What's the deal with 45?

[2B]

I once found myself in a difficult position because I had put almost all of my savings into reducing my home loan. I lost my job suddenly along with about 1,100 others and the housing market in the small town collapsed. I only had about a 3 month emergency fund. Very good luck in finding another job quickly saved us from total financial disaster. Many of my coworkers were not so lucky.

The point of my ramble is to keep at least a year's living expenses in a safe, after tax account in case of disaster. I also can't get excited about paying of a 4.25% loan which I suspect will look like really cheap money in a few years. I would suggest you do pay off your 401k loan.

 

[aida2003]

The point of my ramble is to keep at least a year's living expenses in a safe, after tax account in case of disaster. I also can't get excited about paying of a 4.25% loan which I suspect will look like really cheap money in a few years. I would suggest you do pay off your 401k loan.

I believe the OP had already paid the loan and maxed out one RothIRA for 2012. Now he must fund the 2nd RothIRA.

Also, OP, you mention your wife's part-time work. Can she fund her 401k and maybe get her employer's match? If the choices in her 401k are very reasonable, she should contribute to it to reduce her current taxes. And so her after-tax 'salary' can be drawn from your savings if needed. Even if she doesn't make $17k in the part-time job, she can contribute her all pre-tax money to the 401k unless her employer has stipulations about that. I know my co. does.

I concur with 2B for keeping 1 year's expenses in accessible accounts.

 

[A Bird In Hand]

I agree with scrabbler1 and others - paying down debts would be my top priority.

I once found myself in a difficult position because I had put almost all of my savings into reducing my home loan. I lost my job suddenly along with about 1,100 others and the housing market in the small town collapsed. I only had about a 3 month emergency fund. Very good luck in finding another job quickly saved us from total financial disaster. Many of my coworkers were not so lucky.

The point of my ramble is to keep at least a year's living expenses in a safe, after tax account in case of disaster. I also can't get excited about paying of a 4.25% loan which I suspect will look like really cheap money in a few years. I would suggest you do pay off your 401k loan.

Thanks guys. I should probably update my OP to indicate that I just paid off that 401k loan the other day. I mentioned it in this post.

I don't have any other debt except the mortgage.

2B, that's a harrowing situation you were in. I'm glad you managed to find a job so quickly and averted a much bigger problem. Stories like that are precisely why I've been keeping an emergency fund to cover > 1 year of expenses.

I agree that 4.25% is fairly cheap money, and will likely look a lot cheaper when rates eventually go way up. But at the moment I'm able to max out my 401k, max out our IRA's (partially via the cash savings we have), and still pay down the mortgage in half the scheduled time. Admittedly this doesn't leave much on the table for saving more in taxable investments. On the other hand it's a guaranteed 3.x% return (far better than my cash savings account), and it does help me with my ER cash-flow requirements in a manner that I'm comfortable with.

One stealthily-useful aspect of putting most of my excess income towards my mortgage is that it forces me to keep a close eye on my living expenses, which is going to be a crucial factor in my ER plans.

 

[2B]

The other reason to build up your after tax accounts would be to be able to better balance your tax rate in retirement. A few years ago I realized almost all of my assets are in a traditional IRA or 401k. In retirement I'd be forced to live off these which would drive my marginal tax rate back up to where it is now. Since then, I've been building my after tax accounts (yes, at my currently high marginal tax rate) but I should be able to manage my retirement taxes a bit better. I'll also have some opportunities to rollover trad IRA money into my Roth IRA.

 

[A Bird In Hand]

I believe the OP had already paid the loan and maxed out one RothIRA for 2012. Now he must fund the 2nd RothIRA.

Oops...your reply sneaked in there before I submitted my previous one. We're also fully funding my wife's Roth IRA; she just hasn't yet had a chance to take a look at the funding options yet. See, no need to fret -- she's in the loop on all this stuff.

Also, OP, you mention your wife's part-time work. Can she fund her 401k and maybe get her employer's match? If the choices in her 401k are very reasonable, she should contribute to it to reduce her current taxes. And so her after-tax 'salary' can be drawn from your savings if needed. Even if she doesn't make $17k in the part-time job, she can contribute her all pre-tax money to the 401k unless her employer has stipulations about that. I know my co. does.

Unfortunately she doesn't have any 401k or other retirement programs available through her current employer/level of employment. In previous years we would just max out her traditional IRA instead; this year it'll be Roth.

I concur with 2B for keeping 1 year's expenses in accessible accounts

Me too (see my last post). But even drawing down our savings to max out Roth IRAs will still leave us with > 1 year's savings after 5 years. Meanwhile, there's probably something better to do with at least some portion of $147k than to earn 0.9% taxable. A couple ideas have popped up already in this thread.

 

[A Bird In Hand]

The other reason to build up your after tax accounts would be to be able to better balance your tax rate in retirement. A few years ago I realized almost all of my assets are in a traditional IRA or 401k. In retirement I'd be forced to live off these which would drive my marginal tax rate back up to where it is now. Since then, I've been building my after tax accounts (yes, at my currently high marginal tax rate) but I should be able to manage my retirement taxes a bit better. I'll also have some opportunities to rollover trad IRA money into my Roth IRA.

Good point about tax diversification. We find ourselves in a similar position. Recent and pending Roth IRAs notwithstanding, 100% of our retirement savings are pre-tax. Even with ING savings, we still have more than 75% of our money in pre-tax accounts. And that allocation is only going to become more skewed over time since about 3x as much will be going into 401k than our Roth IRAs each year. Not to mention the vast majority of our returns will be on the pre-tax side, making the allocation even more imbalanced.

I guess I could put some (or all) of my 401k contributions into Roth 401k, but I'm probably getting ahead of myself. I haven't researched tax diversification enough to have any clue what a reasonable allocation would look like.

 

[A Bird In Hand]

Wow, it's hard for me to believe two years have passed since I found this site and made my first post. Let's see how the situation has changed in those two years:

Married w/ 2 kids -> Married w/ 3 kids
$237k left on mortgage -> $188k
Still paying ~ $1,100/mo extra on mortgage
~$500k in retirement accounts -> ~$755k
$165k cash -> $120k cash
$18k 401(k) loan -> paid off

Everything went pretty much according to plan, except our retirement accounts grew faster than I anticipated. Cash dropped significantly due to paying off 401(k) loan, fully funding a pair of Roth IRAs for a couple years, and buying a car. We're still on track to have the mortgage paid off in 6 years, which will hopefully make ESR possible in our mid 40's. I still lurk and read these forums regularly for inspiration, entertainment, and education.

 

[A Bird In Hand]

Oooh, looking over those numbers I just realized our net worth went up by $277,000 in two years. I guess the bulk of that is due to a great stock market, but still...not too shabby!

 

[Rdub]

Great progress!

 

[LongPrime]

Ans to 45:
42, (6x9), is the answer to Life, the Universe and Everything, by Deep Thought.
43 is a prime.
44 has too many factors.
46 is never used. Who has ever use 46 as a target number for anything.
47 is Ok but its neither 45 or 50.
48 is 4 and 4+4. Bad omen for Chinese.
49 isn't 50
50 is half of 100. Who wants to retire at half your expected life expectancy. You want to retire at less than half to really validate your smarts.

 

[A Bird In Hand]

Rdub - Thanks! We're pleased with our progress, but well aware that a downturn in the market could happen at any time and is outside our control. Hopefully we'll be able to take that in stride when it happens. Thankfully our ability to drastically reduce living expenses (by paying off the mortgage) is not contingent upon market returns. Our jobs are pretty secure, so ESR@45 looks pretty close to a sure thing at the moment.

LongPrime, how about this: We don't want to work 9-5 after 45, and coincidentally 9x5 = 45. So we're going to ESR because numerology.

 

[nash031]

Re: 45 vs. 42... For me, my goal is 42, but 45 may be more realistic. 42 is simply the goal because that's the earliest age at which I am eligible to retire from the service and collect my pension. We'll see, but it'll be a hell of a lot easier if my wife keeps working to 45 or even 42! Gives us 3-6 more years of not drawing down accounts at all!

 

[daylatedollarshort]

But if mortgage and all other debt is off the table at 45, then I think my living expenses should be low enough to let me work part time (or switch to a less lucrative but more rewarding job), live off that income, and postpone my withdrawal from retirement accounts.

That is our plan though we didn't figure out how to do that until we were in our fifties. With kids launched and living in a condo some place sunny and warm, our part time, lap top income should more than cover our living expenses plus living abroad in a furnished flat a few months out of the year. SS, pensions and investment income can all be reinvested. We don't really need to invest much in stocks since our expenses are so low compared to our income, so a market downturn wouldn't impact us at all.

Looking back I don't know why it took us so long to figure this out. We had the part time income but our expenses were too high until the last few years to make it all work.

 

[LongPrime]

What is the mortgage interest rate, original term, and term of loan remaining? Have you refi'd. IMO money used to accelerate mortgage is better spent on better investments

 

[A Bird In Hand]

What is the mortgage interest rate, original term, and term of loan remaining? Have you refi'd. IMO money used to accelerate mortgage is better spent on better investments

My goal is to achieve -- as soon as possible -- low enough expenses so that I can afford to work part time. Specifically, my accelerated mortgage payments will result in a guaranteed ESR date in about six years. If you know of an investment that is guaranteed to return about 4% (after taxes) over the next six years, then it'll basically be a wash compared to my approach. If you know of an investment that will likely return 8% over the next six years, but with a distinct possibility my ESR date will be extended to ten or twelve years, I'm not even remotely interested.

 

[GrayHare]

Money is fungible. Whether it is invested in your bank account or in your house, it's the same thing. No one who puts money into their bank account treats it as an expense. Similarly putting it into your house is not an expense. Additionally, repaying a low-interest mortgage via future (inflated) dollars effectively reduces the interest rate to near zero. Should inflation spike in a few years, still having a low-interest mortgage around is equivalent to earning tax-free interest.

 

[A Bird In Hand]

Money is fungible. Whether it is invested in your bank account or in your house, it's the same thing. No one who puts money into their bank account treats it as an expense. Similarly putting it into your house is not an expense. Additionally, repaying a low-interest mortgage via future (inflated) dollars effectively reduces the interest rate to near zero. Should inflation spike in a few years, still having a low-interest mortgage around is equivalent to earning tax-free interest.

Ok...and how can I use this information to achieve a guaranteed ESR date in less than the six years it will take me if I continue with accelerated mortgage payments?

 

[daylatedollarshort]

We have decided we don't really care if we have a mortgage or not, we are more focused on total net worth and annual expenses (including income taxes and health insurance premiums) as more key issues.

Sometimes paying off the mortgage is the best idea, sometimes you might come out ahead financially keeping more money in after tax accounts and having a low interest fixed rate loan with the mortgage interest deduction. This can keep your taxable income / O-MAGI low, which in turn might allow you to pay zero in income taxes, pay close to zero in ACA health insurance premiums and convert retirement money to Roth accounts without paying income taxes.

 

[A Bird In Hand]

We have decided we don't really care if we have a mortgage or not, we are more focused on total net worth and annual expenses (including income taxes and health insurance premiums) as more key issues.

For us, I don't see how net worth has any practical effect on FI. One day, when we're 55+ and we can draw from retirement accounts without penalty, it will become more relevant.

Annual expenses? Yes, reducing them is key to ESR for us. And the only portion of our annual expenses that we can realistically get rid of is the mortgage. P&I accounts for about 1/3 of our living expenses, and since it can be paid off in 6 years without compromising our ability to max out 401(k), Roth IRAs, or decimating our emergency savings, it seems like ridiculously low-hanging fruit to me.

 

[daylatedollarshort]

I don't know your specifics, but just to use a generic example, if being able to drawdown after tax money money saves a household $10K in taxes and $10K in ACA health insurance premiums, that might make more financial sense than paying 3% after tax interest on a $200K mortgage. The numbers aren't going to be the same for every household. For some keeping the mortgage may be financially advantageous. It depends on a wide variety of financial factors.

 

[FIGuy]

To answer the original question:

I think 45 represents the following:
Smart, career minded person graduates with some debt and lives it up in their 20s.
Age 30 rolls around, career romance loses luster, and person asks "is this all".
Discovers ER reality, saves 50% for 15 years and with decent investment growth ends up with 25x annual expenses around age 45. It seems like a good live for now / live for future balance and allows a reasonably full and enjoyable career. After 20 years, I imagine almost any career would start getting old.

I've noticed many here are engineer types working in the corporate world. I've noticed that engineers typically seem to either move up into management or find something else fun to do in their 40s. I work in a newer field though so this view may be skewed somewhat. I wonder if they aren't hitting FI and leaving careers at a substantial rate, actually. Maybe this is part of why "there aren't enough STEMs" in the USA?

 

[A Bird In Hand]

I don't know your specifics, but just to use a generic example, if being able to drawdown after tax money money saves a household $10K in taxes and $10K in ACA health insurance premiums, that might make more financial sense than paying 3% after tax interest on a $200K mortgage. The numbers aren't going to be the same for every household. For some keeping the mortgage may be financially advantageous. It depends on a wide variety of financial factors.

Ah, interesting points that I hadn't considered. In our case it's not really relevant, since we'll still be covered by our employer's health insurance plans in ESR (ages 45-55). But I can see how someone retiring now without employer-subsidized HI might need to...creatively manipulate MAGI in order to optimize expenses WRT ACA.

Right now our itemized deductions come out to just a couple thousand more than the standard deduction, so I'm not sure the mortgage interest deduction offers much in terms of reducing income to qualify for ACA subsidies in the future. Admittedly I don't know a whole lot about *-MAGI and its implications to ACA subsidies, and the rules might very well change substantially by the time it's relevant to us in 17 years or so. Maybe I'll find that a cash-out refinance will make sense in retirement simply to help qualify for ACA subsidies.

 

[A Bird In Hand]

Another year has passed since my last financial update. Here's how things went over the last year:

Married, both of us approaching 40, 3 children all < 10 years old
$188k left on mortgage -> $161k
Still paying ~ $1,100/mo extra on mortgage
$755k in retirement accounts -> ~$884k
$120k cash/non-retirement investments -> $105k

It was a pretty good year. We're now very close to $1MM in combined retirement/cash accounts -- an increase of about $114k over last year. Mortgage balance went down by $27k, so our NW went up > $140k. If we were to take the kids out of private school, sell the house, and live in a van down by the river, we could retire tomorrow.

Our cash accounts keep dwindling as we continue to fund our IRAs annually. Without one or both of us earning additional income in the near future, we'll soon come to a point where we have less cash than we would prefer to withstand a period of prolonged unemployment. When the time comes, we might be forced to sacrifice our sacred cow -- extra principal payments and the dream of super-early mortgage payoff.

 

[EastWest Gal]

If you have a good mortgage rate, you may be too aggressive with early mortgage payoff. You could be investing and saving more. If ROI averages 7-8% and your mortgage is in the 3-4%, you're losing that extra 3-4% as well as increasing your income tax liability. Consider cutting your extra payments to a more reasonable amount and save and invest more. Also have you considered helping your kids through college with 529 plans?

I was FI before we paid off the mortgage. We just plugged away with an extra $200-500/mo over the life of the mortgages (moved, then refinanced to a 15 year mortgage which we paid off in 11 years).

IMO you should back off paying so much principal and invest in 529s or a taxable account.


Sent from my iPhone using Early Retirement Forum

 

[Golden sunsets]

Bird; in your OP you mention funds in TSP. Are you a federal employee? If so will you be eligible for a pension retiring at 45 from the government? I do understand the desire to pay off the mortgage aggressively. Did you refi at the recent low mortgage rates of 3.375 vs the 4 percent plus that you referenced in your 2012 post?