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?


August 2014 net worth update (+21.1%)

31-Dec-2013 31-Jul-2014 31-Aug-2014 MoM YTD
cash $13,500 $5,400 $6,000 +$600 -$7,500
savings $27,400 $21,800 $25,000 +$3,200 -$2,400
investments $134,600 $156,500 $167,800 +$11,300
mortgage $187,600 $151,500 $149,900 +$1,600
net worth $345,900 $412,000 $498,900 +$86,900
liquid assets – debts $49,000 $12,000 $100 +$11,900
$ until FI $823,900 $901,300 $841,500 -$59,800

After some discussion in the comments on last month’s net worth update, I decided to set my condo value to what I realistically think it would sell for today, from a comparative market analysis done by a real estate agent familiar with my area and unit. This month also saw about $4,000 in after-tax savings from my paycheck, in addition to about $8,000 of 401(k) contributions from last month and some gains in the stock market. I’m now so close to $500,000 in net worth!

I saved 71% of my net income this month! I’m at 73% so far for the year. I’ve been looking at my budget with the plan to change jobs and trying to see what I can reduce, but it’s hard when I have ~$1,900/month of fixed expenses. Add in $200/month for groceries and I guess my bare bones budget is $2,100/month, which is a pretty decent chunk of money. I’m so glad I didn’t buy a more expensive place! If I was going to take more than a month off, I could recast my mortgage, which would drop the required payment down about $400/month.

It’s interesting seeing how different my finances have unfolded than I expected. My May 2011 projections showed me hitting $250,000 in 5 years (2016), $500,000 by age 35, and $1 million by age 51. I hit $250,000 two years later than that in May 2013 and will hit $500,000 this year at age 26. My projections now show that I will hit $1 million in net worth around age 30-31, which is twenty years earlier than my projection three years ago. Early compounding really is your friend!

Expenses: I spent $3,570 in August after the mortgage or $2,543 without it. So far, my total spending for 2014 is $31,272, which is $46,908 annualized.

To hit my $38,500 spending goal for the year, I need to spend no more than an average of $1,807/month over the remaining 4 months this year. That’s not really possible considering that the mortgage, property taxes, and HOA dues alone will add up to $6,653 over the remaining 4 months of the year or about $1,663 on average per month, leaving me with only $144 of room each month to hit $38,500. So that’s not going to happen. My current spending estimate is $42,360 for 2014, which would be a decrease of $2,450 from 2013 or about $200/month.

Some of my controllable expenses broke down as follows:

  • ($47) Clothing – adjustment on the cost of some dresses from July
  • $331 Entertainment/Social [average this year: $214, last year: $224]
  • $28 Eating out by myself [average this year: $18, last year: $25]
  • $36 Groceries – for two people [average this year: $201, last year: $152]
  • $116 Work lunches [average this year: $156, last year: $77]
  • $53 Presents – a gift for a friend’s bridal shower [$221 so far this year, $235 last year]
  • $53 Internet
  • $94 Electricity – June/July [$614 so far this year, $571 last year – rates went up about 7% year-over-year]
  • $3 Household goods [average this year: $23, last year: $29]
  • $20 Eyebrows
  • $38 Toiletries – buying a year’s supply of lip balm [average this year: $21, last year: $31]
  • $29 Fuel [$129 so far this year, $302 last year]
  • $1,420 Travel – a) bought flights for a September trip with my boyfriend, b) bought the second flight for a fall trip with some girlfriends, and c) paid a deposit on the hotel for the trip with some girlfriends (the other women owe me for their portion of the cost…) September will see another ~$650 in travel spending and then I will likely be done with non-work travel spending for the year!

Savings: $25,000 (up $3,200)

These funds are spread across a Chase savings account, a general online savings account, a checking account that gets free ATM fees anywhere in the world, and my health savings account.

I’ve decided to keep the Chase savings account open even though I could now close it with no penalty as it has come in handy a few times, for example to get a deposit rather than a statement credit for credit card rewards and then immediately send them to the mortgage. Plus, it is only the opportunity cost on $300, which at the Ally online savings account rates loses me $2.55/year.

This month, I was able to set aside just over $4,000 to my savings account! (It’s only up $3,200 because I tossed a bit at my mortgage to get it under $150,000…) Since I’m done contributing to my 401(k) for the year, I should be able to save quite a bit of funds post-tax over the rest of the year (close to $4,000 from each full paycheck).

Investments: $167,800 (up $11,300 or +7.2%)

This includes my Roth and Traditional 401(k), my 401(k) employer matching (fully vested!), my Roth IRA, my taxable investments including stock index funds and Series I Savings Bonds.

The change here comes from:

  1. July paycheck 401(k) contribution and employer matching (last contribution for the year to any of my investment accounts)
  2. Some stock market gains

My 401(k) is now worth over $100,000! That’s pretty exciting!

Mortgage: $149,900 (down $1,600 or -1.1%)

Some statistics here:

  • 2.5%: the interest rate on my 5/1 ARM
  • February 2018: when the interest rate on my mortgage is set to reset, possibly to 7.5%
  • 1: months of payments eliminated with this month’s pre-payments
  • ~$900: extra payments made on the mortgage this month
  • ~$2: interest this month’s extra payments will save me on the next regular payment
  • 30.7%: portion of my regular payment went to interest (originally was 59%; down 0.2 percentage points from July)
  • 58.1%: amount of equity in my condo, assuming purchase price (up 0.5 percentage points from July)
  • 47.6%: amount of the mortgage I’ve paid down (up 0.6 percentage points from July)

I cheated and threw enough extra at the mortgage this month to roll the balance under $150,000. It was worth it. I still increased my cash position by $3,200, so I call it not a bad month for savings.

TOTAL: $498,500 (up $86,500 or +21.0%)

I ended 2013 with a net worth of $345,900, so I’ve seen a change of +$152,600 or +44.1% so far this year. I’ve set the y-axis on this graph to $465,000 so we can see how my net worth grows towards that throughout the year. I have now surpassed my original y-axis of $465,000 (!), so I’ve increased it to $550,000, which is my new estimate for the year.

August 2014 Net Worth Graph

I Finally Feel…Rich

You couldn’t really tell with my net worth update for April, but I got a huge raise this year on my base salary. As in a raise bigger than I got with the promotion last year. I definitely feel like my compensation is more in line with the market rates now, which is awesome. Plus, I have quite a bit more net income to save each month with the raise. I’m pretty excited for that.

I never really had a definition for feeling rich, but apparently having about $1,000-2,000 in disposable savings (i.e. amount available to save after maxing out my 401(k) evenly and taxes) per month with six months of cash reserves in the bank and investing 20% for retirement does it for me. I definitely feel like I can buy whatever I want. In my life thus far, I’ve built up a good frugal mentality, which has changed to a conscious spending mentality over the last year or so. I know that I have definitely experienced some lifestyle inflation, but I’m happy with how I’ve been spending my money.

Since I now have my raise for the year, barring a promotion at the other review cycle (which I really don’t see happening for at least another year or two, let alone later this year), the only variable in my total compensation for this year is my company’s stock price and whether or not I stay at my company (which is my current plan for the next few years). I won’t reveal the range (until the end of the year), but suffice it to say, I’m still shocked that I could even be seeing that number at this point in my life.

My projection for next year (2013) – Oh. My God. I don’t even want to think about that number because it still seems so insane. I’ll believe it when I actually see it.

I will most likely hit the social security tax maximum in October/November this year. It could be in August/September next year. That is a pretty nice amount of extra monthly cash flow.

Maybe being financially independent by the end of 2020 isn’t such a crazy goal.

Don’t get me wrong – I’m not going to go out and buy a $50,000 luxury car. That’s just not me. But I definitely feel like I don’t really need to worry about money and that is an amazing feeling. (Not that I have ever really worried about money…)

I now see why your career is one of your most valuable assets. So far, I’ve been grossing $15-20k more each year. I keep doubting that kind of growth is sustainable long-term, but then the subsequent year’s numbers get completely pushed up from my initial projections. Because of my salary growth, both my salary and savings are starting to compound now, which is amazing to watch. A 5% raise now means far more than it did on my starting salary a few years ago and that’s only going to continue.

I am so excited and enthralled to watch this journey.

How do you define being rich or wealthy? Do you meet your definition? If not, when do you think you will?

Fun With Projections

It’s really interesting projecting how much my net worth will be in N years. In the Net Worth worksheet in my main financial spreadsheet, I have monthly projections for the next 4 years and then yearly projections after that, to see when I will reach various large milestones.

My current projections indicate that I will have a net worth of $100,000 by the end of this year, $250,000 in 5 years, $500,000 by age 35, and $1 million by age 51. These projections leave out a lot of human variables like whether I will get married, the financial health of my future spouse, whether I will have children, and they assume that my salary will stay at its current level for the rest of my career. They also assume no growth or loss of any assets (both of which are quite unlikely!)

I enjoy playing with these projections even with the number of variables that they ignore.

The biggest part of these projections is how much I save every month (about 50% of my net pay) and how much of my bonuses I save (100%).