25 year old getting my priorities straight

[fossil_fuel]

Hello everyone,

I figure I should introduce myself. I'm 25, wife is 26 with 1 child on the way and planning for 3 more. Current financial goals are saving for a house down payment (should be reached within 18 months) then focusing on the kids' 529 plans so they can attend college without debt while putting money away for retirement at the same time.

My reason for pursuing ER is that I'd like to do things that can't be arranged around a two-week vacation. Hiking one of the great American trails (Appalachian Trail, Pacific Crest Trail or Continental Divide Trail) has always been one of my dreams and I'd like to try it while I'm still young and healthy enough. Parents had severe health problems in their early 50's so I want to have a few years worth of free time to enjoy life in case the same ends up happening to me.

I've been lurking on the forum for a few weeks and there's a lot of great info here, I've learned quite a bit in a short amount of time. Most of the other financial websites I read (Market ticker, zero hedge) have a strong bearish tilt so the generally optimistic disposition of posters around here provides a good contrast.

 

[FIREd]

Hey fossil_fuel,

welcome to the forum.

 

[1986pacecar]

I give you a lot of credit for thinking about ER while you're young. I am nearing retirement age (54) but some bad investments make my goal of retiring in a couple more years unrealistic. Most young people don't think enough about planning for retirement and end up on the short end when the time finally arrives.

 

[PennStateCLJ]

Welcome,

In regard to 529s vs retirement. Your retirement comes first. I would only do 529 safter maxing out everything available to you and the wife.

 

[Amethyst]

Welcome aboard!

Never would I want to deter you from the great goal of early retirement....but it is not the only path to the other goals you have set. Being so young, you could chart a path toward a job that gives you more than 2 weeks' paid vacation, or even a sabbatical.

Agree that retirement comes before funding kids' college - that is pretty much conventional wisdom. But I don't see them as mutually exclusive at all.

Amethyst

Hello everyone,

My reason for pursuing ER is that I'd like to do things that can't be arranged around a two-week vacation. Hiking one of the great American trails (Appalachian Trail, Pacific Crest Trail or Continental Divide Trail) has always been one of my dreams and I'd like to try it while I'm still young and healthy enough. .

 

[Snoozie]

CONGRATULATIONS for starting to think about saving for retirement NOW!! It's NEVER too early!! Just remember: LIVE BELOW YOUR MEANS!! Look where it's gotten so many folks - they'll work till they die. Seriously. Be smart with your money......do you NEED it?? Learn to do repairs yourself by either getting books from library, looking on-line (you-tube) or find a friend who can show you. If you can become somewhat of a handy-man, you will save TONS of money! Sounds like you've got a good head on your shoulders! GOOD LUCK!!

 

[beowulf]

Now is definitely the time to start planning for ER. The next comment is not aimed at discouraging you in your plans to have 4 kids, but they are not cheaper by the third of a dozen. Meaning that, unless you and your spouse earn a lot of money, come into a large inheritance or are capable of living extremely frugally, 4 kids are going to be a real drag on your ER plans. I have kids and they are great and raising them was fun, but it was hard to really save much until they finished college. Cost us at least 5, possibly 8 years delay in ER.

 

[kumquat]

My reason for pursuing ER is that I'd like to do things that can't be arranged around a two-week vacation. Hiking one of the great American trails (Appalachian Trail, Pacific Crest Trail or Continental Divide Trail) has always been one of my dreams and I'd like to try it while I'm still young and healthy enough. Parents had severe health problems in their early 50's so I want to have a few years worth of free time to enjoy life in case the same ends up happening to me.

You could try saving a bunch to spend early on an extended vacation (your mega-corp willing) or follow the advice of

Being so young, you could chart a path toward a job that gives you more than 2 weeks' paid vacation, or even a sabbatical.

I will offer the opinion that having 4 kids is not likely to make your goal of retirement in your fifties easy. That would require significant LYBM and even more significant M. YMMV of course.

 

[pb4uski]

At this point in your young life, focus on

1. your job/career (which is what will provide the income for all the other good stuff),
2. living below your means (but not miserly so you don't still enjoy life)
3. and save and invest regularly (preferable in low-cost index funds like VG)

and when you get to your forties you will likely see that things are falling into place (assuming you can avoid divorce, long job losses, expensive medical issues, etc).

 

[fossil_fuel]

Here's where I disagree with the conventional wisdom. I will happily forgo early retirement, or even a "normal"-age retirement, if that's what it takes to ensure my kids can get a quality education without taking on debt. Like the title of the thread, it's all about deciding what my priorities are in life. I've seen the impact that huge amounts of educational debt has on other people my age and it's not pretty in terms of what it does to their progression towards life goals and their outlook on the future.

It's practically a crime that it costs so much to get an education sufficient to land a good-paying job these days, and I realize that I'll be contributing to that problem by agreeing to pay such inflated prices in the first place. But I believe that that's whats required to give my kids a strong start in life. That's the deal that my parents gave me and my siblings (indeed, at the cost of their own ER) and that's the deal that I want to give my kids as well. My spreadsheet indicates that this should probably be possible, but my experience with spreadsheets is that they aren't very good at predicting the unexpected

Unfortunately my career doesn't offer much flexibility for sabbaticals or longer periods of time off. It's 50 hours a week, 50 weeks a year, or nothing. Longer-term I could probably get into consulting which would offer a bit more flexibility but probably not much. Academia would probably offer such flexibility but to get into that area I would need a PhD which would cost a huge amount of time and lost income, I'd need to be FI in the first place to consider that route. I do enjoy my work, my ideal "retirement" scenario would be to work full-time from January through April and then spend the rest of the year hiking around and traveling. Such seasonal work arrangements don't exist unfortunately.

Anyway, current savings rate is $45k annualized ($55k counting tax-deferred retirement accounts). Current priority is to finish up the house downpayment fund (we don't actually plan on buying a house anytime soon, since I'll probably be moving around every few years for work, but I want the funds available to jump on opportunities once the time is right). Emergency fund is set up with 10 month's expenses (although probably more like 8 months counting COBRA costs if I lost my job, but presumably I'd be receiving unemployment which would stretch out the emergency fund much longer).

Then, it's time to start dumping money in 529s, my goal is to contribute up to the gift tax limit for now while still saving reasonable amounts in the retirement accounts. I like the private college prepaid 529 plan, it offers great school selection and a return equal to the rate of tuition inflation, which is currently about 6.5%, with no risks other than that the rate of tuition increase slows (which will be fine since it will still match the expenses for which it's intended). Ultimately I'll diversify by adding a mix of investment-based 529s to the prepaid plan in order to hedge the risk that stocks/bonds will outperform tuition inflation (as well as the fact that some of my kids will probably choose to go to state schools not covered in the plan). However, at this point with tuition inflation running so high and low investment returns due to ZIRP I believe it makes sense to have more of an allocation towards the prepaid plan.

ZIRP really makes investing difficult. My personal reading of the tea leaves is that we'll follow the path of Japan and have another few decades of continued low interest rate, low growth conditions. Given this, I think that dividend stocks, as well as longer term corporate bonds, are probably the best investment option for the retirement portfolio, as the only way to get a decent return without excessive risk. But, I'm no good at predicting the future so of course a proper contingency plan needs to be in place through a reasonable AA. Much as I hate investing in near-zero interest rate short-term debt at this juncture .

Anyway, I appreciate all the responses, thanks everybody for the input.

 

[Amethyst]

Wow! to your savings rate. Terrific!

Believe it or not, it's possible to have a perfectly good career without front-loading it with student debt...of course, I'm not claiming that what worked for me, would work for your or anybody else's kids.

I lived at home and commuted to undergraduate school (in-state tuition at a state school). I never incurred a penny of student debt and my parents, who were not that well off, were able to afford my undergraduate tuition. What served me well was getting straight A's in college - as a result, employers were interested in hiring and training me. I'm not sure that I would have done so well, grade-wise, if I'd lived on campus. Too many social distractions, and no place to hide.

Since then, my employer has paid for 2 master's degrees.

With 4 (hoped-for) little ones, you will be doing your best to counter the awful Japan scenario (non-replacement birth rate). Really, nothing else will turn us around, but a vibrant demographic of young people working hard and consuming goods and services. Best wishes for everything turning out as you hope.

Take care,

Amethyst

... I've seen the impact that huge amounts of educational debt has on other people my age and it's not pretty in terms of what it does to their progression towards life goals and their outlook on the future.

It's practically a crime that it costs so much to get an education sufficient to land a good-paying job these days,

......
ZIRP really makes investing difficult. My personal reading of the tea leaves is that we'll follow the path of Japan and have another few decades of continued low interest rate, low growth conditions.

 

[Tyro]

Greetings Young Fossil (from an old...er fossil)!

I can't add much to the financial advice given by others here, and you're doing much better than I was (even adjusting for todays dollars), however...

Hiking one of the great American trails (Appalachian Trail, Pacific Crest Trail or Continental Divide Trail) has always been one of my dreams and I'd like to try it while I'm still young and healthy enough. Parents had severe health problems in their early 50's so I want to have a few years worth of free time to enjoy life in case the same ends up happening to me.

As someone who had a profound effect on my life and worldview often professed, "We don't find time [to do the things we want to do] -- we make time [to do them]." We had a similar dream to yours when we were younger -- to hike the Grand Canyon (or take the mule tour). We worked and saved, bought a house, built a business, and like yourself never took more than brief vacations for thirty-mumble years. We finally got to take our Grand Canyon vacation, but not before very suddenly and unexpectedly, my health deteriorated to the point that I could only look down from the rim; I will likely never hike nor be able to ride again -- and like your parents, I was only in my early 50s.

I guess my advice is, don't necessarily wait -- even for ER -- to realize the dreams that are important to you. Make the time to realize them.

Tyro

 

[PennStateCLJ]

I'm 27, and my parents paid for my school and my sister's schooling. They did so at the sake of their own financial security and now have to work until age 70. Some things you may want to consider in putting money in 529s before your financial independence are-

College costs could change drastically in the next 20+ years. Who knows if brick and mortar institutions will still be prevalent? Perhaps college costs will become more reasonable as the correlation to college--> good job goes down as it currently has.

Having money earmarked for college locks it in without penalties for using it for anything else.

Your kids could get scholarships eliminating the need for lots of money locked away in 529s.

FAFSA counts money in a child's name much more negatively than money in your name. My parents had a 529 for me, our expected family contribution before any aid was over $60k per year. Retirement money is not counted like that.

There is also less guarantee of getting a good job at the moment, even with a degree. My wife has a Bachelors and struggles to find a good career. If they don't want to go to college and would rather start a business that may not be your call/decision.

As others mentioned, four kids will be very expensive to raise, but college costs for four could be outrageous. My sister and I between undergrad/grad cost parents about $300k. We could have still gotten a good education for less. I feel like we went over budget because it wasn't our money. Having your kids have some skin in the game could be beneficial, I know I would have taken it more seriously.

I think it's advantageous to put yourself in a good financial position (as you're already doing, good work) and help out your children to the extent you can so that they are not the ones left caring for you and your wife when they are starting families and careers.

I would rather my parents become financially independent and then to have help me pay back any loans. They sacrificed their healthy retirement years for my sister and I. It's hard to watch that now as my parents continue to work, and my wife's parents are ER'd because of placing themselves first. They still paid for kids educations, just out of pocket and after they were sure they were financially independent.

In the case of my parents, if they suddenly couldn't work, it would be pretty difficult for us to support them at this point.

Anyway, call me conventional but there is some food for thought.

 

[pb4uski]

I was never a big fan of 529s and the restrictions they require. For our children's education, we just saved in taxable funds since they were lower cost and provided more flexibility. As it turned out when DD was in college we were able to pay her college costs from cash flow and while we have a stash aside for DS's education, it appears that he will be going another path at least for now.

My parent's paid for our 5 kids educations (some 4 years, some 2 years) so we each started our work lives with no debt, and DW and I did the same for DD and will do the same for DS if he ultimately chooses that path, so I agree with you to some degree. However in both my parent's case and our case we were able to do so without sacrificing our retirement.

For those parents who are not so lucky, I'm not sure that a modest level of student loan debt is a horribly bad thing. And there are other approaches to education (for example 2 years of community college and then transfer to a 4 year school) that get one to the same end at lower cost.

I guess that I end up in the camp that the first priority is for parents to make sure that they are financially stable and not a current or future financial burden to their children and if there is extra $$$$ that can be used to help kids start their work lives debt free or with less debt, then that is icing on the cake.

 

[FUEGO]

Good luck on your plans. They seem very ambitious (and that is a good thing!). I'm in my early 30's and we have 3 kids (so far). Of my current annual savings/investments, I put probably 90-95% into retirement oriented accounts, although some of that is in after tax brokerage accounts. The remainder I put into 529 plans for our 3 kids.

My goal for the kids' college savings is not nearly as ambitious as yours. I hope to fund 4 years tuition and fees for the kids, which works out to a little over $30k each in today's dollars. My thinking is that the college savings we have can always be supplemented by the kids working (during HS and college), loans, scholarships, co-op or work-study, internships, or withdrawals from our retirement portfolio (we will be ER'd by the time the kids are in college). We do max out the 529 contributions to soak up the relatively small state tax credit, but other than that we don't worry much about specifically saving for college.

We all want what is best for our kids, but who knows if they will even go to college? My oldest 2 kids are still very young, and appear smart, but I have slowly learned that you can push them in the right direction but you can't make them do what they don't want to do. You would do a kid a great disservice (and waste a lot of money) forcing them to go to 4 year college when an apprenticeship/OTJ training, or trade school/community college, or military service, or entrepreneurship might suit them much better.

Do what you can for your kids of course, but make sure you are taking advantage of tax savings for retirement accounts. Max those accounts to the limit before you bother with lots of college savings investments. Over time, you will likely increase your income enough to add to college savings in addition to saving for retirement.

 

[nun]

If you keep the number of children to a minimum you will greatly improve your financial situation, the education you can afford for them and the possibility of ER. You might loose out in other ways that are far more valuable, but children and a big financial liability.

I applaud your desire to do the AT, it's a big undertaking and you'll need 6 months to do a through hike. I looked into it a few years ago and instead settled on the far easier adventure of riding my bike across America on the Northern Tier which I hope to do in a couple of years.

I'm with you on the cost of education, it's ridiculous, but there is hope. I work in a university and a PhD student just graduated having paid less than $1000 for her entire education. She started at a local community college to get credits inexpensively, then got a full scholarship to the state university to finish undergrad and then had her fees paid at the state medical college to do her PhD. She's a top notch scholar/scientist, but came from a family with little money and wasn't prepared to take on debt and so came up with a plan to get her education. She's now working for a local biotech company and has zero debt!

 

[EvrClrx311]

I'm about 5 years ahead of you... and on kid 2 of 3. Best advice I can give is to start setting aside as much of your salary towards retirement as you can. Try to reach the max $17K as soon as possible (even if that is by age 40). To get there increase your 401K contribution by 1-2% every year you get a raise. If both are working... try to live on just one salary, because the other might not always be there. Particularly when planning for a large family.

With so many years till retirement, the best thing you can do is never get use to spending that money. If $10-17K is going towards retirement... you'll have A LOT of options when you reach your 50's (maybe even sooner, if the market comes roaring back).

The kids and other expenses will fall into place and you'll tend to spend what you have access to... just don't make excuses for reducing the retirement savings, ever! Don't assume you'll make more later... 15-20% into retirement no matter what.

(at the age of 30 I currently have twice my starting salary from 7.5 years ago in my 401K - and DW and I feel we haven't sacrificed much of anything, still go out alot and have fun)

Good luck!

 

[HatePayingTaxes]

I'm in my early thirties and have 2 young kids. Similar to other posters mentioned, max out your retirement savings and then put some money towards kids education. I do have some extra cash in my taxable acct and my goal was to put away 100k each (present value) for a full ride but, now, I'm leaning towards just having enough for tuition. Not because I can't afford it but to teach the value of education. As parents, we all care for our kids and want best for them but teaching them is much more valuable then paying for full ride. If they graduate with student loan, I'll probably pay it off if they learned to be financially responsible. If they're irresponsible and racking up credit card, well, I won't be helping them until they learn their lesson.

Well, that's the thought at least for now... might change but at least I'll have a fat retirement account.

Also, if Congress extends Coverdell ESA, take a look at that. You can use that for K-12 and college. K-12 costs such as after school program, tutoring, SAT classes, etc.

 

[obgyn65]

Welcome to the forum.