Family of Three Seeking to Semi-Retire

[seeking_semi_retirement]

-=[ Our Situation and Goals ]=-

My wife and I are both 30 years old with one small child (likely the only one). We have a mortgage, but my mother-in-law lives with us and pays half of the mortgage and utilities ($550 + $100). My wife stays home with our son, is finishing her PhD, and teaches adjunct. I have a salaried job, am finishing my PhD, and make some side money by also teaching adjunct. Our goal is to “semi-retire” in the next 5 years. We want to save, cut expenses, and invest as much as possible (while I am employed full-time) in order to save enough to retire fully at age 60. After 5 years, we want to semi-retire, in which we both will work part-time/self-employed/adjunct to make enough for our monthly expenses ($2200) and home-school our son. According to our calculations, we can fully retire in about 17 years if we continue our current trajectory, but we would miss our son's childhood. The basic idea is to have the freedom to leave the full-time job and work for ourselves/part-time in 5 years, giving us the time and flexibility to spend at home.


-=[ The Numbers ]=-

Cash: $22k (would like to keep $12k in cash for emergencies)
Roth 401k: $41k (Vanguard Index Funds: 70% total stock market, 10% international stock, 20% total US bonds)
Property: $187k ($179k house, $8k car)
Mortgage: $160k with 4.375%*
     *Note: Mother-in-law lives with us and pays us half the mortgage (about $550) and half utilities (about $100).

The above gives us a Net Worth of about $85,000.

Net salary - $47k annual (after taxes and health insurance)
Monthly expenses - $2200-2500

-=[ The Questions ]=-

• The big question for us now is where to invest our current cash holdings? According to Mad FIentist, it seems that Traditional IRA would be the way to go for now, converting to Roth later to avoid taxes. Should we max out the traditional IRA for the next 5 years?
  
  
• Does this semi-retirement plan seem feasible? Can we fully retire at 60 if we have $175k in assets at the end of 5 years, and if we don't touch those assets, but live off part-time income?

Edit: Based on what we've read, we went along with the assumption that our expenses would decrease once we hit retirement. The 175k figure was based on us spending roughly 24k per year. As far as our current expenses, we're using a very conservative estimate, and could spend less.

[MDM]

seeking, welcome to the forums.

I admire your intent, but the numbers in your post look a bit thin. 

E.g., let's assume you have $30K/yr expenses and can get a 5% real (i.e., above inflation) return on your investments.  $175K * 1.05^25 = $593K.  Using a 4% SWR you need $30K * 25 = $750K, so you would be ~$157K short.

With two PhDs, however, one might guess you could increase your earnings considerably and thus get where you want with only a few more years of upfront working.  Good luck!

[seeking_semi_retirement]

Thank you for your reply!

We should've mentioned that, based on what we've read, we went along with the assumption that our expenses would decrease once we hit retirement. The 175k figure was based on us spending roughly 24k per year.  (I'll update my original post).

As far as our current expenses, we're using a very conservative estimate, and could spend less.

[OR]

My family is on a similar plan, but minus the PHDs.  It is nice to see someone else on the semi-retirement plan. With kids, you don't want to waste their formative years working too hard. 

I think that you should be alright.  You'll only have a few years until Social Security kicks in (it might be small, but will likely be enough to bridge the gap.)  Also, we plan on living on 2 part time incomes for the foreseeable future, but will likely mix in a year or two of full time work once the kids get older and or move out.  My wife and I's jobs are pretty rewarding in the overall scheme of things (as will be yours).  A little extra padding to the stash in those years and you'll be good.  Either that or a small contribution every year, during part time work.  1-5k a year adds up quick when compounded over 30 years. 

Best of luck!

[retired?]

Just curious - nothing much offer right now.  Why the Phd's if you plan to semi-retire?  Perhaps that is a change of mindset after you both started.  I was in a phd program and it is not exactly an easy thing.  And, most would say there is no reason to get one unless you plan to teach or do research at the university level.

I suppose I'd recommend one working full-time while other is near zero.  I think a single full-time Phd can prob earn more than two part-times.  Don't know your fields.  Of course, that may cause some friction deciding who'd work and who'd stay at home.  At the start of my career, I always made choices that left options open.

[seeking_semi_retirement]

Why the Phd's if you plan to semi-retire?  Perhaps that is a change of mindset after you both started.  I was in a phd program and it is not exactly an easy thing.  And, most would say there is no reason to get one unless you plan to teach or do research at the university level.

We decided to pursue early retirement midway through our PhDs. I'm fortunate to have such a position while also pursuing my degree. Completing the PhD will allow us both to teach adjunct when needed, which will hopefully be a job still worth having in the future.

I think a single full-time Phd can prob earn more than two part-times.  Don't know your fields.

Unfortunately, that's not the case. It comes down to supply and demand, really: Many more PhDs than there are solid jobs. Even one is able to get a tenure-track position, those next 5 years will be full of a great deal of work/publishing. In my area and level, a starting professor salary is likely exactly what I'm making now, maybe a bit more: 45 - 55k.

What are everyone's thoughts regarding my question on the IRA vs. Roth IRA for our situation?

[Gimesalot]

Regarding the IRA, I would do a traditional IRA and most likely leave it that way.  Here's why (This is my understanding and it could be inccorect.  PLEASE CORRECT ME IF I AM WRONG):

For income, there is a standard deduction and exemption from tax.  So for 2014, the standard deduction, for married filling jointly, is $12600.  Personal exemptions are $3950.  A married couple (no kids, not itemizing), does not pay taxes on the first $20,500 of income.  Then you pay 10% on the next $18,150.  Thus, if in 2014, a married couple (no kids, not itemizing), withdraws $38,650, they would pay $1,815 in federal income tax.

Since I don't know your tax rate now, its tough to give you a good answer.  Either way, since your income now is low right now, and will be low in 5 years, I don't think there is much to optimize.  One thing to consider, you can not withdraw your contributions from an IRA that is less than 5 years old.  You need to figure out if converting from traditional to Roth will reset the 5 year clock.

[retired?]

Unfortunately, that's not the case. It comes down to supply and demand, really: Many more PhDs than there are solid jobs. Even one is able to get a tenure-track position, those next 5 years will be full of a great deal of work/publishing. In my area and level, a starting professor salary is likely exactly what I'm making now, maybe a bit more: 45 - 55k.

Supply and demand, eh?  Are you an econ student? ; )  Had not paid attn to the fact that you want to teach, so certainly one cannot beat two.  I was thinking industry was a possibility, in which case, depending on field, is very much true.  I changed mind mid-Phd and sought industry.

Agree with Gimesalot.  But, my understanding is that traditional will have a 10% penalty whereas after 5 years Roth does not on withdrawals of contributions, but not gains.

Here is a nice summary on how to avoid penalties:

http://www.dailyfinance.com/2013/09/23/how-to-avoid-ira-savings-early-withdrawal-penalty/

Withdraw from a Roth IRA. If you have a Roth IRA that is at least five years old, you may be able to withdraw your contributions, but not the earnings, without incurring an early withdrawal penalty.

[seeking_semi_retirement]

Supply and demand, eh?  Are you an econ student? ; )  Had not paid attn to the fact that you want to teach, so certainly one cannot beat two.  I was thinking industry was a possibility, in which case, depending on field, is very much true.  I changed mind mid-Phd and sought industry.

Social sciences, actually. Industry gig would be great, but unlikely. I could, however, act as some sort of consultant. Thank you for your response!

Am I correct, then, in thinking that our best option is something like the following?:

- Open Traditional IRAs for both myself and my wife (we currently only have a Roth valuing around 41k), enabling us to contribute 11k between the two of us.
- Contribute (and continue to contribute) as much as possible to those traditional IRAs, putting any remainder in the Roth and/or other investments.
- When ready, began the conversion from Traditional to Roth
- At 59.5, begin to withdraw from the Roth.

In the meantime, we'd only need to make enough to cover our expenses.

[retired?]

Yes, if $$ has been in Roth over 5 years, can withdraw contributions, but not gains, prior to 59.5 with no penalty.

Look up "Roth Ladder".  It is a tactic for people who retire early and have relatively low or no income (living off savings) to convert traditional or 401k to roth (roll over just enough so that the tax is zero) and then take out later.  It is a great "loophole".