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February 15, 2013

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Can you elaborate a bit on your financial freedom plan? It seems like you would need a lot more assets to achieve financial freedom. What's your financial targets?

It looks like you are doing well overall, but probably need to continue working for the foreseeable future. It must be hard to struggle with the long term relationship question. I haven't been single for over 15 years and I can't imagine trying to get a date. Good luck. Life can throw a curve ball at us sometime, but you just gotta keep going.

My advice is just keep working but I am not sure I would try to pay off the mortgage yet due to not having an emergency fund and only having $80k in retirement. You could always start putting money aside into an 'emergency' fund that you could use to pay off the mortgage once you accumulate enough. Keep on saving for retirement, you will need to max out savings if you were planning to retire early!

I'm a little puzzled why you and your ex-wife never had any savings unless you received cash Christmas gifts. It sounds like you live in a low cost of living state based on the 529 plan (Iowa) and the fact that your house worth is in the $200Ks. Well, actually I know what the problem is (the wealthy parents helping) but I'm still confused because together you were probably near or topping $100K/year. It sounds like your wife might have been a big spender since you are frugal. It would definitely help to have a monthly breakdown of expenses since $70K is still a decent salary in a low cost of living state.

This might sound harsh, but I would completely stop contributing to your childrens' 529 plans. Your ex-parents have already set up $70K for college and you are putting yourself in jeopardy by having very little in retirement and nothing for an emergency fund. If you were to lose your job, your children would be taken care of but you would not be.

$70k for the first child will take care of a decent college education depending on where they go. 529 for the first child should not need any more funding until there is an equal amount for the second child in either 529 or grand parent gift. It is too bad that the $70k was not split between the two kids. I am not sure if that is even an option.


Plus with that sort of cash on hand there will be very little help in the way of finacial aide of "need based grants" as determined by your FAFSA. College education moneys is a complex equation of different factors. What I found out is if you have money save your "Expected Family Contribution" (EFC) will be higher and your ability to get need based grants or low interest loans also goes down.

If you can get the college funds balanced between the to kids thta would be great. It will give you opprotunity to concentrate on the other things in your finances.

Sorry about the divorce. It looks like the divorce has also set you back financially, which is often the case.

Folks note that he has a pension. Iowas pension is also a fairly generous one. So the $80k in retirement is on top of a nice pension.

On the bright side, I think you are in good shape for early retirement. The Iowa pension should net you around 50-60% of your pay by age 55 or so. You're currently paying / saving around 30% of your income to your 403b, Roth, pension and social security. Plus theres about 7% going to child support and other money to support the kids. In 15 years the kids will be out of the house, the house should be paid off and you could live off that 50-60% pension. Plus 10 years after that you can draw social security too. So I think you're pretty well set for retirement at this pace.

I do agree with Noah that you should stop the 529 savings till your emergency fund is built up.

@Jim...a generous pension plan may be more of a curse than a blessing. I have a generous pension where I work...problem is my employer can't afford it...so we took a cut in total compensation of 10% about a year and a half ago. My take home pay went down about 15%. I wouldn't count on early retirement with only 80K in retirement savings. Given the situation, it's not great, but not horrible...if the pension doesn't come through or is reduced, it won't be enough to retire early at the current savings rate.

Mark, Well nobodys job is guaranteed but I don't see any specific reason to worry about Iowa teachers pensions or consider that healthy benefit as a "curse". Iowa has a relatively healthy pension and the state budget has a pretty large surplus. The state pension is state wide and separate from the individual school districts. So even if the local school that JB works for has to make cuts it won't impact the pension. Plus JB said his job is relatively safe. Pensions are generally grandfathered so you can't just wipe them out. Promised and vested benefits are safe.

@jim,

Iowa's pension's may be on very sound financial ground but this statement cannot be true simply on its face: "Pensions are generally grandfathered so you can't just wipe them out. Promised and vested benefits are safe."

Pensions are paid for by saved funds and future contributions. If the saved funds are too low and future contributions are too low or halted there is nothing that can make them all safe.

There are many states that face huge unfunded pension liabilities. They will either need to raise taxes to fund them, cut other budget items to fund them or cut pension benefits. A promise is not worth anything if there is no method by which to fulfill it.

As Herbert Stein said: "If something cannot go on forever, it will stop"

http://www.nytimes.com/2010/12/23/business/23prichard.html?pagewanted=all

In 2009 that is exactly what happened to the pension fund in Prichard, AL. The fund ran completely out of money and when it did it simply stopped sending checks. Promised, vested, grandfathered, it didn't matter. There was no money and so there were no checks. Many people who depended on those checks are losing everything.

I understand that is an extreme example, but it is one that other states and cities may face in their future. Underfunded pensions cannot promise payments they do not have the money for.

Seems like it would be worth considering focusing more on retirement savings than the kids college funds at this point. Based on the numbers, you have a fair amount saved for them, and have ex-inlaws that could help in that area. I'm assuming you're on your own in terms of your own retirement savings. Pension or not, it seems like that area might need more attention.

Anyway, sorry about the divorce. Be strong and positive!

Hi, this is JB. I really appreciate the comments so far. It makes me realize that I left out some info from the reader profile. First of all, I do not live in Iowa. I started the Iowa 529 plan for the kids because it was highly rated at the time for low fees and investment options and you didn’t have to be a resident to contribute to the plan. I live in Washington state which might explain some of the housing comments. I’m within an easy drive (less than an hour) of Seattle, so housing is more expensive than the Midwest (where I grew up). My current house is 1650 square feet and we paid 295,000 for it, about 15,000 more than other homes that size at the time, but it was in turn-key condition and had some upgrades. We had downsized from a 3200 square foot home we purchased well before the peak in the housing market so we were able to sell at a good price but we also bought at an elevated price. So there’s the break-even in housing.

I also left out that my wife did not work for two years after the birth of each child, so we were just living on my salary for four of the last 10 years. After that we had daycare expenses while my wife worked three days a week. This obviously impacted our savings rate. During this same period of time, we were living in the larger house and paying a lot of money for the mortgage, property taxes, and upkeep. This was really poor thinking on our part. In addition, although my current salary is good, my starting salary was around 32,000 and I had a lot of debt. This impacted our savings rate as well.

I really like the idea of suspending the college savings and building up the emergency fund. This is something I had not thought about. I know my in-laws will contribute to my second child’s education as well, so it would be possible to suspend the 529 contributions for awhile. However, my goal has been to have both college accounts fully funded by the time each child attends so there will be no out of pocket expenses and an easier shot at early retirement. College costs continue to go up, so I like the idea of saving more for it.

A bit about my pension: I wish I worked in Iowa. My pension is based on the following formula: 1% x the average of my highest consecutive paid five years of work x the number of years I have worked. So, if I work 30 years and my highest consecutive paid five years of work average 85000 or so (possibly more), my yearly pension would be 25,500 (2,125 a month) plus whatever I have accumulated in my 403-b. However, if I retire and start drawing the pension prior to age 65, there are significant reductions in the amount I receive. I can “separate from service” early and not draw my pension until age 65 and I will receive a COLA added to the pension every year until I do begin receiving payments as long as I have worked 20 years for the state.

My plan is to have enough in other savings and perhaps do part-time work in another field to draw on until age 65 and then start supplementing with the pension. Because my field requires a graduate degree (two-year Master’s program plus an additional year of course-work I had to do to be eligible for the graduate program) I did not start working in my current job until I was 25.
Even if I stop working at 55, with 30 years of work, I will not be eligible for my full pension for many years.

Again, thanks for the comments.

@JB

"However, my goal has been to have both college accounts fully funded by the time each child attends so there will be no out of pocket expenses and an easier shot at early retirement. College costs continue to go up, so I like the idea of saving more for it."

1. Are you willing to give up the idea of moving to part-time work at age 55 so that your children have a large 529?

2. Do you have a magic number that you are trying to reach for each child? $30K? $40K? $50K? If they both decide to go to Harvard or Yale and can't qualify for scholarships because of the large ex in-law fund, what happens then?

3. Will your ex in-laws pick up any slack for the college accounts? If so, why mess with your retirement? Let them foot the bill. If they are elderly, your children will probably inherit large college funds anyways.

If you're retirement age, you can always withdraw extra from your retirement accounts to pay for college. My parents set aside a certain amount for college in tax-advantaged accounts but just kept the rest of the money in normal high-interest savings accounts since we were pretty close to college age anyways. "Fully funded" means something completely different depending on the schools that your kids want to go to. Furthermore, you don't even know if your kids are going to GO to college.

So, save for retirement. But retirement is a super open-ended savings goal and you can always pay for college out of your investments if you don't have enough in 529s, but honestly I would suggest that you have your kids take out loans if you don't have enough money to pay in full and then perhaps pay off their loans when they're done if you have the money then.

Hypothetically speaking, if you had enough money set aside to be able to retire, would you keep working until 65 just in order to get your pension? I doubt it. So save. Don't rely 100% on the pension. Pensions would scare the heck out of me.

JB, I am fellow Washington state resident and have lived here my whole life, love the NW. There is so much great advice here but I thought I would add a little that hasn't been mentioned.

You said you got hooked on compounding interest and the magical results it can produce. If you look at the goal of retiring early there are really just 3 big variables. They are the amount you save, the time you have and the return you get on your investments.

I'd like to focus on the returns. It's sounds like your life has changed pretty dramatically lately and might be a good time for a new hobby. I see from above that you have your money invested in managed retirement funds. Don't get me wrong, those are probably good choices for most people, but if you were to take control of your investments the opportunity to earn better rates is out there. Now, it can be difficult and you must have the right temperament, but it can also be a lot of fun and rewarding. I think this site has tons of info and lots of people willing to give you advice if this interests you. Just a thought.

Sounds like the pain/effect of the divorce is still quite fresh.. I think you need to take time to heal and reflect.. so that you can dream about the future and what you want it to bring.. and then re-assess parts of your life to line up with that..

Do you still need the house with that mortgage? a smaller less expensive house/condo and your financial freedom plan is back on track..

I think you should have a lot more free money now than when you were married.. Relying on the "gift from parents" every year as emergency fund suggests that maybe need to re-evaluate monthly expenses and spending habits..

Wish you all the best!

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