Author Topic: Case Study: ideas for near and long term plan  (Read 4811 times)

socalteacher

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Case Study: ideas for near and long term plan
« on: April 09, 2015, 11:31:20 AM »
Thank you for taking the time to read this.  Stumbling across this forum has been great and really started churning up new possibilities for my family in the future. The different way of thinking has been refreshing. We are at a place in life now that allows us to start thinking about the future and finding this resource at this junction really is changing things.

My wife and I have been educators for the past 12 years. We are 35 years old. While I have always been frugal she has been the opposite. When we had our first child she started to work part time and actually becoming frugal was a necessity for our family. We are on the same page now!  With the economic downturn came budget cuts in education and our jobs were always on the line (pink slipped 6X).  We used our savings to pay down the principal on the house so we could get a fixed lower rate and reduced monthly payment.  We are finally secure in our positions at work and can now start coming up with a plan for the future. The anxiety over the job insecurity has created a very risk adverse attitude in both of us but we are aware of it and ready to overcome it.

We are looking for advice on what to do in the future with our savings. What would you suggest we do with the current 60K in cash right now (currently as emergency fund)? What would you do with the 10K in savings each year. In three years she will go back to work full time as the kids go to school. This will increase our income and we can count on saving about 50K of that, bringing our yearly savings up to 60K.

More specific details:
monthly budget is 5300 (Roths $900, Childcare $600, Mortgage $2100, living exp. $1700)
Home: Owe 320K worth 615K (3.5% 28yrs left) (payment @ $2100/mo. w tax/ins/hoa)
Cash in savings acct. 60K (emergency fund)
One Roth Ira @ 36K (one of the retirement target date funds @ TRowe)
Opened this weekend a Vanguard Roth target date fund for wife (maxed out 2014 and will contribute full amount for 2015 )
Able to save 10K a year ($1000/month x 10 working months)
Both of us have CALSTRS pensions and no access to 401k etc, nor can we pay into or collect SS with this pension (403b is option not explored yet?)
No other debt, college, car, or credit...

We don't want to move. We bought this home with the idea that it was where we will raise our family and be close to family. We do not want to decrease our spending as it is as far as we have been able to go. We have not discussed a retirement date as we love what we do for work and to be honest this whole idea of FIRE is new to us. 

Ideally, I would love to get different ideas of what a possible roadmap could be for us.  I think these ideas would help us develop a near and far reaching plan/ goal.  The people on this forum are way more educated/experienced in this area. . .  which is why we are seeking your advice. The plan is to take the advice and start learning specifics.

Again, THANK YOU!

krishnamba

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Re: Case Study: ideas for near and long term plan
« Reply #1 on: April 09, 2015, 11:47:02 AM »
Wouldnt it be better for tax purposes to have trad ira and deduct the 2x5,500 for both of you.
You can do a Roth Ladder later on when on FIRE.

MDM

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Re: Case Study: ideas for near and long term plan
« Reply #2 on: April 09, 2015, 12:06:02 PM »
We are finally secure in our positions at work and can now start coming up with a plan for the future.
What would you suggest we do with the current 60K in cash right now (currently as emergency fund)? What would you do with the 10K in savings each year.
Both of us have CALSTRS pensions and no access to 401k etc, nor can we pay into or collect SS with this pension (403b is option not explored yet?)
Use the $60K (at least some large portion of it) indirectly by fully funding your 403b option.  You paycheck income then won't be enough to meet monthly expenses, but you just draw from the $60K as needed.

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monthly budget is 5300 (Roths $900, Childcare $600, Mortgage $2100, living exp. $1700)
Home: Owe 320K worth 615K (3.5% 28yrs left) (payment @ $2100/mo. w tax/ins/hoa)
No need to divulge details here if you don't want to, but you should understand these numbers in more detail for yourselves.  E.g., where does that $1700/mo go?  How much of the $2100 will go away when the mortgage is paid, and how much remains as an ongoing expense?

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One Roth Ira @ 36K (one of the retirement target date funds @ TRowe)
Opened this weekend a Vanguard Roth target date fund for wife (maxed out 2014 and will contribute full amount for 2015 )
Check the fund fees.  If similar, status quo is fine.  If TRowe is high, move that to Vanguard.

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We have not discussed a retirement date as we love what we do for work and to be honest this whole idea of FIRE is new to us. 
Ideally, I would love to get different ideas of what a possible roadmap could be for us.
You have time.  Good for you just for exploring options now and making small adjustments that will pay off well later on.  Good luck!

PencilThinMust

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Re: Case Study: ideas for near and long term plan
« Reply #3 on: April 09, 2015, 01:01:34 PM »
My wife and I are in education as well.  Along with our Pensions, we fully fund our 403b's through Vanguard. I would look into your options...

socalteacher

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Re: Case Study: ideas for near and long term plan
« Reply #4 on: April 09, 2015, 02:24:08 PM »
All great points. To answer your questions...


403(b): My school district limits the vendors we can use for a 403(b) and the last time I inquired into it the fees were too high to make sense. I checked their list again today and Vanguard still is not on it. Also, we paid 3% effective tax rate this year.

Mortgage: If I paid the mortgage off I would still have to pay 6K in property taxes and 1K insurance and 1K in HOA. My savings would go up by 17K+. This is something that I really go back and forth with because of the increased savings per year but also the security would allow us to be less risk adverse. I could knock it out in 6 years. (same house next door is renting for $2600)


MDM

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Re: Case Study: ideas for near and long term plan
« Reply #5 on: April 09, 2015, 02:31:26 PM »
403(b): My school district limits the vendors we can use for a 403(b) and the last time I inquired into it the fees were too high to make sense. I checked their list again today and Vanguard still is not on it. Also, we paid 3% effective tax rate this year.
Is a Roth option offered on the 403b?  E.g., similar to https://www.cmu.edu/hr/benefits/benefit_programs/forms/Roth403bBrochure.pdf?

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Mortgage: If I paid the mortgage off I would still have to pay 6K in property taxes and 1K insurance and 1K in HOA. My savings would go up by 17K+. This is something that I really go back and forth with because of the increased savings per year but also the security would allow us to be less risk adverse. I could knock it out in 6 years. (same house next door is renting for $2600)
Some folks don't seem to know the difference between the actual mortgage payment vs. the escrow funds for taxes & insurance, but it seems you are doing fine here.  At 3.5% there is good reason to keep paying the minimum on the mortgage and use free cash flow for other investments.

socalteacher

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Re: Case Study: ideas for near and long term plan
« Reply #6 on: April 09, 2015, 11:38:58 PM »
Thanks MDM for your thoughts.

I did some digging and came up with the following options my district offers through a consortium for a 403(b). It looks like I have access to about 50 different funds (including Vanguard) but have to pay the fund fees and the consortiums management fees. If I want a financial planner that is another fee based add on.  Like I mentioned earlier, this is all a learning curve for me, but this does not seem like the best option. One negative I also hesitate on with a 403(b) is I can't count on using the money until 59.5 years.

Links:
www.fbcretire.com/about.htm

http://www.fbcretire.com/investments.htm (current list of available fund options)

http://www.fbcretire.com/fees.htm (fees to be paid)

MDM

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Re: Case Study: ideas for near and long term plan
« Reply #7 on: April 10, 2015, 12:11:59 AM »
I did some digging and came up with the following options my district offers through a consortium for a 403(b). It looks like I have access to about 50 different funds (including Vanguard) but have to pay the fund fees and the consortiums management fees. If I want a financial planner that is another fee based add on.  Like I mentioned earlier, this is all a learning curve for me, but this does not seem like the best option. One negative I also hesitate on with a 403(b) is I can't count on using the money until 59.5 years.
A few things:
 - You can access 457b money as soon as you retire.  Using 457b + taxable + Roth is one good way to build a bridge from retirement to age 59.5.
 - You can also (after retirement) roll the 403b to an IRA, then start a "Roth pipeline" and access that money 5 years later - something to consider if you retire before age 54.5.
 - Noticed this sentence on http://www.fbcretire.com/fees.htm:
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The following general fees and transaction fees are specific to the Nationwide Life Insurance Company - SDCOE/Fringe Benefits Consortium 403(b)/457(b) Program Vendor on the FBC's Approved Vendor List.
Also noticed Fidelity Investments Institutional Services Com. is an "approved vendor."  Does that mean you can put your 403b and/or 457b with Fidelity and pay only $1.50/mo plus the (very low if you go with Spartan) Fidelity fund fees?

Didn't see anything about a Roth option.  That's too bad - but you should ask about it.  Never know what might happen....

socalteacher

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Re: Case Study: ideas for near and long term plan
« Reply #8 on: April 15, 2015, 09:36:06 PM »
I did more digging around with my district. There is absolutely no information on their website and the person I talked to said that she is pretty sure I have access to pension2 which includes a 403b, roth 403b, and 457 plan. http://www.calstrs.com/pension2

The fees are lower than the previous consortium mentioned.

My teacher pension if I retire at 55 would pay out 44K, @ 60 would be 70K, and @ 65 would be 89K (based on becoming administrator). My wife will also have a similar pension meaning our income could range from 88K-178K. Given these numbers doesn't it make sense to go with the roth 403b while my tax rate is low for the next three years. Then when my wife goes back to work and our gross jumps from 90K up to 160K. . . I would start funding the traditional 403b to avoid paying all the taxes now??? 

Thoughts??

MDM

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Re: Case Study: ideas for near and long term plan
« Reply #9 on: April 15, 2015, 10:25:11 PM »
Given these numbers doesn't it make sense to go with the roth 403b while my tax rate is low for the next three years. Then when my wife goes back to work and our gross jumps from 90K up to 160K. . . I would start funding the traditional 403b to avoid paying all the taxes now???
Yes, with a couple of caveats:

 -  Check your eligibility for various tax credits.  E.g., the Saver's Credit can make it worthwhile to do traditional even when in a low marginal bracket.
 -  Note that "tax rate" means "marginal" both when deducting and when withdrawing.  Due to the pensions, there may not be much difference for you.  You may even be an answer to this thread: http://forum.mrmoneymustache.com/investor-alley/how-can-you-be-at-a-higher-tax-bracket-in-retirement/.
« Last Edit: April 28, 2015, 02:56:18 AM by MDM »

former player

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Re: Case Study: ideas for near and long term plan
« Reply #10 on: April 16, 2015, 01:49:49 AM »
I know that at 3.5% a lot of people here will be saying "don't pay off the mortgage because you can get better returns in the market".  I would just say that you are 35 and have 28 years left on the mortgage, which would leave you making payments until you are 63.  $320,000 is also a big sum to owe.  Given that you have a "spare" 10k per year in savings, how about looking at a refinance of the house to shorten your payback period?  If you could get the same or a better mortgage rate and pay it off at $3k per month instead of $2.1K per month, it would save you interest and give you more flexibility about your retirement date.  You seem to have the security of employment which would take away the risk of committing to bigger monthly payments, and you could be mortgage-free by the time your pensions first become available aged 55.

Genevieve

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Re: Case Study: ideas for near and long term plan
« Reply #11 on: April 16, 2015, 08:46:48 AM »
You might find this podcast useful. They go into how The Millionaire Educator and his family used their accounts strategically to get the most return on their money.

http://radicalpersonalfinance.com/how-to-become-a-millionaire-on-a-teachers-salary-in-20-years-interview-with-the-millionaire-educator-rpf0080/

http://www.millionaireeducator.com/our-story

http://403bwise.com/403bstories/2013_11.html
« Last Edit: April 16, 2015, 08:57:04 AM by Genevieve »

socalteacher

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Re: Case Study: ideas for near and long term plan
« Reply #12 on: April 16, 2015, 02:06:36 PM »
Former Player:
To be honest if I had not run across the MMM forum I probably would have just saved like crazy and paid the mortgage off. I still might do this when my wife goes back to work. It would take less than 3 years to knock out (so <6 from now). Then I would take the 20K that I would not be putting toward it and put it into a 403b or 457 plan.  I really like the idea of having that security. Then the math takes over and I second guess the security owning a home outright would bring. No matter what, I do want that bad boy gone by the time the first little one goes to college.

MDM:
I checked out the savers credit and it would work for me until the wife goes back to work if I am reading it right. Thank you for sharing your knowledge.

Genevieve:
Great articles! Thanks for the resources. I started listening to RPF about a month ago. His pod cast on opportunity cost turned my wife around on her perspective on money vs spending.

The bummer I am finding is that no matter what I do for a 403(b)457 plan I will have to pay 3 sets of fees. The consortium it looks like my district forces me to use charges multiple fees. Very frustrating and definitely feels like there are no choices but to allow oneself to be taken advantage of.