Poof goes the rollover (and my 2015 investment plan and updates to my Investment Policy Statement)

I realized in hindsight that this could have been three separate posts, but I’m going to leave it as is.

Rolling over a 401(k) is a slow process stuck in the archaic ages. At the beginning of April, I initiated the termination from my old employer’s plan. The next day, I had my Roth 401(k) money invested in my Roth IRA. Three business days later, I had in my hands a check for the tens of thousands of dollars that I had in my pre-tax 401(k). I filled out the rollover paperwork that I had acquired from the new 401(k) plan a few weeks prior and mailed off the check the next day, with the morning mail pickup. Within 10 business days of the original request, the funds were in my new 401(k) and I could breathe clearly again.

It was pretty scary seeing the ~$100k in my 401(k) disappear the evening after I started the process and the vast majority of it still not in a bank account. It definitely made me question my attachment to the Backdoor Roth IRA and make me wonder if I was making the right decision not rolling my old 401(k) into a Rollover IRA. Once the funds had arrived in the new 401(k) though, I was definitely in agreement that this was the best and simplest decision, to keep all of my 401(k) money in one spot.

My asset allocation was quite a bit out of whack during this time – basically all of my fixed income was in my 401(k) that disappeared. For reference, today, 2/3 of my fixed income is in my 401(k). Since my 401(k) is a bit over half of my investments, that wasn’t the end of the world. My allocation looked something like 23% fixed income (not bad), 57% US stocks (way too much), and 20% international stocks (way too little).

Overall though, the rollover went reasonably smoothly and so far, I’m glad I did it instead of trying to manage two 401(k)s.

My 2015 investment plan

Since there was a large chunk of money to be invested, this was a great time to re-balance and set up my 2015 investment plan!

I’m working with a target asset allocation of 28% fixed income (age in bonds + 1 percentage point for having > $100,000 in investments) and then the stocks split 50/50 to US and international.

Category EOY Value Current Missing
Total $218.4k $87.4k $131.0k
Fixed income $61.2k $18.6k $42.5k
US stocks $78.6k $52.1k $26.6k
International stocks $78.6k $16.8k $61.9k

The missing chunk represents the rollover, my mid-April through end of year pre-tax and after-tax 401(k) contributions, and expected 401(k) employer match contributions. This year is going to be reasonably easy to re-balance with contributions and not needing to exchange anything.

At the moment, my Roth IRA holds US stocks, so I just sent my Roth 401(k) to the Total Stock Market index fund there. I used to hold shares of an Extended Market index fund in my Roth IRA as well to balance out the large portion of my 401(k) that was in a S&P 500 index fund, but I now have access to a Total Stock Market index fund in my 401(k) and don’t need to worry about that anymore, so I exchanged all of the Extended Market index fund into the Total Stock Market index fund.

Since my Roth IRA holds mostly US stocks and that’s where my after-tax 401(k) contributions will go, I plan to put my after-tax 401(k) contributions into a US stock market index fund in my 401(k) until I move the money over to my Roth IRA since it’ll take several months to max it out.

That means my 2015 contributions will be allocated as follows:

Account Category $
After-tax 401(k) US stocks $Xk
Pre-tax 401(k) US stocks $26.6k – $Xk
International stocks $61.9k
Fixed income $42.5k

I calculated the percentages for each of the pre-tax 401(k) contribution categories overall for the year and then applied those to the amount that was being contributed this week (the rollover and the mid-April paycheck deductions and employer match).

That means that the only manual thing left to do for my investments this year is to move my after-tax 401(k) to my Roth IRA in the fall. I’m a little overweight in fixed income at the moment (30% of my investments) since a big stock contribution will come later in the year, but that’s perfectly fine.

I’m so happy to have finally finished this! Usually I do this work in December/January and it’s now late April…

Updates to my Investment Policy Statement

With the new job and 401(k), I decided it was time to check up on my Investment Policy Statement, which hadn’t really been updated since early 2012.

My long-term goal has always been to be able to retire at 50 with a paid-off home and enough in investments to cover estimated living expenses at a 3% withdrawal rate. I also added a medium-term goal of having the mortgage paid off by my 30th birthday and enough in investments to cover my then-current expenses at a 4% withdrawal rate. This sounds like a Big Hairy Goal, but I’m actually on track to meet it.

I changed my IPS to reflect my plan to lump sum my 401(k) contributions since it no longer affects my employer match. I also added some notes on my feelings about rollovers.

I’ve been contemplating asset allocation a lot over the last six months or so. I’ve been using the following model for the last several years:

The percentage of the investments in stocks is 100 minus (at the time of re-balancing):

  • My age
  • The multiples of $100,000 in investment assets that I have

I added an additional note of: “This formula will continue until I reach 30% in fixed income and 70% in stocks and then it will stay there until I choose to re-evaluate it.”

Why? I’ve realized that with the possibility of early retirement, I’ll need more money in stocks than I’ve previously considered. If I end up working past when a 3% WR on my investments is achieved, then I’ll re-evaluate my asset allocation formula.

“I want the US stocks to replicate the entire US stock market.

I don’t want to stake everything on the US stock market. Market weighting sounds good, so my ideal split would be 50/50 on US/International Stocks.”

My plan for now is to keep my Roth IRA 100% stocks, all of the fixed income in my 401(k), and all stocks in my taxable investment account.

There was an interesting section at the bottom of my IPS showing short-term goals, including estimated net worth for 2010 through 2014. I surpassed all of those numbers, some by a long shot! Some of my goals for the next 5 years include getting my savings rate above 80%, paying off the mortgage, reaching a $1M net worth by the end of 2018, and reaching a $1.5 M net worth by the end of 2020. It seems pretty crazy to imagine my net worth going from the mid $500k range today to $1.5M in 5.5 years, considering that it took the last 5 years to build it up to $500k, but that’s what my spreadsheet shows! The next five years are going to be some incredible wealth building years and I thank all of you readers for following along on this wonderful ride!

Frontloading my 401(k)

I’ve often thought about front loading my 401(k), i.e. contributing the full amount at the beginning of the year in as few paychecks as possible, but never done it.

Why? My former employer, although they did a true-up match the following year, would only contribute the matching money each paycheck if you contributed at least X%. So if I front loaded my contributions, then I would possibly not get the full matching money if I was no longer employed with them when they did the true-up.

With my new employer, I can maximize the 401(k) match even if I front load my 401(k) contributions.

Why do I like the idea of front loading my 401(k) contributions? I like going through my list of savings goals for the year and checking off one at a time, only concentrating on one goal at a time.

1. Get my savings account up to $60,000. done with mid March paycheck
2. Contribute the full $18,000 to my pre-tax 401(k). will be done with end of May paycheck
3. Contribute the maximum I can to my after-tax 401(k) and then transfer it to my Roth IRA. will finish with a September paycheck
4. Contribute the maximum I can to the Employee Stock Purchase Plan. ongoing
5. Pay down the mortgage by $28,671.79. this one probably won’t get done, but I’m forecasting I’ll get 75% of the way there.

I used to not like the idea of the small paychecks, but it has grown on me since I have a nice cash buffer now. I plan to use the BrokerageLink feature of my new 401(k) to set up a three fund portfolio and I can’t set that up to automatically put money into a specific allocation like I can with the regular funds in the 401(k) plan, but by front loading my 401(k) contributions, the money will only be sitting in cash for ~2.5 months if I let it sit there until all the money is there and then invest it. If I wasn’t front loading, I would feel a need to log in more often and set up the money.

Why have I always wanted to do this? Over the last few years, I’ve often wanted to leave my job before the end of the year and it would have been nice to have already maxed out my 401(k), be on the path to get the maximum match, and not worry about that while I was contemplating quitting my job.

Front loading also means I don’t have to worry about getting the contribution % exactly right to max it out with my last paycheck of the year or worry if my last paycheck will actually come in the following year or if there are more paychecks than expected.

I had forgotten about this idea, even after thoroughly reading my new job’s 401(k) plan’s Summary Plan Description (SPD) in detail to learn as much as I could about the after-tax contributions and how the matching worked. But then I read Mad Fientist’s blog post on why you should front load your 401(k) and I was hooked!

Readers, have you ever considered front loading your 401(k)?

An Ode to My Old 401(k)

When leaving a job, there are a few actions one can take with their old 401(k):

  1. Do nothing and leave it where it is, paying any fees your employer charges you now that you’re no longer with them
  2. Withdraw the entire balance, paying a 10% penalty and regular income taxes (ew, this would cost me about $40,000) based on the current balance
  3. Roll it over into the new employer’s 401(k) plan
  4. Roll it into an IRA

I definitely don’t want to withdraw the balance with how much that would cost in taxes and the fact that I would then lose the tax-deferral on my ~$100,000 for another 34+ years! I also don’t want to roll it into an IRA as then I would lose my ability to do a Backdoor Roth IRA. So there rules out half of my options!

The choice between the other two options depend on what the options look like in the new 401(k) compared to my existing one. My employer will charge a small quarterly fee that basically equates to a ~0.04% additional fee with my balance, which is actually a decent chunk considering that the funds in the new plan are cheaper than the equivalent funds in my old one.

When I first started investing, I posted a portfolio review on the Bogleheads forum and got some helpful feedback. Since then, I haven’t requested any feedback from them, but I still use their format to do a periodic review of my investments. I find it’s a great way to take an overall look at my portfolio. I follow the format right down to the questions asked. Here is the questions I asked myself this time around as I was figuring out what to do with my old employer’s 401(k):

  1. My old 401(k) will start to charge a quarterly fee at some point (turns out this kicked in last week) that equates to about 0.04% annually of my current balance. I don’t want to roll my old 401(k) to an IRA since that would cut off my access to the Backdoor Roth IRA, but should I roll it into my new 401(k) plan? The only catch I can see here is that if I roll the old 401(k) out of the plan, then if I were to return to that employer in the next few years, I would have to start the vesting period over again.
  2. My new 401(k) plan allows me to contribute after-tax in addition to pre-tax. It also allows me to do an In-Plan Roth conversion or I can instead move the money to my Roth IRA. Which is a better option?
  3. The international stock index fund I have access to in my new 401(k) doesn’t include small-caps, but the one in my old employer’s 401(k) does. Is that a deal breaker to me?
  4. I see a few options here:
    a) roll old 401(k) into new 401(k), do in-plan Roth conversions to keep things simple
    b) leave old 401(k) where it is until I don’t need it any more to keep my international stock allocation out of the new 401(k) and then roll it into the new one (move after-tax 401(k) contributions to Roth IRA)
    c) roll old 401(k) into new 401(k), but move after-tax 401(k) contributions to Roth IRA
    d) leave old 401(k) where it is and do in-plan Roth conversions

I then made a huge spreadsheet to compare options A, B, C, and D for question 4. B was much more expensive than A or C due to the fee my old employer will start charging soon, so I didn’t make a spreadsheet for option D at all. C ended up being cheaper than A for the first several years and then eventually A became cheaper, but not by a huge margin either way. This makes it a strong vote in favor of option C.

I’m about two months’ away from Vanguard telling me my 5 year return (it’s the small, psychological things…) and if I roll my old 401(k) out before then, I won’t see that number on Vanguard’s site…

I also decided that since the international stock index fund I have access to in my new employer’s 401(k) plan isn’t as complete as the Vanguard one, I’m going to try to keep as much of my international stock allocation as possible in my taxable and Roth IRA accounts. It’s currently the only fund in my taxable account, so I’ll do some rearranging in my Roth IRA at some point.

This also answers question 2, suggesting that I should move the after-tax money to a Roth IRA instead of doing an In-Plan Roth conversion. I’m going to see about rolling the Roth portion of my old 401(k) into my Roth IRA and otherwise, I’ll wait until early May to roll the pre-tax portion to my new 401(k).

I’ve started investigating how to do the rollover. I called the old 401(k) plan administrator and they said that I can roll the Roth portion into my Roth IRA and the pre-tax portion into my new 401(k), so long as I do it all at once. I can initiate leaving the old plan online and the funds should get to my Roth IRA within 2-3 business days. The new plan required me to request some papers to be mailed to me, which will take 3-5 business days, and then I’ll take a look at things again. The telephone rep from the old plan told me that the new plan will most likely require a check to get mailed to them, which will take about 2 weeks. My boyfriend and I were both pretty amused/confused at how much mailing was involved in this process despite the fact that it is 2015…

Yay for a plan (though still with some details to fill in) on this at last! It was stressing me out quite a bit to be unsure what to do with this, especially since my old 401(k) is worth about $100,000, which is about 55% of my overall investments.

Here’s a graph of my old 401(k) balance over the last ~5 years, as an ode to it. It has been a good 401(k) to me over the last five years and I will miss it. (I also refused to shred my old health insurance card. It’s with my previous health insurance card. Yes, I am a bit of a hoarder…) You can see that I didn’t contribute as much in the first year, but I started maxing it out partway through 2011 and it has grown quite nicely since then!

Ode to my old 401(k) balance

Readers, what do you usually do with your old employer’s retirement plan when you leave?

Re-balancing my investments: 2015 Roth IRA contribution edition

I set my 2014 investment allocations back in December 2013 and then left them alone, which went great!

As of 01/02/2015, my investments portfolio was worth ~$164,400. I decided to re-balance my investments now with this Roth IRA contribution and then I’ll re-evaluate things once I start the new job. That will likely be calculating what my new 401(k) contributions should go into and then re-balancing my overall portfolio when I make my 2016 (!) Roth IRA contribution and set my 2016 401(k) contributions.

(Note: when I wrote this post last year, I estimated that my end of year balance would be $156,000. It is $8,400 higher than that! Crazy!)

First, what are the balances in my various accounts?

  • $38,900 Roth IRA (with $5,500 new contribution)
  • $8,400 Old tax-deferred CDs
  • $10,200 Series I Savings Bonds
  • $15,300 Taxable account
  • $97,100 Now-old 401(k)
  • $169,900 Total investments

What is my asset allocation?

% Category Amount
27% Fixed income $45,873
36.5% International stocks $62,013
36.5% US stocks $62,013

My allocation has gotten itself to the following with the markets and contributions in 2014 (a tiny bit out of whack):

  • 27% Fixed income
  • 34% International stocks
  • 39% US stocks

And if I just added my 2015 Roth IRA contribution to total US stocks, my allocation would get a tiny bit more out of whack:

  • 25.8% Fixed income
  • 32.8% International stocks
  • 41.4% US stocks

At which point, US stocks are 4.9 percentage points higher than they should be, which warrants re-balancing in my 401(k) account at the same time. Last year, since I’d just re-balanced in November 2013 to make my 2013 Roth IRA contribution, I didn’t do any when I made my 2014 Roth IRA contribution and instead re-balanced with my 401(k) contributions over the course of the year.

If we follow my ordering from my post on tax-efficient investment placement, what does that ideal portfolio look like?

Steps

  1. (not necessary – all in S&P 500 index fund) My employer match to the company stock
  2. Series I Savings Bonds that already exist in taxable
  3. CDs that are already in my Roth IRA
  4. The remaining portion of my fixed income allocation to the stable value fund in my 401(k).
  5. (not necessary) As much of my remaining fixed income allocation to Total Bond Market in my Roth IRA as possible
  6. (not necessary) If my tax-advantaged balances weren’t enough for all the fixed income necessary, added $10,000 in Series I Savings Bonds (possibly early for future-proofing)
  7. (not necessary) Any other fixed income went to a tax-exempt bond fund in taxable.
  8. As much of my international allocation in taxable as it allowed (in the first few years, my entire taxable balance; in later years, the entire international allocation)
  9. Next, I added any of the remaining international allocation into my 401(k).
  10. The remaining 401(k) funds went to the S&P 500 index fund. Call this amount X.
  11. (X/0.8)-X is how much I put into the Extended Market index fund in my Roth IRA (minimum of $3,000).
  12. The remaining Roth IRA funds went to Total Stock Market.
  13. (not necessary) The remaining taxable funds went to Total Stock Market.

Ideal portfolio

Account Fund Current Ideal Difference
401(k) Stable value $25,300 $27,300 +$2,000
Taxable Total international stock index (admiral shares!) $15,300 $15,300 (same)
401(k) Total international stock index $40,400 $46,700 +$6,300
401(k) S&P 500 index $31,400 $23,100 -$8,300
Roth IRA Extended Market index fund $7,100 $5,800 -$1,300
Roth IRA Total Stock Market index fund (admiral shares!) $26,300 $33,100 +$6,800

Note that these numbers are all rounded, so they may be slightly off if you try to make calculations with them, but they should still illustrate my example sufficiently.

My portfolio is pretty simple right now: one taxable account, one 401(k), and one Roth IRA, with one fund in taxable, two in the Roth IRA, and three in the 401(k). My re-balancing here is really just adding new money to the Total Stock Market index fund in my Roth IRA and then adding some money to fixed income and international stocks in my 401(k).

I performed a few transactions to accomplish this:

  1. Contribute $5,500 to the money market account in my Traditional IRA.
  2. Convert the $5,500 from my Traditional IRA into the total stock market index fund in my Roth IRA once the funds settle.
  3. In my Roth IRA, exchange $1,300 from the extended market index fund into the total stock market index fund.
  4. In my 401(k), exchange $8,300 from the S&P 500 index fund to $2,000 in the stable value fund and $6,300 in the international stock index fund.

D’oh! I did all of these transactions and then realized while writing this post that I needed to set it to only use my Traditional 401(k) portion to do the exchange, so it’s trying to do the re-allocation using all sources (also my Roth 401(k) and employer matching money), which I have conveniently set to only have one fund in those “accounts”. Oops! I called the plan administrator on Monday and they couldn’t do anything to fix the transaction. So my asset allocation is on track, but my accounts are a tiny bit more complicated than I like them to be. Oh well.

2015 Plan B: Mega Backdoor Roth IRA

My plan has always been to pay off the mortgage after maxing out all tax-advantaged investment accounts available to me. When I first made the mortgage payoff plan, I only had access to an employee-contribution 401(k) of $18,000 and a Roth IRA of $5,500 in 2015 dollars. It is possible (I don’t know yet) that with my new employer, I’ll have access to the Mega Backdoor Roth IRA. This is where the employee contributes after-tax up to the total 401(k) annual maximum of $53,000 in 2015 and then you use in-service distribution to transfer the contributions to a Roth IRA and the earnings to a Traditional IRA (and then convert the small bit of earnings to the Roth IRA to keep things clean).

Since I don’t know whether or not I’ll have access to the Mega Backdoor Roth IRA at my new job, I made a plan for 2015 assuming I don’t and then this is my plan for if I do. I’ll go with whichever plan pans out.

The 401(k) maximum is $53,000 in 2015. The maximum employee contribution is $18,000, which I will contribute pre-tax, leaving $35,000 for my employer’s contributions and after-tax contributions. This will leave me approximately $31,425 to contribute after-tax, which is about $2,856/month averaged over 11 months or $2,618.75/month averaged over 12 months. This is clearly going to put a dent in my mortgage payoff plan, but I think it’s worthwhile.

I project my total net pay in 2015 to be $118,142.85. I also expect to have $24,000 extra in my savings account at the end of 2014, after the $5,500 for my 2015 Roth IRA.

The first $18,000 of this goes towards maxing out my 401(k). Then $34,611.43 for monthly spending plans (this includes the mortgage payment). My current plan is $550.00 to my Health Savings Account.

This leaves $88,981.42 of money to work with, including the extra savings account money. Some portion of this money will be funneled into the ESPP with a good discount, but I only see that as a cash flow annoyance since I plan to sell the ESPP funds once their holding period is up.

Next, I’ll fill up the after-tax 401(k), leaving me with another $57,556.42. I’ll throw all of that at the mortgage. I had planned on throwing $73,806.93 at it from savings in 2015, so that’s only $16,250.51 less than planned, which isn’t so bad. This would leave me with the following financial structure at the end of 2015:

  • $20,000 general savings
  • $2,800 Health Savings Account
  • $119,400 Traditional 401(k)s
  • $6,800 Roth 401(k)
  • $73,500 Roth IRA
  • $26,800 taxable investments
  • $75,500 mortgage balance
  • $659,000 net worth

I would then be able to pay about $25,746.63 extra on the mortgage in 2016 and in 2017, which should erase it save for $1,902.56, which I would take out of my $20,000 general savings account. Even if I don’t quite pay it off before the rate resets in January 2018, it will not reset high enough that I can’t afford the payment and I think that is worth it for taking advantage of the Mega Backdoor Roth IRA. I mean, an extra $30,000/year in a Roth IRA in my late twenties is too amazing of an opportunity to pass up. So then in 2018, once the mortgage is fully paid off, I’ll be able to save approximately $38,074.47 outside of tax-advantaged accounts. Note that all of these calculations also assume no raises, no appliances dying, and expenses in general not going up.

The only annoying thing about the Mega Backdoor Roth IRA is that it’ll make my checking account cash flow negative most months since gross pay – taxes – pre-tax 401(k) – ESPP – after-tax 401(k) is less than my monthly spending plan. That’s okay – I can use my signing bonus and savings account to smooth out my cash flow, plus the ESPP funds will be able to be cashed in at various intervals.

Readers, do you take advantage of a Mega Backdoor Roth IRA? How does it impact your cash flow? Would you if you had access to one?

Q1 2014 Update: Life and Finances

I’ve been pretty silent on this blog so far this year.

I spent most of my energy in the first quarter on work, getting involved in my new job and ramping up. Things are definitely going a lot smoother now and I no longer feel so new – a great feeling! After work, my energy went to cooking with my boyfriend. We’re still tweaking that, but we’ve definitely gotten to a really awesome place with our cooking! And I think we should settle in at around $300-350/month on groceries, which makes me feel a lot better than the first month’s $500.

The second quarter is going to be about finding myself again: getting back to the gym and finding myself (and us) a good routine. I paid for an annual unlimited membership at a gym in December. It’s an amazing gym: fitness and yoga classes, a full gym, and more for a pretty reasonable price. The caveat? It’s a 10 (ZERO traffic) to 35 minute drive, or about 25-30 minutes on average, and it’s always impossible to find parking. So sure, it’s a reasonable price and awesome once you get there and parked, but it’s not super convenient, so once I fell out of my gym routine with my injury in September, I just never got back into my routine. Now, I don’t think it’ll be a complete waste by the end of the year as its effective cost will probably come out close to buying punch cards throughout the year, but it’s still a good lesson.

Fitness

So, my project for this quarter is to re-acquire a fitness routine. I walk to/from work, which gives me about 5 miles of exercise per day, but that’s not enough for me to de-stress from work. I could never have a drive commute – even a bus commute stresses me out. I’m not good at motivating myself unless I have a commitment to a specific time / people, so running only works when I’m meeting friends, which leaves me with fitness classes. I identified several yoga studios and alternative fitness classes such as barre and cycling that are convenient to both work and home and have been trying them out. So far, I’ve tried one barre place, am on a week at a yoga place, and want to try out one more barre place. The first barre place I tried, though convenient to both work and home, wasn’t very me as it was super women-marketed. It’s still not bad for a weekend workout, but I’m hopeful that the barre place close to work will fit me better, though I wish it had yoga as well because then it would be basically perfect! I’m really loving this yoga studio I found!

You know what I hate about fitness places? Trying to decide which membership ‘package’ to buy! Do you buy a month? Three months? Monthly renewal? Annual renewal? 5? 10? 15? 20 class punch card? There are way too many options. Most places have a free session or week or some period of time, which is really great for seeing if it works for you without having to put up any money up front. The way I’ve always looked at these in the past is buying a membership equivalent to how long I want to commit to doing this thing.

Punch card at a place I feel like my friends will drag me back to once a week for a while and the punch card never expires? Go for it!

A place where I don’t know when I’ll return? A single visit.

A place where I feel like I can commit to going enough in the next month for it to be worth it over the longest punch card? Buy one month.

Oh, I enjoyed the first month? Maybe I’ll buy another month or three (depending on the place). After doing that for a few months, re-evaluate the commitment again and maybe buy a year.

It’s much easier to do make this evaluation when you’re just looking at one gym too. If you’re looking at multiple, a punch card is often the easiest commitment. By the end of this month, I’ll be looking at what I want to do going forward after evaluating all of these places.

Where is the budget coming from for these new fitness plans? I have been setting money aside each month to pay for an annual membership in December at my “old” gym aka sport #2, so there is $219 stashed there. There is also $199.76 stashed for sport #3 that I probably won’t end up doing this year. I also have $235 stashed for sports tournaments and with the injury last fall, I didn’t actually play in any! Lastly, I have $134.39 set aside for equipment because I’d been planning on buying something for sport #3 and some maintenance costs for sport #2. So I should be able to re-allocate that $788.15 somehow!

Finances

Okay, now back to what this was supposed to be…my first quarter financial update! So finances consist of income, saving, giving, and spending.

Income

I don’t have any bonuses in first quarter this year, so income chugged along as expected this quarter. I don’t know yet if I will get a raise this year or what it will be, but that would go into effect in April. I’m actually pretty convinced at this point that I will get no raise. Thankfully my bonuses are from prior year reviews and I only live off of about half of my regular pay, so the possibility of not getting a bonus won’t hit me very hard either.

I’ve had some troubles getting my W-2 allowances just right, but that’s always a work in progress, isn’t it?

I’ve been doing pretty well with credit card rewards so far. Between the Barclaycard Arrival bonus and the regular cashback rewards, I saw over $700 in credit card rewards in the first quarter. The Chase Freedom and Sapphire Preferred bonuses should hit next quarter, but things will probably slow down in that department for the rest of the year.

Saving

This is the easy part! In Q1, I saved 61% of my net pay.

My 401(k) contributions have been chugging along, as expected. Since I no longer have a high-deductible health insurance plan as of my April paycheck, I’m going to redirect part of that money to my 401(k) each month to max it out a little bit by the end of November instead of December.

I finished maxing out my Health Savings Account for the prior plan year and there’s a nice balance in there that I can still use for health expenses that I have to pay out of pocket!

I made my 2014 Backdoor Roth IRA contribution on January 2nd, so that is done already! I’m unsure about when I will do the 2015 contribution – I may wait until the mortgage is paid off, so I likely won’t set aside money to do that this year.

I’ve also been paying down the mortgage. So far this year, I’ve paid down $10,575.54, which is about 3.7% of the original mortgage balance. I can’t wait for my next bonus to hit – that’ll make a much bigger dent in the mortgage than I’ve been making so far with my regular paychecks.

Giving

I’ve never been very good at finding causes that I want to donate my money to. In December of last year, after a discussion on the comments on a post at nicoleandmaggie, I made a rash of extra donations. And this year, I am making a conscious effort to donate X% of my income. I’m sure that X% is a lot less than other people might do so in my situation, but I felt like it was a reasonable improvement over where I was. It’s kind of fun researching causes and donating larger chunks of money than what I was doing before too!

Spending

So, spending. I’ve spent a lot more this quarter than I had originally intended.

2014 Q1 Spending

I wasn’t expecting it to quite add up to $1,700 over my estimate. Oops! Some excuses/explanations:

  • Clothing: this was mostly because I found myself with very few items of clothing that fit in certain areas. There were some returns already in Q2, so this should look a little better at the end of Q2.
  • Woo for coming in basically right on on entertainment! Same with personal care!
  • On Food, I did really well on eating out by myself. We’re doing better with groceries now, so we’re going to alternate months instead of reconciling at the end, which means I’ll only have to pay one month next quarter. I have been eating out for lunch every day at work this year, which is part of why this is so high. I’m okay with that decision for now.
  • Housing is a bit under because I’ll pay property taxes next quarter and ‘household goods’ spending has been mostly squashed into groceries with the joint spending. I spent more on internet and electricity than estimated, but that should even out a bit more next quarter. And my mortgage payments and HOA dues were right on par. My property taxes did go up more than expected, so that will show up in next quarter’s report.
  • Medical – I estimated only spending on premiums. Oops – I forgot about bills from the injury in the fall.
  • Recreation – I spent nothing in Q1. There will definitely be more spending here in Q2.
  • Shopping – this one was a killer. I only budgeted for the closets and painting. I didn’t plan on repairing my laptop or buying a new case for my cell phone, but those at least came out of some building up line items. I didn’t plan on any of the general furnishings I bought or sales taxes on the painting estimate. Those all added up to almost $500, oops.
  • Transportation – this was awesome! I bought one tank of gas and paid some toll bills. I’m working on trying to lower my insurance costs so I don’t have a $1,360 cost come Q3. I think I might have found an insurance company that should cut that in half!
  • Travel – annual estimate was $4,000. I don’t anticipate going over $4,000 total for the year, so it should work out okay.

There you have it – I went over my estimate by an average of $600/month in Q1. I don’t feel bad about any of the spending. Q2 should be better – my estimate for now is that I’ll come in under $10,000 for the quarter.

Readers, how was your first quarter of 2014?

Financial Plan for 2014

Simple goals, simple implementation, right?

Income plan

The vast majority of my income comes from my W-2 day job. This is separated into regular salary, which is paid out monthly, and stock of which I will see two comparably sized vests this year. I am expecting my overall W-2 income (before deductions) to be somewhere between $160,000 and $200,000 for the 2014 year. This assumes a modest 2% increase and the 52 week low and 52 week high +20% stock prices for the RSUs. I anticipate my income surpassing the Social Security tax maximum ($117,000 in 2014) with my September or October paycheck.

My RSUs see a flat 25% of federal income tax deducted from them, which isn’t quite enough tax because my base pay alone takes me into the 28% federal income tax bracket these days, so I need to compensate for that with my W-4 allowances. My spreadsheet suggests that at this point in time, I should set zero (0) allowances on my W-4 for 2014. I will re-evaluate this after each RSU vest and raise.

Investment contributions

I plan to:

1) Contribute the 2014 maximum of $17,500 to my 401(k) for the year, spread out throughout the year:

  • H3 = annual base pay (gross)
  • J2 = Yearly max to the 401(k) – $17,500 for 2014
  • I2 = ROUNDUP(J2/H3,2) = the % that I should contribute monthly from my paycheck to max out the 401(k) over the course of the year, e.g. if it is XX.3%, I will set it to XX+1%. I will most likely reduce this by one percentage point for my April and subsequent paychecks.

2) Make my 2014 Roth IRA contribution of $5,500 through the backdoor on January 2nd, taking the funds from my savings account.

3) Continue contributing the maximum to my Health Savings Account until the plan year ends partway through 2014. I will then re-evaluate health insurance plans and whether I will contribute to the Health Savings Account again (depends on which plan works out the best).

4) Set aside my 2015 Roth IRA contribution from my final RSU vest for the 2014 year in a savings account. This will probably either be $5,500 or $6,000.

Mortgage plan

All funds that are not set aside for spending, my 401(k), my Health Savings Account, or my Roth IRA will be thrown at the mortgage. My estimate is that this should be around $2,500/month on average, plus RSU vests.

Investment allocations

This exercise is similar to what I did for 2013. As of 12/12/2013, my investments portfolio is worth ~$130,700. I estimate adding about $25,000 to the portfolio this year, including my 401(k) contributions, my employer match, and my Roth IRA contribution, putting an estimated year end balance at $156,000.

(Note: when I wrote this post last year, I estimated that my end of year balance would be $98,100. It is $34,600 higher than that as of November 30th. Crazy!)

My target asset allocation at the end of 2014 will be:

  • 27% Fixed income
  • 36.5% US stocks
  • 36.5% International stocks

Based on this, let’s calculate my ideal portfolio at the end of 2014 and compare it to where my portfolio is now:

Current Ideal EOY Difference
US stocks $48,500 $56,945 $8,422
International Stocks $47,900 $56,945 $9,073
Fixed Income $34,400 $42,124 $7,773
total $130,700 $156,000 $25,268

I will add my $5,500 Roth IRA contribution to the Vanguard Total Stock Market Index Fund Admiral Shares, which means I only need to add another $2,922 to US stocks for the year. Subtracting out my 401(k) match from there leaves my 401(k) contributions as follows for the year:

  • 4% or $654 to add to US stocks (S&P 500 index fund)
  • 52% or $9,073 to add to international stocks (total international index fund)
  • 44% or $7,773 to add to fixed income (stable value fund)

There, we can set and forget for the rest of the year!

I will re-balance the Extended Market index fund vs S&P 500 index fund amounts in January 2015 when I make my Roth IRA contribution for that year – for now, I just care about US vs international vs fixed income.

Banking plan

I’m going to have my entire pay direct deposited to my credit union checking account and then pay the mortgage from there with the leftovers each month. My credit cards are all on auto-pay from here and all of my bills are on auto-pay to a credit card.

I will continue to withdraw any health expenses from my HSA after putting them on a rewards credit card through the end of this plan year. I will re-evaluate my HSA plans during open enrollment.

My plan for expenses is as follows:

  1. If purchase is in person and < $15, use debit card until I reach N transactions. This should earn me just under $200 in interest for the year, i.e. meets my $100 gain for the year rule.
  2. All Amazon.com purchases go on that credit card (this is mostly automatic, so no big deal), as well as restaurants and in-person places that don’t take American Express.
  3. All non-foreign purchases that take American Express go on the Fidelity Amex card
  4. All other purchases (including possibly foreign ones) go on the credit union cashback visa (I love this one because it does automatic redemption every month, no matter the amount!)

This algorithm should net me about $400-550 in cashback rewards for the year, based on 2013 spending levels.

Based on my spending patterns and my rule that I will only add a credit card if it will gain me at least an additional $100/year in cashback rewards and I think I could use the card effectively for at least two years, I can’t really optimize any further than this. I could add the US Bank Cash+ Visa Signature card for 5% cashback on restaurants, but with my spending levels, that may or may not actually make any sense. My credit history is still new enough at this point that I don’t want to churn yet (under 4 years), but I will re-evaluate that in 2015.

I’m really enjoying how simple this plan is and I can’t wait to let it be implemented! Here’s to an awesome 2014!