Author Topic: Young Teachers, Young Kids, How Soon to Fire?!  (Read 3159 times)

Flyingstache

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Young Teachers, Young Kids, How Soon to Fire?!
« on: August 27, 2020, 11:25:29 AM »
Hi Everyone,

I am a big fan of MMM & have been a reader for a few years now. Trying to improve my family's chances of experiencing financial independence & appreciate any insights or ideas from the experts!

Life situation - Married filing jointly. Age 29 (wife & I), 2yr old & 3 month old kiddos. Both are teachers & coaches living in Ohio.

Goals:
- Explore ways of how to achieve FIRE as quickly as possible.
- Really narrow down how to use any excess money to help reach this goal
- How to plan for retirement while also planning for more kids & future expenses that come with that
- Simplify our financial life to help us live our best life possible!

Gross Salaries:
Wife - $68k - elementary teacher in her 8th year of teaching. She has her masters degree & also does some coaching. All insurance (HSA) is deducted from her pay.
Me - $58k - middle school teacher in 3rd year of teaching. Worked in business for 4yrs prior. Recently finished masters degree.

Expenses (Monthly)
Mortgage - $1,100 which includes insurance as well & a little extra towards the principle. Also have $50 automatically deducted weekly to go towards the principle. Bought the house 2.5yrs ago for $167,500 on a 20yr loan. Currently have $100k left
Auto insurance - $80 we pay annually in full but this is monthly estimate
Utilities (trash/water/sewer) - $100
Gas - $75
Electric - $75
Food - $400
Babysitter - $800 - we get an amazing deal from a great lady. We do not have to pay anything during months where we are off school or during school breaks.
Gas (Auto) -$100
Phone - $50 (Project Google Fi)
Cable - $52 - this is for internet
YouTube TV - $70
Educators Union Dues - $162 - unfortunately this is not something we can control & is actually more expensive if we arenít in the union
Netflix/Spotify - $25
Miscellaneous - $100 (gifts/entertainment/dog care)
Total - about $3,189

Assets:
HSA - $1,359
Checking - $3,000 (used to pay bills)
Savings (Ally) - $65,786
Vanguard Traditional IRA - $39,449 (this is from my previous jobs 401k)
Vanguard Roth IRA - $26,574 (maxed out for 2019)
Vanguard Index Fund - $49,257 (VTSAX)
Cars - $10k - we own our cars outright & have a 2013 Honda CRV & 2003 Toyota Corolla
Total between Checking/Saving/Investments - $184,067

Liabilities:
Home - Owe $100k on a 15yr loan (15yrs left) at 3.25% after refinancing from 20 to 15yrs this March. House is now valued at $205k

Future Plans/Thoughts:
- We have been blessed with 2 wonderful kids. We also plan on having more children if we are lucky enough for that to occur. We think we would like 4 children.

- We know our current home is not our forever home & it likely wonít fit our needs in 5yrs. It is a 1,200 sq. ft ranch with 2 bedrooms & an office (counts as a bedroom but really can only fit a crib & changing table). The house is great for us right now but there is not room for expansion in this house & we aren't sure we could fit 3-4 kids in the house with the layout.

- Car - we will likely need to replace the Corolla in the next few years. I drive this to work & back so it doesnít have many miles added to it annually but it is getting worn down & it is tough to haul kids around in. Also trying to find the balance of how much money do we put into this car for maintenance vs buying a new one. We would like to pay cash for the next car

-Planning for college savings for our children

Specific Questions:

1)What should we cut in our expenses? Given our current state, how soon do you think we could FIRE? What do you think is a realistic amount over the next 2-3 years that we should be able to save or increase our assets to?

2)Do we have too much money in our Ally account or should we leave that there for a down payment on a house & purchasing a car? If we should reallocate this money, should we create a Roth IRA for my wife or invest it?

3)College Savings - we have heard mixed things about 529 plans & have heard from others that Roth IRAs are another good option for saving for college. Should my wife & I just use the Roth for college saving? Should we open a Roth for my wife & then also for our kids or just use my roth & create one for my wife to save for college? We donít plan on paying for all their schooling but would like to be able to help some.

4) Life Insurance. We currently do not have any life insurance other than the super basic amount ($40k) that is included in our teaching contracts. We went through the process of applying for life insurance right before our 2nd child was born & the final amount came back WAY higher than the initial quotes & we did not feel comfortable with the options presented. Considering our financial standing, the fact that both my wife & I work, are highly educated, & have families who could provide support, what amount do you think is best for us?

5)Real Estate. When we purchased our current home a year ago, we did so knowing that we likely wouldn't stay there more than 5-10 years. However, we felt we got a good deal & there is great rental potential for the home. The previous owner was renting out the home for $1,600/month. With this knowledge we plan to keep the home when we move & rent it out as our mortgage payment is $1k/month so this will provide additional income. However, if we do keep the house we obviously will need to save for a downpayment on the next house. Does it seem like a good idea to keep our house to rent out & get the $1,600/month or sell the home (would likely get $205k)?


Any insights tips or advice would be greatly appreciated. Thanks so much & if you have any questions or want further clarification, please let me know!

Laura33

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #1 on: August 27, 2020, 12:35:57 PM »
Your living expenses are pretty reasonable.  So where is all the rest of the money going?  Are you actually saving the delta every month?  Some of the figures seem like estimates given the rounding, and a number of categories seem to be missing (vacations?  medical expenses?  car repairs?).  So if you're not tracking your expenses now, start doing that.

For a sense of how long it will take you to FIRE at your current savings rate, check out this chart:  https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/.  Because you have some savings, you can knock a few years off of that prediction.  But note that this focuses on retirement savings and would not account for things like funds for college or new cars (or, on the positive side, daycare, which presumably will not be an issue once you FIRE).

Roth:  I am a very big fan of keeping your retirement funds separate from your college funds.  You have very few tax-advantaged options available to save for retirement, and even fewer available to save for college.  Don't use up your limited space in one trying to save for the other.  Plus it looks like the Ohio 529 gives you a tax deduction for 529 investments of up to $4K per child -- so that's $8K* right there you can knock off your income for state tax purposes, plus never having to pay taxes on either the gains or the use of the funds.  Seems like a no-brainer to me.  Heck, my state gives me only a $2500 tax deduction, and you'd better believe I max that puppy out every year. 

Insurance:  you are fortunate that you do not actually need life insurance, because your expenses are low enough that you could continue your current lifestyle on one income in perpetuity, and the survivor would get SS survivor benefits, which would provide a good chunk (do some research to figure how much you'd be eligible).  At the same time, losing half your income would dramatically affect your FIRE date, and IDK if the SS benefits would provide enough of a cushion to stay on track.  And personally, if my DH were to die while we still have kids at home, I'd want to work less while helping them deal with such a major tragedy.   So some additional life insurance may well be useful, and I cannot imagine it would cost very much at all for people your age, unless you were looking at something like whole life (which you do NOT want).  All you need is a 20-year level-term policy to get you through getting the kids fledged/get to the point where your own savings can cover you.  Do you have any sort of optional group term insurance through your union?  Those prices are often cheaper. 

Also:  make sure you have disability insurance, and if you don't, get it ASAP.  It is much more likely that you will be disabled over your working career than that you will die, and that can have an even worse impact on family finances if you need expensive medical care.  Do not skimp on disability.

Finally:  yes, you have too much in savings.  In terms of those various big, lumpy expenses -- house, car, vacations, etc. -- I suggest you approach it a little more methodically:  figure out how much you will need for an emergency fund, for one-time big expenses, and for periodic recurring expenses.  Usually for house maintenance, for ex., it's 1%/yr for maintenance/basic periodic updates.  Set up different accounts for these three categories.  Then figure out how much you will need to deposit monthly to each fund to meet your goals within your timeframe, and set up automatic transfers to do so.  This is just math:  if you have a $3K/yr vacation budget and a $2K/yr house maintenance budget and a $1K/yr budget for some other recurring expense, you'd just set up to deposit $500/mo. into the "recurring expense" account"; if you want a $60K downpayment in 5 years, then you need $12K/yr or $1K/mo.  You can "seed" each account with your current cash -- honestly, that amount should give you a very healthy EF, so you can set that up and forget it, and then use the rest to start your other two accounts. 

The really important fund there, btw, is the recurring expense fund.  Because even if they occur only rarely, they are still part of your expected expenses, and so you should be saving up for them in advance.  Many people tend to get in trouble or save less than they think because they look just at their basic expenses, like you've provided.  But every car needs tires and oil changes, and every family likes to take vacations, and most kids end up playing sports that require equipment and league fees, etc. etc. etc.  So those things should be part of your monthly budget, even when you don't have to pay them in any individual month.

*Might even be $16K if you can set up separate accounts for each of you for each kid and get the $4K deduction for each.

MrThatsDifferent

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #2 on: August 27, 2020, 01:59:25 PM »
Youíre doing great so far. Everything Laura said is gold. I just have some loose thoughts:
1. You have cable, YouTube tv and Netflix? That seems like youíre paying a lot for watching tv. Iíd look to trim 1 definitely (looking at you YouTube tv) and possibly 2
2. With the savings and home thing. Look, Iím not an expert here so definitely test this out, but couldnít you leverage your current equity for a down payment on a new house, when/if you need that? Iím not sure why youíre making extra mortgage payments either, youíre just decreasing cash flow that could be better used. Give this a read: http://www.innovativeadvisors.net/files/10reasonsforMortgage.pdf
3. I have family who are a two educator household and I shared this blog with them as he has educator specific strategies: https://www.millionaireeducator.com/

Laura33

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #3 on: August 28, 2020, 06:46:51 AM »
Youíre doing great so far. Everything Laura said is gold. I just have some loose thoughts:
1. You have cable, YouTube tv and Netflix? That seems like youíre paying a lot for watching tv. Iíd look to trim 1 definitely (looking at you YouTube tv) and possibly 2
2. With the savings and home thing. Look, Iím not an expert here so definitely test this out, but couldnít you leverage your current equity for a down payment on a new house, when/if you need that? Iím not sure why youíre making extra mortgage payments either, youíre just decreasing cash flow that could be better used. Give this a read: http://www.innovativeadvisors.net/files/10reasonsforMortgage.pdf
3. I have family who are a two educator household and I shared this blog with them as he has educator specific strategies: https://www.millionaireeducator.com/

Oh yeah, I forgot:  STOP prepaying the mortgage.  Mortgage rates are at historic lows.  The odds are very high that you will do much better long-term in the market than by prepaying the mortgage.  The value of your house is directly correlated to the number of shares you have; the value of your house will be exactly the same whether you have 1% equity or 99% equity.

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #4 on: August 28, 2020, 07:24:14 AM »
Start moving 6k a year from the Ally account into a Roth IRA. Also, start buying 10k worth of I bonds at treasury direct every year in leu to the savings account.

https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

You have to hold them for 1 year before they can be redeemed, but they traditionally yield a little better than a savings account and have tax advantages. No state tax, and tax on the interest is deferred until you redeem the bond.

starbuck

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #5 on: August 28, 2020, 07:25:52 AM »
- Car - we will likely need to replace the Corolla in the next few years. I drive this to work & back so it doesnít have many miles added to it annually but it is getting worn down & it is tough to haul kids around in.

I mean, you have two kids in a regular-sized car - what exactly is challenging about this? It's in your best financial interest to put off buying a larger (and more expensive) car for as long as possible, even if you do add a third kid. If the car seats don't fit right, then get different car seats, not a different car. We're expecting a third kid at the end of this year and are putting off a larger car until at least next spring. There's no where to go anyways!

As for the expenses you listed, they all seem reasonable. I would cancel YouTubeTV (we just did before the most recent price hike in August.) It's insanely expensive now, and there's very little new programming available, so what's the point? You're not saving any money with it anymore. And really, do any of us need to be watching MORE tv? (I don't!)

As someone with slightly older kids (4 & 2), I'd suggest focusing on ways to keep their related expenses down so it becomes an easy habit to maintain. Definitely put the word out about accepting all hand-me-downs, especially shoes and seasonal gear. My oldest is 4 1/2, and he's needing new clothes since used are hard to find for this age. But when I do buy new, I prioritize quality brands (like Hanna Andersson, Primary, etc) that are gender neutral (which I define very broadly) and can be handed down to his younger siblings (or even resold.) Stuff like Old Navy and Target don't last long enough to make it past the first kid in decent condition, and just aren't worth it. Anything you need for the kids that you can't get from a friend, find it on FB marketplace or at Goodwill. If family insists on gift giving for kids, make sure some non-toy things get on their lists, like swim goggles, school/art supplies, seasonal gear like swimsuits or winter gear, water bottles, night lights, useful accessories like hats and sunglasses, etc. This helps you from being inundated with toys while still giving relatives an opportunity to give a physical gift. None of my relatives want to gift the non-tangible things like swim lessons or museum memberships, unfortunately!

A Costco membership is crucial for us, so if you don't have one, consider it or something similar in the next year or two. Kids eat a lot. Even my petite two year old can pack away a regular sized breakfast.

I'm also on the "don't pay off the mortgage early" team. 30-year mortgages are the bomb.

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #6 on: August 28, 2020, 10:01:32 AM »
Hi Everyone,

Specific Questions:

1)What should we cut in our expenses? Given our current state, how soon do you think we could FIRE? What do you think is a realistic amount over the next 2-3 years that we should be able to save or increase our assets to?

2)Do we have too much money in our Ally account or should we leave that there for a down payment on a house & purchasing a car? If we should reallocate this money, should we create a Roth IRA for my wife or invest it?

3)College Savings - we have heard mixed things about 529 plans & have heard from others that Roth IRAs are another good option for saving for college. Should my wife & I just use the Roth for college saving? Should we open a Roth for my wife & then also for our kids or just use my roth & create one for my wife to save for college? We donít plan on paying for all their schooling but would like to be able to help some.

4) Life Insurance. We currently do not have any life insurance other than the super basic amount ($40k) that is included in our teaching contracts. We went through the process of applying for life insurance right before our 2nd child was born & the final amount came back WAY higher than the initial quotes & we did not feel comfortable with the options presented. Considering our financial standing, the fact that both my wife & I work, are highly educated, & have families who could provide support, what amount do you think is best for us?

5)Real Estate. When we purchased our current home a year ago, we did so knowing that we likely wouldn't stay there more than 5-10 years. However, we felt we got a good deal & there is great rental potential for the home. The previous owner was renting out the home for $1,600/month. With this knowledge we plan to keep the home when we move & rent it out as our mortgage payment is $1k/month so this will provide additional income. However, if we do keep the house we obviously will need to save for a downpayment on the next house. Does it seem like a good idea to keep our house to rent out & get the $1,600/month or sell the home (would likely get $205k)?

Any insights tips or advice would be greatly appreciated. Thanks so much & if you have any questions or want further clarification, please let me know!

1) You are making 126k combined right now. Do you all not have a 401k's? Without a 401 tax deduction you are probably clearing about 90k post tax and spending 40k of that. So you should be able to save about 120k if you keep the budget as is. The only real wiggle room you have in your budget is childcare which will fall off in a few years. You aren't budgeting for large one off expenses so really planning on 40k to 50k per year spend is probably where you would be long term if you fired. For 45k/yr at a 16% combined tax rate, you need about 52k per year which equates to around $1.3M

2) Yes. Open a Roth for your wife and keep cash to cover 6 months living expenses. 20k in your case.

3) Depending on the tax laws in Ohio a 529 could be helpful. The advantage in keeping the money in retirement accounts is it will not count as assets on the FAFSA when your kids apply for aid. The 529 will be in there name.

4) I would look into a 20 year term life policy. Even 500k would provide the family 25k-30k per year for 20 years while your kids are in the house.

5) Owning real estate is really no different than buying a REIT on margin except you have additional work of being a landlord. Choosing to keep the house can be a good bet. Just remember to multiply any aggravation you have now with your house by 2 and add having to please your new renters. I own a rental and travel often for work. It's not a good combination for me.

You want to FIRE plus buy a new house, a new car, and add two more children and have about 120k in assets right now that would count towards retirement. I would say, based on your upcoming expenses and ability to save 40-50k per year you are probably 15-25 years away depending on what the market does and you future combination of raises and lifestyle inflation. 



   


chrisgermany

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #7 on: August 28, 2020, 12:03:41 PM »
Did you already find www.millionaireeducator.com?
They show some ways to save and build a stash on teachers income.
Enjoy the way to your goals!

JSMustachian

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #8 on: August 28, 2020, 01:43:13 PM »
If you have not already get both of your 403b and 457b accounts created and max all 4 of them if possible. You can live off your savings for a while so you can get your paychecks down to $0 by maxing those contributions. You only have a limited number of paychecks to get those contributions in by the the end of the year since its almost September.

You should have zero tax liability with pension contributions, 403b/457b contributions, and child tax credits. Check your withholding and your tax liability to make sure your district is not over withholding money from your checks. 
« Last Edit: August 28, 2020, 01:48:39 PM by JSMustachian »

rmorris50

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #9 on: August 29, 2020, 07:03:47 PM »
What does "fire as quickly as possible" mean to you? And how serious are you about that goal? For example, I could FIRE today if my spouse and I were willing to downsize and live in a little one bedroom apartment. A lot of us micro-focus on the expenses, and try to minimize impact to lifestyle as much as possible - understandable. But adjusting lifestyle can get you there much faster.

For example, are you willing to stop at two kids?
Are you able to increase income and save the additional income without lifestyle creep?
Or are you happy with your current situation and willing to work say age 45 or 50? Given the great start you are off to, if you stay diligent on your savings and no debt you will probably be able to do that.

Your expense seem reasonable. You can trim them around the edges but is that going to get you to FIRE ASAP?

To help fire ASAP maybe:
1. Cut lifestyle to live off one spouse's income, pocket the other
2. Or increase income somehow, and avoid lifestyle creep
3. Invest in rentals?

Again, all this depends on what "FIRE ASAP" really means to you and how bad you want it. You might have to think bigger than cutting expenses and maxing savings accounts, depending on your specific goals.



Flyingstache

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #10 on: September 09, 2020, 06:53:56 AM »
Thank you all for the amazing responses as always! I have learned a lot, realized we have a lot of room for improvement, & brought up some further questions! Here are some of the takeaways & questions I have...

1) We need to track our spending & could reduce expenses in some areas such as getting rid of YouTube TV.

2) Stop prepaying our mortgage. What is the best advice on how to do this? Should we simply refinance to a 30yr? Should we refinance & do a cash out to get some extra $ & then invest that money?

3) We should open a Roth IRA for my wife asap.

4) We should open an Ohio 529 college savings account for the kids.

5) We should get disability insurance & a life insurance policy as well. Look into what the teacher union has to offer

6) We should look into 403b or 457 options. Do you think it is necessary to to talk to a financial advisor or a tax consultant about any of these moves? We also get our teacher retirement savings but I honestly don't keep track of how much is in there because so much depends on how many years you teach & then the percentages change based off politics etc.

It seems like one of the biggest areas for improvement is utilizing tax advantaged accounts. I struggle to understand a lot of the tax side of FIRE things. Should an accountant or tax advisor be used for any of these steps or is this something I can do but simply need to spend more time looking into?

Thanks again for all your help!

Flyingstache

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #11 on: September 09, 2020, 10:45:30 AM »
Realized the format from the post above didn't really clarify questions.

Biggest questions -

1) Should we refinance to a 30yr mortgage instead of prepaying the mortgage? If so, should we just do a basic refinance or should be do a cash out refi & use some of that money for investments or other things?

2) Of the tax advantaged options, which would you consider most important to implement asap? Roth for my wife? 529? 403b?

Thanks

Laura33

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #12 on: September 09, 2020, 12:16:41 PM »
Realized the format from the post above didn't really clarify questions.

Biggest questions -

1) Should we refinance to a 30yr mortgage instead of prepaying the mortgage? If so, should we just do a basic refinance or should be do a cash out refi & use some of that money for investments or other things?

2) Of the tax advantaged options, which would you consider most important to implement asap? Roth for my wife? 529? 403b?

Thanks

1.  What's wrong with just paying your existing mortgage on your current schedule?  You have a good mortgage at a good rate; you don't need to go to the extreme of paying it off early, nor do you need to go to the other extreme of repeated refinancing and never paying it off.

2.  Is the point to save for retirement or college?  If the former, do the 403(b) first (immediate tax-deferred), then the Roth (unless your 403(b) choices are crappy, in which case you may want to do the Roth first).  If the latter, do the 529.

On the 529:  the real question is where does it come in terms of your investment priorities.  IMO, that should be after your own current and future needs.  First, make sure your budget includes putting enough away to cover your own retirement on your preferred schedule, your emergency fund, and a sinking fund for recurring expenses.  Then if you have money available after doing all that and want to save for college, that's when you consider the 529.

Flyingstache

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #13 on: September 10, 2020, 05:22:44 AM »
Realized the format from the post above didn't really clarify questions.

Biggest questions -

1) Should we refinance to a 30yr mortgage instead of prepaying the mortgage? If so, should we just do a basic refinance or should be do a cash out refi & use some of that money for investments or other things?

2) Of the tax advantaged options, which would you consider most important to implement asap? Roth for my wife? 529? 403b?

Thanks

1.  What's wrong with just paying your existing mortgage on your current schedule?  You have a good mortgage at a good rate; you don't need to go to the extreme of paying it off early, nor do you need to go to the other extreme of repeated refinancing and never paying it off.

2.  Is the point to save for retirement or college?  If the former, do the 403(b) first (immediate tax-deferred), then the Roth (unless your 403(b) choices are crappy, in which case you may want to do the Roth first).  If the latter, do the 529.

On the 529:  the real question is where does it come in terms of your investment priorities.  IMO, that should be after your own current and future needs.  First, make sure your budget includes putting enough away to cover your own retirement on your preferred schedule, your emergency fund, and a sinking fund for recurring expenses.  Then if you have money available after doing all that and want to save for college, that's when you consider the 529.

Thanks so much for the insights!

In regards to the mortgage I think I was assuming that folks were suggesting we do something different with our mortgage instead of prepaying it & some of the information shared talked about how 30yr mortgages were best. I am 100% on board with just paying it as is currently & staying on schedule while not putting extra into the payments.

When you say "if your 403b options are crappy," what would you say determines if they are crappy or not? Our school doesn't really advertise 403b options but I have just gotten a response from HR with some links to available options.

Thanks again!

Laura33

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #14 on: September 10, 2020, 07:42:57 AM »
When you say "if your 403b options are crappy," what would you say determines if they are crappy or not? Our school doesn't really advertise 403b options but I have just gotten a response from HR with some links to available options.

Fees/costs.  I have never had a 403(b) so don't really know what they entail.  But if they're charging giant fees or limit the offerings to things like a cash account that gets 1%/yr, then I'd skip it. 

charis

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #15 on: September 10, 2020, 09:01:00 AM »
Having dealt with a few school 4O3b offerings, I've notice that there is usually one decent option in a limited list of terrible (high fee, annuity, etc) options.  If it doesn't pop out at you due to unfamiliarity, and even if it does, as Laura said, look at the fees (quarterly or annual charges, % admin and/or advisor fees, etc).   

Flyingstache

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #16 on: September 11, 2020, 07:16:40 AM »
So far it seems like a 457 is one of the few options from our school district but I am supposed to be getting more information. I am gathering information about those options & then also am getting information about the OH 529 plans.

I am going to work on adjusting our savings & categorizing different areas to focus on saving.

Question: Would you focus more on increasing the amount of money going into investments or focus on tax deferred options first?

So in order should we, open a ROTH for my wife, set up a 403b or 457, invest more, adjust savings, set up a 529, or something else?

charis

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #17 on: September 11, 2020, 08:09:47 AM »
This is from the commonly quoted order of investments post:

Quote from: MDM
         
0. Establish an emergency fund to your satisfaction            
1. Contribute to your 401k up to any company match            
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield.            
3. Max Health Savings Account (HSA) if eligible.
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level            
5. Max 401k (if
    - 401k fees are lower than available in an IRA, or
    - you need the 401k deduction to be eligible for (and desire) a tIRA deduction, or
    - you earn too much for an IRA deduction and prefer traditional to Roth, then
    swap #4 and #5)            
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.            
8. Invest in a taxable account and/or fund a 529 with any extra.            
            
WHY            
0. Give yourself at least enough buffer to avoid worries about bouncing checks            
1. Company match rates are likely the highest percent return you can get on your money            
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 22% or higher; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 

Flyingstache

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #18 on: September 17, 2020, 11:57:11 AM »
Since my wife & I are teachers we do not have access to 401ks. However, I did not mention that we both have almost 17% taken out of our pay to go into the OH STRS (teacher retirement) program which provides pensions for educators. I never factor this money in because we have no option if it is taken out (or the amount) & the amount we will receive in retirement depends on the number of years we teach & what percentage of pay they currently are giving (used to be 100% of your pay based on the average of your highest 3yrs of pay!!!).

Knowing that this money is coming out pre-tax, does this change any order of investments or does it negate the need for a 403b or 457?

I like to plan for retirement or FIRE without accounting for the teacher retirement just because we don't know how much we will actually get from it.

charis

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #19 on: September 17, 2020, 04:05:46 PM »
Since my wife & I are teachers we do not have access to 401ks. However, I did not mention that we both have almost 17% taken out of our pay to go into the OH STRS (teacher retirement) program which provides pensions for educators. I never factor this money in because we have no option if it is taken out (or the amount) & the amount we will receive in retirement depends on the number of years we teach & what percentage of pay they currently are giving (used to be 100% of your pay based on the average of your highest 3yrs of pay!!!).

Knowing that this money is coming out pre-tax, does this change any order of investments or does it negate the need for a 403b or 457?

I like to plan for retirement or FIRE without accounting for the teacher retirement just because we don't know how much we will actually get from it.

You would just substitute the 457/403b accounts for 401k in this list.  I personally would max the 457 account first because it is more flexible than a traditional tax deferred retirement account.

I don't see how the pensions would change the order if you are not including them in your planning (we don't either), certainly wouldn't take the place of anything (unless you are planning for a tradition retirement - work your 30 years to qualify for the full pension).

Flyingstache

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #20 on: September 18, 2020, 06:57:58 AM »
Ok thanks so much for the insights!

So you are a fan of the 457 over the 403b?

charis

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #21 on: September 18, 2020, 10:12:56 AM »
Ok thanks so much for the insights!

So you are a fan of the 457 over the 403b?

I am a fan because it's a deferred comp plan, not a traditional retirement account. You can withdraw the money without penalty when you stop working for that employer. So it's ideal for an early retiree. 

We max my spouse's 457 and 403b (no match), my 401k (with match), family HSA, two tIRAs, dependant care FSA, and sporadically contribute to 529 education acct and a limited purpose HCRA.  So most of our income is tax advantaged.

Allie

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #22 on: September 20, 2020, 12:46:26 PM »
For your teacher retirement, do you have a defined contribution plan option?  In our state, for public employees, and maybe for teachers, there is a defined benefit and a defined contribution.  For a number of reasons, we didnít qualify for the defined benefit, which would have been awesome...if weíd work until 60.  Our defined contribution is less awesome, but letís us keep some control of the money even if we donít work that long.

We save to defined contribution (cause it isnít optional), then 457 (cause itís deferred compensation - no age limits), then HSA, then IRA (also for tax savings), then 403b, then taxable investments.  We choose to skip the 529 for our kids because there are so many things up in the air regarding future education expenses and young kids.  We may regret that later, but Iím willing to gamble that the long term capital gains on the investments we may use to pay for college expenses will be worth the flexibility. 

TomTX

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #23 on: September 22, 2020, 11:20:56 AM »
So in order should we, open a ROTH for my wife, set up a 403b or 457, invest more, adjust savings, set up a 529, or something else?

Unless it's a much worse set of investments/costs, I would definitely prioritize the 457 over the 403b if you want to FIRE. 401/403/457 internals work similarly, but there is no age requirement for no-penalty withdrawal on the 457 - you just need to leave the employer. Done.

Flyingstache

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #24 on: October 02, 2020, 10:09:58 AM »
Thanks for the great insights into 457 vs. 403b, I really appreciate the advice.

We have our school retirement fund which is similar to a defined contribution plan. Depending on the number of years you are employed as an educator in the state, you get a pension after retirement or a certain age. The amount is usually determined off the average of your 3 highest years of pay.

This is likely a dumb question but here it goes - With our investments account (through Vanguard) & our IRA's (in Vanguard & from 401k rollovers from previous job), do I need to do anything to make sure my wife & I both have equal access in case something happened to one of us? I have our investment fund listed with both of our names but the IRA's only are my name because I wasn't sure if her name was included if she could then open another IRA.

So if we were going to set up a Roth IRA in my wife's name, would it just list her name or would I need to be listed as a beneficiary or is that something we would have to set up in a will or some legal document?

Speaking of wills - now that we have 2 kids, should we make a will?

Thanks as always!

charis

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #25 on: October 02, 2020, 10:29:50 AM »
We both have access to pensions, but as I am planning to retire early or be free to change jobs, they will be small, maybe 25k/year in total. So it's not factored highly in my FI calculations.

My spouse and I each have both an IRA and a roth IRA with each other named as primary beneficiaries and children named as secondary beneficaries (50% each).  This is the case for every account and life insurance policy that is held in one of our names. Everything else is jointly held with the kids listed as the beneficiaries.

We should but haven't done a will yet.

MoneyizHere

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #26 on: October 02, 2020, 02:09:36 PM »
IRA's are individual accounts -they could only have one account owner.  BE SURE to double check that you have your beneficiary up to date however for your IRAs and all your other retirement accounts- that is easy to find - as that will avoid issues in case of untimely death.  If either of you die - the survivor just needs to call the Vanguard and have them transfer over the assets w/ proof of death certificate. 

IRA's and Retirement accounts like Pensions, are all determined by beneficiary listed on the account - and a will has no bearance on retirement accounts. 

I think wills are fairly easy to do these days - you could actually get them done online for the most part.  You'd want to consider who'd watch the kids and who controls the assets in the case both parents are deceased.


Thanks for the great insights into 457 vs. 403b, I really appreciate the advice.

We have our school retirement fund which is similar to a defined contribution plan. Depending on the number of years you are employed as an educator in the state, you get a pension after retirement or a certain age. The amount is usually determined off the average of your 3 highest years of pay.

This is likely a dumb question but here it goes - With our investments account (through Vanguard) & our IRA's (in Vanguard & from 401k rollovers from previous job), do I need to do anything to make sure my wife & I both have equal access in case something happened to one of us? I have our investment fund listed with both of our names but the IRA's only are my name because I wasn't sure if her name was included if she could then open another IRA.

So if we were going to set up a Roth IRA in my wife's name, would it just list her name or would I need to be listed as a beneficiary or is that something we would have to set up in a will or some legal document?

Speaking of wills - now that we have 2 kids, should we make a will?

Thanks as always!

TomTX

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #27 on: October 02, 2020, 07:31:43 PM »
This is likely a dumb question but here it goes - With our investments account (through Vanguard) & our IRA's (in Vanguard & from 401k rollovers from previous job), do I need to do anything to make sure my wife & I both have equal access in case something happened to one of us?

You should list your spouse as your beneficiary on all brokerage and bank accounts (unless they are a joint account holder). You cannot have a joint account IRA.

Your spouse should be able to access all of your passwords if you die or are incapacitated.

MDM

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #28 on: October 05, 2020, 01:14:15 AM »
See Investment Order for the full version of what charis posted earlier.  It has some background information that might be helpful.

MoneyGoatee

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #29 on: October 06, 2020, 01:02:28 PM »
For a sense of how long it will take you to FIRE at your current savings rate, check out this chart:  https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

An even more shockingly simply way would be one of those investment calculators, which I would suggest as a starting point for anyone.  For the OP in question, who has $115k in investment now, if he contributes $20k a year, and assuming a 7% annual rate of return, he will have about $1.2m in 20 years.  If that amount/timeline is not desirable, he'll need to up his contribution.  Of course, this is just a starting point, and you need to explore other possible scenarios, because things change.  You may get less/more than 7% return a year, and you may contribute less/more than $20k a year due to less/more income.  Also, $1.2m in 20 years will only be worth about $800k because of inflation.  So you need to consult an inflation calculator too.  And that's why FIRE members never stop investing.  You need to keep on getting the 5-7% annual return to negate that 1-3% annual inflation.
« Last Edit: October 06, 2020, 01:26:07 PM by MoneyGoatee »

Flyingstache

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #30 on: October 08, 2020, 09:17:15 AM »
Thanks so much for the input. I have added my wife as beneficiary to the IRA's under my name & we are opening a Roth IRA for her.

Housing question - We bought our house 2.5yrs ago for $167,500. We currently owe about $100k on it with a 15yr mortgage. We were recently approached by a real estate agent that feels we could easily get $215-220k for the house (our area is growing rapidly). We know that we likely will be moving in the next 2-3 years (same area) & have debated whether or not to sell the house or keep it as a rental.

Is there a point where it makes more sense to take the $ now & sell the house vs. renting it long term?

For example - If in 2 years someone offers $250k, financially does it make more sense given our situation to sell instead of keeping the house & renting it for $1,500/month? Obviously there are lots of factors that go into this but didn't know if there was a rule of thumb. Any insights would be appreciated.

Our savings account is currently higher than I prefer ($67k currently) because we have felt like we need to save for a down payment on the next house in case we keep this current house to rent.

charis

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #31 on: October 08, 2020, 09:38:15 AM »
First, I would ask why are you moving houses in the same area?  If it's to upgrade to a more expensive home and/or for better schools, I would take a very hard look at whether it's really necessary to achieve your goals.

Second, I'm sure that estimating/comparing the ROI, which probably depends on the housing market in your area, can tell you whether keeping a rental would be a good financial decision.  I'm personally not interested in dealing with the headaches/stress that come with being a landlord so it would have to be a pretty lucrative rental situation. But that's an emotional component.

Flyingstache

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #32 on: October 09, 2020, 06:55:14 AM »
The moving piece is something we have discussed a lot. We like our current home & got a great deal on it so we have a nice chunk of equity. We are in a nice subdivision with good neighbors as well. In our area there is only 1 school district (my wife & I both teach there) so good schools are always available.

The biggest issue with our current home is simply space. We have a 1,200sq ft home that is listed as a 3 bedroom but one is really an office that works for a nursery as it can only fit a crib & changing table. This works for us right now with a 2yr old & 5 month old but we are hoping to have 1-2 more children if we are lucky enough to. Our worry is adding more kids will cause the space to not work. We have already maximized the space by utilizing clever storage & limiting furniture. However, with our development & proximity of neighbors there is no way for an addition & no other space in the house that can be used (basement is a crawl space & storage closet). We want to stay in our current home as long as possible to take advantage of the financial benefits but also want to plan for a new house if we are lucky enough to have more kids.

Flyingstache

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #33 on: October 15, 2020, 11:35:53 AM »
My old bank just called & said they currently could refinance our mortgage to 2% for 15yrs. Estimated closing costs around $2,500

We refinanced in March of this year to 15yrs at 3.75% We have about $100k left on the loan & the house is worth between $200-$220k depending on who you talk to.

Do you think it is worth it to refinance to the 2%?


MDM

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #34 on: October 15, 2020, 02:01:30 PM »
My old bank just called & said they currently could refinance our mortgage to 2% for 15yrs. Estimated closing costs around $2,500

We refinanced in March of this year to 15yrs at 3.75% We have about $100k left on the loan & the house is worth between $200-$220k depending on who you talk to.

Do you think it is worth it to refinance to the 2%?
Depends on how long you will stay before selling.  Some tools that may help: refinance calculator - Google Search

TomTX

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #35 on: October 15, 2020, 03:30:51 PM »
My old bank just called & said they currently could refinance our mortgage to 2% for 15yrs. Estimated closing costs around $2,500

We refinanced in March of this year to 15yrs at 3.75% We have about $100k left on the loan & the house is worth between $200-$220k depending on who you talk to.

Do you think it is worth it to refinance to the 2%?

Ask them what the rate is for $0 closing costs.

Flyingstache

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Re: Young Teachers, Young Kids, How Soon to Fire?!
« Reply #36 on: October 19, 2020, 06:53:13 AM »
I would assume we will stay another 2-3 years.

They had an in-home loan option with $495 closing costs but the 15yr option was 2.75 (the same we have now). I will have to check for a 30yr option.