Investing Advice - Case Study: Want to retire in 10-14 yrs

[Vic99]

I am a private school teacher, age 45, new to the forum.  My wife is 40 and a software engineer.  Right now we are trying to retire when my youngest completes high school, he's 3 - so in 14 years (maybe sooner if my school is not a good fit for him)  The idea being that he can get free tuition as long as I'm employed there (I have been there 21 years already).  Currently, tuition is 17k so who knows what it will be in the future.  I also have a 5 year old son, who I also hope goes to my school.

My wife would retire when I do, but might scale down to part time in the last 5 years I'm employed.

MA resident.  We do not plan to move or have any more kids.  House is right size for us, 1500sq ft with half acre yard in semi-farming community.  We do not plan to change jobs until we retire - its possible, but unlikely as we both love our employment situations.

Gross Salary/Wages: Me: 72k/yr, Wife: 102k/yr

Pre-tax deductions: Me: 403b pretax 15% (6% matched by employer then an additional 3% on top), Wife: 401k pretax 143k (5% matched by employer then an additional 5% on top of that).  Me: dental insurance, Wife: Health Insurance

Other Ordinary Income: PV solar panels generate SRECs averaging $1,625/year.  Should get SRECS for seven more years.  Should break even with installation costs in another 3-4 years.  Also have a chevy volt (plug-in electric hybrid) and get nearly all of its fuel from my solar panels and from being able to plug in at work.

I also save a couple thousand dollars per year by heating with wood as all the wood I get is from free sources.  We very rarely use the electric clothes dryer now.  Might even sell it.

I'm starting to go through all my junk and put stuff on craigslist.  All that money will then be invested.

Qualified Dividends & Long Term Capital Gains: NA

Rental Income, Actual Expenses, and Depreciation: NA

Current expenses: Last 6 months

Mortage: $12,4k (extra principle-only $8,250)  We expect the house to be paid off in ~3 yrs.  I currently owe 48k. 

Car Loan (0% interest) $3,700  (When car is paid off in 2.5 yrs, will sell my wife's car, currently 10 yr old toyota matrix with 130k, and by a 3-4 yr old vehicle that can cart the four of us and a dog and maybe some camping stuff - so maybe a prius V - but not settled on model.  Will pay cash and have no loan.

Childcare $8,250

Food
   Groceries $2,900
   Restaurants & Fast Food $1,300
   Alcohol $100
Gasoline $650
Car Maintenance $200
Life insurance $500
Car Insurance $1,350 (2014 chevy volt, 2005 toyota matrix, 2000 GMC Sierra)
Home Insurance $1,100
Cell Phone/Data Me & Wife $780
Cable $420
Water & Sewer $260
Electric & Heat $625
House Cleaning $850
Gifts: $400

We plan on using the rule of 55 to start getting money out before retirement age, but perhaps we can do better.

We are considering getting rid of cable.  I got rid of my newspaper subscription.  We plan to eat out/use fast food half as often as we currently do.  I think that is realistic for now.

I have 40k in a money market.  About 15k will go back into the house with improvement projects in the next 6 months.  I want to have 15k for emergencies and upexpected events - Parents overseas are getting old, etc. That leaves us with 10k for immediate investments, plus what craigslist gets me.

Questions:
1) What should be our first two or three priorities for investing the 10k and any money we start saving from cutting expenses?  I don't want to use it to pay off the mortgage faster since we are already doing that and its only a 2.5% rate set to go up in 3 years.  Should it be maxing out 401k/403b?  Opening a Roth IRA and maxing that out this year?  Something else?

2) What else do you think we should consider cutting back on?

Many thanks.

[Financial.Velociraptor]

You can totally do this.  I set a 10 years goal in undergrad to FIRE before I knew the term existed.  I got delayed taking care of a terminally ill family member instead of working, then finally re-entered the Houston accounting professional market in the wake of the Enron and Arthur Anderson collapse (competition was fierce!)  I still finished in 14.5/15 years.

I haven't had cable since it was free from my apartment in grad school.  Within six months you won't miss it.  Within 18 months you will consider people who still watch that crap raging morons.

1) You both have much more generous tax advantaged accounts than I had.  Take full advantage of the match.  I think next bucket for you is Roth IRA up to the max.  You can take a year to evaluate if you can dig a little deeper and save even more thereafter.

2) The life insurance of 500 seems high?  Is that a whole life policy?  Maybe that is annual instead of monthly.  House cleaning?  Are you neat-nicks?  When I was growing up, the kids were the "cleaning lady", else no Atari/Nintendo.

[MDM]

Current expenses: Last 6 months

Are these 6 months of expenses, or annualized based on 6 months data collection?

Questions:
1) What should be our first two or three priorities for investing the 10k and any money we start saving from cutting expenses?  I don't want to use it to pay off the mortgage faster since we are already doing that and its only a 2.5% rate set to go up in 3 years.  Should it be maxing out 401k/403b?  Opening a Roth IRA and maxing that out this year?  Something else?

Yes, maximize the 401k/403b and IRAs, even if you have to take a little longer to pay off the 2.5% mortgage.

You should also consider taxable investments instead of that very low interest rate mortgage, but at least maximize all the tax-advantaged options.

Any HSA options?

[Vic99]

2) The life insurance of 500 seems high?  Is that a whole life policy?  Maybe that is annual instead of monthly.  House cleaning?  Are you neat-nicks?  When I was growing up, the kids were the "cleaning lady", else no Atari/Nintendo.

This is half a year for my wife and I.  We pay at the start of the year to save 10% or so.  I rounded some numbers, I believe 500k for each of us came to a total of 1,039/yr.

MDM: These are 6 months of actual expenses.  We started tracking expenses with an AYCO360 account.  I would say it is 90-95% accurate.  Haven't been using it for too long.

HSA options - yes, my wife uses the max of 5k/yr for childcare.  Also did 1k for healthcare this yr, but next yr may be higher becasue need some dental work done.

[ender]

If you haven't already, take a look at this article - http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

I converted everything to monthly expenses. I like taking yearly expenses (so you don't "miss" them) and then making them monthly.

Childcare $8,250 ($1375/month)
Food
   Groceries $2,900 ($483/month)
   Restaurants & Fast Food $1,300 ($217/month)
   Alcohol $100 ($17/month)
Gasoline $650 ($108/month)
Car Maintenance $200  ($33/month)
Life insurance $500 ($83/month)
Car Insurance $1,350 ($225/month)
Home Insurance $1,100
Cell Phone/Data Me & Wife $1,150 ($192/month)
Cable $420 ($70/month)
Water & Sewer $260
Electric & Heat $625 ($104/month)
House Cleaning $850 ($142/month)
Gifts: $400 ($67/month)

Some thoughts:

• Food costs are really high, both groceries and restaurants total almost exactly $700/month on average. You should fairly easily be able to reduce this $150 a month total with only a 3/5 year old.
• Phone costs, my wife and I pay about $35/month for our data plans with Republic Wireless. I don't know what sort of plan you have that costs nearly $100/person for two, but I'm sure you can reduce this even just if you get a lower data plan. There are tons of significantly cheaper options though. Another $100/month easily here.
• Car insurance seems really high, what are your deductibles? have you price shopped this at all? Maybe having a Volt causes this to go crazy high, but $225/month is what my wife and I pay for 6 months with two vehicles... admittedly older but still. I'd expect you can drop at least $50/month here just by viewing coverage/increasing deductibles. Also look into home insurances too.
• Cable - $70/month, or $60 if you want Netflix instead
• House cleaning - I expect this is a non-negotiable but, if not, that's quite a bit too

So if you address all that you get $150+$100+$50+$60+$142 = $500/month, or $6,000 a year in pretty low hanging fruit saving opportunities and it's easy to add that into your pretax accounts.

Keep in mind, if you save $500 in after-tax expenses, you can probably put $600+ into pretax accounts depending on your marginal rates ($625 @ 20%, $667 @ 25%).

[Vic99]

Ender,
I realized I goofed on the cellular data plan and made the edit to the original post.  The plan is still $780 over the last six months or $130/month.  I agree it is still high and I know that we can do better.  Will look at Republic Wireless, but I think we still have another year on our current plan.

You are right, house cleaning is non-negotitable.  We pay $80 for four hours every other week, occasionally skipping a week.  It has really reduced my wife's stress level and that is a good invesment by itself.

My car insurance is being renewed next month so it is on my list to shop around next week.  The volt and the matrix each have a $500 deductible.  Perhaps the matrix should now be $1000.  I have a 15 yar old truck with a $1000 deductible.  I use it often enough to haul wood or for something we bought off of craigslist.  Plus I loan it to family members.

Thanks.

[ender]

Ender,
I realized I goofed on the cellular data plan and made the edit to the original post.  The plan is still $780 over the last six months or $130/month.  I agree it is still high and I know that we can do better.  Will look at Republic Wireless, but I think we still have another year on our current plan.

Keep in mind, if you save $75/month even if your buyout is $400 you can still save significant money over a year. Might want to play with these numbers some here to better understand.

Even buying two new phones you might save money over a year - which goes to show just how expensive most cell plans are!

My car insurance is being renewed next month so it is on my list to shop around next week.  The volt and the matrix each have a $500 deductible.  Perhaps the matrix should now be $1000.  I have a 15 yar old truck with a $1000 deductible.  I use it often enough to haul wood or for something we bought off of craigslist.  Plus I loan it to family members.

Play with quotes on these. Figure out what the value of the vehicles are, too, and get a feel for what you are paying for. My insurance breaks out exactly what each piece of coverage costs us.

When we did this recently we realized we were paying about $425/year for collision/comp with $1k deductibles for two $3k-ish vehicles (about 50% our insurance cost) . To us, that $425/year was not worth the ~$2k in insurance payout we might get if something happened. So we cancelled collision/comp.

Try increasing your deductibles to the max to see what the effect is. You should easily will have the cash to cover the $1k deductible so why pay more to the insurance company instead of self insuring? But if it's only $2/year for that well then keep it, etc.

The recurring costs, such as insurance/phones/etc, are great places to decrease monthly cashflow. Saving $5 on groceries once is great, but saving $5/month on insurance is a gift that keeps on giving.

Once you've "done" auto insurance, move on to the next thing. Just systematically investigate all your monthly spending and you'll do great! Being interested and getting started is the first step and the tone I get from your posts is that you guys are well on your way towards saving tons of money!

[MDM]

HSA options - yes, my wife uses the max of 5k/yr for childcare.  Also did 1k for healthcare this yr, but next yr may be higher becasue need some dental work done.

It appears those are FSAs - Flexible Spending Accounts.  Similar to HSAs - Health Savings Accounts - but different.  Google "HSA vs FSA" to explore.  Not saying an HSA will definitely be better (you might not be eligible at all), but better to know your options.

Others have commented on sore thumb cost items.  Those comments seem reasonable.

Once you get your AGI below $150K, the Child Tax Credit starts to kick in.  That makes all your 401k contributions beyond that point worth ~30% (plus state) not just the 25% (plus state) marginal rate.  You have plenty of income to maximize the 401ks.

[Vic99]

It doesn't like we have access to HSA accounts.

What are "sore thumb cost items"?

[MDM]

What are "sore thumb cost items"?

http://dictionary.cambridge.org/us/dictionary/british/stand-stick-out-like-a-sore-thumb
http://idioms.thefreedictionary.com/stick+out+like+a+sore+thumb

In other words, "obvious" items for improvement.