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This is the first of what I hope will be a regular feature from you, the readers. Based on your submissions, I hope to do these types of case studies on finances about once a month.
What Are Case Studies?
These case studies are based on your financial and life dilemmas. You send me the facts and figures, and in return, I will provide some analysis and recommendations. However, I am also hoping that you, the readers, also will provide commentary. I’m specifically looking for insightful, actionable advice, feedback and encouragement in the comments section.
In my experience, one of the most interesting parts of college was analyzing case studies to figure out what I would do when presented with a dilemma.
With that said, let’s start the first case study from Idaho for this month’s edition. It centers around Josh and Jen, a couple with two children, ages 2 and 5.
Josh got a late start to the FIRE movement. At the age of 40, he began reading and learning as much as he could about FIRE. He requested a Case Study, thinking he may be too far behind. However, I’m optimistic that I, along with the Mustard Seed Money community, can offer this couple some great advice and insight.
Finally, this should go without saying since we have the world’s best commenters out there, but, please remember that we’re here to build each other up and not tear each other down.
With that as the background, I’ll let Josh take it from here!
A little about me: I am a 40 year-old, 14-year medical professional at a federal (government) agency. I currently gross 118,500/yr, and net 74,976/yr. Given I have been with my agency my entire career, if I continue on the traditional retirement path, I can retire at age 57 (only 17 more years), with 30 years of federal service through FERS.
My wonderful wife is currently a stay-at-home mom to our two beautiful kids. She works intermittently as an adjunct professor at the local university. For our current case review, I will exclude her income and past 401(k), as it is unclear when or if she will return to work. If she does, it will be added gravy to this mix.
We now are credit card debt free, nearly car loan debt free, and by next year, should be rid of student loan debt. Tired of living the typical American lifestyle of debt, I have caught the FIRE bug. At the least, I want to make the most out of the years ahead. It may be too late for me to really “FIRE”, but I hope to receive some good insight into which scenario is best to proceed with and why.
Josh and Jen’s Finances
|Josh Monthly Paycheck||$6,248.00||After TSP 5% and Roth 1% contribution|
|Mortgage||$1,492.00||$239,000 mortgage: 28 years left on a 30-year mortgage with rate of 3.6%.|
|Tithe||$600.00||We pay 10% of our check to our church, along with 3 missionaries|
|Groceries||$600.00||Sometimes less than this, but trying to eat healthier, which costs more|
|Allowance||$80.00||Jen and I both get $40.00 per pay period to buy ourselves coffee, lunch, whatever|
|Gas||$200.00||Josh: V6, drives 4 miles to work and back, rides bike when possible. Jen: V8 drives all over the valley taking kids to school/therapy/gymnastics/grandma’s, etc.|
|Utilities||$200.00||This is a rough guestimate. In Summer, water is up and gas down. In Winter, water down and gas up- varies.|
|Insurance||$100.00||Car insurance for both cars|
|Phone||$60.00||Cheapest rate we could find, pre-pay for two phones- $30 each|
|Misc||$300.00||Private speech/OT for my son|
Amount Left Over Each Month
|Amount Leftover After Expenses Each Month||$2,300||Readers, How Should Josh and Jen Spend This Money?|
|TSP||$210,000.00||40% to C fund, 40% to S fund, 10% to L2050, and 10% to L 2040|
|Emergency Fund||$1,500.00||Cash on hand|
|Calsters||$12,000.00||Wife 401(k) – Not Active|
|PERSI||$1,200.00||Wife 401(k) – Not Active|
|Home Mortgage||$239,000||Mortgage: 28 years left on a 30-year mortgage with rate of 3.9%.|
Mustard Seed Money’s Recommendations
Recommendation: Reaching FIRE Pillars
Let’s start by working backwards to learn what Josh and Jen will need in order to reach FIRE.
Josh and Jen spend about $3,900 on monthly expenses. That means that they spend roughly $46,800 on expenses per year.
Based on the Trinity Study (25x expenses) and the Safe Harbor Rule (33x expenses), they would need between $1,170,000 and $1,544,400 for retirement.
However, Josh expects to receive a pension of nearly $36,000 when he reaches retirement at the age of 57. He should also collect Social Security at that point, if it’s still around. For simplicity’s sake though, we won’t factor in Social Security, under the assumption that he won’t take it until he’s 70 years old.
So, let’s lower their yearly expense amount ($46,800–$36,000) to $12,800. Utilizing the Trinity Study and Safe Harbor Rule again, their expenses in retirement would drop to between $320,000 to $422,000.
Josh and Jen appear to be in excellent shape for retirement if things do not change. However, he may be able to tweak a few things in order to fully maximize his current financial situation.
Josh and Jen currently only have $1,500 in an emergency fund. While Josh has a stable job within the government, if he were injured or required to take time off from work, he would be put into a pickle.
A well-funded emergency fund includes 3-6 months worth of expenses (Pillar 6 of the Reaching FIRE course), or roughly $12,000 – $24,000 in a high-yield bank account. I would encourage Josh and Jen in Phase I to save more over the next few months until their emergency fund has reached the proper amount.
I would also suggest that Josh increase his retirement contributions to at least 20% (Pillar 8 of the Reaching FIRE course). He can contribution 10% to his pre-tax TSP and 5% in his Roth TSP. He should open up Roth IRAs for both him and his wife and contribute another 5% ($5,500) in each, for a total of $11,000.
This would leave Josh with roughly $500 leftover after investing his money.
With the remaining $500, he could contribute to his children’s 529 plans. In his state of Idaho, they allow for a state deduction of up to $12,000 per couple.
With $500 per month, he could theoretically take a $6,000 deduction from his taxes. At a rate of 7.4%, this would mean that he could save $444.
On the other hand, Josh and Jen could allocate that money towards their mortgage (Pillar 10 of the Reaching FIRE course). This would diversify their retirement investments. He is already investing in stocks. Paying off his mortgage would act like a bond at a 3.9% rate. More importantly, once Josh and Jen pay off their mortgage, they will be totally debt-free. That would place Josh just a few years from retirement from the government.
Josh’s Questions for You, the Reader
Once I [Josh] hits the holy grail of being able to save thousands of dollars each month, how do you think I should invest it?
Should I plow it all into Vanguard index funds?
Do I buy a rental?
The options, it seems, are endless.