2015 Savings Plan

Now that I’ve started the new job and have a pretty good understanding of all of the benefits available to me, I finally sat down and made a savings plan for the year. I feel so much better having done this! Usually I do this in November/December, so it’s been stressing me out a bit to not have this already done and be so far into the year.

Reminder: Savings Goals

First, let’s check in with the vague savings/investments goals that I made for the year:

2) Contribute the maximum to all tax-advantaged accounts available to me. This means $5,500 in a Backdoor Roth IRA, $18,000 in a pre-tax 401(k) and possibly some additional funds to the after-tax 401(k) and possibly my 2016 Roth IRA amount in a savings account ready to deploy in January. This will account for probably about 2/3 of my savings in 2015.

6) Contribute enough to a Health Savings Account such that Out Of Pocket Maximum ~= Current HSA balance + Employer contribution + my contribution.

7) Succeed at Operation Bayes – I’ll explain this later.

9) Save 70% of my net income monthly…and 100% of my bonuses. (Yay for a big raise that will allow me to save that much of my monthly income!)

10) Contribute the maximum that I can to the Employee Stock Purchase Plan.

11) Pay down the mortgage with any funds that are leftover after 2), including the proceeds of 10).

Plan

I already contributed $5,500 to a Backdoor Roth IRA at the beginning of January, so that’s checked off for sure.

1 – 401(k)

I’ve figured out how to maximize the match on my new employer’s 401(k) and it’s pretty easy. I just have to average X% or more of contributions over the course of the year and I’ll get the full match throughout the year. Easy peasy! I’m going to contribute to the 401(k) evenly throughout the year though. It’s only 90% clear still what they’ll take the 401(k) deductions out of (not sure if it includes my signing bonus or not), so I set the contribution % assuming it includes my signing bonus and I’ll adjust it up later if it doesn’t.

My new employer does allow after-tax contributions to their 401(k) plan! There is a limit though that is less than the IRS limit and I plan to contribute their limit. I’ve set a % on this and if it doesn’t take any money out of my signing bonus, then I’ll increase it, just like with the pre-tax 401(k).

I also need to decide what to do with my old 401(k) and what I’m going to do with the after-tax 401(k) contributions, but I’m going to figure those out later. I still have some time to do that – it’s less urgent.

2 – Health Savings Account

My new employer contributes more generously to a Health Savings Account for me than my last employer did. I still have a small balance in my old Health Savings Account that I need to figure out what to do with. For now, I only want to have the balance in this account cover one year’s maximum outlay, so I set my contribution to meet that gap. I’ll re-evaluate this approach for next year.

3 – Employee Stock Purchase Plan

I’m pretty excited for this! I can contribute up to a certain % of my salary, then at the end of the offering period, the plan administrator buys shares of my employer’s stock at a discount to me! And the plan is pretty sweet in that I can sell the shares immediately with no holding period. I elected to contribute the maximum I can and I’ll use the proceeds from selling these shares to fund the next savings goal in my savings snowball, either cash savings or mortgage paydown.

4 – Cash savings

I’ve estimated how much Operation Bayes will cost if all goes according to plan and decided that I would like to have $60,000 in my savings to cover this and some cash reserves. This is the first item on my savings snowball, so I’m going to work towards this goal and then move back to mortgage paydown. If things don’t go according to plan, then the money here beyond my normal cash reserves will be re-purposed to mortgage paydown. It looks like I should meet this goal with using the ESPP proceeds sometime in July.

5 – Mortgage paydown

Last, but not least, I’ll continue to pay down the mortgage. It looks like this should get around $25,000 in 2015.

6 – Income allotment strategy

With the new job, I get paid twice a month instead of the once a month that I got paid with my last job for, oh, you know, the last forever since it was my only job post-college. This is super weird. My plan though is to continue living off of last month’s income like I guess I have been doing for the last five years, except that I get to earn interest on the mid-month income instead of my employer. I’m still figuring out the logistics of doing this. In a spreadsheet, I’ve portioned off my checking account into two accounts at the moment: buffer and cash flow. I’ll probably just add an income one and put the income as being deposited there until it’s “transferred” to cash flow / savings / mortgage at the end of the month.

7 – Overall

My current calculation shows that I’ll save about 79% of my net income this year! I think my spreadsheet might be a bit confused (I should fix that), but it’s definitely somewhere north of 75%, which is pretty awesome. Including my employer’s contributions to various accounts and expected market contributions, I expect the end of the year to look like:

  • $650,900 in overall net worth (a $119,300 increase)
  • $62,500 in savings (a $14,700 increase)
  • $230,100 in investments (a $65,600 increase)
  • $111,800 in mortgage balance (a $31,200 increase)
  • -$22,900 in taxable assets – debts (a $47,700 increase)
  • $495,700 until FI (a $349,300 decrease) *note to the naysayers: this is a target to shoot for and once I reach it, I’ll do some more exact calculations. Until then, I’m using a 4% SWR of my investments bucket, a paid off mortgage, and a rolling last 12 months’ of expenses to calculate my target.
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28 thoughts on “2015 Savings Plan

  1. I’m surprised that you don’t max out your HSA since it provides for tax-advantaged savings. I understand that you’re probably not going to use much of it for health-related expenses at this time, but you can always pay your health expenses out of it or reimburse yourself in the future for past health-related expenses that you paid for out of pocket. My husband and I had maxed out our HSAs for a couple years before I had our daughter and we were glad to have those funds available in a year with high health expenses.

    • That is quite true, but at this time, I’m deciding to not max out the HSA. If my future plans change, I may change my mind on that, but for now, I’m happy with this path.

  2. Great plan and goals.

    I miss working for a public company and the stock purchase plan that I had. I use to be able to contribute 15% of my income every 6-months. Then at the end of the 6-month window we would get the stock at the lowest price during the 6-months less an additional 15%. Once the shares were distributed every 6-months we had a 17-day window to sell. It was great, my first sell netted me a 300% return, followed by a 180% return, followed by a 90% return…then I moved companies :(

    It was always so confusing to me that so many people opted out of this. I literally had to convince people in my department to get their free money.

    Thanks for sharing your goals.

    Cheers!

    • It’s definitely a bit of a cash flow thing. A lot of people have cash flow difficulties. I’m really excited about the stock purchase plan as my previous employer didn’t have one! I can sell the shares any time, so it’s a pretty sweet deal.

  3. Nice that you have after tax 401k. Do you also have:
    1) in-service pre 59.5 nonhardship withdrawals so you can regularly move the money to your Roth IRA rather than having to wait until you leave employer. If you do, when you do, make sure they make out the check to broker FBO you and not to you.
    2) lump sum contributions (rarer) so you could just do it all in one shot and not have any gains.

    Also, what percent discount do they give you on the stock and what percent of salary do they allow.

    • Yes to 1), but I also have access to In-Plan Roth conversions of After-tax balances, so I’m not sure which of those to choose. I made a spreadsheet and it’s a toss up between the two really in terms of costs.

      No to 2), but I can contribute up to a high % of my salary to after-tax or pre-tax at any time. So for example, I could contribute the max they’ll let me to after-tax for 2.5 months and contribute to a money market fund which would result in minimal gains before doing the conversion.

      10% discount and up to 15% of salary.

  4. Nice – I would choose Roth IRA for future flexibility (in case investment approach ever changed) and to have a decent Roth IRA balance, even if the fund expense ratios in the 401K were slightly better than vanguard admiral. It also eventually gives you a big account you can move around for bonuses if desired, that you are much less likely to want to tap than a taxable account. As you know, you can go after tax 401k -> Roth IRA while employed, but can’t go Roth 401K to Roth IRA until you leave your employer.

    On the stock, not as good as I thought it might be. Effectively 1.67% pay value if you act perfectly and max out advantage, with some administrative hassle. The can immediately sell feature is nice though.

    • I think I’ll choose Roth too, but I like that I have the option for In-Plan Roth conversions, you know? It would be cool to build up a bigger Roth IRA balance – it’s been building up slowly with only $5k/year.

  5. We didn’t max out our HSA the first couple years we had access to it, and I regret that now in hindsight. While our investment options within it aren’t the best (our SP500 fund in it has an expense ratio of 0.6% or something absurd like that), the tax benefits far exceed those costs in the long run. So we’ve switched to the tactic of maxing it out and thinking of that money as part of our “retirement health expenses” fund, since we’re not drawing on it at all now.

  6. Why do you still have 2 checking accounts and a spreadsheet to figure out all of that income mess for living on last month’s income? Why not just use [popular budgeting software]? It’s the greatest budgeting software ever designed and it’s incredibly easy to use. It’s much more efficient than your spread sheets.

    On another note, would you be willing to share your spreadsheets for everyone else to use?

    • I have one checking account and my spreadsheet is pretty similar to YNAB, but I’ve been using it for over five years now and it works great for my purposes. I’m not sure why I would pay for software to do something I’ve already coded up myself in my free time. I also prefer to own my own data, rather than using another company’s proprietary format. I don’t see much point in following a super strict budget at this point in my financial journey, so I don’t think that YNAB would work for me.

      My spreadsheets are pretty complicated and specific to my situation, so I don’t think that sharing them would be very easy. Sorry about that!

  7. I should better optimize which types of investments I put in which Roth vs. non-Roth accounts. Right now both sets have the same investment mix, but I should really think more about tax optimization. Though the cynical part of me is pretty sure that the entire tax situation will be different in 20-40-odd years when we start drawing down from these accounts and I may regret having tried to optimize(!)

    • There’s definitely a cynical part of me that wonders that too… I’ve been keeping my Roth accounts entirely in stocks. Ugh rollovers are crazy. I should finish my post on that.

  8. Hi Leigh, just reading thru some of your blogs. I am really impressed with the amount you are saving each month, really reading up to get a little more inspired to tighten up my ship from a spending perspective.

    1) I know you have touched on it a little, but I am really interested in your decision on your HSA, especially because you have aggressively taken on every other tax advantaged benefit available to you. I am confused why you wouldnt want to max it out every year. The money immediately gives you the tax free benefit on all of your medical bills, plus if you have any dental or eyeglasses, you end up using tax free money. And that money can roll in perpetuity, I believe it can roll to heirs, and you can invest it just like an IRA (albeit with what is typically a high fee rate.)

    If you eventually retire, that money can be used on medical bills when you are collecting medicare etc. Very few of us imo will be unable to use all of our HSA money within a lifetime.

    2)Are the post tax 401K contributions designed to take advantage of the stock plan?

    • 1) I agree that in general, a HSA is a great plan, but in my case, I don’t plan to take full advantage of it and I don’t plan to go into why here. I’ve discussed it at great length with my boyfriend and he agrees that my approach is reasonable.

      2)The post-tax 401(k) contributions are separate from the stock plan.

  9. Leigh, I am confused about the 401K post tax contribution.

    What is the reason you are using a post tax 401K? Couldnt you just set up a personal brokerage account with someone like TD Ameritrade or Vanguard and invest on your own? Is there something a post 401K contribution lets you do that you couldnt otherwise? I have always wondered why that has been an investing option.

    • I’m using a post-tax 401(k) because I can contribute $X and then transfer that money to a Roth IRA, so I’ll have thousands of dollars compounding starting in my late twenties in an account on which I’ll never pay taxes again. Google “Mega Backdoor Roth IRA”. It’s a pretty sweet deal!

      • Well, technically you are just prepaying the taxes. Possibly not a wise strategy with your current income and if you plan to retire early when your income would presumably be much lower.

        • Why am I pre-paying the taxes? I am maxing out my pre-tax 401(k) at $18k this year, so after that my choice is between taxable vs mortgage vs Roth IRA vs Mega Backdoor Roth IRA. In the last two, I won’t pay taxes on withdrawals of earnings if I withdraw them after age 59.5 and with taxable, I’ll only pay capital gains. I don’t know at what point I’ll retire or whether I’ll be married with a still-working spouse when I retire, so it’s really hard to predict whether Roth IRA or taxable wins.

  10. You’re right – I guess you don’t really have any good alternatives – you are locking in the high tax rate on that invested capital, but you would still be paying the same rate if it was put in a taxable account.

    Of course, the taxable account gives you more flexibility on when you can spend it….

    • This is true. And I may not do the after-tax contribution every year, but also, who knows how long I will have access to a 401(k) plan that allows me to do this. I’m really looking forward to paying off the mortgage and then investing my extra capital into a taxable account :)

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