Firefighter needs help to FIRE

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Topic Author
Samcdonough
Posts: 9
Joined: Tue Apr 13, 2021 3:22 pm

Firefighter needs help to FIRE

Post by Samcdonough »

Hello and thank you for any considerations for my situation. I’m fairly new to investing in a reasonably intelligent manner and want to learn from people with much more knowledge and experience if I’m on the right track with taxes, bond allocation, and a few minor points.

Emergency funds: Three Months in Credit Union savings account
Cash in our checking has about 1.5 months worth of expenses at all times and is used to pay credit cards and any major bills like mortgage HOA etc that don’t accept cards.

Debt: Mortgage recently refinanced to a 20 year term just under 180,000 at 2.625%. We intend to stay in this house for at least 12-15 years and will more than likely pay it off in that time.
Car Loan: about 6,400 left on mine at 4.49% (this will be paid off in 8-12 months) Hers was paid off this summer. Unexpectedly we both had to replace our paid off cars the same month in spring of 2019.
Credit cards are paid off in full weekly and points used for travel

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 5% State

State of Residence: Maryland

Age: 34 years old hoping to retire at 48-50 with eligibility at 45 for normal fire department retirement.

Desired Asset allocation: Open to suggestion but currently equity heavy and comfortable. See question 2
Desired International allocation: Open to suggestion but intend to build to 20% of equities from 0% now

Please provide an approximate size of your total portfolio 175,000. Was investing very modestly and was mislead by a financial advisor(whole life insurance salesman) before I was made financially aware 2-3 years ago. Lots of wasted time and money but helped cement my investment philosophy.


Current retirement assets approximately


Taxable
1.25% Money Market Cash -not planning on holding cash here much longer
3% Vanguard Total Stock Market Index ETF (VTI .03%)

I bought the ETF because I didn’t have the $3000 for the mutual fund at the time. My desire to automate these contributions and not have to wait to buy full shares has made me consider either selling a portion of VTI or building up the cash in the money market until I hit the minimum to purchase mutual funds here. Don’t want to incur unnecessary taxes but the cash has been dragging for awhile and I’d like to put it to work.

His 457b
40.75% Vanguard 500 Index Admiral Share (VFIAX A .04% )
Company match? No

His Roth IRA at Vanguard
19% Vanguard Total Stock Market Index (VTSAX .04%)

Her 403b TIAA-CREF previous employer.
12% Vanguard Institutional Index Fund (VIIIX .02%)
Company match? No

Her Roth IRA at Vanguard
19% Vanguard Total Stock Market Index (VTSAX .04%)

She also has a nearly vested amount of time in a state teachers pension fund but is unsure if she will return to that line of work and get the pension benefit. This contribution figure is not included in our portfolio as it is unclear how it will be used but present value is about 40k if it is rolled to a deferred retirement account. It does not earn interest but if it’s rolled over out of the fund it can not be rolled back and her time would start over. That falls under TBD for now.

_______________________________________________________________



Will update with available funds in workplace accounts if necessary. They are limited in mine and mostly high expense ratio.

5% Crypto I realize this isn’t discussed but it is a small portion of the portfolio. I’m comfortable with this small allocation and the choices.

Contributions

New annual Contributions planned for 2022
$19,500 his 457b, up from 14,000 this year
$0 her 403b currently, she is taking time off and will contribute to whatever 401k or 403b is offered at her next position. She was on pace to max hers for ‘21 until she left
$6000 his Roth IRA
$6000 her Roth IRA once she has earned income again
$2000 Asset class not discussed
$ TBD Taxable

Contributions are automated except for Roth to some degree, I have tried to fill those as soon as the funds are available while also DCAing.

Questions and some background

1. I'm trying to work out the proper allocation and strategy for my situation. I am a firefighter in a large department with a future pension. I’m on year 9 of 20-25. Our pension is generous and ranges from 60-85% of our highest two earning years depending on time served. At my current rank with no COLA or raise of the max that would put me in the 60-85k a year range at the end of my career. I intend to promote 1-3 times and raises are likely but I plan out with the numbers currently available. There is also a DROP program that’s an option at the end of year 22 but it depends on many factors if I’d stick around. That would allow a large rollover contribution at the end of my career in a tax deferred account. I can expand on that if desired.

I have every intention of maxing out at 85% but that’s easy to say when I’m less than half way done. I enjoy the work and want to stay in, but injuries or job burnout are real for us.

Given a substantial pension on the horizon, is a tax deferred 457b the right thing to do? They do not offer a Roth option for our plan currently but it is being considered. Knowing that predicting future taxes is difficult/impossible I have been working on filling any tax advantage account whether Roth or deferred and will finally do so with both next year. We will fit under the Roth contribution limits for a few more years depending on my wife’s pay. Back door Roth will be looked into if available when we exceed the income limit.

The taxable account is small because we figured we should fill the retirement buckets first before spilling over into taxable. This is currently fed only a few hundred a month just recently and the amount contributed will fluctuate depending on what’s left over. My plan has been to raise that number as our income increases. This is likely where non-US equities will go as I have been buying into the international diversification argument. Is that the correct placement?

We are living a slightly more modest life while she takes time off and can accelerate investing in taxable and her retirement accounts when she returns to work. It’s been great for her well being to step away from a high stress position.

Every time I try to work out the tax implications of deferred vs taxable in my head I come back to thinking I’ll be good either way, but I don’t want to be setting myself up for a tax bomb situation and leave substantial money on the table. If I’m overthinking it please let me know. I’d love to stop thinking about this and move on.

2. Probably a fairly common question, but I’m curious as to the role of bonds or other fixed income in a scenario with steady income via a pension and as “recession proof” as a job can reasonably be. The pension starts the month after I retire regardless of age and has spousal survivor options which we will consider down the road. I came into the financial world via JL Collins and the FIRE movement so that heavily influences my current allocation. Do I need to consider bonds at this time if I’m comfortable with the volatility of an all equities portfolio? Our investing has not seen a real bear market but we live well below our means currently and have committed to avoiding lifestyle inflation as my career progresses. Assuming my career is the length I want it to be(23-25 years) my intention was to start to incorporate bonds of some type around year 18 and work my way towards roughly 80/20 and stay there. Is even that high of an allocation necessary?

Nothing in life is guaranteed and I recognize my department could financially fail and pensions could be in jeopardy. I’m planning for success but do realize contingencies need to be in place for catastrophic failure which is why I try to keep our savings rate high and lifestyle within reason. Social security hasn’t been factored in our plans because I can’t know if it will be around for us. It will be a nice surprise but definitely not relying on that in our plans.

My true goal with investing is to have us be financially independent and never have to rely on w2 income when I leave my job, as well as a legacy for our daughter. Both of us will likely work in some capacity after my fire career but only in fulfilling roles when we aren’t traveling. I guess barista FIRE is the term I’ve seen thrown around for a similar mindset but I haven’t put a label on it. I hope to pursue passions like family, fitness, cooking, travel and whatever interests me at the time for the majority of retirement life.

Any thoughts are appreciated. I’m more than happy to clarify anything. I’ve learned a lot in my short time browsing the forum and just wish I had come some level of financial awareness a decade ago.
B-rad
Posts: 46
Joined: Tue Sep 28, 2021 3:57 am

Re: Firefighter needs help to FIRE

Post by B-rad »

I feel ya man, I have going on 17 years of service and would like to walk out after 20 years and one day . I'm leaving my financial advisor as we speak and my pension plan also makes me confused on how much bond exposure I need . Then throw in my 457 , two roth ira, 2 529 plans, and a taxable account. Its confusing as hell. There are some great people here that have helped . I'm about to present them with more questions when all my money gets to Fidelity .
tashnewbie
Posts: 4230
Joined: Thu Apr 23, 2020 12:44 pm

Re: Firefighter needs help to FIRE

Post by tashnewbie »

I can’t really speak to some of your questions, but I know other forum members will come along to help.

I do want to note that you can make a spousal Roth IRA contribution for your wife even when she’s not working outside the home, as long as your household income at least matches what you put in IRAs ($12k max), which it does.
Topic Author
Samcdonough
Posts: 9
Joined: Tue Apr 13, 2021 3:22 pm

Re: Firefighter needs help to FIRE

Post by Samcdonough »

B-rad wrote: Sat Oct 23, 2021 10:49 am I feel ya man, I have going on 17 years of service and would like to walk out after 20 years and one day . I'm leaving my financial advisor as we speak and my pension plan also makes me confused on how much bond exposure I need . Then throw in my 457 , two roth ira, 2 529 plans, and a taxable account. Its confusing as hell. There are some great people here that have helped . I'm about to present them with more questions when all my money gets to Fidelity .
Glad I’m not the only one a little confused. Our department financial advice given generally is along the lines of
Step 1. Contribute to deferred comp
Step 2. ???
Step 3. Profit!

tashnewbie wrote: Sat Oct 23, 2021 10:52 am I can’t really speak to some of your questions, but I know other forum members will come along to help.

I do want to note that you can make a spousal Roth IRA contribution for your wife even when she’s not working outside the home, as long as your household income at least matches what you put in IRAs ($12k max), which it does.
Thanks for the reminder. This is a short sabbatical and she will work again soon but it’s nice to find out we can do just fine on reduced income if we had to.
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sergeant
Posts: 1849
Joined: Tue Dec 04, 2007 10:13 pm
Location: The Golden State

Re: Firefighter needs help to FIRE

Post by sergeant »

I would not worry about a "tax bomb" during retirement with your pension and a large deferred account. If/when you get a Roth option I would think about possibly splitting the contributions 50/50 Roth/TDA. My pension is currently twice your stated expected pension and I have a low 7 figure amount in my 457 account. DW has a 50k a year pension and a low 7 figure amount in her 457 account. I've done all the modeling and only small Roth conversions are needed to avoid a "tax bomb" when RMD's kick in. We do hold mainly FI in the 457 accounts to limit growth. Equities are in Roth and taxable.

DROP tends to be a no-brainer. If you are able I would try to stick around for it.

Only about 30% of cops and fire guys make it to full retirement, for a whole host of reasons. Do make sure that you have great disability insurance that covers all activities. Fire guys have lots of time off and like to have fun participating in some high risk things. Disability insurance is a must!

You're doing great. Keep maxing the IRA's, 457b, manage debt, and insure against disability and it will all work out fine.
For the ashes of his fathers, And the temples of his gods. | Pensions= 2X yearly expenses. Portfolio= 40X yearly expenses.
SuperTrooper87
Posts: 241
Joined: Tue Jan 26, 2021 5:42 am

Re: Firefighter needs help to FIRE

Post by SuperTrooper87 »

sergeant wrote: Sat Oct 23, 2021 3:53 pm I would not worry about a "tax bomb" during retirement with your pension and a large deferred account. If/when you get a Roth option I would think about possibly splitting the contributions 50/50 Roth/TDA. My pension is currently twice your stated expected pension and I have a low 7 figure amount in my 457 account. DW has a 50k a year pension and a low 7 figure amount in her 457 account. I've done all the modeling and only small Roth conversions are needed to avoid a "tax bomb" when RMD's kick in. We do hold mainly FI in the 457 accounts to limit growth. Equities are in Roth and taxable.

DROP tends to be a no-brainer. If you are able I would try to stick around for it.

Only about 30% of cops and fire guys make it to full retirement, for a whole host of reasons. Do make sure that you have great disability insurance that covers all activities. Fire guys have lots of time off and like to have fun participating in some high risk things. Disability insurance is a must!

You're doing great. Keep maxing the IRA's, 457b, manage debt, and insure against disability and it will all work out fine.
+1. I too am in year 9 of 20. Following similar goals. Will lead to a comfy retirement at 50.
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EngCapt1
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Joined: Sun Dec 18, 2016 11:02 pm

Re: Firefighter needs help to FIRE

Post by EngCapt1 »

Samcdonough wrote: Sat Oct 23, 2021 10:22 am Given a substantial pension on the horizon, is a tax deferred 457b the right thing to do?
Absolutely, max the 457b. You can make the Roth vs Traditional decision later whenever they offer that in your plan.

:sharebeer
Retired Firefighter | 65% Equities/35% TSP G Fund
chipperd
Posts: 1674
Joined: Sat Sep 24, 2011 5:58 am
Location: here and now

Re: Firefighter needs help to FIRE

Post by chipperd »

Wife retired hazard duty after 20.5 years with nice COLA pension, though not as nice as yours! We became financially independent at 47 and 50. Friend is a financial advisor and between his guidance/review when we pulled the plug in full time work, this site and my reading here are my thoughts that seem to fit your questions

Regarding how to think of pension: we think of the pension as an instrument that just reduces our monthly nut. For us we need about $7,500 after taxes to feed our lifestyle at this point. Her pension after taxes is about $3,500, so our savings and/or part time income (we both have part time jobs, in part to stay active) needs to make up the other $4,000/ month. I don’t worry about how the pension impacts our asset mix. Just as an FYI, we are about 40% domestic stocks, 20% international stocks, 20% bonds and 20% cash.

Plan for a bridge to get you to social security (I’m assuming you qualify). Again, we look at social security as a COLA pension that just reduces our monthly expenses and doesn’t impact our asset mix. Make sure if you plan to tap your 403 funds to get you to social security, you plan on taxes needing to be paid upon withdrawal.
I’m assuming you and family will have health insurance after you leave the department. That’s an expense that derails many early retirees.
Would be great if your wife went back to teaching just to get the pension.
We picked the 100% surviving spouse option for wife’s pension. Only reduced monthly pension by about $150. We felt that was worthwhile vs taking out a huge term life policy on her should she pre decease me.
Google “ the ultimate retirement calculator”. It’s one of the few I’ve found that allows you to enter post retirement income like pension, and shows you how much $ you spend and will have left over each year moving forward. You could run it several times with and without wife’s pension so you both know is it’s worth her time to go back to earth her pension.( In other words how much would you need to save to make up for her lost pension).
Feel free to ask follow ups
Chipperd
"A portfolio is like a bar of soap, the more it's handled, the less there is." Dr. William Bernstein
Topic Author
Samcdonough
Posts: 9
Joined: Tue Apr 13, 2021 3:22 pm

Re: Firefighter needs help to FIRE

Post by Samcdonough »

sergeant wrote: Sat Oct 23, 2021 3:53 pm I would not worry about a "tax bomb" during retirement with your pension and a large deferred account. If/when you get a Roth option I would think about possibly splitting the contributions 50/50 Roth/TDA. My pension is currently twice your stated expected pension and I have a low 7 figure amount in my 457 account. DW has a 50k a year pension and a low 7 figure amount in her 457 account. I've done all the modeling and only small Roth conversions are needed to avoid a "tax bomb" when RMD's kick in. We do hold mainly FI in the 457 accounts to limit growth. Equities are in Roth and taxable.
I’ve inquired about the Roth and they sent out a survey to the participants about interest but I’m not sure if enough people know/care for them to introduce it.

DROP tends to be a no-brainer. If you are able I would try to stick around for it.
Financially I agree completely, it would potentially be a 300k+ addition to my deferred accounts. Lifestyle wise we will have to decide if we want to commit to 3 more years at the end of my career and delay retirement.

Only about 30% of cops and fire guys make it to full retirement, for a whole host of reasons. Do make sure that you have great disability insurance that covers all activities. Fire guys have lots of time off and like to have fun participating in some high risk things. Disability insurance is a must!
I hold the highest disability insurance the department offers although I like to think I don’t live a high risk lifestyle off duty.

You're doing great. Keep maxing the IRA's, 457b, manage debt, and insure against disability and it will all work out fine.
Thank you for the reassurance.
FI4LIFE
Posts: 548
Joined: Sun Apr 28, 2019 9:27 am

Re: Firefighter needs help to FIRE

Post by FI4LIFE »

You seem to be on a good path I'll just share my 2¢ since we are in similar positions in the same field.

I'm currently in year 17 and hope to be done in 9 when I turn 50, like you. Will you be passing up medical benefits if you leave at 50? I'd need to stay to 55 but am starting to burnout and don't think I will stick around that long.

The 457b is the way to go for early retirees since you can access it immediately upon termination of service without penalty. I have gone back and forth on bonds for the same reasons as you. If you use the search function there are several great discussions about bond allocation and pensions. I've never allocated more than 15% and even that seems like a waste to me in our current environment.

The pension really gives us a safety net so I am comfortable with a very aggressive equity allocation. My pension fund is highly diversified across multiple asset classes as I'm sure is yours.

I don't bother with international allocation with the mindset that American corporations are global and diversify themselves for me. Moved on from trying to "optimize" everything to not worrying about it so much. That's just me. Good luck.
Topic Author
Samcdonough
Posts: 9
Joined: Tue Apr 13, 2021 3:22 pm

Re: Firefighter needs help to FIRE

Post by Samcdonough »

chipperd wrote: Sun Oct 24, 2021 5:09 am Wife retired hazard duty after 20.5 years with nice COLA pension, though not as nice as yours! We became financially independent at 47 and 50. Friend is a financial advisor and between his guidance/review when we pulled the plug in full time work, this site and my reading here are my thoughts that seem to fit your questions

Regarding how to think of pension: we think of the pension as an instrument that just reduces our monthly nut. For us we need about $7,500 after taxes to feed our lifestyle at this point. Her pension after taxes is about $3,500, so our savings and/or part time income (we both have part time jobs, in part to stay active) needs to make up the other $4,000/ month. I don’t worry about how the pension impacts our asset mix. Just as an FYI, we are about 40% domestic stocks, 20% international stocks, 20% bonds and 20% cash.
That’s along the lines of how I’m viewing the pension. We obviously don’t know at this stage what our expenses will be in 15+ years but we will model with the pension as the foundation and build upon it.



Plan for a bridge to get you to social security (I’m assuming you qualify). Again, we look at social security as a COLA pension that just reduces our monthly expenses and doesn’t impact our asset mix. Make sure if you plan to tap your 403 funds to get you to social security, you plan on taxes needing to be paid upon withdrawal.
I do contribute to social security and had it confirmed that our pension does not carve out our SS payments.

My intention was to draw down on taxable, then deferred (457b first then 403b), and Roth last. Does that sound like the correct order?

I’m assuming you and family will have health insurance after you leave the department. That’s an expense that derails many early retirees.
Yep, health care benefits carry through just the same as during my working years.

Would be great if your wife went back to teaching just to get the pension.
We did run some numbers and the pension would be along the lines of 1,200 before taxes with no COLA a month starting at I believe age 62. Not nothing for sure, but I’m not pressuring her to return if she’s done with it over that amount.

We picked the 100% surviving spouse option for wife’s pension. Only reduced monthly pension by about $150. We felt that was worthwhile vs taking out a huge term life policy on her should she pre decease me.
I haven’t run the numbers on our surviver option yet but it’s certainly on the table.


Google “ the ultimate retirement calculator”. It’s one of the few I’ve found that allows you to enter post retirement income like pension, and shows you how much $ you spend and will have left over each year moving forward. You could run it several times with and without wife’s pension so you both know is it’s worth her time to go back to earth her pension.( In other words how much would you need to save to make up for her lost pension).
Feel free to ask follow ups
Chipperd
I appreciate your insights and the calculator suggestion.
Carson
Posts: 854
Joined: Fri May 09, 2014 3:26 pm

Re: Firefighter needs help to FIRE

Post by Carson »

Similar position and at age 45 my partner is counting down 'till they are 50. The early burnout factor is real and a debilitating injury really cemented the idea to get out as soon as possible.

I will say the best thing you can do as a fella is to keep your lifestyle in check and save as aggressively as you can stand within reason. I really think the entitled lifestyle creep we see from age 40-50+ is really what prevents people from being able to take charge and exit when they need to. So while we could afford an $80k truck/boat/lake cabin, we're putting that money in savings instead. And it's this frugal mindset that will allow us to keep our lifestyle in check and live off of the pension payments.

Meanwhile, there was a time when it was looking like massive pension changes were underfoot and we were concerned that the pension would simply not exist. So we've thrown all the darts at savings vehicles. Max 457 (due to how it can be accessed upon separation) Max ROTH IRA for both (same, can withdraw contributions) and Max 401k for the person left in the traditional workforce. We've only recently built another layer of savings that's TBD and will probably go into taxable.

The fact that you have access to healthcare and social security is HUGE. Probably the only other thing you need to think about is education costs for your daughter and I admit to sticking my head in the sand on that one.
wetgear
Posts: 859
Joined: Thu Apr 06, 2017 10:14 am

Re: Firefighter needs help to FIRE

Post by wetgear »

Samcdonough wrote: Sat Oct 23, 2021 10:22 am Car Loan: about 6,400 left on mine at 4.49%

Taxable
1.25% Money Market Cash -not planning on holding cash here much longer
Can you use the MM cash to knock out that car loan? It's not much but that interest rate is :shock:
Not going to get a guaranteed 4.49% return on anything else so this seems like a no brainer.
nigel_ht
Posts: 4742
Joined: Tue Jan 01, 2019 9:14 am

Re: Firefighter needs help to FIRE

Post by nigel_ht »

Samcdonough wrote: Sat Oct 23, 2021 10:22 am My true goal with investing is to have us be financially independent and never have to rely on w2 income when I leave my job, as well as a legacy for our daughter. Both of us will likely work in some capacity after my fire career but only in fulfilling roles when we aren’t traveling. I guess barista FIRE is the term I’ve seen thrown around for a similar mindset but I haven’t put a label on it. I hope to pursue passions like family, fitness, cooking, travel and whatever interests me at the time for the majority of retirement life.
You've gotten quite a bit of good advice so I'll only add that it seems unlikely that between your savings and pension that you'll need to baristaFIRE as opposed to just FIRE at 50. That's assuming it all goes as planned. :)

Assuming you can sustain 2022 savings that's $33.5K x 16 years for $536,000 in base savings. Even assuming zero real over 16 years that's $706K total plus four years from a paid off house. At a 3% WR you have $21K + pension. Even at the $60K that would be $81K assuming pension payout adjusts for inflation since your salary will hopefully keep up to some degree + promotions.

Think about bonds within a couple years from retirement. Your pension gives you a lot of flexibility.

Pensions are like the unicorns around here...
Topic Author
Samcdonough
Posts: 9
Joined: Tue Apr 13, 2021 3:22 pm

Re: Firefighter needs help to FIRE

Post by Samcdonough »


Can you use the MM cash to knock out that car loan? It's not much but that interest rate is :shock:
Not going to get a guaranteed 4.49% return on anything else so this seems like a no brainer.
Our plan had been any influx of cash to go towards making lump sump principal payments on the cars. It was approximately 12k at the beginning of this year.

It’s not a bad idea though and I hadn’t considered it thank you.
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