Author Topic: Case Study - Mid 20s Teacher  (Read 6030 times)

nirvines88

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Case Study - Mid 20s Teacher
« on: February 27, 2015, 12:28:48 PM »
26 year old teacher seeks further aid with optimization on cutting costs, if possible...  I'd also appreciate some help with the questions at the bottom, which relate to my goal of financial independence/early retirement.  I hope to accomplish financial independence by my mid 40s, but obviously there are a lot of unknown variables (stock market returns? inflation? will there be teacher pay raises? marriage or kids in the future? etc.) that could alter the timing of the achievement of my goal.

Note 1: I've already maxed out Roth IRA for 2015 so I'm not including that in reoccurring expenses. 
Note 2: I recently raised my 401k contribution rate so it's going to look like I'm barely scraping by, but I'm really doing fine - my emergency fund was getting a bit big so I am allocating more to the 401k. 

Income:

Teacher salary (school year) - $41,654/year over 10 months (or $3471.16/mo over 12 months, for ease of calculation here)
Tutor gig (school year) - $2,000/yr (averages to $166.66/mo)
High school coaching gigs (year around) - $1,100/yr (averages to $91.66/mo, or about $2.00 per hour)
Renting spare room (just starting this) - $5,400/yr (averages to $450/mo)

Total: $50,154/yr or $4179.50/mo

Current expenses per month:
 
Non-negotiable Expenses
House (principal, interest, taxes, insurance, no PMI): 950.00
401k (pre-tax): 1,000.00
401k (Roth): 600.00
Federal taxes: 349.59
State tax (NC): 162.00
Social Security: 257.00
Medicare: 60.10
Pension: 249.93 (put in 30 years (which I won't) and get 45% of your final salary; put in less, and receive a lower percentage)
Vision: 13.10
Health ins.: 0.00 (high deductible employer plan)
Dental: 7.20
Phone: 0.00 (dumb phone on family plan - negligible amount)
Internet: 34.99
Water/garbage: 40.00
Electricity: 80.00 (working on improving this for the winter and it will come down significantly in the summer)
Netflix/Amazon Prime: 0.00 (share with sisters; in combination with antenna TV there is more content than can be watched)

=3,803.91/mo

Discretionary Expenses
Car Insurance: 50.00
Gasoline: 30.00
Groceries (food, booze, toiletries, etc.): 175.00
Eating out/bars: 50.00
Misc. (occasional home supplies, b-day gifts for family, movie ticket, whatever): 50.00

= approximately 355.00/mo


 4,179.50 (monthly credits)
-4,158.91 (monthly debits)

= 20.59 (approximately monthly surplus, although this number is for learning purposes only; some months I have more leftover, some months I net a negative number)

Assets:

About 100,000 between my work 401k and Vanguard IRAs.  I only use index mutual funds and it is all held in tax advantaged accounts, with a 50-50 split or so between Roth and pre-tax.  85% stocks (75% is U.S./25% international) and 15% bonds.  I also have a credit union account for paying bills and my emergency fund.  Lastly, I put 20% down on my recently acquired home, so I do have about 40,000 in equity.  Not really looking for optimization here.

Liabilities:

Mortgage: 159k (30 years @ 3.875%)

Specific Questions:

1) Any obvious ways to improve spending or cut down on costs?  I think I've thought of the obvious ones...but perhaps I'm missing something.

2) I'm saving about 50% of my income (nearly max out 401k+max IRA+mortgage principal payments).  Using the MMM rule of thumb, does this mean I can retire in about 17 years if my spending habits stay the same?

3) How should I account for social security and my pension when retirement planning?  Should I lean towards investing via Roth because social security and my pension will fill my lower tax brackets when I draw down assets once retired?  Or should I lean towards pre-tax, because I want to retire early and could slowly draw down on the accounts and/or convert to a Roth?  I'm currently hedging my bets and doing a mixture of the two.

4) Because I want to retire early, should I switch to my employer's 457 plan rather than continuing to use their 401k?  They have the same investment options and I haven't heard about any obvious gotchas or negatives with a governmental 457.

Edit: added info about home equity and fixed some formatting
« Last Edit: February 27, 2015, 12:34:28 PM by nirvines88 »

teacherwithamustache

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Re: Case Study - Mid 20s Teacher
« Reply #1 on: February 27, 2015, 01:04:31 PM »
401K or 403B?

Keep Saving at this rate and you will be retired by 40 if not sooner.  If you are not staying the course to pension land then cash out of your pension every year and roll it into one of your Vanguard accounts.  I am 13 years in and a bit pot committed to another 15 years until pension time.  As long as you are disciplined it should work out better for you in long run plus you have control of your pension funds.

KD

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Re: Case Study - Mid 20s Teacher
« Reply #2 on: February 27, 2015, 01:13:21 PM »
Can you do both????...the 457 and the 401K?

nirvines88

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Re: Case Study - Mid 20s Teacher
« Reply #3 on: February 27, 2015, 01:19:38 PM »
401K or 403B?

I use my state 401k because it is better than my county 403b.  It has less fees and better fund options, including index funds.

Can you do both????...the 457 and the 401K?

Your question could be interpreted 2 different ways:
1) Can I use both the 401k and 457?  Yes, I believe so!  Lots of tax sheltering available.
2) Do I have the means to contribute to/max out both the 401k and 457?  No, definitely not! 

With the 457, to my knowledge, you can withdraw from at any time, whereas with the 401k you have to wait until age 59.5 (unless you use one of the multiple ways to get around that, which have been discussed on this forum). 

MrSal

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Re: Case Study - Mid 20s Teacher
« Reply #4 on: February 27, 2015, 01:26:55 PM »
401K or 403B?

Keep Saving at this rate and you will be retired by 40 if not sooner.  If you are not staying the course to pension land then cash out of your pension every year and roll it into one of your Vanguard accounts.  I am 13 years in and a bit pot committed to another 15 years until pension time.  As long as you are disciplined it should work out better for you in long run plus you have control of your pension funds.

Please say more.

I'm interested in hearing that.

Can you actually cash out the contributions made to the PSERS system without affecting the pension? When I say cash out I mean rollover to some other account types like IRA or Roth.

KCM5

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Re: Case Study - Mid 20s Teacher
« Reply #5 on: February 27, 2015, 01:41:27 PM »
Definitely use the 457 if the options are the same. Is there any matching for the 401(k) that there isn't for the 457? Money in the 457 can be withdrawn any time after you're no longer working there, so its a really valuable tool if you want to retire before normal retirement age. Personally, I'd fully fund the 457 before considering the Roth 401k, too. Those tax savings are powerful and you're funding a Roth IRA already, so you'll have some after tax savings to use.

Also, your tax withholdings seem a little high considering all of your pre tax savings. Have you done the math to see if that number is optimal? Or are you purposefully overwitholding to get a refund?

nirvines88

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Re: Case Study - Mid 20s Teacher
« Reply #6 on: February 27, 2015, 01:47:15 PM »
Definitely use the 457 if the options are the same. Is there any matching for the 401(k) that there isn't for the 457? Money in the 457 can be withdrawn any time after you're no longer working there, so its a really valuable tool if you want to retire before normal retirement age. Personally, I'd fully fund the 457 before considering the Roth 401k, too. Those tax savings are powerful and you're funding a Roth IRA already, so you'll have some after tax savings to use.

Unfortunately there is no matching for the 401k nor the 457.  I'll look into the 457 this weekend and see if I can find any hidden pitfalls.

Everyone tells the young low earners to go with the Roth option.  Let's look at an approximate example, and perhaps you can tell me if my interpretation is correct.  If it is, it favors leaning Roth.

In retirement (if current plan pans out):
-social security will take up most of the 10% bracket
-pension will take up most of the 15% bracket
-pre-tax 401k withdrawals then for any additional money I need; likely taxed at the 25% bracket (not ideal!)

Also, your tax withholdings seem a little high considering all of your pre tax savings. Have you done the math to see if that number is optimal? Or are you purposefully overwitholding to get a refund?

You're absolutely right, I do usually get a refund of a 300-1000 dollars from the Feds, and usually owe a bit to the state.  I could probably tweak my withholding numbers a bit, but it's probably only a net difference of $500 or so.  Of course, if I'm optimizing everything, I'd probably rather invest that $500 at the start of year x than year x + 1.


ChaseJuggler

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Re: Case Study - Mid 20s Teacher
« Reply #7 on: February 27, 2015, 01:53:52 PM »
High 5 yo! I'm a 28 year old high school teacher living near Charlotte in almost the exact same situation as you.

We should meet up and share stories sometime if you're nearby!

teacherwithamustache

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Re: Case Study - Mid 20s Teacher
« Reply #8 on: February 27, 2015, 01:58:27 PM »
401K or 403B?

Keep Saving at this rate and you will be retired by 40 if not sooner.  If you are not staying the course to pension land then cash out of your pension every year and roll it into one of your Vanguard accounts.  I am 13 years in and a bit pot committed to another 15 years until pension time.  As long as you are disciplined it should work out better for you in long run plus you have control of your pension funds.

The way it works in Texas....  You the employee contribute 8% to your pension out of your paycheck.  The employer contributes 8% from their budget.  This 16% goes into the pension fund as your account.  At any point you can withdraw the principal.  The only value that you know of is the principal.  Currently my pension cash value is 75,000 after 13 years of teaching.  So if I want to withdraw my pension I get 70K.  The state keeps the growth.  I never know about the growth but whatever.  I get my pension for the rest of my life so scoreboard.

Please say more.

I'm interested in hearing that.

Can you actually cash out the contributions made to the PSERS system without affecting the pension? When I say cash out I mean rollover to some other account types like IRA or Roth.

rpr

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Re: Case Study - Mid 20s Teacher
« Reply #9 on: February 27, 2015, 02:09:50 PM »

Can you actually cash out the contributions made to the PSERS system without affecting the pension? When I say cash out I mean rollover to some other account types like IRA or Roth.

Is this a trick question? I would think that once you cash out the pension is gone. Your choice : cash today OR pension in retirement.  The state (or teacher's) retirement system is supposed to manage and invest your contributions to provide you with a pension in retirement.  If you cash out, then you are responsible for doing the management of these funds.

I do not know if the cash value can be rolled over to IRAs.

FIace

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Re: Case Study - Mid 20s Teacher
« Reply #10 on: February 27, 2015, 02:11:59 PM »
I would be contributing to the Traditional IRA and not the Roth if I was you.  The Roth only makes sense if your income is too high to qualify for the Traditional or you expect that you will be in a higher tax bracket when you start to withdrawal the money.  Put any extra money after maxing out 401k and Traditional IRA into a tax efficient fund in a taxable account.  My choice would be Vanguard Total Stock Market Index Fund (VTSAX).  You could then use this money first, while you set up your Roth IRA pipeline in early retirement.

ChaseJuggler

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Re: Case Study - Mid 20s Teacher
« Reply #11 on: February 27, 2015, 02:49:54 PM »
I'm pretty sure in NC that you can only qualify for the (reduced) pension after you hit age 50 with 20 years in the classroom.
http://goo.gl/pa7sgI

You can roll the lump sum into an IRA after your last day though. (this is my current plan)
« Last Edit: February 27, 2015, 02:55:51 PM by ChaseJuggler »

MrFrugalChicago

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Re: Case Study - Mid 20s Teacher
« Reply #12 on: February 27, 2015, 03:36:25 PM »
You look pretty awesome to me.  Few questions:

Single? No kids?

What happens when big things happen? Furnace goes out, car blows up... lots of things that can happen, but I don't see where they are budgeted. I think you need at least 5% budgeted towards unexpecteds, possibly more..

I know nothing about your housing market, but I spend the same amount on my house while making 3x what you do. If it lets you walk to work or something maybe it is worth it.. and I guess with room rent out, it comes down to a sane amount. I have owned houses of very different values, when I step back and look at it - I don't think I really get my monies worth on the more expensive houses I have lived in.

Really outside of house, your expenses rock. Income is hard to change.. you could give up say coaching or something and do a better paying summer job, but if you enjoy coaching - no point to make your life suck to make a little more money.

mozar

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Re: Case Study - Mid 20s Teacher
« Reply #13 on: February 27, 2015, 09:28:01 PM »
I agree with getting a roommate. Getting a house 3 times your income is really maxed out. Its nice to be settled in somewhere if thats what you want, but 950 a month is a lot on your income.

nirvines88

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Re: Case Study - Mid 20s Teacher
« Reply #14 on: February 28, 2015, 06:45:02 AM »
I'm pretty sure in NC that you can only qualify for the (reduced) pension after you hit age 50 with 20 years in the classroom.
http://goo.gl/pa7sgI

You can roll the lump sum into an IRA after your last day though. (this is my current plan)

That sounds right.  So if I retired at 45, I'd have 20 years of service and be worthy of a partial pension, which I could then start receiving in my 50s, I believe.

You look pretty awesome to me.  Few questions:

Single? No kids?

What happens when big things happen? Furnace goes out, car blows up... lots of things that can happen, but I don't see where they are budgeted. I think you need at least 5% budgeted towards unexpecteds, possibly more..

I know nothing about your housing market, but I spend the same amount on my house while making 3x what you do. If it lets you walk to work or something maybe it is worth it.. and I guess with room rent out, it comes down to a sane amount. I have owned houses of very different values, when I step back and look at it - I don't think I really get my monies worth on the more expensive houses I have lived in.

Really outside of house, your expenses rock. Income is hard to change.. you could give up say coaching or something and do a better paying summer job, but if you enjoy coaching - no point to make your life suck to make a little more money.

Yep single and no kids.  I do have an emergency fund that I try to keep around 10k, so I think I should be ready for an emergency.  Now if both the heat pump blows up and my car explodes, that might be tough to juggle.  I suppose the Roth IRA contributions could be a double emergency backup.

Yeah the house is definitely my luxury item.  I bought it for 200k, which is a modest price for where I live.  If you want to spend less you have to either a) super far from work or b) in the sketchier parts of town.  I live 3 miles from work.  The house is a 3 BR and I am getting a roommate in a few days, so that should cut 450 off the 950 mortgage, at which point it's temporarily a bargain per month.

I've thought about perhaps dialing back on coaching to tutor more (obviously ~$2 an hour < $50 an hour).  However, I really enjoy it, so it's something I'll have to think about.  I know in the back of my mind that coaching is probably one of the biggest detractors to my FI, mainly because it's just not paid well by the schools where I live and it takes so much time.

High 5 yo! I'm a 28 year old high school teacher living near Charlotte in almost the exact same situation as you.

We should meet up and share stories sometime if you're nearby!

I'm in Raleigh, so about 2 hours away!

I would be contributing to the Traditional IRA and not the Roth if I was you.  The Roth only makes sense if your income is too high to qualify for the Traditional or you expect that you will be in a higher tax bracket when you start to withdrawal the money.  Put any extra money after maxing out 401k and Traditional IRA into a tax efficient fund in a taxable account.  My choice would be Vanguard Total Stock Market Index Fund (VTSAX).  You could then use this money first, while you set up your Roth IRA pipeline in early retirement.

I think what I really need to do is sit down and nerd out over the numbers. 

thedayisbrave

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Re: Case Study - Mid 20s Teacher
« Reply #15 on: February 28, 2015, 08:53:48 AM »
Yeah the house is definitely my luxury item.  I bought it for 200k, which is a modest price for where I live.  If you want to spend less you have to either a) super far from work or b) in the sketchier parts of town.  I live 3 miles from work.  The house is a 3 BR and I am getting a roommate in a few days, so that should cut 450 off the 950 mortgage, at which point it's temporarily a bargain per month.

Not sure whereabouts in Raleigh you live, but that is definitely WAY more house than you need.  I'd argue that you don't have to live in a sketchy part of town for less... last month I looked around at some townhouses in Southwest Raleigh near Cary and they were going for $145k.  Granted, I'm not sure exactly where you work but I don't think other parts of Raleigh vary that greatly.  At least you put down 20% though.

You mention it's a 3 BR.  Could you rent out two rooms instead of just one? That would effectively cover your mortgage payment.  Obviously it would be slightly more bothersome sharing your space with 2 other people but I do it just fine in an 1000 sq feet condo so it shouldn't be too much of a hardship for you.  You're in a good spot so this is just an idea... it would certainly enable you to "front load" your financial life (something I'm a fan of).   

nirvines88

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Re: Case Study - Mid 20s Teacher
« Reply #16 on: February 28, 2015, 12:16:26 PM »
Yeah the house is definitely my luxury item.  I bought it for 200k, which is a modest price for where I live.  If you want to spend less you have to either a) super far from work or b) in the sketchier parts of town.  I live 3 miles from work.  The house is a 3 BR and I am getting a roommate in a few days, so that should cut 450 off the 950 mortgage, at which point it's temporarily a bargain per month.

Not sure whereabouts in Raleigh you live, but that is definitely WAY more house than you need.  I'd argue that you don't have to live in a sketchy part of town for less... last month I looked around at some townhouses in Southwest Raleigh near Cary and they were going for $145k.  Granted, I'm not sure exactly where you work but I don't think other parts of Raleigh vary that greatly.  At least you put down 20% though.

You mention it's a 3 BR.  Could you rent out two rooms instead of just one? That would effectively cover your mortgage payment.  Obviously it would be slightly more bothersome sharing your space with 2 other people but I do it just fine in an 1000 sq feet condo so it shouldn't be too much of a hardship for you.  You're in a good spot so this is just an idea... it would certainly enable you to "front load" your financial life (something I'm a fan of).   

I have no interest in living in a townhome and dealing with an HOA or neighbors on top of me.  I'm enjoying my oversized 1300 sq. ft ranch with garage that holds my ping pong table, dart board, and foosball table.  I love having a yard and being less than 3 mi from work. 

I'm definitely thinking about looking for a second roommate.  The biggest downside would be that the two roommates would have to share a bathroom, which would be a lousy deal for the first roommate, since I'm sure he was planning on having that solo.  We'll see what happens!  Having two others pay for mortgage would be a sweet deal.