Author Topic: FIREfighter trying to make a grand plan  (Read 1174 times)

FIRE_fighter

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FIREfighter trying to make a grand plan
« on: September 20, 2017, 07:32:01 PM »
Topic Title:  Trying to make a grand plan for FIRE after discovering MMM about a week ago!

Life Situation: married, 1 dependent 2 months old, United States 29 and 27 years old

Gross Salary/Wages: $55,000 + $100,000 = $155,000

Individual amounts of each Pre-tax deductions 401k profit sharing plan 3% contribution (employer’s contribution maxed out based on hours worked-not employee’s contribution amount), 457b deferred comp. $25/pay minimum amount

Other Ordinary Income: Side Gig about $1000/month after taxes (independent contractor)

Qualified Dividends & Long Term Capital Gains: an old S&P fund $25,000

Adjusted Gross Income: $9500 take home per month

Current expenses: Current monthly expenses are about $3300. That includes our $1200 mortgage and two 0% interest credit card payments spread out to be paid before we have to pay any interest on them. Once we either sell our CR-V or pay it off and pay off those 2 credit cards our monthly expenses will go down to $2300.

Assets: House value about $300-320k, 2013 CR-V value $18k with $11k on lein, 1995 Ford Ranger value about $2k

$10k in savings account

I am a firefighter and will get a pension when I retire in 20 years. The amount will depend on my end rank and a few other factors so it is too variable to estimate at this time.

Liabilities: 
Student Loan - $10,000 (6% apr)
Honda CRV- $11,400 (4% apr)
CC #1- $4,400 (0% apr until 6/2018)
CC #2- $850 (0% apr until 9/2019)

Mortgage – $160,000 (3.75% apr) year 5 of 30


Specific Question(s): 
We are considering selling the CRV and buying a used gas efficient car. We will get rid of that loan/interest and save money on fuel and car insurance. Is this a good idea or should we keep the CRV as our primary vehicle?

Should we pay off the 0% credit cards early or spread them out?

We were considering paying off the mortgage quickly after we eliminate our other debt. It would free our work situation up due to our monthly expenses decreasing by so much. We could accomplish this in about a year and a half with our current aggressive plan. After we pay the house off my wife could go PRN and have total control of her work schedule which she does not right now. She could stay at home more with the kiddo and with her flexibility we would never have to pay for childcare but still keep two incomes.

Other things we could do with the money:
-Increase my 457b deferred comp plan
-Increase her contribution to her 401k
-Start investing in a Vanguard fund
-Invest in real estate (flipping properties for rental or to sell)

SwordGuy

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Re: FIREfighter trying to make a grand plan
« Reply #1 on: September 20, 2017, 08:16:35 PM »
What would I do?

Your job should be reasonably stable.  Not clear what your spouse does - PRN? - is that nursing?  If so, so should hers.

In that case, your biggest financial derailment danger would be illness or injury.
Are you covered with sufficient STD or LTD (Short or Long Term Disability) to cover your lost income?  Possibly both lost incomes to allow for in home care by the non-injured/ill spouse? 

Your mortgage rate is pretty low, it's right on the edge of whether it's better to pay it down quickly or invest instead.

I would suggest filling up your tax-advantaged accounts first, to the max.

After that, would suggest that you invest it in stocks and bonds - mostly stocks.   That way, if you take a real hit in income for awhile you can draw down your savings as needed.   Once you have enough invested, you can always pull it out and pay off the house in one big payment, or let it ride for even more growth. 

This is actually safer than paying early on the mortgage.

Laura33

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Re: FIREfighter trying to make a grand plan
« Reply #2 on: September 20, 2017, 08:39:57 PM »
It sounds like your goals are not necessarily to FIRE at the earliest possible date, but rather to give your wife flexibility to cut way back in a few years while you finish out the 20 years.  So let's look at this another way.  Start here:  http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

If you have take-home of $9500 and can maintain expenses of $2200, you have about a 75% savings rate.  Based on this article, that says you can reach FI in about 7 years, if you were starting from zero.  Since you have almost a year's worth of expenses invested already, that brings you down to 6 years at your after-the-car-and-CCs-are-gone pace.  And that is with the mortgage, and without considering the pension. 

The caveat is that that assumes you are investing in the market, instead of using your extra income to pay off that low-rate mortgage.  So if you invest the delta every month for the next few years, that will put you more than halfway to what you need to both FIRE.  Your DW could then cut back as much as she wants, and you can just let the investments ride until your pension kicks in, at which point you will have more than enough to FIRE on.

What you are giving up by planning to pay off the mortgage is the tax deductions.  With your combined income, you are probably in the 25% bracket.  If the two of you were investing $36k per year, that $36k would reduce your AGI by that amount, meaning you would pay $9k less in taxes, every year.  In other words, you could save $36k and pay $9k toward your mortgage for the same net impact on your cash flow as just throwing $36k at the mortgage.  That is a lot of extra cash to give up in the quest to pay off the mortgage early. 

In terms of the car, it's probably better to sell, pay off the loan, and get something older with cash.  But you've probably already eaten the worst of the depreciation, and with your massive savings rate it isn't killer, as long as you drive it into the ground.  On the CCs, you are definitely right to pay them off before the due date -- but given the 0% interest, I wouldn't rush to do it sooner (you'd be better off paying the minimums and putting the payoff amount into a 1% interest savings account, where at least you will make some money off of it).

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FIRE_fighter

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Re: FIREfighter trying to make a grand plan
« Reply #3 on: September 20, 2017, 09:06:40 PM »
Yes, my wife and I both have Short and long term disability. Laura33, good tip about reducing our AGI to save that huge amount on taxes. And yes you're right I love the fire department and would only leave early if our financial situation was beyond perfect and I had something else lined up to keep me busy like one of my business ideas becoming a reality. But yes we would like to have more freedom for her work.

lhamo

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Re: FIREfighter trying to make a grand plan
« Reply #4 on: September 20, 2017, 09:18:04 PM »
You should definitely take maximum advantage of the 457b, in addition to your other retirement options.   That is another bucket you could tap without penalties prior to traditional retirement age.   

You guys are in a real sweet spot!   Just stay safe.   And thank you for your service to your community
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Kayad

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Re: FIREfighter trying to make a grand plan
« Reply #5 on: September 21, 2017, 03:48:52 AM »
Agree with others that first taking full advantage of 457 and any other tax advantaged saving options (403(b), IRA) is optimal.

Would just point out that in terms of paying down debt, take care of that 6% student loan before you put anything toward the 3.375% mortgage.

farfromfire

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Re: FIREfighter trying to make a grand plan
« Reply #6 on: September 21, 2017, 03:54:57 AM »
Qualified Dividends & Long Term Capital Gains: an old S&P fund $25,000
25k of qd+ltcg a year, or 25k of investments?

FIRE_fighter

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Re: FIREfighter trying to make a grand plan
« Reply #7 on: September 21, 2017, 06:47:24 PM »
It sounds like your goals are not necessarily to FIRE at the earliest possible date, but rather to give your wife flexibility to cut way back in a few years while you finish out the 20 years.  So let's look at this another way.  Start here:  http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

If you have take-home of $9500 and can maintain expenses of $2200, you have about a 75% savings rate.  Based on this article, that says you can reach FI in about 7 years, if you were starting from zero.  Since you have almost a year's worth of expenses invested already, that brings you down to 6 years at your after-the-car-and-CCs-are-gone pace.  And that is with the mortgage, and without considering the pension. 

The caveat is that that assumes you are investing in the market, instead of using your extra income to pay off that low-rate mortgage.  So if you invest the delta every month for the next few years, that will put you more than halfway to what you need to both FIRE.  Your DW could then cut back as much as she wants, and you can just let the investments ride until your pension kicks in, at which point you will have more than enough to FIRE on.

What you are giving up by planning to pay off the mortgage is the tax deductions.  With your combined income, you are probably in the 25% bracket.  If the two of you were investing $36k per year, that $36k would reduce your AGI by that amount, meaning you would pay $9k less in taxes, every year.  In other words, you could save $36k and pay $9k toward your mortgage for the same net impact on your cash flow as just throwing $36k at the mortgage.  That is a lot of extra cash to give up in the quest to pay off the mortgage early. 

In terms of the car, it's probably better to sell, pay off the loan, and get something older with cash.  But you've probably already eaten the worst of the depreciation, and with your massive savings rate it isn't killer, as long as you drive it into the ground.  On the CCs, you are definitely right to pay them off before the due date -- but given the 0% interest, I wouldn't rush to do it sooner (you'd be better off paying the minimums and putting the payoff amount into a 1% interest savings account, where at least you will make some money off of it).

Thank you for your response. Our question is, what dollar amount should she feel comfortable going PRN at? I think the reason we liked the idea of paying off the mortgage because it was a solid goal we could reach and then say "okay, you can work less now", but with investments, it seems a little more arbitrary as to when she could stop (at which point we would have our 2nd baby). After considering it, it does make sense to put all that money into investments instead. Anyone have any idea as to what a good goal should be, dollar amount or years? We can keep investing once she goes PRN, but the bulk of our income ($5500 per month) is her, so that would drastically decrease. We would also have to put health insurance on my plan when she goes PRN which would -$400 extra a month from my income, although by then I will have a raise that will probably offset that cost.

Our 10k is in a regular ol' savings account, not earning any interest, we built that up before having the baby as an emergency fund. We will look into putting that 10k into some low earning interest savings account.

FIRE_fighter

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Re: FIREfighter trying to make a grand plan
« Reply #8 on: September 21, 2017, 06:50:52 PM »
Agree with others that first taking full advantage of 457 and any other tax advantaged saving options (403(b), IRA) is optimal.

Would just point out that in terms of paying down debt, take care of that 6% student loan before you put anything toward the 3.375% mortgage.

So after debt paid off, I can max out my deferred comp and she will max out her 401k. And yes, we plan on knocking the student loan out with the next two paychecks! We got it down from 31k to 10k in a year, didn't realize how much more we could be doing, we were consumer suckas for sure.

FIRE_fighter

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Re: FIREfighter trying to make a grand plan
« Reply #9 on: September 21, 2017, 07:02:12 PM »
Qualified Dividends & Long Term Capital Gains: an old S&P fund $25,000
25k of qd+ltcg a year, or 25k of investments?

So that is an IRA that has a total of 25k, my wife's dad has had that for her since she was little and he has recently told her she can do with it what she wants (he was the custodian of the account and the money couldn't be touched until he was 62.5 without penalty and he is old enough now to withdraw without penalty.) It's with wells fargo so we need to schedule a meeting with the guy in charge of it so we can get all the details. It's marked as "conservative growth" and the est. annual income this year is $596. We are just now looking at all this so a little clueless in the matter, we have a LOT to learn when it comes to personal finance.

Wondering if we should keep something like this or try to put it somewhere it can make more gains?

Laura33

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Re: FIREfighter trying to make a grand plan
« Reply #10 on: September 22, 2017, 07:29:03 AM »
Our question is, what dollar amount should she feel comfortable going PRN at? I think the reason we liked the idea of paying off the mortgage because it was a solid goal we could reach and then say "okay, you can work less now", but with investments, it seems a little more arbitrary as to when she could stop (at which point we would have our 2nd baby). After considering it, it does make sense to put all that money into investments instead. Anyone have any idea as to what a good goal should be, dollar amount or years? We can keep investing once she goes PRN, but the bulk of our income ($5500 per month) is her, so that would drastically decrease. We would also have to put health insurance on my plan when she goes PRN which would -$400 extra a month from my income, although by then I will have a raise that will probably offset that cost.

I can't tell you a specific dollar amount, because there are too many unknowns (like the value of your pension), but here are some rules of thumb:

You need @25x your annual expenses in investments (i.e., not including cash/EF) in order to live forever off of your 'stache per the 4% rule.  For you, that means @$2200x12x25 (assuming expenses don't rise with kids, lifestyle inflation, etc.) = $660K.  If you want to make an estimate of your pension, you would just knock that off the annual total before you multiply by 25 -- so if your expenses are $2200 and you think you will get a pension of $1000/mo, your net expenses are $1200/mo, meaning that you would need a 'stache of $360K to fill the gap.

The other "rule" is the rule of 72, which tells you how long your money takes to double -- basically, the interest rate multiplied by the time equals 72.  So if you assume your money will make 6%, then it will take 12 years to double; at 7%, it takes 10 years; etc.

In other words, if you want to be able to FIRE in 20 years, and you think that you will have a $1K/mo pension, your "target" is $360K in 20 years.  But if you think that you will get 6% returns, that means in 8 years you need to have $180K saved, because that $180K should double by the time you hit 20 years -- without you saving another cent!

So what I would recommend is plug all of this into a spreadsheet, with your own assumptions and your own numbers.  Say you want to have another kid in 3 years:  what figure do you need to have saved by then for your 'stache to grow to $360k over the remaining 17?  Or do it the other way and plug in the amount you plan to save per month, and see how long that will take to get to the amount that will grow on its own to your target after 20 years.

Of course, once she quits, you can still continue to save off of your income alone.  :-)  But the beauty of this approach is that you don't actually need to rely on that to be FIREd by the time your pension kicks in.

Also, I would get the IRA out of WF.  Transfer it to Vanguard, throw it in VTSMX, and let it ride -- the Vanguard people will walk you through this (it's just a matter of sending forms asking for a direct transfer from one account to the next -- the only key is do NOT let WF write you a check).
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civil4life

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Re: FIREfighter trying to make a grand plan
« Reply #11 on: September 28, 2017, 11:31:33 AM »
Great Job already!

I would definitely max out your pre-tax savings before paying extra on the mortgage. 

I could understand the security of both of your incomes, but it also seems like your wife would like to be home with your kid(s).  They only will be that age once.  Also, if you have to do any sort of daycare it will really eat into your monthly expenses.

I am not sure if the nursing is confirmed, but it is a very sought after profession.  If your wife dropped to PRN now (even just until kid(s) reach school age) if you had a drastic change in your income it would probably be fairly easy for her to jump back into a full-time position.