Case Study #2: Joe — off to a fast start!


Over in the Ask jlcollinsnh page, reader Joe posted a very interesting profile along with a series of questions.  Since I think his situation and our conversation about it might have broad interest, it has become our first case study in a long time (here’s #1) and this post.

First is his note, which I have edited a bit, but only to include some facts he later provided:

Jim –

I wanted to layout my personal situation for myself and my girlfriend and get some feedback from you re: any things you think we’re missing out on or areas of opportunity.

(Joe is 27 and his girlfriend is 24. The income and expenses are his alone. She is a full-time student.)

Monthly Income
* Salaried at $12,500/mo with quarterly bonuses based on profit. Given past profit numbers this should equate to about $3,300-4,200/mo. Total comp: $15,800-16,700/mo.

 I get 100% covered health insurance, dental, etc. I have disability insurance through work.

Monthly Expenses
* Housing (own) = $1,315/mo (House mortgage + property taxes + pmi)
* Bills & Utilities = $423/mo (Gas, Water, Electric, Internet, Cable TV, Cell Phone for myself and GF)
* Transport = $287/mo (Car Insurance, Gas, Maintenance, Parking, EZPass, Transit Pass, Bike Maintenance)
* Food & Dining = $321/mo (Groceries, Restaurants, Bars)
* Shopping = $330/mo (House goods, clothes, electronics, gifts)
* Pet care = $59/mo (Dog food, annual vet visit, toys)

Annual Expenses
* Travel = ~$3.2k/year, $260/mo (g/f family is INT’L so we need to travel at least once per year)

Monthly Investment Contributions
* Roth 401k = $728/mo
* 401k = $728/mo
^^ Note: Company matches to the tune of about $200/mo
* Principal Payment = $300/mo (Pay an extra $300 towards house)
* Vanguard taxable = $4k/mo (55% VTSAX, 15% VGTSX, 15% VGSIX, 15% VBMFX)

TOTAL INCOME: $16,250/mo

In terms of what I’ve gotten so far:

* House, Zillow = $255k
* CASH = $53k
* Car, KBB = $13k
* Roth 401k = ~$18k (Principal Target 2045 Retirement Fund)
* 401k = ~$18k (Principal Target 2045 Retirement Fund)
* Old 401k = ~$28k (Assortment of funds available in Fidelity)
* Vanguard Roth IRA = ~$21k (Target 2045 Retirement Fund VTIVX)
* Vanguard Taxable = ~$20k (55% VTSAX, 15% VGTSX, 15% VGSIX, 15% VBMFX)

* House Mortgage = $173k


  1. Anything good to do with some of that cash to keep it mostly liquid / safe as an emergency fund + life fund (marriage, new car, etc)? It’s just sitting in Capital One 360 + Bank of America.
  2. I just upped my investments, my plan is to up the contribution amount until I am breaking even every month and not growing my savings. Based on what my predicted income, taxes, spending, and current investment contributions are, I think that means I will likely push my monthly investments up another $3k/mo.
  3. I can rent out my house for ~$1,700 and move closer to my work for a monthly rent of ~$1,800. I would save about an hour per day by being closer to work, and given the the fact that utilities would be cheaper and I would make money on top of mortgage, it seems like a good idea. Thoughts?
  4. Should I consider saving some money and buying another house for myself as either an investment property or a house to live in (thus converting my current into an investment property)? Around me it is common to buy a house for between $250-350k that is pretty nice and it can rent out for $1500-2500.
  5. Are the target retirement funds decent?
  6. Am I missing out on any big opportunities in my portfolio?
  7. Does it seem like I’m on a good track?


My Reply

Welcome Joe and thanks for your detailed profile. Let’s start by answering your last question (#7) first:

Beautiful Track 5

It seems you are on an beautiful track!

Well done so far.

You have just about 200k in income and you are living on under 36k per year. That’s an annual savings rate of 82%. That’s brilliant. About the only thing that appears to be missing is accounting for the repairs and maintaince your house is sure to require over time. But think hard and be sure you’re not missing anything else in your expense profile.

If those expense numbers are accurate, and for anybody living on 18% of their income, I’d say spend it on whatever you damn well please.

OK, let’s look at your other six questions, in order:

1.  53k in cash, for somebody with your income and spending level, is needlessly high. It is just shy of 1.5 years of your current living expenses.

If wedding costs and/or a new car are in your near term plans, figure those costs and hold that aside as cash. Otherwise, half your annual spending is more than enough: 18k. And unless your job is insecure, I wouldn’t even hold that much. But with your assets, if you want to, it is a small enough number.

Make that money work harder: Move the excess to VTSAX (Vanguard Total Stock Market Index Fund) in your taxable account.

2. You should push your investment levels far higher. Subtracting your expenses ($2995) from your income ($16,250) you have a monthly surplus of $13,255. Yet you are only investing $5756, leaving $7499 unaccounted for. Since you don’t mention if your income is pre or post tax, some of that might be going to the tax man. But you still have much more to deploy.

3. Your idea of moving certainly makes sense from a cost and commute time savings point of view. However, with your income and savings rate, I’d make the call based more on which option provides you the most appealing lifestyle.

4. Having a rental house can be a very attractive investment. But it can also be a money pit. Do some very serious homework first, rather than just buying another house and converting your current home into a rental.

Remember, too, this is also a part time job. If this appeals to you and you see it as a desirable way to spend your free time, go for it. If not, you have no real need here.

A REIT like VGSLX  (Vanguard REIT Index Fund) gives you broad-based real estate exposure while you read a good book sipping cognac by a roaring fire.

If you haven’t already, start by reading this: Why Your House is a Terrible Investment.

5. I am not familiar with Principal Target 2045 Retirement Fund, but taking a quick look it seems OK. The .63% ER (expense ratio) is a little pricey. (Your Vanguard Roth in VTIVX, the Vanguard equivalent, has an ER of .18% for comparison.) My guess is you are in it because that’s what’s offered in your 401k. That’s fine, but when you leave that employer you’ll want to roll it into a Vanguard IRA (unless you are using the Backdoor Roth strategy described below). There will be no reason not to own the better, lower cost VTIVX in your IRA/Roth then.

Here’s my take on TRFs overall.

6. Not big opportunities, but your portfolio could use some fine tuning. Let’s look at that next…

rock pushing

We’ll just move a few little things around…

Open a non-deductable IRA…

and immediately convert it to a Roth IRA. This is a very cool technique called a Backdoor Roth IRA.  High income earners utilize this to get access to a Roth.

There are some complications to this (as described in the link), the  main one being that such a conversion will also effect all IRAs held other than Roths. But you don’t have any others. Your personal situation is such that you’ll avoid this common complication altogether.

Here’s what you do:

Read that linked article carefully. Then….

Open an IRA with Vanguard (you don’t have to specify deductible or non-deductable) and put the max contribution ($5000) into VMMXX: Vanguard Prime Money Market Fund. You want the money market fund so you have as little variation in value as possible in the short time you hold it as value variations add complexity.

Immediately instruct Vanguard to transfer it into a Roth IRA. You can use your existing Roth. You now have a perfectly legal Roth contribution in spite of your high income. And you can do this every year. Just be sure you don’t open any other IRAs or roll any 401k money into an IRA.

You won’t get any immediate tax deduction, but earnings will grow tax sheltered; important in your tax bracket.

BTW, for those readers who have lower incomes that allow for traditional deductable IRAs, my pal the Mad Fientist has worked out some very clever strategies: Check out the section on Roth IRA Conversion Ladder

Old 401k 

Ordinarily, I’d suggest you promptly roll this out of Fidelity (where the funds are likely to have high ERs) and into an IRA at Vanguard holding VTSAX. But that would vastly complicate the Backdoor Roth strategy above. So do this only if you decide against the Backdoor.

If you do decide to use that strategy, keep the old 401k but with an eye towards consolidating the multiple funds you have into Fidelity’s Total Stock Market Index fund, if available. Responding to the competition from Vanguard they have made these very low cost and it will serve you well.

If they don’t offer the Total Market Index fund, look for the S&P 500 Index Fund. That will serve nicely. So would a Target Retirement Fund if you prefer one of those.

Vanguard Roth IRA in VTIVX

I guess is this is an older Roth built when your income was low enough to allow Roth contributions? If not, I see a problem. As a single guy, your income disqualifies you from contributing to a Roth.  (Other than the Backdoor discussed above.) The phase out limits range from 112k to 127k. Past 127k you can no longer contribute at all. If you built up this Roth when your income was within the limits, no worries. If not, you’ll have to back out of it.

As for VTIVX, this is a fine fund. But Roth money is very long term and you already hold a very similar fund in your 401k. I’d use VTSAX instead. It will be a more volatile ride, but if you leave it alone after 40-50 years it will very likely have delivered a much stronger return.

Vanguard Taxable

You have 20k spread across four funds and you are adding 4k per month. That’s great, but you don’t need so many funds. I’d simplify and focus all this into VTSAX for the reasons I outline here, and this is why I don’t feel the need for international funds.


While I don’t have a great problem with you paying an extra $300 per month, I also don’t see the need. If your interest rate is 4.5-5% or less, better to invest this money in VTSAX. If your interest rate is higher, look into refinancing.  With your income and lack of debt, they should fall all over themselves offering you their best terms and rates. I’d go for a 15 year fixed. It will be a higher payment than a 30 year but you’ll be done with it sooner.

I’d also borrow a full 80% on your 255k value = 204k. This is higher than your current 173k balance and not the advice I’d give to most. But this debt is so small compared to your income and your tax bracket is so high, you can easily afford it and will benefit from the tax deduction. Put the excess you receive right into your VTSAX fund.

Oh, and if you keep this mortgage you now have more than enough equity to have them dump the PMI. That’s wasted money for you and I’d get it gone ASAP.

OK, now…


First, keep on with your terrific savings rate and increase your investing pace. Soon enough you’ll find your investments are producing the 36k you are spending. When that happens, live on that and invest your full income. Your investments will then really explode, as will the income they can provide. At that point, feel free to expand your lifestyle to that increasing level. For more on how much spending your investments can support, here’s my piece on the 4% rule.

Second, notice we are simplifiying and streamlining your investments. At this point in your life you are in the very active wealth building phase and VTSAX is the best tool for that. Both in your taxable and tax advantaged accounts. Because it’s what is offered in your 401k, you’ll also be holding the Principal Target 2045 Retirement Fund. That’s fine and you can roll it to Vanguard when you move on from this job, depending on your use of the Backdoor Roth.

Third, we are introducing that last as way to access the benefits of a Roth.

Fourth, your house is very modest against your income and that will serve you very well. Unless you can advantageously refinance, don’t worry about the mortgage. But dump the PMI.

You are off to a fine start and with your income, spending level and savings rate should easily hit finacial independance in short order.

Good luck and keep us posted on your progress!


For more on the idea of buying another more suitable house and turning your existing home into a rental:  How a smaller house saves us $16,500 a year.

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Important Resources

  • Talent Stacker is a resource that I learned about through my work with Jonathan and Brad at ChooseFI, and first heard about Salesforce as a career option in an episode where they featured Bradley Rice on the Podcast. In that episode, Bradley shared how he reached FI quickly thanks to his huge paychecks and discipline in keeping his expenses low. Jonathan teamed up with Bradley to build Talent Stacker, and they have helped more than 1,000 students from all walks of life complete the program and land jobs like clockwork, earning double or even triple their old salaries using a Salesforce certification to break into a no-code tech career.
  • Credit Cards are like chain saws. Incredibly useful. Incredibly dangerous. Resolve to pay in full each month and never carry a balance. Do that and they can be great tools. Here are some of the very best for travel hacking, cash back and small business rewards.
  • Empower is a free tool to manage and evaluate your investments. With great visuals you can track your net worth, asset allocation, and portfolio performance, including costs. At a glance you'll see what's working and what you might want to change. Here's my full review.
  • Betterment is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
  • NewRetirement offers cool tools to help guide you in answering the question: Do I have enough money to retire? And getting started is free. Sign up and you will be offered two paths into their retirement planner. I was also on their podcast and you can check that out here:Video version, Podcast version.
  • Tuft & Needle (T&N) helps me sleep at night. They are a very cool company with a great product. Here’s my review of what we are currently sleeping on: Our Walnut Frame and Mint Mattress.


  1. Done by Forty says

    That’s an awesome case study. Kudos to Joe for having such an amazing savings rate and putting his income to good use. I love hearing about these sort of success stories. With the tips you’ve provided, he’ll reach FI in no time at all.

  2. Frankie's Girl says

    Just wanted to chime in here… that is an incredible savings rate, and something to be very proud of.

    As far as the old 401K, he can most definitely leave it and still get some great options. I have all my funds with Fidelity, and considered switching to Vanguard, but discovered that Fidelity offers low cost index funds through their Spartan series. I double checked the Bogleheads site to get the Fidelity equivalents to the Vanguard funds you recommend.

    The total stock market index fund is the Spartan Total Market Index Fund (FSTVX for the advantage class has .06% expense ratio; for comparison the VTSAX has a .05% ) and I have an REIT (FSRVX) and total bond fund (FSITX) as well that have the same expense ratios as Vanguard. So it is possible to get decent, low-cost funds from Fidelity. You just have to avoid the “recommended” funds and stay away from their professionally managed offerings. And I was really lucky that my 401K offered the total stock market index fund!

    If I hadn’t already had several accounts with them (including a current 401K), I probably would have just put everything into Vanguard, but I’ve been really happy so far and the customer service and their very easy to use website are a big plus to me since I’m still learning. I know that Vanguard is the best in terms of their offerings and expense ratios, but it’s nice to know that you do have options. 🙂

    • jlcollinsnh says

      Great points, FG!

      …and thanks for naming the specific funds. Hopefully Joe’s 401k will offer those options.

      Fidelity does a fine job with their index funds and, by most accounts, provides excellent service.

      My only caution, as you also point out, is they make the big money on the actively managed stuff and are highly motivated to see investors switch to those.

    • Joe says

      So it appears it is actually a Fidelity Netbenefits account which means I don’t have the full range of investment options? I see all Blackrock other than a company stock.

      Here is a better idea of what is offered and what my holdings are (denoted by check): just realized I cut off the columns.. they are Name, Asset Class, Category, 1 year, 3 year, 5 year, 10 year/LOF, Returns as of

      I could roll it into the Target date funds, but it seems my picks are kicking the target funds butts.


      • Frankie's Girl says

        If it’s definitely an old 401K, then you have the option to convert it to an IRA and then you’re wide open as far as investment choices.

        There are some caveats to rolling it to an IRA like:

        After you reach age 70½, you’re required to take minimum required distributions from an IRA (except for a Roth IRA) every year even if you are still working. If you plan to work after age 70½, rolling over into a new employer’s workplace plan may allow you to defer taking distributions.

        If you need extra protection from creditors outside bankruptcy, federal law offers more protection for assets in workplace retirement plans than in IRAs. However, some states do offer the same or similar protection for IRAs too.

        Which might not even apply to you, but definitely do some research and see what the experts (of which I am NOT one) say about whether a rollover IRA is a good fit for you.

        • KCN says

          The only exception to the RMD at 70.5 is Roth IRA. All other tax-deferred retirement accounts must subject this IRS rule, including the rollover amount in your employer’s plans (401k, 457 or 403b plan).

      • jlcollinsnh says

        Looking at those links, I see an option called
        Blackrock Total Market Equity Index. That sounds like what I would recommend.

        Unfortunately, I can’t see the expense ratio (ER). ER is critical in making your decision. Performance comes and goes, but expenses are forever!

        • Joe says

          The BLKRCK TOT US EQ IDX
          Exp Ratio (Gross)

          Exp Ratio (Gross)

          Exp Ratio (Gross)

          • jlcollinsnh says

            Very nice, low ERs!

            I’d go with:

            The BLKRCK TOT US EQ IDX
            Exp Ratio (Gross)

            For the inclusion of mid & small caps.

      • Joe says

        Hey! I work for a Technology firm as a Product Manager (

        Regarding the savings rate, thanks 🙂 I’ve tried to avoid lifestyle inflation as much as possible in hopes that it will pay off sooner rather than later. In general, I believe it has as it allowed me to leave jobs I didn’t love and pursue opportunities, including my current one. I was able to triple my income in the past 4 years by leaving jobs I didn’t love, having the cojones to ask for what I thought I was worth (with no regret as I had an emergency fund and a side hustle I could rely on), etc.

        • Mrs EconoWiser says

          Awesome! My husband works for a huge technology company as well. I married a really smart guy who also happens to be the sweetest, yay! He started as a software engineer, he’s now a software architect and he’s on his way to becoming a system architect. For Dutch standards he earns a shitload. However, salaries in the USA are much higher. He was once invited to go to silicon valley and was offered a job there. We actually went there together to check things out. That was when he was still a software engineer and he would make about 150.000 dollars a year.
          I, however, was not able to see any opportunities for my career and I didn’t want to become a stay at home lady. So we decided against the move.
          I can imagine that with his current and future position he would earn along the lines you’re describing. So cool!
          Again, for Dutch standards his in the top region, but the Dutch are more conservative when it comes to salaries. Compared to his study buddies he’s also the top earner. In some cases he even earns twice as much!
          I’m at the top of what I can earn. I’m in education and at the top of my teacher’s salary scale. On the one hand that’s rather unfortunate, on the other hand due to good bartering in the past I now earn a lot more compared to colleagues who are my age. So I’m not complaining. I also own a side business. In total, that conjures up a very nice salary as well.
          So your story is an eye opener for us. We should be able to make do with a lot less cash and build up that ‘stash even faster!
          Again, well done Joe!!! And thanks Uncle Jim for sharing his story and your vision on his case.

    • jlcollinsnh says


      I kept thinking this too!

      It is very impressive for a young guy like Joe to start making serious money and not fall prey to lifestyle inflation.

    • Joe says

      Thanks a lot Krissie, I mentioned in an above comment that I’ve tried to avoid lifestyle inflation and used that as a way to enable myself to advance in my career.

  3. Insourcelife says

    Joe, you can do pretty much whatever the hell you want with such a high savings rate! Your idea of moving closer to work does sound good though, just remember that landlording is not for everyone. Usually to make the amount of money you are making at your day job one has to work a lot and you might not like the added responsibility of managing a property. We have a condo that we rent out and even that sometimes is a pain. Congratulations on getting yourself in the beginning of a very short runway to FI!

  4. Mark A. says

    “Soon enough you’ll find your investments are producing the 36k you are spending. When that happens, live on that and invest your full income. Your investments will then really explode, as will the income they can provide. ”

    Jim, Joe has a fair amount of his investments in tax-advantaged accounts so if he transitions asap to FI as you advise, probably when his portfolio hits about $900k total, he’d need to pay 10% penalties and income taxes on his (4% or so) withdrawals from those. Is that a better way to go than continuing to take living needs from his already-taxed salary? I can see how his investments would explode but his taxes and penalties would also go up as long as he works, wouldn’t they? I haven’t done the math for those kinds of scenarios and would like to be lazy and learn from your own number crunching here because that sort of preliminary transition to FI while still working is an appealing concept to me too. Congrats Joe and thanks for sharing your case study.

    • jlcollinsnh says

      Hi Mark…

      Since Joe never mentioned early retirement as a goal, I wrote my response without much considering it.

      But the main reason I am unconcerned is that his non-tax advantaged accounts will quickly grow well beyond the 401k and Roth. Both those have capped annual contribution limits that Joe will easily hit. And then he’ll still have thousands more each month to invest.

      Should he decide to step away early, he will have more than enough in his taxable accounts not to have to withdraw or pay penalties on any of the tax advantaged stuff.

      But that’s Joe. Your question still holds for folks with lower salaries and for whom IRA and 401k investing absorbs the bulk of their savings.

      For some ideas on that, check out the links I provided in article to the Mad Fientist posts. He’s crafted some very interesting strategies. 🙂

  5. Kevin L says

    “Soon enough you’ll find your investments are producing the 36k you are spending. When that happens, live on that and invest your full income.”

    I am getting close enough to the point that my investments are producing what I am spending; I am about $2k away if I understand how to calculate this correctly. It should be less than half a year to close the gap.

    With that in mind, I am wondering how, in practice, I live on the investments. They are in Vanguard index funds, but almost half of it is in a traditional IRA with another fraction in a Roth IRA, some in the 403b, and another small amount in an HRA. I have only ~$100k in taxable accounts that are easily accessible. It seems easier to keep living on a percentage of my income than trying to live off the investments.

    How do I live off an investment mix like this while contributing 100% of my income to investments? I would like to keep contributing the max allowable to the tax sheltered accounts. That is over $52k per year: $17.5k to my 403b, $17.5k to wife’s 403b, $5.5k to my IRA, $5.5k to wife’s IRA, over $6k to the HRA. After that, it seems easiest to live off of a portion of the remaining income rather than investing that while trying to figure out how to pull money out of previous investments for living expenses.

    Another thing, I want to make sure I am calculating correctly the point at which my investments are producing what I am spending. My family expenses are about $30k a year which is right about 30% of my family income. My net worth is ~$650k of which ~$250k is tied up with the house in which I live. That leaves ~$400k in investments. My understanding is that in the long-term I can guess VTSAX will provide 7% return; that is ~$28k a year. Am I doing the correct calculation to determine the point at which my investments are producing what I am spending?

    • David W says

      Someone correct me if I’m wrong, but I think the idea of “live off your investments and invest your whole income” is more just a way of looking at the big picture in a different way. Say your income is 100k, living expenses are 40k/yr and that’s exactly what your investments generate. Taxes aside, there would be no difference from living off 40k from investments and investing 100k and leaving the investments alone, living off 40k of your income, and investing the other 60k. Still 100k going into investments per year.

      I doubt Jim would suggest anyone withdraw money from investment accounts and put it back in from your paycheck since it would likely trigger taxes, and even if it didn’t trigger taxes what would be the point of shuffling it around that way.

    • jlcollinsnh says

      Welcome Kevin…

      Great questions and I really need to do a post on this. They keep reoccurring in the comments on various posts. One of the more recent is here:
      Check out my conversation with Darrel in the comments.

      That, and David’s very clear explanation here of what is really just a useful mental concept should answer most of your questions.

      But let’s look at your last question about how much spending your investments can support. For more on that, you’ll want to read the linked article above very carefully.

      While it is true that the stock market, and VTSAX, by extension should fairly easily return 7% a year (actually historically closer to 10-11%) this is NOT he number you want to use as your withdrawal rate.

      The problem is, getting to that average annual return is a very wild ride. Stocks can and do go thru years of lower and even negative returns. Asking a portfolio to provide a withdrawal rate based on the averages during these down periods is a death sentence for it.

      As you’ll see in that post, 4% is a good rule of thumb. Given your 400K, that yields 16k per year.

      Personally, I’m currently pulling about 5.5% a year on my portfolio. But that is with a strong rising market at my back. If that turns, I have my spending cut plans already in place. Flexibility is key.

      Hope this helps?

      • Kevin L says

        Thanks for the reply Jim. I didn’t realize that the 4% value was relevant prior to ER. I knew that I wouldn’t stop working until I had at least 25 times my living expenses, but I was incorrectly interpreting the amount of money your investments make in this context as the total amount of money I would expect instead of the expected amount less inflation (which is how it is calculated for the 4% rule). I am glad I asked and got that clarification. Thanks.

        I am not planning on retiring anytime soon anyway. I have only been in the full-time workforce for a little over 14 years and just turned 35. Even when I do exit the mandatory full-time work phase of life I still plan on earning at least enough to cover my expenses so I will actually be withdrawing 0% until I get to a more traditional retirement age. My current job is not something I am in a hurry to leave so I likely will stay with it for some time after FI.

        Eventually, I plan to start a small catering operation when I leave my current job; I do not want to have to worry about saving further for retirement at that point. My wife’s part time job contributes ~$18k per year plus she has nice insurance benefits. My income through the catering operation and side hustles will only need to be $12k per year. To me, that is easily doable. The amount the catering operation earns will determine the amount of energy I put into various the side hustles (computer repair, lawn mowing, driveway shovelling, etc…).

        I was not talking about pulling out 7% on the 400k. That would be a crazy talk. I was just thinking of how much I could anticipate that money earning. Also, I wasn’t quite sure if I should have been considering the value of the house. It sounds like I was correct in excluding that from anticipated investment returns. When the kids are off to college I plan to sell the house for something a couple thousand square feet smaller (current house is 4160 square feet) and I expect that to net around $100k plus lower my living expenses further, but I didn’t want to factor that in since it is not available currently.

        I think that I will be able to leave my full-time job in about 4 years and live off of other revenue streams including the wife’s part time job. I should have 25 times my living expenses saved up by that time. I might even work full-time an extra year or two longer too and inflate the lifestyle slightly. Some 20 years later, I would be looking to start withdrawing money according to the 4% rule or whatever SWR makes sense at that time.

        Thanks for the guidance. I do not yet understand everything you have shared completely, but I have absorbed enough of your guidance to feel comfortable I am heading in the right direction. You might shake your fist at me for planning to drop my savings rate below 50% in the future, but I think it will be okay.

        If you see a serious flaw to dropping my savings rate to 0% while also maintaining a withdrawal rate of 0% after I get to savings of 25 times my expenses, let me know. Realistically, I will still save some percentage even then. I have always been kind of a compulsive saver and don’t think I have it in me to spend 100% of what I earn.

        • jlcollinsnh says

          Hey Kevin…

          It sounds to me like you understand the principles here just fine and you’ll get no fist shaking from me! 🙂

          In fact I love your plan and think it very sound.

          Once a person has 25x their annual expenses invested, a job is purely optional.

          If you get there and then work just enough to cover expenses while leaving your portfolio alone to grow you really should be golden!

          Figuratively and materially! 😉

          • FloridaStache says

            I’ve wondered this too on the 25x annual spending rule for ER- does that mean 25X annual spending saved in TAXABLE accounts (thus avoiding penalties for early withdrawal) or 25X annual spending saved across BOTH taxable AND non-taxable accounts?

            I’ve been looking for a post on the specific mechanics of transitioning to ER based on this rule and haven’t seen one that answers all my questions- I hope you do one soon!

          • jlcollinsnh says

            Hi FS…

            25x is a rule of thumb that reflects the 4% rule. Since these are just guidelines typically they include all investments.

            My guess is the thinking is that taxes in retirement will be low enough not to be a major factor.

            Of course for your personal calculations you are free to set your own parameters.

            As for my post on this, I too hope it will answer all your questions.


            What were they again? 😉

          • FloridaStache says

            Let me try to articulate my question better. Whenever I hear of the 4% withdrawal/25x spending rule, I have a hard time applying that to early retirement (i.e. before penalty-free withdrawals of IRA/401(k) savings. FIRECALC, for example, asks how much you have in your “portfolio” but doesn’t seem to differentiate between penalty-free portfolio savings in taxable accounts vs. what one has in tax-free accounts that aren’t accessible until age 59.5.

            So my question is, how do I apply that 25x spending rule as an early retiree? Assuming I don’t want to touch my tax-free savings (and assume for the moment that I’m not doing any SEPP or Roth conversions) until age 59.5, how much would I need to have saved in taxable accounts today (age 36) until 59.5, and then how much more would I need from, say, age 59.5 to 95?

          • jlcollinsnh says

            That exactly the kind of question I hope to address in the upcoming post I mentioned.

            What makes is tough is the answer for a specific situation is dependent on a wide range of variables: Savings rate, income while working, balance between tax advantaged and ordinary accounts at retirement. But basically, what you’d do is:

            1. Consider your total stash in calculating the dollar amount 4% will allow for.
            2. Be prepared to be flexible in your spending as the years go by. Spend a bit more when the market is rising, less when it is correcting.
            3. Draw the money first from your taxable account, letting the tax-advantaged accounts grow unmolested.
            4. Keep your bonds and REITs in the tax managed accounts and rebalance to maintain your asset allocation. Depending on the balance you have, this might mean holding some REITs and bonds in the ordinary account to maintain the allocation.
            5. If your taxable account runs dry in this process, look to techniques described to begin shifting money from the tax advantaged accounts without penalty. If you’ve been drawing at the 4% pace and adjusting spending down during bear markets, you should have plenty in these accounts by the time this happens.
            6. Be open to income producing opportunities even in retirement. Many if not most people find that once full-time work is no longer distracting them, their passions lead to money making opportunities. Of course for those who retire to the couch to watch TV this won’t happen. But neither will living to 95 in most cases.

            Hope this helps.

          • FloridaStache says


            Thanks- your answer was just what I was looking for. And hey, looks like you’ve written the outline for that future post already!

  6. Lucas says

    So i guess the ROTH backdoor is fine, but i would definitely have him max how his 401k vs ROTH 401k. just throwing away tax savings right now. Not really going to hurt him much either way at this point though, but it does depend on future plans.

    Looks like he wants to keep expenses low and “retire early” in which case if he contributed to the regular 401k he could easily setup a SEPP withdraw on 2-3% of the balance as soon as his income drooped and pay almost nothing in taxes on the withdraws. Or he can work on converting to a ROTH at that point. anyway, just my 2 cents.

    • jlcollinsnh says

      Welcome Lucas…

      Actually, with $728 a month going into his 401k and his Roth 401k his annual 401k total comes to $17,472, just shy of the 17.5k ceiling. I missed that too in my first read thru. 😉

      Interesting point on the SEPP.

      With what Joe will have in his regular accounts he won’t need to tap his tax-advantaged ones at all. But for other readers this could be useful.

      SEPP = Substantially Equal Periodic Payments. It is a way for people to access tax-advantaged accounts penalty free before 59.5. You still have to pay taxes on the money as it comes out, just like after 59.5, and once you set it up you are locked in. So like most strategies, understand it and use with caution. For more:

        • jlcollinsnh says

          Just re-read it and you are absolutely right. I missed it. Sorry Lucas!

          And it is a fine idea. It will give you an additional tax break and with your bracket that is a very good thing!

        • Rob Bertram says

          Hi, Joe!

          I believe that Lucas is suggesting that you should focus on your Traditional 401k for a few reasons. First, contributing to a Traditional 401k reduces your adjusted gross income which is what is used to find your tax bracket. It looks like your annual income is somewhere between $189,600 – 200,400. If you contribute $17,500 into your Traditional 401k, this would put your AGI around $172100 – 182,900.

          The threshold between the 28% tax bracket and 33% tax bracket is $183,250. So you can save 5% in taxes. In addition, you have more money in your pocket on taxes that you would have paid had the money gone into a Roth which you can then put into a regular investment account.

          Second, the main reason for contributing to a Roth is that you pay taxes now so that you don’t have to pay later. It works out in your favor when taxes now are lower than taxes later which could still be true. It really depends on how much you plan on making when you retire. At your savings rate, that could be well above what you’re making now.

  7. Brad says


    This is a very interesting case study and I think Joe deserves a big round of applause for being only 27 and a) making that much money b) only spending 18% of his income!

    That said, my question is the same as yours in item #2: Where is the additional $7,499 going? Clearly taxes has to account for some of this, but where is the additional few thousand a month going?

    He can really stockpile money at this savings rate, and should be well on his way to “F-you Money” in short order. He’ll just need to determine when/if he wants to retire early and that will certainly impact the type of account he puts his money into I’d think.

    As an aside, I want to tell you how much I enjoy your site! I just came across it a few weeks ago and it has already changed my life. I just opened and funded my first Vanguard account and I’m now halfway through my 2nd John Bogle book. I love the simplicity and the superior math of your investment series and I plan on referring to it quite often on my site.

    Hope to see you in Ecuador next year!

    • Joe says


      About $5,700 to fed + state + city taxes based on past paychecks. That leaves approximately $300 for miscellaneous smaller expenses that I didn’t outline above and $1,500 going to my savings each month.


      • Brad says


        That makes a lot of sense — thanks for the clarification!

        You are ahead of 99%+ of non-trust fund babies, so you should be really proud of yourself.

        If you can keep doing this for a number of years you know for a fact you’ll be set for life. Now you really need to determine what kind of life you want it to be and how soon you want to transition into that life (if ever. Maybe you love your job).

        If you don’t already, I suggest you read Mr. Money Mustache for some inspiration..


    • jlcollinsnh says

      Thanks Brad…

      I very glad you found your way here and it resonates with you!

      BTW, looks like a cool site you have going yourself.

      It would be great meeting you, especially in Ecuador!

      But meanwhile, I’ll be going to FinCon next month. You?

      • Brad says

        Thanks for checking out my site — I greatly appreciate it! I’m still very new to the publishing world, but I’m trying to provide some valuable content where possible…

        I honestly didn’t know about FinCon until very recently and I just can’t make it. It would be fun to meet you and others such as Mr. 1500 who I’ve corresponded with and seems like a great guy (I know he comments here a bunch so you’re familiar with him…)

  8. Jake @ Ca$h Funny says

    Jim, this is an awesome case study. I really liked the depth you went into and the advice is great for me to hear about. As for the emailer, saving over 80% of any income is fabulous. I hope to one day be in a similar spot, but I won’t be making $200k for quite a while probably. Thanks for the interesting read.

  9. Krissie says

    I still think this “joe” is a mythicial creature. I’m curious to know if he lives in a big city. I assume so because you can’t get such a high paying job otherwise. How has he not succumbed to the pressure of getting the latest and greatest car? Especially at his age. It takes YEARS before you realize you never can keep up with The Jones’. Did he grow up “privileged”? I assume he had parents that taught him well.
    Anyways, I have a very basic question and i’m sure there is some better way of posing questions but…what exactly IS a money market account and why and when do you put your money in them? Sorry, I know this is probably one of those stupid questions (event though there are no stupid questions). I asked a friend of mine last night who is an ATTORNEY with a minor in ACCOUNTING and she couldn’t explain it to me. I know I put $ in one (with Vanguard) and then transferred it to VTSMX. What I have found by playing the dumb blond is that people act like they know what you or someone else is talking about but really don’t. They seem to be afraid to ask questions for fear of looking stupid (as I had done for years). I discovered when I asked my husband (who is the highly educated and payed one) “do you know the difference between an FSA and an HSA”, or ” do you know what an annuity IS”? Those two I could answer, blond hair and all 🙂

    • Joe says

      Hey Krissie –

      Not so mythical!

      I graduated from a state university that is Top 50, maybe, but nothing too special. I do live in a big city in the North East, and have received similar job offers in other large cities on the West Coast, East Coast, and internationally.

      Regarding car, I’ve never liked driving. I really hate driving, actually. I bought a new car for $15k cash and maybe put 8k miles on it per year, if I’m driving a lot. I typically ask my g/f to drive because I hate driving so much! I regret spending $15k on the car considering I either bike or take the bus to work every day. Every now and then I see a Jaguar F-type or Tesla S and drool a little bit, but then I realize it doesn’t make sense for my lifestyle or my goals.

      Regarding privilege, my parents both were high school graduates and nothing more. They weren’t dumb, but they aren’t the most intelligent, either. They commonly worked 80 hour weeks doing pretty basic stuff and traveled a lot for work, leaving me and my sisters with our grandmother. They eventually, in their later years, broke $100k as a couple. However, that doesn’t really matter because they constantly have to buy gifts for people as that is how they show affection. They also have a pretty bad gambling addiction. Now, not that my life was bad, it was quite good. But they didn’t really teach me any financial lessons. Luckily, my dad helped me open my first bank account when I was 16 and got me a credit card tied to that. My interest in financials went further back, though. I was the kid who tried to sell lemonade door to door. Or who would see it snow and get excited at the prospect of shoveling peoples driveways for money. I at one point enlisted my friends help and became the “canvaser” that lined up driveways for us to shovel for the following 6 hours!

      I went on to pay my own way through school using grants / scholarships / jobs. UPS, for example, will give students tuition reimbursement for working in their package hubs! And, after a while, if you show initiative, you can make ~$18/hr @ 25 hours per week as a part time supervisor. I also had a little side hustle I did around then that made decent money.

      But all in all, I just have always had a desire to succeed. Sometimes I think my fear of failure is stronger than my desire to succeed, but now we’re getting philosophical. 🙂

    • jlcollinsnh says

      Hi Krissie..

      When I hit the publish button it occured to me that Joe’s senario was such that people might think I had created him. So I am very glad you are responding to some of the comments, Joe! 🙂

      OK, Money Market Funds.

      These were created around 1971 and like all mutual funds they collect money from multiple investors, like us, and use it to buy assets: In this case very short term treasury notes and commercial paper. Think bonds.

      The fund I mentioned in the post VMMXX, for instance, holds paper with an average maturity of only 59 days. This dramatically reduces their volatility when interest rates change.

      If you click here:
      you can see a profile of exactly what it currently holds.

      The idea was that you could park cash in them with little or no chance of losing principle and earn a better interest rate than a CD or savings account. For years this was the case.

      But, unlike bank accounts, they are not guaranteed by the FDIC.

      Now with interest rates so low the difference is tiny and many times the banks actually pay more.

      I still use VMMXX to hold my cash but mostly for the convenience of moving it around my Vanguard investments.

      For more, this is a pretty good explanation:

      Make sense?

      OK, now your turn! 🙂
      Let’s hear your answer to: ““do you know the difference between an FSA and an HSA”, or ” do you know what an annuity IS”?

      • Krissie says

        AHHHH, so after reading your explanation and wikipedia it seems to me a money market account is somewhat of a cross between a saving account and a mutual fund ????
        As for my turn… I would say an FSA is something you have to use or lose (that you contribute to) within a year and you don’t want it. An HSA, which I learned about through The Amazing Mad Fientist, is something you DO want. If you have a high deductible health plan you can put up to $3200 a year in an HSA (one that uses Vanguard funds preferably) to offset your yearly health care related expenses should you need it. If you don’t, that money rolls over and can accrue interest. Lots of it. And, if you are lucky enough to have had good health for many years and not need to dip into it, you can start withdrawing from it at retirement (62?) like a traditional IRA. You could also pay your health expenses out of pocket (after tax) during this time and then borrow from yourself down the line should you need to. Even if it is something other than health related assuming of course you had health related expenses previously that you had already paid. Everyone should read The Amazing Mad Fientist post on it AND listen to his amazingly awesome podcasts because he explains things so much better than I do. (remember, I am blond or is it blonde? anyways…) Lastly, an annuity is something most people probably don’t want either unless you have no heirs and expect to live a very long life and are worried about having enough money. Basically, you purchase it in a lump sum and it guarantees you x amount in payouts for as long as you live. It can start at any length after you purchase it. Meaning it may start 12 months from the day you purchase or whatever deal you make with them. And THEM are always on the winning end. So, lets say you purchase a $250,000 annuity at age 65 and it is to pay you $10,000/year for as long as you live ( yes, I pulled those numbers out of my arse, I have no idea what the payout schedule is), but you die at age 70. The annuity company gets your remaining $200,000. I don’t know about you but I have a long list of deserving charities I would much rather see benefit.

        • jlcollinsnh says


          That’s a great and succinct definition of a MM fund! A mutual fund that serves as a savings account.

          As for the rest, let’s see if The Amazing Mad Fientist himself chimes in….

        • Mad Fientist says

          Krissie, you are too kind! I must say though, I really like the sound of “The Amazing Mad Fientist”. Jim, I hope that is how you will continue to address me in the future…especially when we get together in person next month 😉

          Nice work on Jim’s pop quiz, Krissie. You definitely have a good handle on all of that stuff so I’d say you passed with flying colors!

          • Krissie says

            Thanks! Everything I know I learned from you 2 and MMM. I’m sure Lord Jim Collins will continue to address you as The Amazing Mad Fientist. Keep up the good work in helping all us little people!

          • jlcollinsnh says


            Just as soon as he starts calling me “Lord Collins!”

            If I ever start a cult Krissie, there will be a High Priestess role for you! 😉

        • Kevin L says

          “Meaning it may start 12 months from the day you purchase or whatever deal you make with them. And THEM are always on the winning end.”

          My understanding is that “THEM” on average comes out on the winning end. That is a pretty big difference. There are cases where individuals live long lives and beat what they would have gotten if withdrawing that same amount from a total stock market fund. In particular, this is true when they start just before a big downturn of the market.

          If my understanding is wrong, I would love to learn.

          • Krissie says

            Kevin, you are right. There are instances where “THEM” do not come out ahead. I have no personal knowledge of what those statistics are. But, as we all know, you can’t time the market and know when the downturn will happen. And if someone could time the market (like our good friend Mr. Buffet), they probably wouldn’t need an annuity because they would be incredibly wealthy!

  10. Charles says

    I’m glad you didn’t give Joe the usual advice of dividend stocks and converting his 401K to a roth which is foolish in his tax bracket. the onloy caveat I would recommend is due to Joe’s age he should focus on Vanguard’s Mid Cap and Small Cap to balance out the Total Stock Market Index. I know those companies are in that index but at a young age you need growth. People make a big deal about the stock market making an all time high this year, that was the S&P 500. Mid caps exceeded their highs two years ago. What’s harder to increase 20% a $15 billion dollar company or Microsoft at $250 billion.
    Make sure you get a good accountant. They’re worth their weight in gold in finding the deductions you need.

  11. Jeff says

    Thanks for the case study. The one thing that stood out for me was leaving a REIT in a taxable account. I’ve heard that because of the way that REIT dividends are taxed (much higher rate than other dividends) that they should be kept in tax deferred accounts. This could be another way to simplify and optimize Joe’s taxable Vanguard account scenario. Nice job Joe!

    Jim – thoughts?

    • jlcollinsnh says

      Hi Jeff…

      Good point. REITS are best held in tax advantaged accounts for the reason you cite. So should bonds.

      Joe had four funds in his taxable account, including REIT and bond, and my advice was to consolidate all those into VTSAX which is a tax efficient fund.

      The tax consideration you mention is one reason.

      The other is that Joe is in the Wealth building stage and doesn’t currently need REITs or bonds. When he stops working and adds those, they should go into the tax advantaged accounts. Along with his TRFs as those also hold bonds.

      • Jeff says

        Makes sense – thanks Jim. I do have one follow up. I just read a “Random Walk Down Wall Street” by Burton Malkiel. It’s a really interesting book. In the book, he recommends the following Vanguard funds for use in a taxable account due to their tax advantages:


        Any thoughts on leveraging some/all of these in a taxable account? I could see using 1-2 of these in lieu of the Bond Fund and the REIT funds along with VTSAX.

        • jlcollinsnh says

          Hi Jeff…

          While I’ve heard of that book, I confess I haven’t read it. So I have no insights into Mr. Malkiel’s thinking on this.

          Each of the three funds you list is what are called “Tax-Managed” funds in that they try to be as tax efficient as possible. The first targets mid & large cap stocks, the second is 50% in those and 50% in tax free Muni bonds and the third is large cap.

          While their expense ratios are only .12%, that’s still higher than VTSAX. Since stock index funds like that one are inherently tax efficient, I’ve never seen the need for these others.

          For someone who wanted a 50/50 stock/bond allocation and was only interested in munis, VTMFX would work fine.

          But none of these would really serve in lieu of a Bond or REIT fund in terms of income or as a hedge against deflation/inflation; which is how I use them and why I recommend them when I do.

          Make sense?

          • Jeff says

            It does make sense. I appreciate the follow up. I’m sure you’ve written on why VTSAX is inherently tax efficient. I’ll have to go back to the archives to see what I kind find ;-). I do recommend the book – especially if you have any interest in the history of the markets. Thanks again.

          • jlcollinsnh says

            Mostly it has to do with VTSAX being an index fund. Index funds don’t trade trying to beat the market creating taxable events, they simply buy and hold.

            I really should read that one of these days….

  12. Tom says

    Jim — Great analysis as usual. One thought on the 15 year mortgage. I’m a big fan of creating my own 15 year mortgage out of my 30 year mortgage. Simply match the principal on each monthly payment and you’ll pay off your loan in 1/2 the time. There are tons of spreadsheets online to help with this, including this one:

    Your monthly payment will gradually and slowly increase as you pay more towards principal and less on interest. However your income will also likely go up, making these small increases more manageable. The real advantage with this approach is the increase in flexibility. If you have a bad month or get laid off you can always revert to just making the smaller required payment.

    In my case I got so excited about watching the payoff date shorten that I started pouring tons of extra money at the mortgage. I eventually paid off the full 30 year loan in about 7 years.

    • jlcollinsnh says

      Hey Tom…

      Always nice to hear from you, and that’s a great idea. I especially like the flexibility aspect. Thanks for the spreadsheet link.

      My only caution would be that mortgage rates are typically a bit lower on the 15 year. Being cheap as I am, that gives it an edge. 😉

  13. Ross says

    Thanks for that little trick about the back door Roth IRA. I read a lot on personal finance and I haven’t seen that anywhere else. So, thanks.


  14. Justin says

    Thank you so much for the Case Study. It was very helpful to read, and I wish I would have read this much earlier.

    We had a financial advisor a couple of years ago, and he suggested that we should roll over my wife’s 403-B into a traditional IRA. We are about to make a combined income where we can no longer contribute to a roth IRA, so how sticky of mess would it be for her to do a backdoor IRA annually? How can this be done? Thank you so much for your help and the amazing blog and book!

  15. Frugal Steve says

    Hi Jim,

    I’m not sure if you’re following comments on these older articles anymore, but I chose to comment on this one because it contains one of the scenarios (item 1 in your reply to Joe) that I was hoping you might shed more wisdom on. I’ve read the entire stock series and most of your other posts, but haven’t seemed to find exactly what I’m looking for on two topics:

    1. What is the best place/method to put extra cash for the risk averse saver? My wife and I are mid 30s, have 4 young children, an OK income, no debt other than our mortgage, and a good chunk of money in Retirement accounts and HSAs. We have had a lot of volatility with my job over the past few years and due to this ended up stashing away a bunch of cash into an online savings account (About $100K in savings, monthly expenses of about $4400 not including taxes = almost 2 yrs expenses) This is obviously too much for an emergency fund, but we are having a hard time putting it into the market for the fear of losing cash that we may want to use. At the same time, watching the stock market go up at rates 5-10 times of what I can get in my online savings account is a painful process. I’m tempted to keep 3 months expenses (~$15K) in online savings and put the rest into a taxed Index fund. But, getting over my fear of taking a huge hit and then needing the money has caused a lot of analysis paralysis. Any advice to overcome those fears and not lose out on good investment opportunities?

    2. The second is do you have any suggestions for other finance blogs or articles geared toward young families with a lot of kids and not a huge income. It seems like every FI blog I’ve read is by people that either have no kids or only one or two kids. I’d love to see what others with more kids are doing (i.e. college savings, managing financial demands of a large household, and still saving as much as possible for retirement)

    Your thoughts are appreciated.

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