New member and working towards FI

[MrTankster]

Hi everyone. I'm a new member to this forum. My wife and I are both 28 years old and we have been working full-time for about 5 years now. We are also expecting our first child later this year, and so I figured this would be a nice time to lay out the full picture of where we are at, before things get crazy .

We have been on the FI path for about 3 or 4 years now, with a goal to reach it sometime in our 30s. With a baby on the way, that goal feels even more important to us. We would both much rather have the time and flexibility to spend with our kid, rather than at work. We expect that daycare costs will soon reduce our savings rate over the next few years, so right now we are trying to aggressively fund our retirement accounts.

Here's a breakdown of our finances:

Gross Household Income:
$145k

Emergency Fund:
$10k

Debt:
My federal student loans - $22k with 4% average interest rate
Her federal student loans - $40k with 5% average interest rate

Retirement Accounts:
HSA - $18.5k (FSKAX)
Roth IRA - $44.5k (FSKAX)
Roth IRA - $38.1k (FSKAX)
Rollover IRA - $109.3k (FSKAX)
Rollover IRA - $41.5k (FSKAX)
457B - $16k (BlackRock Russell 3000 Index Fund)
401k - $8k (S&P 500 Index Fund)

Total Invested:
$276k

For the past few years, we have focused heavily on maxing our tax sheltered accounts. This includes maxing an HSA, both IRAs, and the 457b. After automated retirement contributions, we usually have around $1.5k - $2k left over each month, which mostly goes toward travel and vacations.

A few questions that have been on my mind lately::
1. We’ve largely ignored our federal student loans during forbearance, but payments are set to resume later this year. The interest rates feel like they fall into a gray area where we could either aggressively pay them down or simply make minimum payments and continue investing heavily. I realize this is partly personal preference, but I’d love to hear how others would approach it.

2. Since we are wanting to potentially retire in our 30s, when would it make sense to start building up a cash cushion, to help against SORR?

3. Is there a point where it makes sense to prioritize taxable brokerage contributions over additional tax-advantaged accounts? I understand the flexibility benefits of taxable accounts, but with strategies like Roth conversion ladders available, I’m still not fully convinced how necessary they are for early retirement.

I appreciate any thoughts or feedback and I am looking forward to learning more from this community.

 

[pb4uski]

Are the rollover IRAs traditional IRAs? Are your current retirement contributions to Roth or traditional accounts?

IF you were not working, how much would you need for living expenses? I have to be a Debbie Downer, but you would probably need a huge nut to prudently retire in your 30s, preferably a lot in taxable accounts that can be withdrawn without any early withdrawal penalty. Also, any SS that you will qualify for would be trivial because you will have very few years of qualifying earnings.

Your post sort of reminds me of a moment when I was in my 30s with two young kids, DW was a SAHM and I had a stressful job where we could have bought a house with 10-20 acres in the boonies free and clear. I thought we could have a huge garden and harvest vegetables for the winter, heat with wood off the land, have some chickens for eggs and meat, have a couple beef cows, harvest a few deer off the property, etc. IOW, downshtft to part time work to pay the property taxes and other cash expenses but otherwise live off the land. The more I thought about it the more that it sounded like a lot of work.

I recommend that you go out and but Quicken Deluxe and start using it to manage your finances. It has a Lifetime Planner tool bundled into it that is very good for developing a plan.

Best of luck.

 

[MrTankster]

Are the rollover IRAs traditional IRAs? Are your current retirement contributions to Roth or traditional accounts?

IF you were not working, how much would you need for living expenses? I have to be a Debbie Downer, but you would probably need a huge nut to prudently retire in your 30s, preferably a lot in taxable accounts that can be withdrawn without any early withdrawal penalty. Also, any SS that you will qualify for would be trivial because you will have very few years of qualifying earnings.

Your post sort of reminds me of a moment when I was in my 30s with two young kids, DW was a SAHM and I had a stressful job where we could have bought a house with 10-20 acres in the boonies free and clear. I thought we could have a huge garden and harvest vegetables for the winter, heat with wood off the land, have some chickens for eggs and meat, have a couple beef cows, harvest a few deer off the property, etc. IOW, downshtft to part time work to pay the property taxes and other cash expenses but otherwise live off the land. The more I thought about it the more that it sounded like a lot of work.

I recommend that you go out and but Quicken Deluxe and start using it to manage your finances. It has a Lifetime Planner tool bundled into it that is very good for developing a plan.

Best of luck.

Yes, both rollovers IRAs are traditional. Current retirement contributions are only towards the Roth accounts.

We are estimating around 50k in annual expenses, though this is likely to change in the next coming years. For the past few years, we have lived well on 40k in annual expenses. We recently moved from a LCOL to a HCOL area, so our rent has gone up by a considerable amount in the last year. That seems to be our largest expense, by far. If we choose to stay in our current area, homeownership will likely not be a possibility for us. For now, we are okay with that. Renting and investing the surplus should do wonders for our retirement accounts.

I'm not too concerned with withdrawing from our retirement accounts before the age of 59, as there are a few strategies out there to help with that. See How to Access Retirement Funds Early. In regards to Social Security, it's hard to know what my payout (if it exists) will look like come the time that I reach the eligible age. The ssa.gov quick calculator estimates $1300 in monthly benefits if I were to retire 10 years from now, at age 38. That seems pretty good to me!

Thanks for your recommendation on the budgeting software you use. We haven't really bothered on keeping a strict budget. Instead, we just make sure that we are meeting our investing and savings goal. This seems to have worked well for us.

 

[Koolau]

I'd suggest playing around with FIRECalc. It has lots of way to do "what ifs."

FIRECalc: A different kind of retirement calculator

www.firecalc.com

I don't want to discourage you but Early Retirement in the 30s is, well, VERY early. Not impossible. It's doable, but it means an incredible commitment to either intense saving now or living a very modest retirement life (or both).

Things seem to come together a bit later (early or mid 40s) when the savings just take on a life of their own with something approaching geometric growth.

Regarding a plan going forward, it's good to have enough savings to cover 6 months for someone losing a j*b or a significant illness (or time off to spend with the new child). BUT now is the time to go for real growth with relatively aggressive investing (high risk with - hopefully - high reward). No guarantees, so you gotta be ready for anything.

As far as school debt repayment. You're right that you're kinda at a "middling" interest rate that might be better to pay off BUT might keep you from earning more with investments. I'd suggest you start whittling down the debt (perhaps at the expense of some fun stuff - but don't over do - you need to have some fun and do some living along the way). In any case, keep up the investing as much as possible.

You have a GREAT start on your savings. At the rate you're going, you should be able to Retire Early with Financial Independence much sooner than most people.

Please check back often and let us know how it's going.

 

[Surewhitey]

Lowering & making your monthly needs consistent is my pc of advice. We have no debt therefore minimizing our monthly needs. Kid(s) add to this if both work per my DD's opinion.

You don't mention owning a home or other debt (cars?). Locking in big items for an inflation hedge has worked for us. Eg, we bought our home in 2018 for $282k, now costs ~$55k. A 2018 Avalon in 2019 for $17k all in, now we know cars are stupidly expensive.

You will be needing a huge amount of post tax bucks for years up to getting to use your 401k type accounts. Converting to Roths is a great option for the low income times & you can use the principal after 5 years (I think)... We have ~40% in post tax for this reason. You can "engineer" your income down for ACA subsidies.

Probably some things to look for are low income benefits. One to consider is the tax saver's credit. Probably others for kids (Trump accounts).

 

[MBAustin]

Welcome Tankster! Congratulations on firmly establishing your FIRE-enabling behaviors as a couple from the get-go - much easier than trying to change later. Remember that the goal is to get to FI so that you have the flexibility to make choices rather than having the need for income drive your decisions.

That said, 30s is a very aggressive target. A 50K annual spending budget is quite low for a family of 3 in any area, much less an HCOL. Although it may be attainable in some years, there are always "spiky" expenses as well - some predictable like replacing vehicles, some not so predictable like a major health event. So I would focus on maintaining flexibility into your 40s or 50s. Our goal was to always live on one income (generally the higher one) so that if one of us decided to (or was forced to) leave the workforce, we would not be forced into decisions we didn't want to make. Fortunately, that didn't happen until DH was in his early 50s and had to retire on disability from a chronic illness. But you never know. I know personally about 6 people (40s-60s) who were laid off or forced to retire just in the past couple of months.

In any case, enjoy preparing for your new baby and keep up the good work!

 

[MrTankster]

I'd suggest playing around with FIRECalc. It has lots of way to do "what ifs."

FIRECalc: A different kind of retirement calculator

www.firecalc.com

I don't want to discourage you but Early Retirement in the 30s is, well, VERY early. Not impossible. It's doable, but it means an incredible commitment to either intense saving now or living a very modest retirement life (or both).

Things seem to come together a bit later (early or mid 40s) when the savings just take on a life of their own with something approaching geometric growth.

Regarding a plan going forward, it's good to have enough savings to cover 6 months for someone losing a j*b or a significant illness (or time off to spend with the new child). BUT now is the time to go for real growth with relatively aggressive investing (high risk with - hopefully - high reward). No guarantees, so you gotta be ready for anything.

As far as school debt repayment. You're right that you're kinda at a "middling" interest rate that might be better to pay off BUT might keep you from earning more with investments. I'd suggest you start whittling down the debt (perhaps at the expense of some fun stuff - but don't over do - you need to have some fun and do some living along the way). In any case, keep up the investing as much as possible.

You have a GREAT start on your savings. At the rate you're going, you should be able to Retire Early with Financial Independence much sooner than most people.

Please check back often and let us know how it's going.

Thanks for the calculator suggestion. Though it's difficult for me to come up with accurate estimates for any future pension or SS payouts, the results look promising if we continue to invest at our current rate.

I fully acknowledge that stepping away from full-time work in our 30s is an ambitious goal. The math shows that it is possible, but who knows what the future holds for us! We figure that worst case, we can just switch to part-time jobs to cover living expenses while our investments continue to grow.

I agree with your thoughts on how to go about student debt repayment. I think it would be in our best interest to redirect some of our vacation funds to paying off the larger interest debt.

Thank you for the feedback

 

[MrTankster]

Lowering & making your monthly needs consistent is my pc of advice. We have no debt therefore minimizing our monthly needs. Kid(s) add to this if both work per my DD's opinion.

You don't mention owning a home or other debt (cars?). Locking in big items for an inflation hedge has worked for us. Eg, we bought our home in 2018 for $282k, now costs ~$55k. A 2018 Avalon in 2019 for $17k all in, now we know cars are stupidly expensive.

You will be needing a huge amount of post tax bucks for years up to getting to use your 401k type accounts. Converting to Roths is a great option for the low income times & you can use the principal after 5 years (I think)... We have ~40% in post tax for this reason. You can "engineer" your income down for ACA subsidies.

Probably some things to look for are low income benefits. One to consider is the tax saver's credit. Probably others for kids (Trump accounts).

I think we have done a good job on keeping our costs low since leaving school. Our largest expense by far is rent. It hurts my soul having to pay almost $2k a month in rent, but that's the price we pay for living in a HCOL area. The good thing is, we can always move to a cheaper place to help lower our living costs.

We are renting a 1-bed apartment with no current plans for home ownership. We do own 2 fully paid off cars that we intend on keeping for the foreseeable future. One is a 2023 Mazda Cx-30 and the other is a 2016 Toyota corolla.

I do think we will leverage the roth conversion ladder strategy when it comes time to take from our funds. I will also have a 457b account that we can leverage for early withdrawals.

With the expected arrival of our child, we will likely open a Trump account and a 529 plan with the state.

 

[MrTankster]

Welcome Tankster! Congratulations on firmly establishing your FIRE-enabling behaviors as a couple from the get-go - much easier than trying to change later. Remember that the goal is to get to FI so that you have the flexibility to make choices rather than having the need for income drive your decisions.

That said, 30s is a very aggressive target. A 50K annual spending budget is quite low for a family of 3 in any area, much less an HCOL. Although it may be attainable in some years, there are always "spiky" expenses as well - some predictable like replacing vehicles, some not so predictable like a major health event. So I would focus on maintaining flexibility into your 40s or 50s. Our goal was to always live on one income (generally the higher one) so that if one of us decided to (or was forced to) leave the workforce, we would not be forced into decisions we didn't want to make. Fortunately, that didn't happen until DH was in his early 50s and had to retire on disability from a chronic illness. But you never know. I know personally about 6 people (40s-60s) who were laid off or forced to retire just in the past couple of months.

In any case, enjoy preparing for your new baby and keep up the good work!

I will say that stepping back from full-time work in our 30s is more of a broad, open ended goal. More than likely, we will downshift into part-time work to cover basic living expenses while our investments grow. Or perhaps we may decide to take a long sabbatical and just spend time traveling parts of Europe. But who really knows. Like you said, FI is about the flexibility it provides

You do raise a good point on the idea of spiky expenses. We'll need to give this some more thought. Fortunately, we have done a good job on living below our means to the extent that we could live off one income, if need be. This also means that our soon to be exorbitant daycare costs won't hurt as bad, given that the money will just be re-directed from retirement contributions.

Thanks for your feedback and insight!

 

[NgineER]

Welcome!

Great to see folks planning early. Sock money away while you can, and do it tax deferred along with brokerage to pay taxes from on conversions.

We were able to keep expenses low (your range) while kids were little. As soon as sports and extra curricular kicked in the spending has exploded. They will take whatever you give them.

I assume that retiring I. Your 30’s you’d want to have a 3% WR max to stay safe. That means $50k/0.03–> $1.7M in savings. Might want to make it $2M to account for increased spending as kids grow older.

You’ve done pretty well so far, but you need to be laser focused on your savings and investing in order to pull off retirement in your 30s.

Good luck!

 

[Out-to-Lunch]

Welcome aboard!

 

[Doolish1]

Social Security looks at 35 years of earning, so those SSA calculators think you are going to be working until retirement age. If you stop working in your 30s, you'll have ~20 years of "zeroes" added in. Just something else to look at.

 

[RetiredHappy]

I would pay off your student loans before taking spending on travel and vacations. Retiring in your mid 30s is way too ambitious. Keep on saving.

 

[MrTankster]

Welcome aboard!

Thanks!

 

[MrTankster]

Social Security looks at 35 years of earning, so those SSA calculators think you are going to be working until retirement age. If you stop working in your 30s, you'll have ~20 years of "zeroes" added in. Just something else to look at.

The quick calculator from ssa.gov should already factor this into its calculation. See here https://www.ssa.gov/oact/quickcalc/faqs.html#7

 

[MrTankster]

I would pay off your student loans before taking spending on travel and vacations. Retiring in your mid 30s is way too ambitious. Keep on saving.

Thanks for your perspective. It's important to remember that retirement is a number and not an age

 

[MrTankster]

Welcome!

Great to see folks planning early. Sock money away while you can, and do it tax deferred along with brokerage to pay taxes from on conversions.

We were able to keep expenses low (your range) while kids were little. As soon as sports and extra curricular kicked in the spending has exploded. They will take whatever you give them.

I assume that retiring I. Your 30’s you’d want to have a 3% WR max to stay safe. That means $50k/0.03–> $1.7M in savings. Might want to make it $2M to account for increased spending as kids grow older.

You’ve done pretty well so far, but you need to be laser focused on your savings and investing in order to pull off retirement in your 30s.

Good luck!

I'm hoping we can do a good job of keeping costs and life style creep to a minimum. It's too early to tell how much we will be spending towards extra curriculars, but we shouldn't have a problem enforcing a budget for this, like we would for any other expense.

I personally find 3% WR to be too conservative, but I recognize that this subjective to one's own risk tolerance.

Thanks for the advice!

 

[Gumby]

With respect to paying down debt, I always viewed it as making a no risk investment at the loan rate. Even better, you boost your net worth without having to pay taxes on cap gain distributions or dividends.

 

[NgineER]

I'm hoping we can do a good job of keeping costs and life style creep to a minimum. It's too early to tell how much we will be spending towards extra curriculars, but we shouldn't have a problem enforcing a budget for this, like we would for any other expense.

I personally find 3% WR to be too conservative, but I recognize that this subjective to one's own risk tolerance.

Thanks for the advice!

What do you base 3% being too conservative on? 4% was designed to get you through 30 years of retirement without running out of money, in your case you probably have 50 years ahead of you. You could conceivably start at a higher rate if you can be very flexible with your spending

It is easy to be aggressive when you are young and have no responsibilities, but as you are building a family it will be less prudent to take risk as you are not jeopardizing only your life style but are impacting others as well.

You still have time to figure things out and can adjust your plan as you go.

You are in a very good spot thinking of all of these things now.

 

[SevenUp]

The ssa.gov quick calculator estimates $1300 in monthly benefits if I were to retire 10 years from now, at age 38.

You aren't eligible to receive SS before age 62. See Quick Calculator where it says, "However, if you enter a date before you are eligible for benefits, we will assume you want to start receiving benefits at the earliest possible age (age 62)."

 

[MrTankster]

You aren't eligible to receive SS before age 62. See Quick Calculator where it says, "However, if you enter a date before you are eligible for benefits, we will assume you want to start receiving benefits at the earliest possible age (age 62)."

Correct. The estimate I shared accounts for this.

 

[SevenUp]

The ssa.gov quick calculator estimates $1300 in monthly benefits if I were to retire 10 years from now, at age 38.

You aren't eligible to receive SS before age 62. See Quick Calculator where it says, "However, if you enter a date before you are eligible for benefits, we will assume you want to start receiving benefits at the earliest possible age (age 62)."

Correct. The estimate I shared accounts for this.

Ok, just to be clear: you aren't expecting any SS at all between age 38 and age 62 (or even longer, should you choose to defer SS in return for a larger monthly amount).

 

[GoBirds]

Be extremely careful with those student loans.

If you haven’t already, create an amortization schedule for each individual loan.

Don’t be the person paying student loans for ten years and only reduce the principal by $2000. Or worse the principal is higher than originally started with. “We paid the minimums”

And, If you pay extra towards principal ensure that the loan company applies it correctly.

Otherwise I like your optimism but I am skeptical of your plan

 

[NgineER]

For question 2, I'd stay all equities for as long as possible as you have time on your side. I'd make the switch right before retirement or contribute to your SORR bucket the last 2-3 years.

 

[engineernerd]

Welcome to the forums! My answers:

1. At your age, AFAIK continuing to make your loan payments on time would have the benefit of improving your credit score, which probably has benefits in many areas it shouldn’t really (insurance premiums, even job prospects).

2. In all the account types you list (except the emergency fund), there is no tax incurred for switching investments so this can be done last-minute when you know you are almost ready to retire. If it were me, I would let FIRECalc show me the “best” stock allocation (via the “Investigate changing my allocation” option) and just go with that.

I’m also going to answer a question you didn’t ask: To help against SH ("S*** happens”) risk, the first thing I would do is beef up that emergency fund. At least six months of living expenses is a very wise target, IMHO.

3. This is tricky for a true early retirer. Money in taxable accounts tends to generate not-entirely-predictable taxable income, which can make managing MAGI for ACA premium tax credits more difficult. On the other hand, the tax you’d pay on certain kinds of investment income can be very low, lower than the tax on the income you’d generate from a tIRA using Rule 72(t). So I have no firm advice about this.


And now some unsolicited advice (ignore if you wish):

(1) Make sure to involve your DW in this decisionmaking from the get-go. She will likely live longer than you and may (quite reasonably) want to target a bigger safety factor than you.

(2) It’s a bad idea to target retiring at a certain age. You can end up falling in love with that age. Life happens and you have to be able to roll with it without getting depressed. You also need to keep such a goal in perspective and not let it become an obsession that sucks the joy out of life in the here-and-now. Or leads you to kid yourself about whether you are really ready, and live to regret it.

What we did was to target being able to retire “early.” We saved as much as we could without feeling deprived, thought carefully about which expenditures brought us true joy and which would just be fun in the moment and then fade to boredom, read up on investing the easy way (low-cost index funds) so we could focus most of our attention on living our lives and also stay loose about our retirement-year expectations so that having “enough” would be a pleasant surprise instead of NOT having enough being a recurring disappointment.