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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!
Josh’s Story
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
Net Income
| Net Income | Amount | Comment |
| Josh Monthly Paycheck | $6,248.00 | After TSP 5% and Roth 1% contribution |
Monthly Expenses
| Expenses | Amount | Comments |
| 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 |
| Internet | $65.00 | Home internet |
| 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? |
Assets
| Assets | Amount | Comments |
| 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 |
| Home | $335,000.00 | Home Value |
| Calsters | $12,000.00 | Wife 401(k) – Not Active |
| PERSI | $1,200.00 | Wife 401(k) – Not Active |
| Total Assets | $559,700.00 |
Liabilities
| Liabilities | Amount | Comment |
| 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.
Phase I
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.
Phase II
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.
Phase III
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.
I’d mix it per your asset allocation as set by your risk tolerance. I also might consider mortgage payoff part of bonds after saving an emergency fund.
Finally the insurance comment here worries me with only car insurance. Disability insurance and life insurance are good candidates here. If the wage earner can’t work there’s some risk there.
FullTimeFinance recently posted…Outsource Versus Do It Yourself
Great thoughts Full Time Finance!!! Having the proper insurance is so important especially if something were to happen in the long run.
You need to plow more into TSP. Being a Federal employee, I’m very familiar with our funds. Their expense ratio is less than Vanguard. I would not be putting my money into their Lifecycle funds. You have overlap being divided up into four ways of investing with your TSP. Plus, you are placing a lot in gov’t bonds (G fund) and the F fund is basically cash. The L2050 has 11.42% G fund, 6.33% F fund with the L2040 at 20.77% G fund and 6.98% in F fund. If you like the Lifecycle funds then pick one past the date you actually want to retire. For me personally, I’m in the C fund and have been for past 10 years of employment. Over those 10 years, my Personal Investment Performance has always been in the 2 digits. My philosophy is I am in the earning stages of my life and can handle the ups and downs of the stock market with C fund. Once I retire in another 10 years then I will move 30-40% portion of the money into the G fund. Even in retirement, I have many years left (20-30 years?) and want a portion of my portfolio to continue growing in C fund.
Not sure if this is bad manners but a good blog to read is TSP Allocation Guide.
Thanks for sharing Debbie and not bad manners at all. Any place that shares great info is welcomed 🙂
I would put more money into an emergency fund too. With 2 kids, it’s more than just my rump up on the batting station. A paid off home in full retirement sounds quite tempting too. For the 529, it’s good but not the sole/best option. I think the kids should have some skin in the game so they take education more seriously knowing they’re gonna be the one shelling out money (at least before you guys help out.) For me, it’s investing that extra 500 and/or paying off the house.
Thanks for sharing Lily!!! Like you said, having two kiddos definitely ups the game for me as well with the emergency fund 🙂
When trying to grow your wealth, the most important factor is motivation. It doesn’t matter which route that you take (stock, real estate, business), take the route that gives you the most motivation and satisfaction. I find that the more passionate I am, the more motivated I am to keep going and the harder I work because I enjoyed the journey to get there. Reaching FIRE is a long journey. The more motivated you are, the better you will stay on course and keep on going.
Welcome to the journey J and J.
Leo T. Ly @ isaved5k.com recently posted…How To Negotiate Better Deals With Your Financial Success
Thanks for sharing Leo!!! I know you love real estate and I know it’s been a wonderful path for you so far. That’s my favorite thing about personal finance. There are multiple ways to get there.
First, he would be CRAZY to retire at age 57, even if this is his MRA (minimum retirement age).
You do not get your FEHB (health insurance) until you reach age 62, so unless there is another job or you don’t plan on getting sick for 5 years, there is a huge gap and risk. Even more importantly, his retirement pension is based off of 1.0% of his high-three if he retires before age 62. By delaying to age 62, his percentage jumps to 1.1%. Small number, but huge over the remainder of one’s lifetime.
Please take a mid-year retirement seminar!
Thanks for stopping by Paul!!!
I looked online and I can’t find the rule that says you don’t get FEHB until you are 62. OPM’s website says if you have 10 years of service and have reached the MRA that you are eligible.
https://www.opm.gov/healthcare-insurance/fastfacts/thinkfehb.pdf
This plan sounds great to me! Once the emergency fund is well-funded the path to FIRE will really take off.
Simple Money Man recently posted…The S&P 500 Equal Weight Index – Simply Explained
I’m right there with you. Get that emergency fund taken care of 🙂
I agree with the Phases that were recommended in the article. Emergency fund is of paramount importance. There’s plenty of online high yield savings offers that pay up to 2%. Begin immediately to fund this account with 6 mo’s living expenses. This is for emergencies so don’t fret about opportunity costs.
You should increase your tax deferred retirement savings. A great recommendation.
The BEST investment I’ve ever made in my life was to fund 529 college accounts as soon as my 3 children were born. This has covered 100% of their tuition, books and housing. I have two daughters currently attending universities and I have total peace of mind and not a single worry about these expenses. If you invest in 529 NOW, at college time you can continue concentrating on FIRE preparation with ZERO concerns of college expenses.
Thanks for sharing your experience Mr. Fire By 2023!!! That’s awesome that you are able to fully fund your children’s education. That is not only a peace of mind for you but also a huge blessing for them as well 🙂
First, congrats on a great start. I would say plow it into index funds and see if you can bulk up those savings. So instead of taking the pension at 57 you could take it at 50. While you would lose money in the pension, your savings might be able to make up the difference and then you could always find an encore career if you wanted.
Jason recently posted…Update on Public Service Loan Forgiveness
Thanks for sharing Jason!!! I believe with the pension that you need to reach the MRA (57) if you want to hold on to health care benefits, which is huge.
I agree with Lily’s comments. The emergency fund is the most critical to have in place. The “Great Recession” was only a few years ago, and one lesson we learned from that – different industries all got hit with layoffs at different times – the domino effect. Then we saw that people were out of work for up to a year or more.
My husband and I have our emergency account fully funded (we have 2 years $$ in cash, and more in Govt Saving Bonds/ employee stock plan that we can liquidate quickly),
After we funded our emergency account, we got rid of our debt:
1st we paid off/closed credit cards.
2nd we paid off car notes.
3rd we paid off our mortgage.
Lastly maxed out our retirement plans while allocating remaining funds for non-retirement investments.
As for tuition – we both went to college while working full time jobs. It took forever to get my M.S. but it was paid for when I got it. My employer also contributed some $$ for tuition assistance.
Thanks for sharing!!! That’s awesome that you have a fully funded emergency fund as well as knocking out all of the debt. Sounds like you are all set up for the future, especially with an M.S. Congrats!!!
Great idea to do this case study. I was toying with a similar idea after reading a white coat podcast.
As far as what to do with money once you get to have money to start saving, I would make sure I max out all tax deferred accounts available (bare minimum at least meeting requirement for maximum employer match).
Then I would attack debt like it was the plague (cyclical debt first, then the biggies like home mortgage).
Investing also good to start at this time, keep it simple with index funds and set and forget
I am a huge fan of index funds. It took me years to get there but I’m finally on the right path 🙂