Author Topic: Young Educator Couple Tries to Figure Out Options  (Read 1296 times)

Falconbug

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Young Educator Couple Tries to Figure Out Options
« on: December 21, 2016, 12:41:02 PM »
Hi everyone!

I've edited for length and clarity. I think the first post was just too much info!

First, a little background: my wife and I are 28 years old, have been married for 4 years (but together for 10), and have dealt with our share of setbacks. Between us we've paid back $20k in student loans, had two jobs, lost one job, etc. We were both in education, but my wife is pursuing a change of careers at the moment, and will finish her graduate degree in about 10 months with zero debt. We've learned a very important lesson about work: no job is worth it if it makes you miserable. We didn’t realize how blessed we were to have shed that job until a month or two later. We have about 150k left on our 4.875% mortgage, but no other debt.


As a teacher, retirement options and savings are a little different than for some other people. Given what I have available to me, I am curious what would be the best option for us in the long run. FI excites us, but we are uncertain about RE.

I have a defined benefit plan, to which 14% of my pay goes every year. The benefits have been reduced drastically since I started teaching 5 years ago, but it boils down to this:

Earliest eligibility to retire with benefits is age 52, 30 years experience, for a 33% benefit

Earliest non-reduced benefit is age 60, 38 years experience, for a 83.6% benefit

This is calculated as:
AVERAGE (of top five years pay) X percentage = yearly benefit (paid out monthly)

Based on our current contract, which is by no means a guarantee, that would work out to about $112,000 as the average. For those interested, our current contract keeps “steps” (raises based on experience) in place and includes 2% percent on base (essentially inflation). Our previous contract froze all steps (no raises), had no increase on base, and took more from our paychecks for health insurance. I am optimistic that those types of shoddy negotiations won’t return, but there is a slight trend toward the privatization of public education, which could cause many changes.

The age 52 would mean $36,960 per year

The age 60 would mean $93,632 per year

There is an account withdrawal option that works like this:
Withdraw at any age, any time after 5 years in, you get:
All contributions
50% Match of all contributions
6% annually compounded interest on all contributions
6% annually compounded interest on match of contributions
(interest rate subject to change at any time without notice)
Generally speaking, it is best to roll this into an IRA because of potential penalties, unless you are of retirement age.

I am also eligible for either a 403(b) or a roth 403(b) and a 457 plan.There is no employer match for any of these options. This is where things get a little confusing for me, and why I’m writing looking for opinions, thoughts, and advice.

This year, I will contribute to a traditional IRA to lower our taxes and increase our refund (and reinvest). We currently fall into the 15% tax bracket, married filing jointly. We have our emergency fund well stocked, enough cash to cover tuition for the remainder of my wife’s degree, and feel comfortable maxing out at least one of our IRAs. There is some concern of one of our cars dying in the near future, but we certainly have no plans of buying new or financing something. 

In the future, and especially once my wife is full time employed, we want to start contributing more to our other options, 403(b), 457, etc. I have read many posts discussing the “order” in which to contribute, but I am curious about the tradeoffs between the various plans.

The 403(b) options open to us are managed by TSA Consulting Group, which offers: (removed for length)

Roth 403(b)

Metropolitan Life Insurance Company


Looking through the Fidelity 403(b) options, there seem to be some decent fund options,  with FSTVX having an expense ratio of 0.045. This seems most similar to VTSAX,  which I think would be my top choice of Vanguard funds for an IRA.


I could also contribute to a 457 plan, administered by Ohio Public Employees Deferred Compensation Program. This plan seems to offer the most flexibility in access to funds, once I have separated from service. There is no age component here that I can tell, so this could be very beneficial should we decide to retire early. The fees worry me more with this account. There is an annual fee of 0.0014 or 0.14% (with a cap of $55 per quarter) plus the expense ratio. (fund list removed for length) Out of the options, I feel like the Vanguard Institutional Index looked pretty solid, with a low 0.02% expense ratio and fund that seems to try to match the S&P 500.

Our goal, once we are both fully employed, it to put away at least $30,000 a year (which would likely be close to my wife’s full income).  We are tentatively looking at starting a family within the next several years, but we want to get ourselves on even more secure financial footing before then.

Any thoughts, suggestions, criticisms, advice, etc. on the best way to proceed? Should we go 403(b) and 457? 457 first, then 403(b) if enough? Skip those and go for the IRA first? Any comments are greatly appreciated!

« Last Edit: December 22, 2016, 11:01:16 AM by Falconbug »

aceyou

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Re: Young Educator Couple Tries to Figure Out Options
« Reply #1 on: December 22, 2016, 08:31:34 PM »
Hi Falconbug.

Are you able to buy years?  In Michigan you used to be able to buy up to 5 years, which I did.  That option is gone now. 

Also, can I assume that because you are contributing 14% to your pension, that this includes social security?  I pay 7%, plus FICA, which works out to be about 14%.  Curiosity is the only reason I ask, I'm always interested in how other states work. 

With the 457 vs 403, I'd go with the 457 if the difference in cost is REALLY close.  Otherwise, I'd consider how quickly you want to FIRE.  If very soon, which it does not sound like you are planning to do, then it may not matter as much anyway.  Regardless, are you aware of a roth conversion ladder.  You can transfer money from a 403 to a Roth IRA penalty free at any age (you still have to pay the income tax), then wait 5 years, then you can take the money out of the Roth without penalty.  So, even with the 403 you can access the money really early without penalty if you plan it out. 

My bet is that going after the maximum pension amount won't be a huge priority for you as long as you keep saving hard each year.  By the time you are 50 you are going to be ready for new adventures, and probably well sooner than that. 


meandmyfamily

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Re: Young Educator Couple Tries to Figure Out Options
« Reply #2 on: December 22, 2016, 08:53:44 PM »
This blog is about two educators.  Very inspiring:  http://www.millionaireeducator.com/our-story-ii


Falconbug

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Re: Young Educator Couple Tries to Figure Out Options
« Reply #3 on: December 22, 2016, 09:02:57 PM »
Hi Ace,

Thanks for your comments! In OH, you can only buy years if you have a qualifying experience (military service, out of state teaching, private teaching, etc.), and it is incredibly expensive.

Crazily enough, none of my pay goes into Social Security. From my understanding, I won't have any when I retire! Even when my wife subbed, she still paid into STRS instead.

I have spent a good deal of time looking at the conversion ladder as well. I guess I always get hung up on the five year waiting period -- especially if you really want to avoid taxes and such like the gocurrycrackers did. Would the tax benefits of combining the 403 and 457 outweigh the ER differences? I could max out both and put away almost 36k (eventually) per year.

Thanks!

Falconbug

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Re: Young Educator Couple Tries to Figure Out Options
« Reply #4 on: December 22, 2016, 09:03:48 PM »
This blog is about two educators.  Very inspiring:  http://www.millionaireeducator.com/our-story-ii

Thanks meandmy! I think I just saw a podcast on madfientist about this couple. Great stuff and thanks for the link!

aceyou

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Re: Young Educator Couple Tries to Figure Out Options
« Reply #5 on: December 23, 2016, 10:27:16 AM »
I think you'd want to max both of your Roth IRAs before you do anything that doesn't get matched in your 403/457.  Your income is as low as it'll ever be and if you do teach till you are 55 or 60 you will he in a high bracket even in retirement.  And if you retire early it becomes your easy to access tax free money till you get old enough to access your 403/457's.  So whether you retire before or after you plan to, it had an advantage either way.