Couple New to FIRE

[Westwood87]

My wife and I are in the early stages of FIRE and trying to learn.  She is 28 & I am 31.  We sold our home in November and moved into my parents basement as my wife intends to go to grad school for CRNA.  She is currently has been an RN for 3 years and earned her bachelor degree last summer.  She has been continuing chemistry classes at our local community college to meet the qualifications for grad school.  She will be able to apply this summer.  We used the profits from selling our homes last year to payoff debt. So far we have paid off my student loans, my vehicle, her vehicle.  Our only remaining debt is her school loans from Nursing school which we plan to have paid off by June/July, through the Dave Ramsey method. 

Income: $120k between the 2 of us
401k: $22k  Currently investing 5% of check to receive full match  Vanguard Funds and Target Date
403b: $24k  Currently investing 6% of check to receive full match  Target Date Fund
Cash: $5,000 this is our agreed upon emergency fund.

Once we pay off the remaining student loans ($28k) we plan to start piling up cash to either be used to pay for CRNA school (my wife will attempt to get into a cohort for 2 years, if she doesn't get in we will then close that door and use our cash for a house)  Hopefully if used toward a house we can stay with my parents long enough to pay cash for a house or at least put 60% or more down.

Questions:
Should we bump our retirement up to the 15% or higher after we pay off the $28k?

When we're looking for how much we need to have to retire (which we hope is by age 50) do we count "our number" together?  In other words I've heard MMM say his number was $800k to retire.  Was he referring to their amount counting his and her investments?  As in if one has $300k and the other $500k, then their interest should have been enough to cover their lifestyle moving forward?

Also, if my wife gets into CRNA school we will be going down to one income for 3 years while she is in school, in which case she will make quite a bit more than she does now and that changes things completely.

We are currently trying to learn all things finance through YouTube and the Internet by the following:
Dave Ramsey
Money Guy Show
MMM

Thank you for you time

[caracarn]

Hey welcome!  Glad you are here.

The more you can plow into retirement the better.  Any money you have that you will use to live off of in FIRE is that you would include, so I include taxable accounts to since not all my stache is in retirement accounts.

[FireAnt]

My husband and I started our journey towards FIRE a few months ago-- I found this investment order extremely helpful in planning retirement/investments.

https://forum.mrmoneymustache.com/investor-alley/investment-order/

[Freedomin5]

You guys are DINKs with a combined income of $120k, and your housing costs are minimal. You should be able to easily reach a savings rate of 70-80% of after-tax income.

Max out all your retirement accounts.

And yes, count your number together. Your number is based on your annual expenses. So if you and your wife (living in one household) spend $30k per year, you will need $750k in total to retire, for example.

Once you get closer to retirement, you will need to be more specific in figuring out how much you need in each savings bucket, because some “buckets” can’t be touched prior to a certain age. So for tax purposes you may need to draw down your taxable accounts before drawing down your retirement accounts, for example. This means that you should also be investing your savings in taxable accounts.

If you’re anticipaitng a drop in income when your wife is in school. then it does make sense to plough as much into savings now while your incomes are still high.

[Laura33]

It sounds like you have done a good job getting out of debt following Dave Ramsey.  But if you are really interested in FIRE, you need to move past the limiting view that "debt is bad" -- you need to maximize the value of every dollar you have, which sometimes mean accepting low-interest debt in order to free up money for higher priorities (like, say, building a 'stache that can support you for 40-50 years).  For example, a house:  Mortgage rates are still near historic lows.  If you can buy a house with a loan @4% (tax-deductible) interest, that allows you to put the other 80% in the stock market right away.  Historically, the market has done quite significantly better than 4% over periods of a decade or two -- and really, if the market doesn't do better than that over the next 10-20 years, you're not going to FIRE in that timeframe anyway.

In your case, you are leaving a ton of money on the table -- or, more specifically, paying it to Uncle Sam.  You guys make $120K/yr and have basically nothing to deduct, so you are going to get the $24K standard deduction, for a net of about $90K AGI (because your 401(k) contributions don't show up in your AGI).  Now, your first @$38K of that is pretty good -- you're paying 0-10% tax on that.  But for every dollar over that figure, you are paying $0.22-$0.24 to Uncle Sam.  See https://taxfoundation.org/2018-tax-brackets/.  That means you have $0.22-$0.24 less to put to work for you.  So for every dollar you earn over that $38K AGI, you're really only paying $0.76-$0.78 to your debt.

Why does that matter?  Because for every single one of those dollars that you put towards your 401(k) or IRA*, you get to put the full $1 in -- and then that dollar grows tax-deferred for years and years until you use it.  Boiled down, your net worth will improve a lot faster if you put as much as you can into tax-deferred investments than it will if you keep putting only 3/4 of that amount toward tax-deductible loans and paying the other 1/4 to Uncle Sam.

I am explaining this to provide some context for the Investment Order sticky italianant posted -- that thing is brilliant and an excellent guidepost.  So unless your student loans are at a high interest rate, I would strongly recommend maxing out your 401(k)s and deductible IRAs first, while just paying the minimum on your student loans; with your income, and living rent-free, you should be able to do so easily.  I would also recommend planning for only a 20% downpayment on a home (so you can avoid PMI) rather than paying cash -- the big thing to remember there is that a home is fundamentally a consumption item, not an "investment," because you will always need somewhere to live, so focus on not buying more house than you actually need.

*Note that with an AGI around $90K, you should be eligible for both a 401(k) and a deductible IRA, unless you had big tax deductions for student loans that would need to be added back in.

[ysette9]

As usual, Laura33’s advice is spot-on. Dave Ramsey is generally considered to be really good at motivating the hopeless to stop acting like idiots and getting a handle on their debts and spending. You seem to be past that stage where you aren’t drowning in debt and bring home more than you spend. That is excellent. This means you should really graduate beyond Dave Ramsey and focus your learning on other sources of info for more sophisticated personal finance. (Like MMM forums- welcome!)

The Investment Order thread is a great thing to study. The What is good but the Why is even more important to understand. Laura is right that you want to be as optimized as possible with your money. Sure, you can get to your goal the brute-force way of paying off all debt first and then investing in Dave Ramsey’s fee-laden, kickback funds that line his pockets. But you will get to FI faster if you take advantage of tax-advantaged accounts and be smart about knowing which debts to pay off quickly (credit cards) and which ones to let ride while investing the difference (low-interest debt).

When I was running simulations on our own situation when we were considering buying a house I modeled buying a house in cash versus the traditional 20% down, 30-year mortgage. Buying the house in cash meant having to work and extra 3-4 years versus having a mortgage. To me that was pretty stark. Simply put, the personal satisfaction of a paid-off mortgage is not satisfying enough to make me willing to work several extra years. It may not be as extreme in your case, but I can guarantee you the maths say that putting 60% down versus 20% with a low interest rate will mean you will work longer. This is the next layer of sophistication beyond Dave Ramsey that you are smart and responsible enough to handle correctly.

[Westwood87]

Thank you guys very much.  I have read the responses and we will re-read them when I get home because they're rather heavy (which I appreciate).  I'm trying to learn to make sure that if there is a balance between the Dave Ramsey plan and what I've ready on some the postings here it's better to be ahead of the game when it comes to compounding interest.  We don't know what way things will go with us (as far as my wife getting into school so it's hard to have a 5 or even 2-3 year plan until we see how that plays out).  But we are ready to learn and make the best moves we can with the situation we are currently in.  We want to try and get to a spot where we are heavily investing in our 401k and 403b. 

We have heard a lot about also opening IRA's for the extra $5,500/year.  Can we each open 1 and I'm assuming there's a limit of 1 account each?

[ysette9]

The IRA contribution limit for 2019 is now $6k. That limit is per person, per year. Definitely take advantage of that if you can as it will lower your taxable income.

[Westwood87]

So when comparing ira to a Roth IRA is lowering the taxable income better than having the tax free growth? Or is that situational based?

[caracarn]

It is situational based.  Simplest explanation is if you expect lower tax rate when you retire go with traditional, if not go with Roth.

[ysette9]

So when comparing ira to a Roth IRA is lowering the taxable income better than having the tax free growth? Or is that situational based?

I believe the Investment Order thread talks about how to decide between one or the other. But yes, the basic gist is that you should go Traditional if you expect your tax rate to be lower in retirement and Roth if you expect your taxes to go up in retirement. My guess would be that at your income, traditional is likely the better option, but read up on it more.

[Laura33]

We don't know what way things will go with us (as far as my wife getting into school so it's hard to have a 5 or even 2-3 year plan until we see how that plays out). . . .  We want to try and get to a spot where we are heavily investing in our 401k and 403b. 

If your income may drop significantly in a few years, that is even more of a reason to max out your tax-deferred accounts now instead of waiting until the debt is gone and things are settled.  The reason is the power of compounding.  Say your DW gets into school in a couple of years.  If you max out your 401(k) and IRAs, that will give you on the order of an extra $100K invested over the next two years.*  So if you have an extra $100K in the bank by 33, then at 43 you will have an extra $200K, at 53 $400K, and at 63 $800K.**  Note that this is not your total savings -- this is the extra you will have in your account from having $100K more in your account by age 33.

OTOH, say you take the next decade to get all of your other ducks in a row first -- you pay for school, your income drops in half, you wait until your DW graduates and gets a job, you save hard for a house.  So then at 41 you decide you're finally in a place where you can afford to start maxing things out.  That means that by the time you're 43, you'd have accumulate that same $100K you you had at 33 under the first option (IOW, you're accumulating the same "extra" $100K over a 2-ish year period, as laid out in *, but starting at 41 instead of 31).  But note that now you only have $100K, whereas under option 1 you had twice as much at age 41 ($200K).  That's because you missed an entire doubling, simply because you waited an additional decade to get started.**  And the disparity only grows, because you're always one doubling behind -- so at 53 you have only an extra $200K instead of $400K, and at 63 you have an extra $400K instead of $800K.

That is why high-interest debt when you're young is such a killer, and conversely why investing in the stock market when you're young is the single-best way to grow your wealth:  because the longer those high interest/high returns have to compound, the more dramatic the difference to your net worth.  So since you have so much excess cash flow right now, and you anticipate a lot of that drying up or being diverted to other priorities (house) over the next 5-10 years, set yourself up now so that that extra cash flow is working for you as hard as it can while you're doing those other things.


*Total guesstimate based on @ [$19K 401(k) limit + $6K IRA limit = $25K/yr] x 2 people = $50K/yr x 2.5 years = $125K total - whatever $$ you are already contributing.

**This is based on Rule of 72 -- if you assume @7% returns, your money will double every decade.

[Westwood87]

Laura33:  I will sit down with my wife and review this.  Last night before bed we actually figured out the costs of going to school vs not going.
Ex: Making $60k/year as a RN for 3 years vs quitting work to go to school and not making anything until year 4 where the salary jumps to $180k, but is really only $120k more than she would have made in her previous job.  So it will take x amount of years to catch back up in salary, but we also missed out on maxing the retirement those 3 years. 

Thank you again for giving such a detailed answer.  I know it's time consuming.

[ysette9]

Opportunity costs of going back to school is an important consideration, probably more so when your timeline is shortened as with FIRE folks. Losing 2-4 years earnings and investing is more significant when your entire career is 15 years versus 40.

Qualitatively, we maxed out our 401ks as soon as possible (immediately for my husband, within the first 5 years of my career for me) and I am SO grateful that we did. 10 years later when I discovered MMM and started running FI calculations I had a big and pleasant surprise at how far down the path we already were. Now that I am losing steam big time in my 30s with two young kids I am immensely grateful that FI is within sight. That provides me peace of mind every day.