only $99,500! At $2k/month, that should be gone in under 5 years easily! I promise you that eventually the outpouring of money will end :)

  12. Yes, the deposits come back to me thankfully. I could have avoided those deposits — by paying for my own credit checks. The public monopolies (at least hydro and water, not totallys sure re: Union Gas) have to pay interest on the deposit in the form of a discount against future services at the end of the year. This rate for my power / water company is 2%; it’s not actually interest paid out so it’s a tax-free credit for something that I will definitely still be using in a year.

    Thanks; as a fellow frugal person, it just kills me to see all this money pouring out the door. But it’s nice to hear “It gets better” lol.

    • The major outpouring stopped for me after about a month after I moved. That eliminated the Immediate Must Dos. Since then, I’ve been doing things in little bits since I don’t have a lot of time. I try to remind myself that some of these things, I’m buying for life. The barbecue? I may have to replace the propane tank, but I’ll never buy another barbecue. The patio furniture will fit this place perfectly and most likely a house as well. The front entryway table, the futon, the picture frames, the kitchen garbage can, your snow shovels, these things I’ll keep around for a long time. Same thing when I buy plant holders this spring.

      That’s pretty sweet that they pay you “interest”! Then it’s not so bad. And where would you get a guaranteed 2% these days? Haha.

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