Teacher on FIRE

[eazyebeneezer]

Teacher working towards FI

Life Situation: Married, age 40, one dependent age three, Boston area
My wife and I split all expenses and have separate finances, so the following is for myself only. Her accounts are separate and she's well ahead of me on the FI journey.

Gross Salary/Wages: 85,000 before any deductions

Individual amounts of each pre-tax deduction (2018 targets):
403b: 18,500
457b: 18,500
IRA: 5,500
Pension fund: 9,500
HSA: not available
FSA: I don't see the point (doesn't rollover)
Insurance: 1680

Other Ordinary Income: none

Qualified Dividends & Long Term Capital Gains: not significant YET

Adjusted Gross Income: 34,000

Taxes: Federal: 4,828
state: 2168

Current expenses, monthly:
Rent: 800
Car lease (face-punches galore): 145 (split w partner)
Car insurance: 116
Food/groceries: 400
utilities, internet, phone: 400
everything else: 139

TOTAL EXPENSES: 2000/month 24,000/year

Expected ER expenses: same or less, depending on geographic arbitrage. If rent increases we will cut expenses elsewhere.

Assets:
cash: 15k
403b: 2k
457b: 6K
ROTH IRA: 24k
Trad IRA: 5.5k
Betterment Taxable account: 2k
Teacher pension account: 70k

Net Worth: 124.5k

Liabilities:
zero debts except car lease (145/month) done 9/2019

Specific Questions: Assuming I follow the investment order recommended here and on the Bogleheads forum, any money leftover after maxing out pre-tax contributions will be thrown into my Betterment taxable account. I am aiming for FIRE in 2022, at age 45. By 2022 I will have reached the top of my payscale (~100k/year) for three consecutive years, and that means at age 65 I can collect a pension of 35k per year, assuming I don't work any years between ages 45-65 (unlikely). That means I just need sufficient funds to cover expenses from age 45-65. The 4% formula does not apply to my situation because of the pension. It will be nice to have a supplement, though, since 35k is modest for this area. I will likely keep working part time to leave the nest egg time to grow. Does my plan seem sound??? Any other investing ideas? I have an aversion to real estate and the prices are insane in this area. Wife is French so we may move to France after FI. Cost of living is probably 50% lower than Boston. Also open to living in South America or Asia for extended time. Long live MMM!

[Freedomin5]

How much will you have in your taxable account by age 45 when you plan to retire? When do you start getting your pension? When can you start withdrawing from your other retirement accounts? How much of a supplement do you want to go with your pension?

Goldielocks posted about a stages and “buckets” approach to figuring how much stash you need. The idea is to divide your ER years into stages and figure out the present value of the amount that you need for each stage. Then add it all together and that will tell you how much stash you need at 45 when you retire. Obviously, you’ll have to adapt the numbers to your situation but they do a good job laying out an example. I’d use this approach to check your plan to make sure it’s sound.  Here’s the post:

The following method for calculating your stash requirements, posted by goldielocks, didn't seem to get the attention that (I thought) it deserved. It suggests that by being more specific about how much income you need/want and for how long, during the different stages of your retirement, your FIRE number may be reduced.

Doing the calculation, my FIRE number is down almost 20%! and I was being extra conservative. Thank you goldielocks for the step-by-step and the excel function :)

I definitely consider decreased spending as I age, risks strategy, and government income when I think of the 4% rule.  I also consider 4% as the rule if you want your money to only last 30 years, 40 years with income fluctuation..

I break down my FIRE like this; 

Phase 1 -- kids living at home  (maybe until the youngest is 20) -- 4% rule does not apply,  need to save up cash to fully fund this phase, on-going temporary contract / work part time is likely needed to ensure ramping up employment on 6 month notice is possible..  Expect cost surprises x 4 persons risk factors.

Phase 2 -- Age 50ish to 60 ish...  No gov't pension.   -- Again, savings strategy does not comply to 4% rule, rather a combo of anticipating DH's modest income and living off savings.    Ability to sell nearly paid for home and downsize in a tremendous down market if choose not to re-income ourselves.  OR - rent out rooms, etc.

Phase 3 -- Age 60 ish to 75is-- gov't income, home paid off, less costs.  SWR of 4% rule applies.  More travel in good years, less spend in bad years.    Need to asset allocate to have at least 3 years in fixed income or cash like accounts to smooth out downfall, especially at start.

Phase 4 - Age 75ish up -- 4% SWR applies.  less spending overall.  Gov't pension sufficient to carry us through if market totally tanks....extra money, if any, spent lavishly on family vacations with grandkids.

Each phase has a different spend / savings number...  I have accomplished my savings needed for phase 2. 3. 4. and working on 1 right now.

The one more year challenge, for me, is DH who sees us finally entering our "Golden Years of Spending"...  (don't get me started.....)

I am not near FI yet and my DH does not really want to FIRE; he wants to work until at least 55 (and maybe more). I like your phased approach Goldielocks. I think I need a plan like this because our situation is similarly complex (and we had kids late so by the time our youngest is 20, we will be 57 and 60, and hopefully long retired). Can you provide some examples of how you do the math for this? Even if it's with fake numbers, it would be super helpful for me.

This is how I approach it:

I work from Phase 4 backward, because I will have few options in Phase 4, other than living on less.  So, I want to secure the farthest out retirement portions first.  The magic of compound interest also means that Phase 4 and then Phase 3, are pretty easy to fund, if you get started when you are in your early 20's.

Phase 4 --

If my government benefits of CPP and OAS will provide my husband and I up to $22k per year, we will want to spend another $30k per year fun money / other expenses.   This is pretty generous for 75 yr to 95 yr, but could afford some nice private nursing supplement or respite caregiving.

At a 4% SWR, need to have $30k/0.04 =$750,000 at the start of Phase 4, or Age 75.  That is 32 years from now. 
What amount of money do I need saved today in 2015 to have $750k at the age of 75?

Using my favorite, Excel.    Present Value Function.  I use 5% interest rate, which is IN ADDITION to inflation / year assumption of 3%.  e.g., I assume 8% total return rate, but I want to use current dollars to estimate income needed...

= PV(rate, nper, pmt, fv, beg/end)
= PV(0.05, 32, 0, -$750000,0)
PHASE 4 $ Required Today= $157,400.

Phase 3 -- Age 60 to 75  Travelling years not on a budget?
For various reasons, I have not broken this at 65, which is CPP benefits standard age, or 67, which is age for OAS. 
I want to have income of $60,000 per year, in addition to Government benefits adding up to $15,000 per year.   Very little taxes at these income rates, BTW.

Money needed to fund 15 years at $60,000, with the total invested at 4% moderate conservative asset mix, net of inflation.
How much money do I need at age 60 to fund $60,000/yr withdrawls at 4% net interest invested rate, leaving $0 at age 75 (when phase 4 kicks in?)

= PV(rate, nper, pmt, FV, beg/end)
=PV(0.04,15,-60000,0,0)
= $667,100 at age 60.

But wait -- how much do I need TODAY, to get $667,100 at age 60?   
Repeat the phase 4 calculation, with only 17 years to age 60, but the rate should be 5% average, again.

= PV(rate, nper, pmt, fv, beg/end)
= PV(0.05, 17, 0, -$667100,0)
PHASE 3 $ Required Today= $291,055

Phase 2 -- Age 50 to 60, DH working.

Desired income after tax is $75,000 per year, DH earning between $60,000 and $75,000 --> Average $55,000 after tax.  High income needed is because of mortgage.  grr.
He will probably make more, as he is just recently back in the workforce after 12 years out.  AND he therefore wants to work for a long time, as he likes his new career very much. (Robotics / Mechatronix)

Money needed to pull from savings:  $20,000 per year.
I will drop this back down to 2% interest, net, during the years of withdrawl I will asset allocate more conservatively.  You could split this into $60k as CASH buffer  and the remainder invested

Money needed at age 50, to last 10 years at 2% interest net of inflation...
=PV(0.02, 10, -$20000,0)
= $154,000

Money in today's dollars : (has 7 years to compound until age 50)... note, I am ok with more risk at 5% until I pull the trigger to use the money.
=PV(0.05, 7,-$154000,0)
PHASE 2 -- Money needed in today's dollars: =$109,754

Phase 1 -- for simplicity, a straight calculation, given short term.
We spend on expenses and cashflow (including accelerated mortgage which is principal), say $75000 per year. 

7 years x $75000 = 525000.
How much will come from employment (which is taxed?) -- Assume $50,000/yr of after tax dollars.
Required is therefore $175,000

-- Where does the  money come from :  Tax deferred or tax paid accounts?
-- Let's assume it is tax paid accounts, like a ROTH or investment account.  (I could pull from my RRSP, because I don't need to wait until 59.5...  but others can't, and I am saving the RRSP for later anyway...)
Phase 1 $ Required today-- Need $175,000 in Cash.  Prefer lower taxed investments, such as dividends, but look at asset allocation best for you.  May be GIC's or other.

Totals -- needed today, in investments,   Phase 2, and 1 need to be in taxable accounts or I need more to pay for taxes.  Phase 3/4 the income is split and lower, so taxes are minor.

Phase 4 $157,400
Phase 3 $291,055
Phase 2 $109,754
Phase 1 $175,000

Total $733, 209

Now of course, this will vary widely depending on what spend rate my DH and I agree to, and how much part time work is captured in Phase 1 and Phase 2. How much tax rates vary from now to then, etc..

Also, using a 4% SWR starting at age 75 is a bit nuts (conservative) as I don't think we will live past 105 years. DOH!   But I would rather hedge to the conservative on far out numbers that I will have very little income alternatives for.  Changing it to 6% only drops TODAY's dollars by $88k.

To that end, I did not include estate legacy of my $, nor any inheritance that we will likely get, and have left the HCOL paid off house by age 60 as a separate  pool of money to be conservative.  With the workshop we have, likely DH will not want to move until he is done with it -- age 75 perhaps?

[MrThatsDifferent]

Checkout:

http://www.millionaireeducator.com/

https://andrewhallam.com/

[eazyebeneezer]

Checkout:

http://www.millionaireeducator.com/

https://andrewhallam.com/

I have learned so much from these guys! I read Andrew's first book and it really helped crystallize my vision. I emailed Ed telling him I can't wait to read the book he's currently working on. My heroes!

[MrMathMustache]

Teacher here.  I noticed you plan on maxing out a 403b and 457b starting this year (and presumably continue through age 45?).  Since you can't withdraw from a 403b without penalty until age 59, is it possible it might be better to just take that $18500, less taxes you pay up front, and just put it in your betterment account so that you have access to that money in the intervening years?  Also, are the costs in your plans competitive?  Our choice of providers, while not terrible, are more costly than a Vanguard or Schwab, which is why I max out my 457b but only put enough in my 403b to manage my tax bracket.  Just a couple things to think about!

[eazyebeneezer]

How much will you have in your taxable account by age 45 when you plan to retire? This is the big question. I will consider this fund my extra stash, which will determine whether/how much I need to work during years 45-65.

When do you start getting your pension? I can start collecting at age 55, but I'll get the max by waiting until 65.

When can you start withdrawing from your other retirement accounts? The 403b is like a 401k, so money can be withdrawn penalty-free at age 59.5. If necessary, I'll do a Roth conversion for years 50 - 60. However, I have a magical account called a 457b. That is like a 401k except that money can be withdrawn penalty-free at any age after separating service from current employer. Cha-ching!

How much of a supplement do you want to go with your pension? This is another tough question to calculate now, because we may be living in a different country or state, and expenses should be much lower. However as perma-renters we are somewhat at the mercy of the rental market wherever we are, so it's hard to predict. A nice round number to shoot for would be an extra 15k/year, to be conservative.

Thank you for the reply and the extra information. It's very helpful to consider the different stages. I will have to revisit the math periodically, especially as we get a better idea of projected expenses when we decide where we'll be living, etc. The plan is in its nascent stage, but I'm just so excited to see that it could actually work. I will of course stay flexible and work more as needed, but even taking off a couple years to do something different feels completely liberating. Teacher burnout is for real.

[eazyebeneezer]

Teacher here.  I noticed you plan on maxing out a 403b and 457b starting this year (and presumably continue through age 45?).  Since you can't withdraw from a 403b without penalty until age 59, is it possible it might be better to just take that $18500, less taxes you pay up front, and just put it in your betterment account so that you have access to that money in the intervening years?  Also, are the costs in your plans competitive?  Our choice of providers, while not terrible, are more costly than a Vanguard or Schwab, which is why I max out my 457b but only put enough in my 403b to manage my tax bracket.  Just a couple things to think about!

Thanks for the feedback. I definitely plan to max out the tax-deferred options until age 45. And since my salary will be significantly more in school year 2019-2020, I should have plenty leftover after maxing those two to contribute to the taxable account. As I mentioned in the reply above, the 457b is a very flexible account, which I can use if needed in the years before 59.5 once I've separated from service. But hopefully the amount in the taxable account will be substantial as well. Motivation to hit that high savings rate (60-70%)!

Thankfully our costs are very competitive, once I finally did my homework and opted out of the atrocious AXA plan I had been sold in my first year. If I knew then what I know now......

[Calvawt]

Make sure you really understand how your 457 plan works.  In some cases you have to withdrawal it all in a certain timeframe or transfer it to another plan to avoid a lump sum payment. Hopefully you have already done that reading and can take distributions at your leisure.  Good luck.

[eazyebeneezer]

Great reminder. Thank you. I believe distributions can be taken at will, but I will double-check the fine print.