reader case study-help with a plan

[whammer33024]

i just need help formulating a plan on how to get where i want to be.  early retirement isn't necessarily an ultimate goal, but it would be nice to have the option. 

background-we live in iowa.  wife is 29 and has been a teacher for the last 5 years(4 with the same district).  so she will collect IPERS upon retirement(i don't understand IPERS but i want that in here for you guys to consider).  i work for my father and plan to buy the business from him in a few years(more on that later).

income-combined monthly income of right at 4k(one thing to consider is i make about an extra 600 a month in the summers mowing lawns after hours that i'm not counting in the 4k income.)

spending-right at 2800 a month

savings-1200 a month

assets- i'm literally just starting a 401k, so 0 for me. and my investment will only be 3% a month with the company matching 3%.  my wife has 4k in a 401k from a previous employer(what should we do with that?) we have 1k in our savings account and 4k(at all times) in our checking account.  reminder that my wife will receive IPERS

liabilities-we owe my parents $2700(down to 1500 on the 19th of this month) and we owe my mother in law 7500.  mortgage we owe 105k on a 30 year fixed at 3.675%.  house is valued at 125k.

1. should we pay off our debt to parents, build up 10k emergency fund, and then start fully funding retirement? another order?

2. smart to fully fund roth IRA's for each of us or a different vehicle? 

3. we have a one year old son and plan for at least one more child in the next couple years and would like to set up college plans for each of them

4. at what point would you guys recommend paying off the mortgage?

basically i'm just looking to get pointed in the right direction. we started doing dave ramsey in late april and have made a significant(paid off about 30k in consumer debt using savings and reducing spending), but i want to really ramp things up.  we are working hard to lower spending, but 2800 is probably the high number i felt comfortable putting down.

[jamaicaspanish]

You mentioned IPERS twice.  So I'll give my normal public-school-teachers retirement advice:  research the benefits of  purchasing service with your wife's previous 401k.

https://www.ipers.org/retirees/otherbenefits/purchase_1.html

[whammer33024]

hmmm, i've never heard of purchasing service.  seems like a solid idea.  she should become vested in 2 years or so.  i will have her start looking into that idea.  thanks!

[yddeyma]

Sounds like you're not really sure what you want.  Its hard to make a plan for anything if you don't know what you want.  You mention you want the option of early retirement.  So maybe your goal is to be financially independent.  Great, now get specific.  How much do you need, at what age do you want to achieve this, etc.  Are there any other financial goals you want to make along the way, like living on one income while the kids are young, changing careers to something more satisfying but less earning power, having X amount saved for college, etc.

So define one big goal, and then add all the milestone goals as appropriate.  Once you've got that, you can generate a plan to achieve it all.  And, ultimately, you want your plan to be in line with your family "mission" in life and to achieve your goals.

[whammer33024]

i've taken some time to sit down and evaluate my ultimate goal, and i've come to the conclusion that FI at 50 is it.  we are in the 15% tax bracket, so this is the plan i've come up with, let me know if you guys think i'm an idiot or it works

-fully fund 2 ROTH ira's(one for my wife and i)
-will have about 400 a month left, put all that into savings(use money for house renovations and car purchases, crap like that)
-i make right around 3000 a year mowing lawns after hours, i was planning to just invest this money in a regular account to help pay for renovations, cars, travel, etc.
-i put 3% to my 401k and the company matches up to 3%
-my wife's ipers will kick in at 65 which i would guess would bring home 2k a month
-don't have access to an HSA

if my calculations are correct and assuming a 7% growth, at 50 we would have around 480k in our roths and interest every year would be around 32k, which is what we spend a month. if we stop investing in that year, at age 60 it would be just over a million dollars. 

sooo...am i an idiot?

[GoldenStache]

I checked out the purchasing service with IPERS (just curious).. The example that they give:
49 year old purchasing 2 years of service will cost $17K
With that additional 2 years they will increase monthly check by $169.70 or    $2,036.40 a year

Paying $17k to get back $2k in 13 years is not great at all (I did not see anything about inflation adjustment for payments, maybe they are maybe they are not)

$17K @ 13 years @ 7%compounding interest is  $40,967.37

$2,036 is greater than the 4% of $40,967.37 ($1,638.68) but I would rather have the $40k myself.

[whammer33024]

good stuff goldenstache, thanks.  i think we will pass on the purchasing service at this point. 

shortinseattle, i left a couple things out that might change your thinking a little bit.  we have 1k in regular savings(emergency fund), but we also have 1500 in a savings account labeled as medical.  that should cover any major issues that occur at this point.  normal doctor visits we will just cash flow. combine those with the 4k(equivalent to YNAB's month ahead) and i consider us already having an emergency fund of 6500 bucks. 

so the exact layout of our plan is:

-pay back parents.  should take about 6 months total
-begin monthly contributions to roth IRA's so they max out by end of year
-use 400 left over every month to keep building emergency fund
-3000ish from mowing a year will go into regular investment account(or emergency fund)

and yes we already pay daycare for our first child.  that's included in our monthly expenses.  its 120 a week.  second child will be half of that so total of 720 a month.  by the time that happens, we should have cut a lot more out of our budget to offset that extra cost. 

as far as buying the business, i'm not totally sure.  its what i know, its what i've planned to do since i was 7(i'm 30 and been working here for 8 years) and i do enjoy it.  but the thought of having to take out a massive loan scares the bejeezus out of me. 

[former player]

Congratulations on paying off your consumer debt, sorting out a budget you are comfortable with and starting retirement accounts.  All good stuff which puts you on firm ground for the future.  It's particularly impressive that you've done this when you have a one year old son, as that is frequently the time when families find their finances going in the opposite direction.

Your wife's IPERS pension scheme allows her to buy additional years of service with her 401K from a previous employer.  I'd look very seriously at that.  GoldenStache gave the example of a 49 year old purchasing service, but your wife is 29, so she should get a lot more service time for her money than a 49 year old would, and the calculation may well turn in her favour.  She needs to get the figures which apply to her, now, and see what the return would be: don't forget that buying extra service could bring her pension date forward as well as providing extra cash.  Even if the figures are marginal, there may still be benefits in your wife simplifying matters by having all her pension provision in one place, particularly if her current 401K does not have a sparkling choice of funds.

[whammer33024]

thanks for the response former player and for the congratulations.  my son has been the big motivator for ME to get us on a better financial track. 

my wife is currently awaiting response from the investment people through school.  its been a couple days since she sent the email, so if she doesn't get a response today then i'm going to have her push harder