I think I’m nearing the end of this investigation into early retirement. I’ve read several books, joined the MMM forums where I got some helpful advice, lurked on some other forums, read financial papers and journals… it’s been fun and enlightening.
For the most part, I’m on the right track to retire comfortably at 55 (and if health makes me retire before then, well, I’ll just have to make it work). There are just a few things left to do that I can’t do right away.
Open a 457 Plan
Thanks to MMM, I found out about a government employee retirement plan I had never heard about. I’ve mentioned it to colleagues, and so far no one else has heard about it, either. That’s pretty sad since it seems to have some benefits over the 403(b) most teachers put their money into. I called the person in charge of our plan and will be mailed more information. Until I get that package, I can’t move forward on this, but if all looks good, I will probably start this year with $250 monthly donations, then $500 when I get my raise in October, and then increase incrementally with raises. I can contribute up to $18,000 a year in addition to the $18,000 a year I’m already contributing to my 403(b). I don’t think I’ll get enough raises to max it out before retirement, but every tax deferred dollar counts.
Decide between Roth and Traditional
This seems to be the never-ending debate, and I won’t be able to come to a conclusion until I do my taxes in February (my district waits until the very last second to give us our W2s). If we’re able to defer our taxes with a traditional IRA, then most likely I’ll have my husband get a traditional and I’ll get a Roth. I’m interested in the Roth in particular because after five years, I can withdraw what I’ve contributed without penalty, and that may come in handy if I’m not able to work until 55. On the other hand, the 10% penalty +tax for withdrawing from a traditional early still wouldn’t be as much as what I’m paying in taxes now, so if I can defer two traditional IRA accounts, maybe that’s the best way to go. It’s all a moot point until I do this year’s taxes, though, so I can’t make a decision yet. No matter what I choose, it’ll be better than not having an IRA at all, which is where I was this time last year.
Paying off the House or Investing More
This one’s tough. As it stands right now with our extra principal payment, we’re set to pay off the house when I turn 53. That would be great emotionally and may even be a lifesaver if 53 turns out to be the year I can no longer work.
Then again, if I take the extra principal payment and invest it in an IRA, we’d make at least $120,000 in that time at very modest interest rates (barring an untimely crash, of course).
Financially, the latter choice sounds more solid, but I’m not considering just finances here. My health is unpredictable; my working days may be cut short. Would it be better to possibly have a stack of cash (depending on the market) or have a paid off house? Will there even be any water left in my state by the time I’m 53?
Neither choice is risk-free. What I’ve decided for now is to put what I was going to add as even more principal payment into my new 457 account and keep the goal at paying off at 53 instead of lowering it to, say, 49. I will be revisiting this question regularly, I think.
How Much Emergency Cash Should I Have?
By cash, of course, I mean easily accessible liquid funds. For years I had six months of no work (both my husband and I). Now I have about three months worth (or six if only one of us stops working). Three months should be long enough to find other work if necessary. Neither of us are above any kind of work, so if there’s a 2008-like meltdown, we’ll apply for anything.
I’m thinking, though, if I go the Roth route, maybe I’ll only keep a month’s supply on-hand once we’ve had the Roth for five years and can access our contributions. Then rather than our emergency account sitting around earning something like 0.01% interest (it’s not quite that bad), we could earn something on it while it sits, and a one-month emergency supply gives us plenty of time to access those funds. That said, there is a risk should there be 1929-levels of market shenanigans.
How Much Can We Really Live on in Retirement?
I’ve been estimating $30,000 after the house is paid off, but it’s just a guess. I’m tracking every single cent of spending this year, so I won’t have an answer until next January.
These are the questions I’m pondering as I close out this obsessive chapter of my learning journey. Up next I will be refocusing on German, learning to sew, starting a vegetable and herb garden, and trying to groom my own dog.