New to forum, need help with some money decisions...

[Jaysinet]

Hello, I am excited to partake in this adventure with fellow people who are passionate about living right with money.  I currently only have debt in the form of a mortgage which is not a bad financial situation.  We are at a crossroads with some choices and I am having trouble finding answers from people in the know.  Here is our situation:

Income combined - $130,000

Currently 38 y.o, and spouse 33 y.o.

Debt - Home Mortgage Balance - 56k
           Home value - 120k

My work retirement - Defined Benefit Pension 82% of top 3 years (government) at age 55 with 30 years of service,  and 3% escalator if you don't leave before age 55.  I am currently 15 years in with this agency.

              457b governmental - 2% employer match, current balance of $12,000

Spouse retirement - Employee sponsored 403b, with a 7% match, current balance $13,000

Cash Savings - emergency fund - $10,000

            Cash saved above emergency fund - $40,000

So our dilemma is this, we would like to retire with a legacy for our family and be able to travel some, but live comfortable.  If I want to retire at age 52, I cannot access the pension until 55, but the 457b allows penalty free withdrawal upon termination of employment.  We were saving up cash for a couple reasons, i.e, new home down payment and grad school for spouse.  We want to make sure we are making sound choices here going forward.  We would like to move in the next two years, and obviously the sale of our home will yield a nice chunk to plunk towards a new home around $60,000 or more.  Where should we park this $40000 to put the money to work in a location that will give us access to it before age 59 1/2 for early retirement?  Is this a scenario where we max out the 457b of mine and the 403b of my spouse to couple with my defined benefit pension? Or does the Roth IRA still make sense for us, or do we just utilize both?  Also, I understand there is an opportunity cost to hold cash, but we don't like to borrow money, which is where the idea is coming from for paying for her grad school out of pocket.  Just looking for some direction and advice and I am sure I left some info out, but this is a start.  Thanks!

[Argyle]

What kind of grad school is it?  Unless it is a professional school (law, nursing, etc.), the standard advice is never to go to a program that you have to pay for. Good students at the good programs will have their way paid for them. 

You don't say how much you are spending and saving.  And do you get a company match on pre-tax savings?

[Jaysinet]

Yes, she is going to grad school to earn her Nurse Practitioner degree, many of which are paid back by employers after the fact.  She is getting substantial help in paying, so our out of pocket would likely be $20k for the entire program.  I mentioned the 457b at my work and her 403b at her work both have a match, and both are pre-tax accounts.  As for spending, we are very budgeted and live quite easily and under our means.  If your're asking about the pension having a match, yes the government pays a substantial portion of the amount into the pension, which is why its a defined benefit rather than a contribution benefit. 

[Jaysinet]

Also, as for spending it is like this...

Income per month take home: 7800
              expenses per month: about $2800 a month

[MDM]

Where should we park this $40000 to put the money to work in a location that will give us access to it before age 59 1/2 for early retirement?
Is this a scenario where we max out the 457b of mine and the 403b of my spouse to couple with my defined benefit pension?
Or does the Roth IRA still make sense for us, or do we just utilize both?

Income per month take home: 7800
              expenses per month: about $2800 a month

If I understand all the above correctly (you can use the case study spreadsheet to check yourself) you should be able to maximize all your tax-advantaged opportunities (403b, 457, IRAs) and still have money left over to invest in a taxable account.

See also http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

[Jaysinet]

So I understand maxing out the accounts.  My government pension breakdown is as follows: I put in 9.5% of income pretax, and the municipality puts in 16.5% on my behalf.  The 457b matches 2% of my income, so they match $1600 for the year, which would be me putting in $15,900 to max this account out.  A ROTH would allow another $5500 per year for me.  This would equal an extra $1783 per month to max these both out for just me.  But doing so would mean I am investing 36% of my income into retirement accounts including my pension portion.  I know most Americans are way under this number, and that's why I am here and living this lifestyle of difference.  I'm just checking if it makes sense to invest this heavily, or do I even need to invest this heavily?  This is only for me, and if I max these out, should my wife also max out her 403b and a ROTH, or is it not necessary with my investments, and we should live a little along the way to celebrate our financial freedoms?   I just want to be sure we are where we want to be and on the right path for processes.

[MDM]

So I understand maxing out the accounts.  My government pension breakdown is as follows: I put in 9.5% of income pretax, and the municipality puts in 16.5% on my behalf.

Pensions can be a good deal, or not, depending on the terms.  Do you know how much you will get as a function of when you retire and when you start to take the pension?

The 457b matches 2% of my income, so they match $1600 for the year, which would be me putting in $15,900 to max this account out.

Employer contributions are not counted against the $18K/yr that you may contribute.  $18K from you and $1.6K from the employer gives you $19.6K/yr into the 457b.

A ROTH would allow another $5500 per year for me.  This would equal an extra $1783 per month to max these both out for just me.  But doing so would mean I am investing 36% of my income into retirement accounts including my pension portion.  I know most Americans are way under this number, and that's why I am here and living this lifestyle of difference.

Yes, you would be doing better than average for the country as a whole.  Within the contributors to this forum, you might be average or even below average.

I'm just checking if it makes sense to invest this heavily, or do I even need to invest this heavily?

That is up to you to decide.  Count me in the group who would say "yes". 

This is only for me, and if I max these out, should my wife also max out her 403b and a ROTH, or is it not necessary with my investments, and we should live a little along the way to celebrate our financial freedoms?

Up to you.  Again count me in the group who would say "yes" - but see below for a possible exception.

I just want to be sure we are where we want to be and on the right path for processes.

Have you put your numbers into the case study spreadsheet?  Depending on the pre-tax reductions, credits, etc., you may find that you can have it both ways: plenty to "live a little" at the same time you sow the seeds of early retirement with "more than enough."  If you think you won't have enough to live on now, you could post those numbers to see if others might have suggestions.

[Jaysinet]

Yes, I would get 82% of my top three years average for the rest of my life with a survivor benefit.  So I am guessing with past indications, by the time 18 years comes, I should be around 110000 for my top years wages.  Thus my defined benefit pension will pay me about 90k a year from age 55 on.  So if I live to age 85 this would be a value of about 2.7 mil.  So if I max out the 457b going forward if I averaged 8% in 18 years this should be worth about 700k.  And if I averaged the same in a ROTH maxed out for next 18 years, it should be worth about 240k.  If my wife maxes out her 403b in 22 years, since she is younger than me it should be worth about 1 Mil.  I realize these are all assumptions of an 8% growth and ideal calculations.    But that could give us potentially another 1.9 mil at retirement.