Case Study - Sort of unusual situation

[FI in the sky]

First time posting here, but have been lurking for awhile.  Newer to the world of MMM and other FI blogs/podcasts, but luckily I have always been a saver.  As I’m learning, what I thought were high savings rates (10-15%) are a joke compared to what actual high savings rate are.  I love reading the blog and case studies as I feel it has helped focus me on my FI path.  I may have not looked around enough yet, but I feel my situation is a little different from the majority of case studies I have read.  I work for a city government and have a great pension, 3%@50.  I earn 3% toward pension a year and it maxes at 90%.  The earliest retirement age for pension eligibility is 50 (there is no leaving earlier for a reduced rate).  Luckily, I started my career early so I will be able to retire at the full 90% right at 50.  Given the state of public pensions I don’t believe my pension will stay intact as the years pass.  That is why I want to make sure I can be FI aside from my pension.  Below are my specifics and then my question.

Life Situation: Married (wife is 37 and I’m 36), one kid (5 years old), living in California.

Salary: I made 125k (lots of overtime), wife stays home with kid and works a few hours a week and made 4k

Assets:
457b (def comp)- 28k (I was not contributing to this in any significant way for a long time, plus I used 20k from it (tax free) to purchase a year of service credit toward my pension), recently started receiving an annual 3% contribution from employer.
Roth IRA - 162k (combined for my wife and I, I max both every year)
480k whole life insurance policy - I know, I was young and naive,  I pay about 3600 a year, I’m about 10 years into it, cash value right now is 40k
CD - 132k on a 5 year CD at 2.75%, I am 1 year in and it has a one time rate bump I have not used yet, this money came from an inheritance.  We put the money into a CD before I started reading and researching about FI.  After discussing with wife our two options were put towards mortgage or CD.  We went with CD since rate was higher than our mortgage.
Cash - ~93k, which fluctuates with living expenses, I would say very conservatively at least 80k is pure savings
House - worth ~525k, I owe 202k, 2 years in to a 15 year 234k mortgage at 2.65%.  When CD matures in 4 years it will have approximately 4k more than what we will owe on the house.  Our plan is to use it to pay mortgage off.  I know it might not be the best choice due to low mortgage rate, be we love the thought of being done with the mortgage.
2 cars - both cars paid off.  Wife’s is 2010 and mine is 2002.  Since the vast majority of my career I have had a take home car I only have about 82k miles on mine.  I have a secret desire to be able to retire with my same car.
Pension - currently 16 years in at 3% (48%), pension is based on base salary which is much lower than the 125K


Liabilities: our only debt is the 202k mortgage (1574PI + 696TI=2270 payment), no cars, credit cards, student loans, or anything else


Taxes: Paid about 11k in federal taxes and less than 4k in state taxes this year.

Current expenses: I will most likely get into this in the future.  Although I feel like we are decent in this area, we DEFINITELY have areas we can cut and trim.


So until I recently started learning more about the FIRE philosophy I always believed 50 was an early retirement age.  I know it still is compared to most people.  Like I previously mentioned I have serious concerns that my pension will be reduced at some point in the future.  However, I hope it will not so I plan on working to 50 so I can max it out.  Furthermore, another big incentive for me to stay until 50 is my employer will pay a substantial part of my (including my wife) medical insurance (current retirees get about 1300 a month) until eligible for Medicare at 65.  SO FINALLY, my question is does it make sense for me to max out my 457 deferred comp and maybe stash other money in an HSA?  I feel like since I will retire with a rather high pension relative to my salary that I am not saving much on taxes.  I will be making to much to ladder any def comp money into savings or Roth IRA.  To further complicate matters, I feel I will promote within the next few years, thus bumping up my salary and pension (is it smart to defer taxes at a lower salary to pay them later at a higher one?).  I can’t wrap my head around the math if given all the above it is still beneficial to max out my 457 def comp or invest money in a taxable account.  Or something else I’m not even thinking about?  One last thing, because I pay into pension I don’t pay into and won’t receive Social Security.  Any thoughts input is appreciated.  Thanks.

[Lady SA]

I think in order to answer your question, we need to know more about your goals in retirement and afterwards. Since you pretty much have a guaranteed healthy retirement income, you need to gauge how spendy you want to be in retirement, and do you want to spend all of your money during retirement, or do you want to leave a sizable inheritance for your heirs?

If you are interested in leaving an inheritance, then I would save as much as possible now and going forward. But if you are wanting to only save enough for yourself and your wife to live off of with little left over, then perhaps another path is more optimal for your goals.

[bugbaby]

Regarding the 457, it depends on your current marginal tax rate vs future rate.

Also depends on the investment options & the fund fees in the plan.

My gut answer would be yes, save in the 457 plan because of both the tax savings and the ability to withdraw without penalty if you separate from your employer.

Sent from my KIW-L24 using Tapatalk

[MDM]

It's probably worth your time to put pencil to paper (or keyboard to spreadsheet) and estimate your marginal rate in retirement.  That should drive your traditional vs. Roth choice.

See Investment Order for general thoughts, and one approach to the estimation mentioned above.

[fuzzy math]

You do have an unusual situation! Has your wife historically worked enough (40 credits) to be eligible for SS? I'd say your biggest questions are whether you want to leave an inheritance and what your wife will do if you die first. Assuming your pension has joint survivorship and she can draw for her lifespan? Currently your options won't leave as much of an inheritance for your kid as a traditional 401k/SS situation would if the early retiree had amassed $1MM. It seems like your family has largely skipped saving due to your pension? If you are concerned about CA's solvency (which has been an issue for 10 yrs now), you really need to be saving at the same rate as everyone else here who believes SS won't be available as promised. Your retirement seems to be hinging entirely upon you working until age 50 at the same job. If you were to be fired/ laid off / job eliminated / pension turned into some other scheme / disabled, what is your fall back option? If you stopped working there at 45, would you still be eligible to draw at age 50?

I think you should definitely MAX your 457 b - there are no early withdrawal penalties for access before age 59.5 like there are for 401k/403b accounts. This would give your wife options if your pension were to cease. This will also lower your taxable income significantly.

Traditional advice is that whole life insurance is terrible. It sounds like you have only put in roughly what you would be able to get out at this point. I'd normally tell someone to withdraw that money and learn from the stupid tax, but in this case it's almost functioning as your IRA. I hope someone else here can advise you.

[Chrissy]

Yes, max the HSA and 457.

Cash out the insurance policy and take $60-$70k of your $93k cash stash to start your taxable investments.  Or heck, invest the lot!  You have access to plenty of cash:  $132k in the CD for the next 4 years, ROTH contributions, 457 if you lose your job.  You've got an out-sized cash position now, and it's getting eaten alive by inflation.  If lump-sum investing makes you nervous, dollar-cost-average your way into the market.

It makes no sense to pay off your super-low mortgage.  When the CD matures, you'll have 10 years to retirement and 9 years left on the mortgage.  If you're still feeling good about your job, let it play out.  Invest the money in taxable.