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Old 08-10-2010, 11:15 AM   #1
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First - what a great site. Glad to have found it, and am excited to continue reading and learning through all the information available.

My wife and I are starting to become rather serious about retiring early and an looking for any advice one may have or can give on our situation.

Us:
35 and 43 years old
2 Young Children

Debt:
Mortgage Debt - $151,000.00
Car Loan - $12,000.00
No other debt owed - just monthly expenses of utilities, groceries, taxes, insurance, gas, etc.

Income:
Her - $90,000.00
Me: $50,000.00

Savings:
$30,000.00 - CD's
$4000.00 - Savings Bond (Long Story!)
$4000.00 - Cash
$2000.00 - Savings/Money Market
$29,000.00 - Combined Roth Accounts
$20,000.00 - Traditional IRA
$100,000.00 - 401K's
$5000.00 - Mutual Fund Account
$9000.00 - Brokerage Account

My wife puts away 10% pre-tax into her 401 K, and her employer matches 5% of her gross salary and dumps into her 401K, so a total of 15% of her gross salary is put into her 401K yearly. I put away 11% pre-tax into my 401K, and my employers contributions bring my total to 14.5% of my gross salary.

We also put away $2000.00 each into our respective Roth IRA Accounts, and put $750.00 each into the kids educational savings accounts.

After reading many of the posts on this site, I realize we are not anywhere close to where we should be, discouraging, but ready to tackle the task. We don't live an extravagant lifestyle, and don't plan on one in retirement. Want to be comfortable, that is our goal.

Looking for honest feedback on our situation, and some old pro's suggestions.

Thanks.
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Old 08-10-2010, 11:47 AM   #2
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I'd say you appear to be making fine progress on a month to month basis. Keep it up and you will get where you are going.
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Old 08-10-2010, 12:11 PM   #3
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I added up 203k in "investments" at age 43/35. This is a good start.

I see 140k in income with the following description
Quote:
We don't live an extravagant lifestyle, and don't plan on one in retirement
And then I took these comments and did my own math

Quote:
My wife puts away 10% pre-tax into her 401 K, and her employer matches 5% of her gross salary and dumps into her 401K, so a total of 15% of her gross salary is put into her 401K yearly. I put away 11% pre-tax into my 401K, and my employers contributions bring my total to 14.5% of my gross salary.

We also put away $2000.00 each into our respective Roth IRA Accounts, and put $750.00 each into the kids educational savings accounts

Income:
Her - $90,000.00
Me: $50,000.00
10% of 90k is $9000
11% of 50k is $5500
$2000 Roth her
$2000 Roth you



140k gross pay
you are investing about 18k per year

18/140= savings rate of 12%.
every 7 years you work, you are saving about 1 year of expenses (assuming you are spending most of the 122k on taxes or other things in the budget)- 18k replaces 122k every 7 years
**if you include the match ($6250 is added in each year in match), it is a 20% savings rate on gross pay which means every 5 years you work, you save 1 year of expenses**

The single best thing you can do is lower your spending and raise the savings rate. The degree to which you do this is the single biggest factor into how early you can retire. If retiring at age 60 is OK, what you are doing now is probably good enough. If you want to retire younger, lower spending so you have less expenses to replace and invest the difference.
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Old 08-10-2010, 12:13 PM   #4
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Welcome. Nice progress so far. I can only add the usual.

Max out the Roth and 401K if you can. Put contributions in Stable fund until you decide on asset allocation. You never know how long the job may last.

Maybe increase Emerg Fund if cash + savings is your Emerg Fund.

Track your expenses.
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Old 08-10-2010, 12:30 PM   #5
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Some fun sites to check out...

Choose to Save® for a "ballpark" estimate of what you'll have to spend in retirement given your savings

The figure is another estimate of where you need to be relative to retirement.
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Old 08-10-2010, 01:22 PM   #6
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Well, I definitely don't want to rain on your parade..., but your net worth is only $40K. I didn't include value of your house to the NW because you need a roof above your heads. But if your house is like an investment, it sure changes this equation. Quite a few people buy a prime RE expecting its sale proceeds to exceed the price of a retirement home down the road.

How old are your kids? Do you save only $1,500 a YEAR for their education? I'd say it's little, but hopefully they'll win scholarships (at least that's what I wish my kids will do).

Now comes a tricky part because I don't know what an extravagant life is because I only know the frugal style at the time being. Is keeping up with the Joneses extravagant? What if you don't have the latest iPhone, PlasmaTV, or iWhatever, but a family of four dine out a few times a week, would this be extravagant or not...?
Anyway... based on your income alone (from my frugal perspective), you both afford to max out 401k's and RothIRA's.
Your emergency fund is kind of meager, IMO unless your jobs are super safe. What about saving for your next car instead of getting a loan (unless you got 0% financing)?

But you're surely in the black, so it's GREAT.
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Old 08-10-2010, 01:27 PM   #7
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Thanks

JIMOH:

Thanks, kind of advice we are looking for. Appreciate you taking the time to read and offer suggestions. We definately are tightening up and beginning to get more aggressive on saving/investing. We think we can cut back and stash another $10,000.00 into investing. We are going to take $6000.00 of the $10,000.00 and max out Roth's, since we are already putting in $2000.00 annually each. Remaining $4000.00 we will have to figure out how to invest wisely.

Thanks for the feedback.
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Old 08-10-2010, 02:04 PM   #8
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Originally Posted by DreamingBig View Post
JIMOH:

Thanks, kind of advice we are looking for. Appreciate you taking the time to read and offer suggestions. We definately are tightening up and beginning to get more aggressive on saving/investing. We think we can cut back and stash another $10,000.00 into investing. We are going to take $6000.00 of the $10,000.00 and max out Roth's, since we are already putting in $2000.00 annually each. Remaining $4000.00 we will have to figure out how to invest wisely.

Thanks for the feedback.
YW

BTW your gross income is similar to ours, and I will shed some light on my plan...

Here are some tips

1) Know your tax bracket- if you have $6000 free to invest, I am guessing this is $6000 taxable. If you put it in 401k it might be $7500 (because money is pre-tax in 401k) and if you are in 25% bracket, I would contribute enough to lower bracket to 15% if at all possible.

Example- if married filing jointly
and the taxable income (as reported on 2010 tax return) was $71,000. The bracket cap for 15% is 68k (see Reference Room)

so put $3000 more into one 401k or the other (calculate $3000 as a percent of the income of person increasing contributions) then put the balance into Roths.

If you can contribute to Roth in 15% bracket that means

a) you are betting taxes in retirement are higher than 15%
b) you are spending less because you squeezed more money to invest
c) you are being efficient in your decisions financially


2) College costs- how much of a dent will $750/year be for college? Is there a better opportunity with this money somewhere else? How aggressive is the college fund invested now?

I make the assumption that in 16 years when my twins start college (they are two now) that there will be federal tax incentives (federal tax credits) for college education. I make a further assumption that if I am retired (it will be close) that I will qualify for them. As it stands now, my income while w*rking qualified for them.

If you look at the credits, the hope credit is $2500 per student per year. I have not read the details of the credit for 2010, but in 2007 it worked like this
100% refund of money spent up to $X
then 50% of money spent up to $2X

If it works the same way now, that is 100% refund up to $1600
then 50% refund up to $1600 - so spend $3200 and get $2400 back.

If you put $3200 into a 529 or educational IRA, is the money invested aggressively enough to get $2400 over next 10 years (I am assuming kids are younger than 6). That is a 75% return over 10 years. Its possible, but may or may not be probable.

To use the hope credit, read the IRS guidelines- if money comes from a 529 it CANNOT be used to claim a tax credit (check me on that, but that is way it worked in 2007).

So if you divert that $750/yr to something else, then pay cash for college, you might get a better ROI on all monies involved.

In my case, my plan is to pay the mortgage off BEFORE kids start college, and then my mortgage payment becomes their college funding for a short amount of time.

3) Timeline
The best way to answer questions like this will be to place various life events on a timeline. The timeline gives you goals for when certain items in your life should occur, and can help you determine if something is a good decision relative to the goals on the timeline.

For example, on your timeline place the following milestones
1) retirement
2) mortgage paid off
3) kid #1 starts college
3a) kid #1 finishes college
4) kid #2 starts college
4a) kid #2 finishes college
and any other financial event you see as a goal (like refinancing mortgage or paying off a debt)

then play around with the money (like $750/yr) and see if it enables one goal or another to occur earlier. There is usually a snow ball effect that if you get one goal done efficiently (early) that another goal gets done earlier too (or cheaper).

For example, if you direct the college money to mortgage, and get 151k of mortgage paid off in 10 years (before oldest starts college) you have $X per month free to pay for college, but if it takes 11 years to pay same debt off, you cannot change that cash flow from mortgage to pay for something else. (This assumes kid goes to college normal year and does not wait a year for parents to pay off mortgage).

Some money might be freed up when mortgage is paid off, more might get freed up once youngest finishes college, so use a timeline to establish which money can fund which goals.

4) personal finance basics- if you can live on 80% of your gross pay, that is a great place to start. I calculated your savings rate as 12% above. This excludes matches, and I do this to point out you are "spending" 88% of gross (granted some of this is FICA and taxes and benefits). Try squeezing that 88% number- spending 80% and saving 20% means that every 4 years of work is 1 year of retirement expenses- and any little extra you squeeze from that point is a much faster retirement (75% spent and 25% saved means 3 years of work for 1 year of expenses).
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Old 08-15-2010, 02:30 PM   #9
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You should be able to save/invest about half your gross income. That's $70K a year. From the other $70K you pay all your expenses includes taxes. Your taxes will be low since you have kids and will be socking away $33K into 401(k)s right off the top.

Look at your tax return. The top half of Schedule B should show less than $10 in taxable income. If it shows more, then you need to invest more tax-efficiently. All that cash needs to be in tax-advantaged accounts: 401(k), Roth, 529 plans. Your taxable accounts should be very tax-efficient stock index funds. Your Schedule D should always show a $3000 loss due to tax-loss harvesting.

I sure hope the car loan is a 0% loan and your mortgage interest rate is about 4.5%. Otherwise, pay off the car loan and refinance the mortgage.

We have more income than you and paid less than $9K in income taxes last year. We will get an additional tax-credit for college expenses this year, so income taxes should drop by $2500 for us.
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Old 08-17-2010, 02:20 PM   #10
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You should be able to save/invest about half your gross income. That's $70K a year. From the other $70K you pay all your expenses includes taxes. Your taxes will be low since you have kids and will be socking away $33K into 401(k)s right off the top.

Look at your tax return. The top half of Schedule B should show less than $10 in taxable income. If it shows more, then you need to invest more tax-efficiently. All that cash needs to be in tax-advantaged accounts: 401(k), Roth, 529 plans. Your taxable accounts should be very tax-efficient stock index funds. Your Schedule D should always show a $3000 loss due to tax-loss harvesting.

I sure hope the car loan is a 0% loan and your mortgage interest rate is about 4.5%. Otherwise, pay off the car loan and refinance the mortgage.

We have more income than you and paid less than $9K in income taxes last year.
LOL, I strongly agree with your 1st and 3rd paraghraphs, but I've got a few questions about the 2nd & 4th.
In regards to the 4th paragraph, I'm curious whether $9k is a combination of FIT and SIT. If so, if you don't mind telling, what's your state and are both you and your SO retired already and don't have mortgage interest anymore? I'm sure you've mentioned your status and state, but my brain doesn't retain such info for a long time.

With regards to the Schedule B, did you say that its top half shouldn't show more than $10 of taxable income by the OP's young age and the size of his/her portfolio or would you apply this rule to everyone (meaning regular mortals and not millionaires)?
I'm wodering because if let's say you've got about a nice chunk of shares in total index and a few high-yielding dividend stocks like I read on some blogs people doing, it would produce quite a bit of taxable income, IMO. So, if I read you right, those people make a mistake from a tax standpoint and should move all their taxable investments into tax-managed funds or tax exempt munis...?? OTOH, maybe performance of the 'wrong' investment might offset the 'right' ones, so it's nothing wrong to help Uncle Sam too in the process?
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Old 08-17-2010, 04:04 PM   #11
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Compared to most people in the U.S. you are probably doing great. However most people in the U.S. are never going to retire early or be financially independent, so if that is your goal you have spend and save much differently than what is considered normal by most people.

So my advice, in general, is simply to not follow the herd mentality when it comes to spending and saving. The median income in the US is around 50K. Your family makes 140K. Can you live closer to what the median family makes and save the rest? As others have suggested, I'd for sure start with paying off the car loan and maxing out the retirement accounts.
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Old 08-17-2010, 06:45 PM   #12
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Doing good so far but you can do a lot more. You already have good advice above from jIMOh, LOL and others. I just ditto what they already said...ratchet up the savings. At 140k gross, I am sure you can find ways to save 20-25% or more of your gross, given your modest mortgage, car loan, and no other debt. Make sure you find "joy in the journey"...but without spending too much to do it.

Good luck, and welcome.

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Old 08-17-2010, 07:05 PM   #13
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LOL, I strongly agree with your 1st and 3rd paraghraphs, but I've got a few questions about the 2nd & 4th.
In regards to the 4th paragraph, I'm curious whether $9k is a combination of FIT and SIT. If so, if you don't mind telling, what's your state and are both you and your SO retired already and don't have mortgage interest anymore? I'm sure you've mentioned your status and state, but my brain doesn't retain such info for a long time.
We live in a state with no state income tax, so less-than-$9K is all our income taxes, federal and (no) state. My spouse works full-time as an engineer; I work part-time though I earn more than my spouse. We still have mortgage payments, charitable deductions, property taxes, etc and itemize. Our charitable deductions are larger than our property taxes which in turn are larger than our mortgage interest. We are both over-49 years old, so we can each put $22K into our 401(k)s which reduces our taxable income quite a bit. We have 2 kids. We did not pay AMT in 2009, but did in 2007 and 2008.

Quote:
With regards to the Schedule B, did you say that its top half shouldn't show more than $10 of taxable income by the OP's young age and the size of his/her portfolio or would you apply this rule to everyone (meaning regular mortals and not millionaires)?
I'm wodering because if let's say you've got about a nice chunk of shares in total index and a few high-yielding dividend stocks like I read on some blogs people doing, it would produce quite a bit of taxable income, IMO. So, if I read you right, those people make a mistake from a tax standpoint and should move all their taxable investments into tax-managed funds or tax exempt munis...?? OTOH, maybe performance of the 'wrong' investment might offset the 'right' ones, so it's nothing wrong to help Uncle Sam too in the process?
Top half of Schedule B is interest. You should have all your interest earned in tax-advantaged accounts. See, for example, Placing Cash Needs in a Tax-Advantaged Account - Bogleheads This technique works for everyone.

The bottom half of Schedule B is for stock dividends. I did not mention it, but all your taxable dividends should be qualified dividends. If you have a million dollar portfolio in taxable, then you will have between $20K and $30K of qualified dividends (taxed at 15%). Better yet is if most of these dividends are from foreign index funds, so you can also get the foreign tax credit. That is, if you have taxable investments, put your foreign index funds in taxable over tax-advantaged.

You should put your bond funds in tax-advantaged, so there should be no need for tax-exempt muni bond funds.
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Old 08-18-2010, 01:02 PM   #14
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Well, I definitely don't want to rain on your parade..., but your net worth is only $40K. I didn't include value of your house to the NW because you need a roof above your heads. But if your house is like an investment, it sure changes this equation. Quite a few people buy a prime RE expecting its sale proceeds to exceed the price of a retirement home down the road.

How old are your kids? Do you save only $1,500 a YEAR for their education? I'd say it's little, but hopefully they'll win scholarships (at least that's what I wish my kids will do).

Now comes a tricky part because I don't know what an extravagant life is because I only know the frugal style at the time being. Is keeping up with the Joneses extravagant? What if you don't have the latest iPhone, PlasmaTV, or iWhatever, but a family of four dine out a few times a week, would this be extravagant or not...?
Anyway... based on your income alone (from my frugal perspective), you both afford to max out 401k's and RothIRA's.
Your emergency fund is kind of meager, IMO unless your jobs are super safe. What about saving for your next car instead of getting a loan (unless you got 0% financing)?

But you're surely in the black, so it's GREAT.
Aida, No one's mentioned it yet so maybe I'm missing something. You say their net worth is $40K. Unless he's provided information that I can't see in his post, there is not enough information to determine this. How do you figure?
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Old 08-18-2010, 01:36 PM   #15
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I'm don't get it. You seem to have been saving well and have $200,000 accumulated. Your debt is low and reasonable. You make $140,000 a year but only manage to save $18,000 with that kind of debt. Unless you paid off a significant portion of that house already, your payment can't be that high. Same with the car. You say you don't live an extravagant lifestyle, but your implied spending on stuff besides house, car, college and savings seems pretty high.

Not calling you out, but what are you spending all that money on? Are your house and car payments really high, but you have paid the balance way down? If not, are you eating lobster every night and wearing Armani suits to work in the yard? Something is missing from your description of you finances and spending. At first blush, you have a lot of catching up to do and a lot of discretionary income to do it with.
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Old 08-18-2010, 02:09 PM   #16
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Not calling you out, but what are you spending all that money on? Are your house and car payments really high, but you have paid the balance way down? If not, are you eating lobster every night and wearing Armani suits to work in the yard? Something is missing from your description of you finances and spending. At first blush, you have a lot of catching up to do and a lot of discretionary income to do it with.
In my experience, the "fail to meet FIRE numbers" spending of middle-class people with kids, a nice income, and no Fabergé egg habit, can be due to one of five major expenditure groups: eating out, clothes, "ideal home" stuff, vacations, and frequent new car purchases. Those are usually the areas where people to whom I've spoken about FIRE over the years say their money goes, when they look at it.

(Obviously, if they have a yacht, etc, that's also expensive, but it sticks out. The others are "normal" things to spend money on and so don't tend to get thought about as much.)

In our case, for example, it would be eating out and vacations. We just bought a new car but our other 2 cars are 9 and 10 years old. DW has bought more clothes lately since she got her "fancy" new job, but that's tailing off. Our home is, um, non-palatial.

It's worth looking at your expenditure on those 5 areas and see where the largest numbers are. Generally that's a good place to start looking for that extra $10K-20K/year.
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Old 08-18-2010, 02:13 PM   #17
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Aida, No one's mentioned it yet so maybe I'm missing something. You say their net worth is $40K. Unless he's provided information that I can't see in his post, there is not enough information to determine this. How do you figure?
All I did was added the OP's total Debt and total Savings that were provided. I'm not including his dwelling, because he needs to live somewhere.
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Old 08-18-2010, 02:39 PM   #18
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We live in a state with no state income tax, so less-than-$9K is all our income taxes, federal and (no) state. My spouse works full-time as an engineer; I work part-time though I earn more than my spouse. We still have mortgage payments, charitable deductions, property taxes, etc and itemize. Our charitable deductions are larger than our property taxes which in turn are larger than our mortgage interest. We are both over-49 years old, so we can each put $22K into our 401(k)s which reduces our taxable income quite a bit. We have 2 kids. We did not pay AMT in 2009, but did in 2007 and 2008.
OK, now it explains a lot. I was afraid that I've totally messed up our tax returns.

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Top half of Schedule B is interest. You should have all your interest earned in tax-advantaged accounts. See, for example, Placing Cash Needs in a Tax-Advantaged Account - Bogleheads This technique works for everyone.

The bottom half of Schedule B is for stock dividends. I did not mention it, but all your taxable dividends should be qualified dividends. If you have a million dollar portfolio in taxable, then you will have between $20K and $30K of qualified dividends (taxed at 15%). Better yet is if most of these dividends are from foreign index funds, so you can also get the foreign tax credit. That is, if you have taxable investments, put your foreign index funds in taxable over tax-advantaged.

You should put your bond funds in tax-advantaged, so there should be no need for tax-exempt muni bond funds.
Dang it, I tried to visualize Schedule B and got it wrong.
Thanks for the link. I'll have to study more, but at the first glance it seems I'm not very comfortable going this route in case a lightning strikes out of the blue and I need the $ fast. Granted I have to admit that we do report interest and we've got a chunk of money in savings and CDs. Probably it's not prudent taxwise but I feel more comfortable. However, I'll have to take a closer look at your provided link.

Thank you.
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Old 08-18-2010, 03:10 PM   #19
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In my experience, the "fail to meet FIRE numbers" spending of middle-class people with kids, a nice income, and no Fabergé egg habit, can be due to one of five major expenditure groups: eating out, clothes, "ideal home" stuff, vacations, and frequent new car purchases. Those are usually the areas where people to whom I've spoken about FIRE over the years say their money goes, when they look at it.

(Obviously, if they have a yacht, etc, that's also expensive, but it sticks out. The others are "normal" things to spend money on and so don't tend to get thought about as much.)

In our case, for example, it would be eating out and vacations. We just bought a new car but our other 2 cars are 9 and 10 years old. DW has bought more clothes lately since she got her "fancy" new job, but that's tailing off. Our home is, um, non-palatial.

It's worth looking at your expenditure on those 5 areas and see where the largest numbers are. Generally that's a good place to start looking for that extra $10K-20K/year.
Ya, I guess that's what I was trying to say. It's the little things. Going out to eat all the time, owning 37 pairs of black shoes, Spending all your time off jetting around the country on cool vacations, etc. I know full well how easy it is to fit your lifestyle to your income and not really see that a lot of that is frivolous and unnecessary. Not saying you should deprive yourselves, but examining your spending and cutting out the stuff that really isn't adding to your happiness, comfort or well-being.

I'm not schilling the book, but "You're Money or Your Life" really changed how we viewed money and our spending. I went from needing to work after taking my pension to having extra money every month without working, just by examining our spending. We don't feel deprived, we just make better choices. Were not perfect, but we are getting better and better at it.
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Old 08-18-2010, 03:13 PM   #20
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Originally Posted by LOL! View Post
The bottom half of Schedule B is for stock dividends. I did not mention it, but all your taxable dividends should be qualified dividends. If you have a million dollar portfolio in taxable, then you will have between $20K and $30K of qualified dividends (taxed at 15%). Better yet is if most of these dividends are from foreign index funds, so you can also get the foreign tax credit. That is, if you have taxable investments, put your foreign index funds in taxable over tax-advantaged.
Sorry, forgot to mention that dividends will lose their favorable treatment after 2010 unless the current gov't change their minds.
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