Hey Guys,
I'm new to the FIRE community and have never been good at this stuff and am trying to figure out what is best to reach FI in 10 years or less.
Life Situation: Just turned 34, female. Long term male partner, 33. Unmarried, may marry in future.
Have you discussed FI with your partner? Are we correct that these numbers are all yours? If so, what are their finances like?
^don't feel obligated to answer any of that of course given that we're strangers on the internet =) but context can be helpful. Not especially helpful in this case, thankfully, so these questions are more suggestive to you =).
Live south of Boston, MA. Zero dependents. I am already vested in my current employers pension which if I left right now would be $1500 a month when I turn 65. If I stay where I currently am while trying to reach FI for the next 10 years it would grow to about $3500 a month, or even over $4200 a month, without early withdrawal penalties.
Ignore this if that pension is COLA or if "without early withdrawal penalties" means you could start taking the pension at 44.
A thing to keep in mind: depending on when you FIRE, note that inflation will eat away at this. This is a double-edged sword: you get less money, but your IRA-ladder plan becomes more viable as tax brackets go up over time. Of course, this example is using retrospective data so caveats abound, but if we take the scenario where you retire in 10 years at age 44 with a pension projected to be $4000 (in 2020 dollars) available to you when you're 65 (30 years from today), that might provide you the same spending power of what you can get with a little under $2000 a month today. I'm pretty far from a pension expert and would second the NPV calculation mentioned earlier for valuing it, but I wanted to put this out there in general and also to highlight that your IRA pipeline might be more less impacted than you think. Countering that of course is that we're all at the mercy of the IRA pipeline rules and/or tax brackets changing at any time, though generally people feel the pipeline is pretty safe since it involves voluntarily paying taxes now (earlier).
Here the link if you want to play with it:
https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=4%2C000.00&year1=198912&year2=201912What risk is there that the pension goes bust?
Do you have an option to take a lump sum payement? May or may not be a good idea =).
IRS filing status-single.
Gross Salary/Wages: Salary ~$62,316 after taxes
What is this before taxes?
Cash Savings in a high yield savings account of 2.1%: $120,000. I plan on using part of this money for a vacation home up north that we would also rent out part-time. I will leave 6 months of cash for my emergency fund and the rest I plan on investing in VTSAX through Vanguard.
I'll second the caution here. To help frame this, how much home are we talking in terms of $? Are you buying this or are the two of you buying (and owning) this?
Fidelity 401K: $38,695. My company does not match. I just increased my contribution to start maxing it out from now till future. I can only pick target funds for this.
I'm pretty okay with target date funds. Make sure you're picking the right risk mix not just a year that sounds good =).
Fidelity Roth IRA: $44,711. I'm unsure if I could convert this to traditional as my pension and withdrawals may end up increasing my income
when I'm 65 and withdrawing about 4% and collecting a pension that could be as much as $50,000 a year. Depending on what the cost of moving this IRA to Vanguard would be I may or may not switch this. Either way I plan on moving the money into low cost index funds, worst case scenario low cost index funds w/ Fidelity or move it all to Vanguard
So the real reason I'm commenting at all is this section. Are we correct that this is already Roth? If so, there is no 'converting' to be done with this, it is already in the most tax advantageous account possible for any income scenario*. There is no 'convert to traditional' with the exception being a single year's contributions i.e. if you contributed $X** to Roth IRA this year and want to know if you should re-characterize it to traditional for this tax year. This is all very good news by the way =).
That is separate from what you do going forward, for future contributions, of course. It is definitely worth running some numbers to figure out if you are best served contributing to traditional or Roth. I mentioned a little about the pension income and tax brackets above, but I'll add this here:
1) If you retire early, you might have many years to convert traditional to Roth before the pension kicks in at all
2) If the two of you get married the lowest tax bracket might be much higher than your expected pension + other withdrawals necessary to meet your expenses. In general, look at the tax brackets now to help you make this choice, and there are lots of calculators out there to help you with this.
2b) Also, if you are making other withdrawals to taxable accounts remember that only the gains count (e.g. sell $10,000 worth of stock for $10,000 of expenses but only $2700 of that was gains).
3) Read the gocurrycracker blog posts about never paying taxes again for some more in-depth conversation about this
4) If you want to move to Vanguard I always recommend calling them up and having them initiate things so you don't accidentally trigger a taxable event when you really just want an in-kind transfer =). Trust us, they'll be super helpful, given that you're basically saying 'I want to give you 0.x% of my money, can you help with that?" ;). The cost should be free as should the hassle. I will say that Fidelity and Vanguard probably aren't that different.
5) Also keep in mind that traditional vs. Roth involves a fair amount of guessing about future tax structures which is a bit like guessing what days it's going to snow in 2045 - probably in the winter months, but beyond that who knows. Don't stress too much about it!
6) A thing some people forget is that if you do an IRA ladder it's not like you need to pay exactly 0 taxes for it to be considered a success. To illustrate, sometimes saving a 30% marginal rate now is worth paying a 10% tax rate
and paying the early withdrawal penalty later.
*that doesn't imply that getting to this point was the most optimal scenario, necessarily.
** max of $6,000
No debt as we do not own a home, I paid off my student loans, my car is also paid off.
Monthly Expenses:
Rent $500
Union Dues $65
Internet $105
Cell Phone w/ iPhone bill $135
Utilities $90
Groceries $301
Car Insurance $100
Gasoline $150
Car Maintenance $50
Hair/Eyebrows $110
Pure Barre $179
Misc $100
Restaurants $50
Entertainment $30
Shopping $21
Travel $300
Total Expenses: $2286
Monthly Income after Taxes:$5193
Annual 401k contribution: $19500
Annual IRA contribution: $6000
My plan is to do the IRA conversion ladder to be able to withdraw and also withdraw from non retirement account such as Vanguard investments, if I am understanding everything correctly. I am very fortunate as we currently live in my parents duplex on the opposite side and our rent money goes to them. My father has said that the home will be left completely to me, I am a dental hygienist and plan to temp part-time once I reach my FI goal. I don't know if this factors into anything as well.
I'd say working part-time gives you a lot of flexibility, might lower healthcare costs, and might protect against downside risk. It might lower the value of your IRA ladder but probably not a meaningful amount given your listed expenses.
My questions are:
1) How do I/if I even should calculate my pension into this plan? I have not seen any way of calculating a pension into FIRE that I understand
You might consider a common way to do this, looking into "bucket" approaches. In those approaches you might write down your expected budget for every year and then calculate out how you're going to fund each individual year. I'm not an expert, but the thought might run along the lines of: if we retire at 44 I need to fund 21 years until the pension shows up and covers my expenses for the rest of my life. (If we ignore the stock market making it
easier than this) that means I expect to need 21 years * 12 months * 2286 in expenses each month + a buffer saved up, plus whatever my pension-expenses projects to be if nonzero.
2) Does this seem doable in 10 years?
3) Does anyone have recommendations for what I should do with Fidelity Roth IRA
Ignore the exact numbers.
Let's say you put half of your current cash into a taxable account and your vacation home breaks even in ongoing expenses.
That puts your current invested total at 60 + 38 + 45 = 143k.
Let's suggest you add nothing but 401k and IRA for the next 10 years, at 25k a year and get 0 real returns. That puts you at 143 + 250 = 393k in today's dollars 10 years.
Your annual expenses* today suggest you need (2286*12*25) = $685,800 in today's dollars if you choose to use the 4% rule, so you'd be short about 290k.
It is a little unclear if your $5193 monthly take home is after maxing your 401k but if it is, and you invest your monthly surplus (5193-2286) ten** months a year for the next 10 years and get 0 real return that's an additional..... 290k.
So, my answer to the question "does this seem doable in 10 years" is this:
If your expenses don't change above inflation, you don't further optimize your expenses at all, you never get a raise above your personal rate of inflation (but also, like, don't get fired), you're missing accounting for about $4,000 per year in expenses due to lumpiness of some expenses in the real world / bad luck, you find out your pension is actually worth $0, the market has a very, very bad 10 years, and you never inherit the duplex and subsequent rental income from it, you'll probably be within spitting distance of FI at the 4%*** rule at the 10 year mark.
So, yes this very much does seem doable =).
*Over the next 10 years you should consider what expenses you don't have now but you will have, or will want to have, once you retire. That might be health insurance for 45 year olds including deductible / out of pocket max (ACA subsidies may make this expense very low if it still exists), income taxes if you'll have any though it's unlikely at this expense level, or more traveling or hobby money since you're building the life you want and then saving for it not the other way around.
** life happens, so this won't happen 12 months a year. You might need to buy a new car, pay for a surgery, etc. etc. over a 10 year period.
*** some people think 3.5% rule makes more sense from a peace of mind during retirement standpoint. Over the next 5 years read about this and see how
you feel.
This is all so confusing, thank you guys for any and all advice.
Marissa
Overall you are in great shape. The good news too is that you have, like, 10 years to figure this out, you're already 85% of the way to figuring it all out, and every year you take to figure it out the amount you have to get right for it all to go well goes down as your margin of error goes up since your nest egg is growing all the while =). Keep learning, keep saving, keep building the life you want (which probably doesn't involve checking financial spreadsheets every day). Track your expenses and change it where it makes sense but don't obsess over it, nurture your relationships, and have fun!
