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Trying to look ahead and make some plans as far as saving and retirement. I know this forum provides some excellent, smart, and at times hard to follow advice. Looking for everyone's opinion on moving forward. 

I currently work for the government and am on track to retire at age 52. This will result in me receiving 50% of my final salary from that point forward. My current salary is $46k, if I stay in this position it will be around 62k at my retirement minus COLA. I currently am putting a few dollars into a ROTH 457 biweekly. My wife currently brings in 36k and is putting 10% into a ROTH 401k provided by her employer with 5% match. 

My question comes as to how best to setup the next 20 years of our careers and be financially able to retire in 20 years (I'll be 52, she'll be 45). I am currently looking into refinancing our current mortgage from a 30 year (2 years paid) to a 15 year term. This will eliminate our MIP, save us ~$90k in interest, and leave us mortgage free prior to my goal retirement. This will make payments tight for a period of time, but I believe long term benefits outweigh this cost. The plan at retirement is to move south to a much lower cost per living area. We would then rent our current home, and use money generated from rent to pay for our new location. The other option is to sell our home in the north, and then take half of the proceeds and buy in the south an reinvest the remainder. I personally however like the idea of the passive income generated from our current home, especially if it is mortgage free. 

Another question is saving for retirement. Currently we put everything we can into our 410k/457 plans. With any increase in salary we often offset this in an increase in contribution, as we are no where near the max yearly contribution limits. Should we continue down this path? One concern is bridging the gap between our planned retirement ages and the distribution age without penalty of 401ks. Am I correct, in that my 457 does not have the age penalty associated with it? Should my wife continue to put all retirement savings into her 401k? I look forward to everyone's insight. 
 

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Dus10 (Aug. 16, 2016 @ 8:23p) |

We're the rentals strategic to the retirement plan?

I think Starbucks offers an education benefit also?

Infinion (Aug. 16, 2016 @ 8:28p) |

Yes, my plan has always been to include rentals. It was kinda from the same vein as Automatic Millionaire... that was m... (more)

Dus10 (Aug. 17, 2016 @ 5:56a) |

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dreamscometruemd said:   My current salary is $46k, if I stay in this position it will be around 62k...
 

That's all the salary growth you expect to achieve in 20 years?

Personally, I would not do anything with the mortgage.  Leave that as is.  Instead, take whatever you would have put towards the higher mortgage payment and increase your retirement plan contributions.  Sounds like you have a decent pension, but in twenty years, all kinds of things can change.  Plus, 50% of salary is probably not enough.  You need to save more. 

dcwilbur said:   
dreamscometruemd said:   My current salary is $46k, if I stay in this position it will be around 62k...
That's all the salary growth you expect to achieve in 20 years?

Personally, I would not do anything with the mortgage.  Leave that as is.  Instead, take whatever you would have put towards the higher mortgage payment and increase your retirement plan contributions.  Sounds like you have a decent pension, but in twenty years, all kinds of things can change.  Plus, 50% of salary is probably not enough.  You need to save more. 

  

That's assuming I stay in the same mid-level position, yes. That's also assuming I actually receive all my step increases, which is anything but guaranteed. 

Wouldn't the $90k saved in interest outweigh the increase in retirement savings? The increase would be ~$200/month. That would $48,000 contributed to retirement over the 20 year period of time. Of course with compounding this would be substantially more. However there would also be the fact that I would have 8 years left with a mortgage payment at the end of 20 years. With the 15 year mortgage I would be mortgage free 5 years before retirement. I know it is better to start saving sooner then later. But at that point I would have 5 years I could theoretically put the entire mortgage payment into savings. And again the biggest factor being mortgage free, which would greatly reduce living expenses and make living on 50% salary much more doable. 

Options:

1) You need to start saving more aggressively.
2) You need to focus on increasing your current salary/earnings right now. If you can get an extra $1,000 increase this year, every year after that, your salary, raises and bonuses will grow with it.
3) Look for extremely low fee funds or robo advisors and set up automatic deposit. Wealthfront, Wisebanyan, etc.

Being mortgage free in your case is illogical.  You already said that you are selling your house and moving when you retire, which will of course leave you "mortgage free."  If you have the cash flow to max out your retirement savings AND pay off your mortgage, that would be a different story.

So you are only 32 years old currently? Is this a federal civilian job?

You should focus on ways to improve your career and get promotions....just don't accept that you are going to sit at your level for 20 years, that's depressing.

Health savings account is the ultimate backdoor IRA. I didn't see anything about a traditional IRA savings either. Two other areas you can sock away tax free money. What is the 401k invested in?

GreyRabbit said:   Options:

1) You need to start saving more aggressively.
2) You need to focus on increasing your current salary/earnings right now. If you can get an extra $1,000 increase this year, every year after that, your salary, raises and bonuses will grow with it.
3) Look for extremely low fee funds or robo advisors and set up automatic deposit. Wealthfront, Wisebanyan, etc.

  2) Unfortunately that isn't possible within my current position. Within the state government there aren't raises or bonuses. I of course hope to be promoted over the next 20 years, but that is the only opportunity for income growth outside the allotted COLA and step increase of ~2% yearly. 
  3) Would you suggest this for IRA? Currently I'm using the government provided 457. My wife is using her work provided (she works for a large bank and the fees are low) 401k. I do have a Wealthfront account however I just have ~$5,000 in an investment (non IRA) account for liquid savings. I also have ~$10,00 in a "high interest" savings account. 

dcwilbur said:   Being mortgage free in your case is illogical.  You already said that you are selling your house and moving when you retire, which will of course leave you "mortgage free."  If you have the cash flow to max out your retirement savings AND pay off your mortgage, that would be a different story.
  I said my ultimate goal would be to rent the property as a passive source of income. I thought that would be the best approach instead of "cashing out" at retirement and relocating. 

rascott said:   So you are only 32 years old currently? Is this a federal civilian job?

You should focus on ways to improve your career and get promotions....just don't accept that you are going to sit at your level for 20 years, that's depressing.

  Correct, 32. I am in a state government position, not federal. I am attempting currently to get a side business running in my downtime to help supplement income. I have goals and plans for promoting, I just want to plan on my current projected salary, and not account for jobs I don't currently hold. My next in line supervisor has 3-5 years left, and the two individuals above them have just a few more then that. So there is growth potential within my agency. There is also opportunity to leave the agency but stay within the government. However I reside in a rather rural portion of the state and the number of positions is limited, and relocating is out of the question. I have also already done the hour+ daily commute and the cost/benefit was to high. 

dreamscometruemd said:   dcwilbur said:   Being mortgage free in your case is illogical.  You already said that you are selling your house and moving when you retire, which will of course leave you "mortgage free."  If you have the cash flow to max out your retirement savings AND pay off your mortgage, that would be a different story.
  I said my ultimate goal would be to rent the property as a passive source of income. I thought that would be the best approach instead of "cashing out" at retirement and relocating. 



You need to get rid of the MIP....but what's your current rate and your current loan to value %? A refi may not be the best way to do so.

Beyond that, stick with the 30yr fixed. Max out your retirement options before considering paying down the mortgage faster.

Current rate is 4.25% and LTV% I would estimate to be around 80% currently.

codename47 said:   Health savings account is the ultimate backdoor IRA. I didn't see anything about a traditional IRA savings either. Two other areas you can sock away tax free money. What is the 401k invested in?
  I will have to look more into HSA accounts. I do not have one offered at my work, only FSA, so my knowledge of them is limited. My wife however has one provided via her work which they contribute I believe $500/year. 

My biggest concern with putting everything in IRA accounts is the withdrawal penalty. Being as we would be retiring before 59 I would assume it would be beneficial to avoid the penalties. 
The 401k is invested in a variety of low-fee mutual funds, I don't have the exact breakdown off hand. 

I think it would be impossible and frankly irresponsible to retire at 52 given your current numbers.  I have a federal job where I must retire at 56 at about $80k per year, I don't plan to fully retire for fear of boredom. And I'm pretty sure that 80k a year won't be enough if I have 365 days of time on my hands.

Does this pension come with employer-paid retiree health insurance? Health care costs could eat a significant portion of your pension earnings.

Also, do you pay Social Security taxes in your job -- which would make your current earnings eligible for SS benefits?

I won't speak to the question of whether you will or will not be able to retire. But I will mention two things that may help you:

--Don't forget you can save the old-fashioned way, in an after-tax account. I retired at 57 from a state govt job and while I had savings in IRA/401k/457, the bulk of my investments was in after-tax accounts, in very low cost index funds.

--You can withdraw from an IRA w/o penalty if you do substantially equal periodic payments; google IRA SEPP for more info.

Good luck.  P.S. You are correct, there is no age penalty withdrawing from a 457.

 

kriskos4 said:   I think it would be impossible and frankly irresponsible to retire at 52 given your current numbers.  I have a federal job where I must retire at 56 at about $80k per year, I don't plan to fully retire for fear of boredom. And I'm pretty sure that 80k a year won't be enough if I have 365 days of time on my hands.
  I agree, and I don't plan on retiring to just do whatever. I am sure that I will find something to do as a "second career". However I would like to find something enjoyable as opposed to doing it because I financially have to. 
stanolshefski said:   Does this pension come with employer-paid retiree health insurance? Health care costs could eat a significant portion of your pension earnings.

Also, do you pay Social Security taxes in your job -- which would make your current earnings eligible for SS benefits?

  
Yes, at least currently. That is something I've also thought about. Currently retirees pay only a slightly higher cost then active employees. Yes, current wages are taxed for SS. 
UncaMikey said:   I won't speak to the question of whether you will or will not be able to retire. But I will mention two things that may help you:

--Don't forget you can save the old-fashioned way, in an after-tax account. I retired at 57 from a state govt job and while I had savings in IRA/401k/457, the bulk of my investments was in after-tax accounts, in very low cost index funds.

--You can withdraw from an IRA w/o penalty if you do substantially equal periodic payments; google IRA SEPP for more info.

Good luck.  P.S. You are correct, there is no age penalty withdrawing from a 457.

 

  Thanks for the information.

dreamscometruemd said:   
kriskos4 said:   I think it would be impossible and frankly irresponsible to retire at 52 given your current numbers.  I have a federal job where I must retire at 56 at about $80k per year, I don't plan to fully retire for fear of boredom. And I'm pretty sure that 80k a year won't be enough if I have 365 days of time on my hands.
  I agree, and I don't plan on retiring to just do whatever. I am sure that I will find something to do as a "second career". However I would like to find something enjoyable as opposed to doing it because I financially have to. 

  I want to find a second career where they pay me to travel the world, eat good food, do adequate exercise, try out multiple hobbies, spend time with family, and also volunteer / do philanthropy, all on my own schedule.   Sounds like a decent way to avoid "boredom".  Know anyone hiring with those job attributes?

Bend3r said:   
dreamscometruemd said:   
kriskos4 said:   I think it would be impossible and frankly irresponsible to retire at 52 given your current numbers.  I have a federal job where I must retire at 56 at about $80k per year, I don't plan to fully retire for fear of boredom. And I'm pretty sure that 80k a year won't be enough if I have 365 days of time on my hands.
  I agree, and I don't plan on retiring to just do whatever. I am sure that I will find something to do as a "second career". However I would like to find something enjoyable as opposed to doing it because I financially have to. 

  I want to find a second career where they pay me to travel the world, eat good food, do adequate exercise, try out multiple hobbies, spend time with family, and also volunteer / do philanthropy, all on my own schedule.   Sounds like a decent way to avoid "boredom".  Know anyone hiring with those job attributes?

  Maybe a MOD here at fatwallet? 

Did you just start this job? If not, are you able to retire from it any sooner? If so, that is probably a better bet, then you can get a private sector job making a lot more for those years. I used to work with a federal employee (I was a contractor) and he already had in his 20 years (22 actually) and his youngest daughter had just started college. He was saying that he would keep working until she graduated then retire and move out of his current home. His wife is a teacher and is nearing retirement, too.

To me, it seemed nuts that he would stay until his daughter graduated. He could have taken his retirement and be collecting pension right then. Then, he could have come back as a retired annuitant (basically, year-to-year contract with the government) or went to work for a contracting firm making significantly more money (because his years of government service make him valuable to contractors). He thought it sounded too risky because he would have a guaranteed job for the next four years. Inside my head, I was going nuts. Why would you need that level of guarantee!?! He already would be getting a pension and then working for significantly more money... and as a contractor, as long has he got a on a long-term contract, he would be fairly guaranteed at that point. What's the worst, he loses his job, keeps collecting pension, and then gets unemployment while he looks for another job? It boggles my mind how people's thinking gets to skewed when they work in such positions for so long.

I've been with my current agency for 2 years now, I have 9 years of service in total. I need 30 years of service to retire at 50%, or reach a specific age. I forget the age portion as I reach the 30 years before the age matters. I plan to retire as soon as I can collect my pension for the exact reasons you've stated. The small increases provided for more years of service simply don't make sense.

Skimmed this.

Just wanted to add that you should do the math on all alternatives related to the mortgage. Certainly try to get rid of the MIP, but locking into a 15-year, with the associated higher payments now, might not be the best. If your goal is to save as much as possible now, which it seems to be, the less you have to push to your mortgage, the better. You can pay it off at whatever term you'd like, even if the paper says 30-year.

Basically, don't assume that the long term savings outweighs the long term opportunity costs of limiting savings now. 15-year also forces you to the higher payment, which might be fine with two incomes, but might put you in a bind if you lose one at some point.

I don't think you're going to make it 20 years in your job. That's just not the world we live in anymore.

When you do retire, how much money will you and your wife need annually?

The math isn't real hard, but as a general rule, you probably need to take your projected annual expenses (in retirement), subtract any income provided by social security / pensions and multiply the result by 25. Your "nest egg" needs to be about that size before you can afford to retire.

GreyRabbit said:   Options:

2) You need to focus on increasing your current salary/earnings right now. If you can get an extra $1,000 increase this year, every year after that, your salary, raises and bonuses will grow with it.

 

  This!

You can cut cable, eating out, gas, etc. all you want, but growing your income will produce more impact that cutting (not to mention seeing your salary grow is more psychologically gratifying than cutting things you have become accustom to).

Take some time to examine what skills you have, what the market values, and then bridge the gap. Find people who are doing what you want to do at a higher level and do exactly what they do, dress the way they dress, and seek professional development at the same places they go.

It may take 6 mo. or 6 years, but doing this will result in a "break" or opportunity to advance... at that point it is up to you to take advantage of it.

Two questions:

Does the pension have COLA?

Your spouse currently bring in roughly 44% of the HHI and presumably doesn't have a pension. 50% of your income (as pension) could be quite less to live on, depending on what your current/future monthly expenses are.

ETA: One more point:
You seem to focus all your retirement contributions in a Roth (457 and 401k)? You need to carefully examine if this is optimal (compared to a traditional account), particularly since you will have the ability to spread your distributions over a large number of years. One factor to consider in this regard: What state taxes do you pay now and what state taxes you would be paying in retirement (when you will be moving south --- FL has no income tax)

Bend3r said:   
dreamscometruemd said:   
kriskos4 said:   I think it would be impossible and frankly irresponsible to retire at 52 given your current numbers.  I have a federal job where I must retire at 56 at about $80k per year, I don't plan to fully retire for fear of boredom. And I'm pretty sure that 80k a year won't be enough if I have 365 days of time on my hands.
  I agree, and I don't plan on retiring to just do whatever. I am sure that I will find something to do as a "second career". However I would like to find something enjoyable as opposed to doing it because I financially have to. 

  I want to find a second career where they pay me to travel the world, eat good food, do adequate exercise, try out multiple hobbies, spend time with family, and also volunteer / do philanthropy, all on my own schedule.   Sounds like a decent way to avoid "boredom".  Know anyone hiring with those job attributes?

  
I had that job for a while - did travel videos for the NYT.  Pay was pretty terrible though and the editors were dicks.  But it was completely on your own schedule - I'd propose a location, they'd give me a series of topics to cover on that location, and then I'd be free to do it when I wanted.  But after expenses there wasn't much left over. 

dreamscometruemd said:   The plan at retirement is to move south to a much lower cost per living area. We would then rent our current home, and use money generated from rent to pay for our new location. The other option is to sell our home in the north, and then take half of the proceeds and buy in the south an reinvest the remainder. I personally however like the idea of the passive income generated from our current home, especially if it is mortgage free. 

 

  

There are a lot of negatives to being a long distance landlord.   I wouldn't recommend it to anyone.       Just a couple points: You get a big tax break to sell your primary house that you'd lose if it turns into a rental, good property managers are hard to find ( if any really exist) and they cost you money off the top, and I honestly think its a lot better and easier to run things locally than from 100's or 1000's of miles away.   Is your current house particularly attractive as a rental?    

I suppose it doesn't matter a ton at this point since your'e talking 20 years in the future so no reason to lock in a decision now.    

 

No kids in the future; is that the plan?

why are you not considering finding another non-government higher salary job? Just because you work someplace for 30 years, you get 32k/year for life doesn't mean you have to stay there. If you can get a job at 100k/year for 20 years (at least an extra 1.2 million in savings, 3% draw rate = 36k/year) , you'll come out way ahead if you keep your current lifestyle (and sock the rest away)

OP Really needs to some reevaluating if he honestly thinks he can retire at 52 (before SS kicks in) with a pension that you hope will be there for a measly ~$23k/year. Hope you aren't planning on living another 10-20 years.

He's only 32 years old....hopefully in 10-15 years you get a few promotions and are making at least double what you are now.

If that's not feasible, then you may want to reassess your long-term career goals.

you're 32 and wife is 25, do u plan on having kids? did u account for that?

The best solution for you is to make more money. Sounds silly, but it really is true, and you are young enough to make it happen. The secret of early retirement is that yes on one side you have the movement to cut expenses like cable, expensive car, etc...but on the other side is that you have to actually save A LOT of money. Most of the big early retirement bloggers saved $50-80K a year during their working years which is what allows them to retire young and live off the $30-50K their nest eggs generate yearly. You can't save $50K a year if you aren't even making that.

Don't forget that they seem to be living comfortably on $80k now.  I know I don't think I could live on $50k in retirement, but that's more due to the lifestyle to which I've already become accustomed.  Not everyone needs $200k to survive.

I do think they need to save more though, and at 32, OP seems awfully set in his ways about his future as a state employee.

Go Curry Cracker and Mad FIentist are both worth your time to read everything that they have. They cover early retirement really well.

dcwilbur said:    at 32, OP seems awfully set in his ways about his future as a state employee.He's an old soul!

dreamscometruemd said:   Wouldn't the $90k saved in interest outweigh the increase in retirement savings? The increase would be ~$200/month. That would $48,000 contributed to retirement over the 20 year period of time. Of course with compounding this would be substantially more. However there would also be the fact that I would have 8 years left with a mortgage payment at the end of 20 years.The first thing you should do is refinance into another 30-yr mortgage at the current interest rates, which should be closer to 3.25-3.5% (depends on your location and loan amount). Just make sure your LTV is < 80% to avoid PMI.

But no, the $90K saved in interest would not outweigh the increase in retirement savings as long as the returns in your retirement accounts are higher than your mortgage interest rate. You might want to retake the lesson on compounding.

Your goal to be mortgage-free at retirement is based purely on emotion, not math. As long as your investments have a better rate of return than your mortgage interest rate, you should invest as much as you can and postpone your mortgage payments for as long as you possibly can. Refinance every month if you can (make sure the lender credit exceeds all closing costs, so you make money each time you refi).

I wouldn't recommend long distance landlording either. We do it small scale pretty locally, and it's worked out well, but mostly because the properties are in one of the highest appreciating markets while we've held them. Other than that, cash flow is not so great, especially compared to returns on low cost index funds with the money we have sunk into them. Extra expenses due to remote management would spoil it for us. If we move, we're selling everything.

And with a time window that starts at 20 years, I'd recommend putting everything into those kind of index fund investments. That will easily outpace any mortgage at our ongoing 'historically low' rates. Get out of mortgage insurance, but then pay as little as you can get away with.

Skipping 9 Messages...
Yes, my plan has always been to include rentals. It was kinda from the same vein as Automatic Millionaire... that was my old house and we just rented out when we got the new house... and we will either do the same with our current house when we decide to downsize. Starbucks does offer the education benefit, but it wouldn't offer me much value in retirement, but my eldest started working there this spring and will be using that benefit.



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