Valid Flight Plan?

[ZzRayZ]

So I found this site (and others like it) a few months ago and it has been a revelation. I have sort of been playing with some of these ideas in a half assed kind of way for a while. But reading here and ERE, they finally coalesced into a real plan. At least I think it is a real plan. I would really appreciate constructive criticism.

I am about to turn 34, married w/ 2 young kids and would like to FIRE in 10 years. We paid off a student loan, a 401K loan and all credit card debt. Our only debt is a 77K mortgage. We have worked to slash utility bills (ongoing). We cut out almost all stupid spending. We have a 6 month fund put back.

The Plan: (1/1/16)
Adjust my 401K to max it out. 18K + 2600 (employer base & match) into low cost Vanguard index.

Wife gets 4K put into church based pension annually automatically (optional 403b).

Add 1K principal to my monthly mortgage payment, should pay it off in 5yrs. Rate is low but we want to be debt free.

Once the mortgage is dead, the money will be invested in my wife’s 403b/Roth.

Put all remaining cash in my Roth IRA (should almost max out by year’s end).

All raises/promotions invested instantly to avoid creep.

This comes out to about 50% savings rate. I am a little unclear on how to get the exact number as some is pre-tax.

Flaws? Refinements?

[Exflyboy]

Almost exactly what I did and it took about 17 years to be FI.

10 years might be a little optimistic at 50% savings rate and it depends on what market returns you get in any case.

Other than that that generally your on the right path with the few details you provided.

Good luck!

[Another Reader]

In most cases, it makes more sense to max out your wife's 403(b) plan before paying down the mortgage.  If her investment choices are even ok, the tax deferral and compounding generally outweigh the mortgage pay down benefit.  That's especially true with a low mortgage rate.  The IRA's are also generally more beneficial than paying extra on the mortgage.

[dandarc]

Depends where you're starting from.  If from 0, a 50% savings rate = around 17 years (obviously, depends on your returns).  But if you've got a bunch of money saved already you could be much closer.  From the post, it sounds like you might be closer to 0 than your number, but without specifics, hard to know.

http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

[ZzRayZ]

Sorry,
My 401K has ~40K
Her church pension has ~32K

[ZzRayZ]

I am only including the extra 1K on the mortgage in the 50%. Some principal is naturally applied each month.
When the mortgage dies not only the 1K but the $550 regular payment will be invested upping the percent.
We each get 2-3% raises most years which will be invested (this maybe a wash with inflation).

[ZzRayZ]

Maybe I was not figuring my rate right.
 I read over the shockingly simple math post again. It says “Your savings rate, as a percentage of your take home pay”
Here’s my new math:
$1717 My 401K (me + work)
$330 Her company pension contribution
$1144 Extra principal + regular principal (gradually increasing)
$250 Roth (Currently allocated, should climb)
$3441 Total Savings (Do all of these count as savings?)

$4211 Monthly take home (Do I need to add the $1500 401K into this?)
81.7% Savings rate (Drops this to 60%)
I like this math better but does it sound right?

[Rubic]

I'm with Another Reader.  Rather than pre-pay your mortgage, invest the $1000 each month in your wife's 403b/Roth.  If that is maxed out, I'd put the difference in a taxable investment account for additional flexibility.

[ZzRayZ]

If I don't pay off the mortgage, 10 yrs later when I would like to be done working, I will still have about 17 yrs left on my mortgage. That will make the money I need to generate from investments much higher.

[BarkyardBQ]

If I don't pay off the mortgage, 10 yrs later when I would like to be done working, I will still have about 17 yrs left on my mortgage. That will make the money I need to generate from investments much higher.

1) Usually better to invest than pay off a low rate fixed interest loan
2) Don't assume you need 25 times (4%) your yearly mortgage payment in savings, the payment stays the same (eventually ending) while your assets increase.
3) Assuming your income is the same in 10 years as today, how many months would it take you to pay off your mortgage after hitting your target number.
4) Deferring your income to 401k/403b may lower your taxes more than your mortgage interest costs you.

It would cost us 10k in taxes to pay off our mortgage in 1 year vs deferring the income. 10k invested each year for 10 more years is much better than paying off the mortgage this year. In 10 years, it would take us 4-6 months to pay off the mortgage balance once we decide a FIRE date.

[dandarc]

You should add the total 401K and pension contributions when figuring your income for savings rate purposes.  Anything that is in the numerator must also be in the denominator.  I get about 55% for these numbers.  Significantly different from 80%+ in terms of time remaining.

[MDM]

If I don't pay off the mortgage, 10 yrs later when I would like to be done working, I will still have about 17 yrs left on my mortgage. That will make the money I need to generate from investments much higher.

And - assuming historical market performance - you will have a much higher investment balance with which to generate that money.  Also, the mortgage payments have a finite lifetime so they are not the same as ongoing expenses when using Trinity Study methodology.  Thus not paying off the mortgage can shorten your time to FI.  See http://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/.

See also http://forum.mrmoneymustache.com/ask-a-mustachian/calculating-savings-rate-and-other-questions/

[ZzRayZ]

You should add the total 401K and pension contributions when figuring your income for savings rate purposes.  Anything that is in the numerator must also be in the denominator.  I get about 55% for these numbers.  Significantly different from 80%+ in terms of time remaining.

I realized the 80% seemed too high.
Do I only add in the portion of 401k that I contribute? Am I correct to exclude the 5.5% company portion?
The pension is all company funded. I am right in excluding it?

[ZzRayZ]

Specifics of my mortgage:
$77,400
~27yrs left
3.625%
PMI ~$41 a month (doesn't this effectively raise my interest rate?)
The house was a foreclosure so it is worth more than I paid. I have also made major improvements. I may be able to drop PMI with a small investment in an appraisal this spring.

Is there no argument for early mortgage payoff except peace of mind?

[MDM]

Specifics of my mortgage:
$77,400
~27yrs left
3.625%
PMI ~$41 a month (doesn't this effectively raise my interest rate?)
The house was a foreclosure so it is worth more than I paid. I have also made major improvements. I may be able to drop PMI with a small investment in an appraisal this spring.

Is there no argument for early mortgage payoff except peace of mind?

Yes, PMI increases your effective interest rate.  If you are paying a fixed amount of $41/month, the first month PMI cost $41/$77400*12 = 0.64% on an annual basis.  The 360th month (if you never got rid of PMI and just paid the basic monthly amount for 30 years) would cost ~$41/$352*12 = 140% on an annual basis.  There is often a very good return for prepaying specifically to get rid of PMI.

As for paying the whole mortgage, see all the linked threads in the FAQ thread.  If you assume the post-tax market return will be higher than the post-tax mortgage interest, then as you note there is "no argument for early mortgage payoff except peace of mind."  Of course, if one assumes the market return will be worse then one can conclude mortgage payoff will be better.  You pays your money and you takes your chances....

[dandarc]

You should add the total 401K and pension contributions when figuring your income for savings rate purposes.  Anything that is in the numerator must also be in the denominator.  I get about 55% for these numbers.  Significantly different from 80%+ in terms of time remaining.

I realized the 80% seemed too high.
Do I only add in the portion of 401k that I contribute? Am I correct to exclude the 5.5% company portion?
The pension is all company funded. I am right in excluding it?

If you include the match / pension in savings, you need to include them in "income" as well.  If you don't, your projections based on savings rate will look overly rosy, and then you'll be disappointed when it takes 20 years instead of 10 or something like that.

Keep in mind the savings rate is just a shorthand way of combining your expenses and investment for figuring the years to FI.  You could also use NPER in Excel if you know your future need (25X expected retirement annual expenses, or whatever you think your number is), rate of return (most use 4 or 5% as a real return estimate), current value of invested assets (you provided above), and expected annual savings.

[ZzRayZ]

My savings rate is ~55% then
So if I put the additional principal money into the 403b, that would shift 12k of post tax dollars into pre tax dollars, correct?

As the amount saved pre tax would be higher than the 12k post tax, my savings rate should go up, right?

How do i figure out how much pre tax to put in 403b to equal 12k post tax?

[MDM]

How do i figure out how much pre tax to put in 403b to equal 12k post tax?

Pre-tax * (1 - tax rate) = Post-tax.  If "tax rate" = 30% (federal + state&local), then

Pre-tax = $12K / (1 - 0.3) = $17,143. 

[ZzRayZ]

Are all 403b the same?
I started reading about the one my wife has access to. It sounds like you put the money in and have no control over how it is invested.
Is it really a separate account or just part of her pension program?

[arebelspy]

Are all 403b the same?
I started reading about the one my wife has access to. It sounds like you put the money in and have no control over how it is invested.
Is it really a separate account or just part of her pension program?

You should have a choice of providers and investments. It's unlikely they only have one choice. She'll need to check with her employer though to find that out.

[pbkmaine]

403(b)s can vary widely. Could you add some details?


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[ZzRayZ]

Unfortunately I have no details about the 403b as I was not even looking at it until starting this thread. I will have her get as much info from work as possible. I will post the specifics when I get them.

So I understand this, should it be very similar to a 401k in that it is an account through some investment firm?

[arebelspy]

Unfortunately I have no details about the 403b as I was not even looking at it until starting this thread. I will have her get as much info from work as possible. I will post the specifics when I get them.

So I understand this, should it be very similar to a 401k in that it is an account through some investment firm?

Correct.

[ZzRayZ]

Her retirement pdf says:
4. Savings Plan Accounts
There are two types of accounts in the Savings Plan: 403(b) Smart Account and Rollover Account.

10. Investments
The money contributed to the Savings Plan, and the earnings thereon are invested at the direction of the Board in accordance with its investment policy as implemented by Retirement Fund Management. This is done for the purpose of ensuring the future growth of the Savings Plan assets and to provide retirement income to all Participants who retire from a YMCA and receive an Annuity from the Retirement Fund. As a Participant in the Savings Plan, you do not direct how contributions to the Savings Plan are invested by the Retirement Fund.

[ZzRayZ]

All the info on her 403b says the same thing. All investment decisions are made by the board of trustees. I have no input on the types of investments. I do not even know what the expense ratios are.
It just says "a variety of vehicles, including stocks and bonds"

"As a Participant in the Retirement Plan, you do not direct how contributions to the Retirement Plan are invested by the Retirement Fund."

"17. Crediting of Interest to Your Accounts
Effective January 1, 2009, your account balance earns interest daily. The Board, in its sole discretion, sets the rate of interest that will be credited
to your accounts."

Is this still a good idea?

[MDM]

It could be a good idea.  Have to admit, however, that her situation raises red flags and brings visions of Bernie Madoff saying "trust me" to his clients. 

There are fewer protections for people in 403b plans than their 401k counterparts, but https://www.bogleheads.org/wiki/How_to_campaign_for_a_better_401%28k%29_plan might still be useful.

Again, I'm not accusing anyone of anything in particular - other than arranging a 403b in much less than transparent fashion.

[Another Reader]

This is a type of plan that is classified as a church plan.  There are two components, the retirement plan (401a), that is mandatory, and a supplemental plan, called the savings plan (403b).  The savings plan is supplemental to the retirement plan and is invested in the same portfolio.  The only choice appears to be an annuity supplement to the retirement annuity.  Details are here - click on the pdf's for the details.

https://www.yretirement.org/how-the-fund-works/savings-plan

This is as much detail about the investments as I can find on the site.

https://www.yretirement.org/how-the-fund-works/investments--performance/portfolio-table

https://www.yretirement.org/how-the-fund-works/investments--performance/how-the-fund-compares/How-the-Fund-Compares

I would spend some time researching this before I made any decisions.  Certainly I would fund IRA's for both of you if feasible.

[MDM]

This is a type of plan that is classified as a church plan.  There are two components, the retirement plan (401a), that is mandatory, and a supplemental plan, called the savings plan (403b).  The savings plan is supplemental to the retirement plan and is invested in the same portfolio.  The only choice appears to be an annuity supplement to the retirement annuity.  Details are here - click on the pdf's for the details.

https://www.yretirement.org/how-the-fund-works/savings-plan

This is as much detail about the investments as I can find on the site.

https://www.yretirement.org/how-the-fund-works/investments--performance/portfolio-table

https://www.yretirement.org/how-the-fund-works/investments--performance/how-the-fund-compares/How-the-Fund-Compares

I would spend some time researching this before I made any decisions.  Certainly I would fund IRA's for both of you if feasible.

^Good info.

Appears what the YMCA does is neither fish nor fowl when compared with defined benefit pensions and individual 403b defined contribution accounts.  Just because it is different does not make it good or bad - as AR notes you should do your own due diligence.

[ZzRayZ]

It claims "broad and index-like exposure to stocks and bonds "

"INTEREST RATES
Account balances at the Fund earn interest credits daily. Through the power of compound interest, these accounts grow steadily over time. Due to the structure of the Fund, participant retirement savings are protected from market volatility; account balances have never gone down."

So a few questions:
Is that portfolio table 'index-like' enough to function like an index fund?

Will this be able to be rolled into an IRA at early retirement like a 401k can?

We have not used the 403b yet but we are in the pension. It seems the 403b is just an extension of the pension. Does this mean reading the pension statements that we get will apply to the 403b in terms of costs and returns?