Learning how to save, sixteen years later

I like to reflect on the financial decisions I’ve made over the past year because trying to explain them, in writing, ultimately forces me to better understand the machinery involved, and often suggests additional actions I might consider taking, now or in the future.

“I’m sure you know the quote ‘Writing is nature’s way of letting you know how sloppy your thinking is’, and knowing how sloppy your thinking is allows you to sharpen it, test your arguments, and test different explanations. I find, more often than not, that I understand something much less well when I sit down to write about it than when I’m thinking about it in the shower. In fact, I find that I change my own mind on things a lot when I try to write them down. It really is a powerful tool for finding clarity in your own mind.” —Marc Brooker in Writing Is Magic

So what happened in 2022?

In broad strokes, we put our house in Fresno on the market on July 28th, we were in contract on August 4th, we closed on September 13th, and we moved to Monterey on September 28th. In the interim, we traveled to France to visit Stephanie’s family for the first time in three years. Given the deteriorating macroeconomic environment, we felt very fortunate to have sold as quickly as we did. It’s entirely plausible, had we waited any longer, that we might still own a house in Fresno today—or more likely, we would have had to settle for recouping far less than we put into it. Of the net proceeds, I used the bulk (a little over 95%) to buy shares in Schwab’s S&P 500 index fund (SWPPX), while putting the remainder in a money market fund so that we’d have a cash buffer before Stephanie received her first paycheck—as a bona fide Physical Therapist!

Speaking of, one of the maaany cool benefits of her new job is access to a 403(b) plan—the non-profit world’s version of a 401(k). Starting a new job in mid-October gave her a relatively short window in which to maximize her contribution for 2022, so she ratcheted her contribution rate up to 100%, all invested in Vanguard’s Total Stock Market index fund (VITSX). The first deferral resulted in something neither of us had ever seen: net pay of $0! She was able to funnel the last three paychecks of the year into her 403(b) before reducing her contribution rate for 2023 (so that we’ll have some money to, like, pay for things).

A nice side-effect of sheltering so much of Stephanie’s partial-year income is that it gave me some room for one last “tax-free” Roth IRA conversion. (To recap, in 2019 I rolled my former 401(k) over to my traditional IRA, and then each year over the last three years I’ve converted a portion of the balance to my Roth IRA, all of it “tax-free” thanks to the standard deduction, the Lifetime Learning Credit, and most importantly, the fact that we had no earned income during that time.) After updating my Form 1040 spreadsheet (described in last year’s annual report), I discovered that by contributing $6k to her traditional IRA this year, I could convert the remainder of my traditional IRA balance while keeping our total tax near $0. And then she could contribute $6k to my Roth IRA, which was essentially tax-free since we had no more tax to deduct. I do realize it’s kind of funny that I offset an IRA conversion with an IRA contribution. I could have left $6k “unconverted” in my traditional IRA, and then made two, essentially tax-free, $6k contributions to our Roth IRAs, but the end result, in terms of total dollars across our respective IRAs would have remained the same.

It’s worth mentioning that these IRA contributions were only possible because Stephanie made just enough taxable income before her 403(b) deferrals began (rule: you can’t contribute more than you earn) while at the same time not making too much (rule: you can deduct your IRA contribution while also covered by an employer retirement plan only if you make below a certain limit). If you haven’t cuddled up with IRS Publication 590-A, you’re really missing out. As an aside, I do cringe a little when I go back and stumble upon nuggets I’ve written like, “I will then likely convert it from a Traditional IRA into my Roth IRA (and absorb the requisite tax hit)” [emphasis added]. Ugh, it didn’t have to be that way. But that’s why I write these.

Of course all of the above refers to Federal taxes; California state taxes are a different beast, with a lower standard deduction and the treatment of long-term capital gains and dividends like ordinary income. So I did a quick back-of-the-envelope calculation to estimate our 2022 state taxes and realized we’d definitely come up short. Not wanting to go through the rigamarole of making estimated quarterly tax payments next year because we’d underwithheld this year, I made a one-time tax payment of $800 to the California Franchise Tax Board. And then hilariously, a few weeks later California sent us a debit card with $700 on it as part the Middle Class Tax Refund (MCTR). So I guess we’re “even”.

The return of earned income in our life has triggered a counterintuitive reaction. We actually feel a little tight, when you’d think we should feel flush. I suppose the lack of income over the last four years was freeing because we had no yardstick (other than the sum total of our savings) against which to measure our monthly expenses. But with Stephanie’s net income as our shiny new yardstick, we’ve started to realize that it might not stretch as far as we’d hoped (especially if she maximizes her 403(b) contribution). In the meantime, we’ll have to plug the hole with our non-retirement savings, which feels a bit like admitting that we’re living beyond our means—unless of course we’re withdrawing less than 4% per year, in which case it’s a totally viable long-term strategy.

But it’s easy to imagine how nice it would be if I found something to do that also helped plug the hole. Coincidentally, today marks the four-year anniversary of my last day of work. The question “What to do?” has been on my mind a lot lately, but more because I no longer have a house to renovate or a yard to landscape. Though buying property here would certainly occupy my time, the housing market is stuck in a stalemate of high interest rates, high prices, and low inventory. So in the meantime, you can find me casting about Monterey for things to do.

Update: Learning how to save, seventeen years later

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