Questions from Readers

I was updating my net worth info at NetWorth.Com when I noticed that I had three questions.  Wow, I have a few readers out there in cyberspace...awesome!  Here are the questions followed by my answers:

Cheers posted:  
"I am curious if I am understanding your profile comments correctly. You max out all your retirement accounts, and because of this, you need to supplement your income with 72t SEPP distributions from your IRAs?  So basically, you are still funding your IRA's, but taking 72t distributions at the same time?
Is there an advantage to this? It seems like it would make more sense to just cut back on your retirement contributions, so you don't lock yourself into the 5 (or more) years of required 72t distributions."


EM:  Cheers, good question.  My wife and I started our SEPP plans to provide us with a stream on income that will give us more flexibility.  Currently, we have a stream of $18,000 per year that we use to pay our mortgage and other living expenses.  This means that when we work, we are able to fully fund our various accounts (457, 403b, IRA, HSA and ESA).  Because we no longer want to work full-time year after year, we are currently hammering our accounts as best we can.  Putting our heads down at our current jobs is not a realistic possibility.  Sure, we could do it, but at this point in our lives, it's simply not worth it.  

To your question...yes, there is an advantage to doing this.  Maxing out our various accounts 1.) accumulates money to our side of the ledger and 2.) gives us a sense of control when it comes to our taxes.  For example, this year my wife and I know that we'll save roughly $80,000 while only paying $1,800 in federal income taxes.  We like that!  We also like the increased freedom, financial and otherwise, that we are starting to experience.  So much so, that we are going to take some time away from work starting in June.     

cyber888 posted:  
"Hmm .. curious about SEPP. Are you really able to contribute to your IRA while doing a SEPP ? or is your SEPP from a 403 or 401k and different from an IRA?"

EM:  Cyber888, my understanding of the SEPP laws is that you can not take distributions from an IRA while also contributing to it.  Our SEPP IRAs contain IRA and 403b monies that were rolled into the account.  Here is what we did:  First, we consolidated (via rollovers) all of our 403b monies from Valic and our Vanguard 403b accounts to our Vanguard IRAs.  Then, we each established SEPP distributions for our IRA accounts.  In February 2013, I opened new IRA accounts at Vanguard for both my wife and myself.  All IRA contributions for 2013 and beyond will be made in this account.  In the future, all of our 403b balances will be rolled to these new Vanguard IRA accounts.  As these accounts grow, we can decide 1.) if we will simply let them continue to grow, or 2.) if we will harvest them via SEPP distributions. 

The bottom line is that our old IRAs are SEPP accounts and our new IRAs will receive future contributions.

Spud posted:  
"Why do you keep such a high balance on your CC?"

EM:  Spud, I have mixed feelings about this.  I hate having this credit card balance, but I currently have all of the debt at a 0% introductory rate.  This special interest rate period will end in May of 2014.  As long as I have a mortgage (at 5.875%), I will funnel all extra money towards principal pre-payments.  We are making sure that we do not add to our credit card debt.  Once our mortgage is paid off, we'll focus our attention to the credit card debt.  


Well, that's my first attempt at answering readers' questions.  Are there any other questions or comments out there?  If so, let me hear them.

      

How We Saved $250,000 by Taking "Crappy" Jobs

In May of 2009, my wife and I were exhausted and in need of a change of scenery.  Our teaching jobs in LaGrange had become more and more hectic and less and less enjoyable.  One morning as I perused my Teach Georgia account, I came across jobs for both of us in Echols County. On a whim, I decided to apply for the jobs just to see if we might get an employment nibble.

Later that morning around ten o'clock, I saw that I already had an email and a phone message expressing an interest in interviewing us.  That night I spoke with the assistant principal and set up an interview for the following week.  In a span of twelve hours, our job prospects had dramatically changed for the better.

Naturally, I started researching the area and found out that Echols County was very different from the rest of Georgia.  First, the county had less than 4,200 people in its 421 square miles.  Most of the economy consisted of agriculture and timber...not exactly big city living.  I had always heard that south Georgia was a lot slower than the rest of the state, but at the time I did not fully understand how.  Finally, Echols County was the official county of banishment for many Georgia lawbreakers.  

A week later we went for our interviews, nailed them, and got new jobs.  After the interview we drove around Statenville, the county seat, and quickly realized that there wasn't much to the town.  It had two gas stations, a small grocery store and a small family-run restaurant with outdoor picnic tables.  It also had a public library, a health department, a post office, and a few other government buildings.  On the bright side, the school district had less than 800 students on its K-12 campus.  Academically, the school had a private school feel.  




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Statenville's Lone Stop Light

Back in LaGrange we told our friends and co-workers that we were accepting jobs in Echols County.  In spite of being life-long Georgia residents, most of them had no idea where Echols County was.  As I described the county to them, I could tell many of them thought we were crazy to head off to the sticks of south Georgia.  We heard lots of questions:  "What will you do for culture?"  "What will you do for fun?"  "Will your son be happy there?"  It was obvious:  in the eyes of my friends and co-workers, we were taking really CRAPPY jobs in the boondocks. 

In spite of the negative vibes, we were convinced that we could make our time in Echols County worthwhile financially.  Prior to officially accepting the jobs, I verified that the district offered the retirement plans necessary to complete our savings plan.  

Fortunately for us, the district offered three retirement plans:  a 457, a 403b and an annuity funded by the district (401a or 403a plan?).  Since the district did not offer the social security plan, they paid 6% of our salary into an annuity at Valic.  In addition to these three plans, my wife and I knew that we would fully fund our IRA accounts and pay into the Teacher Retirement System of Georgia.  In all, we would be contributing to five retirement plans...each!

  Before leaving our jobs in LaGrange, we added $33,000 to our 457 accounts to raise our combined 457 balance to $90,000.  Utilizing our savings in our 457 accounts was key to working our plan since these funds can be tapped without the usual IRS pre-59.5 10% penalty (when an employee separates service).  From 2010 to 2012, we took distributions averaging $30,600 a year from our 457 plans.  This stream of money enabled us to go full throttle on our retirement savings.   
     
In 2010 and 2011 we fully funded our 457, 403b and IRA accounts.  The district contributed monthly to their annuity plan...more on that later.   Here is what we saved in our first two years:

2010 & 2011 Retirement Savings
Account	Self	Spouse	Total
457	$16,500	$16,500	$33,000
403b	$16,500	$16,500	$33,000
IRA	$5,000	$5,000	$10,000
Yearly Total	$38,000	$38,000	$76,000
$76,000 * 2 years = $152,000

In 2012, 457 and 403b contribution limits increased by $500 per account, so we were able to save even more.  Here is the breakdown:    

2012 Retirement Savings
Account	Self	Spouse	Total
457	$17,000	$17,000	$34,000
403B	$17,000	$17,000	$34,000
IRA	$5,000	$5,000	$10,000
Total	$39,000	$39,000	$78,000

After three years of aggressive savings, we were able to put away $230,000 in our 457, 403b and IRA accounts.  During that time our district annuity plan had grown to over $20,000; what an added bonus to our overall savings!  This is what the final tally looks like:     

Total Retirement Savings from 2010 to 2012
2010	$76,000
2011	$76,000
2012	$78,000
District Annuity	$20,000
Total	$250,000

Most of our friends and co-workers considered our move to Echols County a lateral move at best while others saw it as a journey to educational and social oblivion.  In reality, it was a great experience on many levels.  Financially, we did great, but we also grew professionally, had a ton of fun, and met about 4,000 great people.   I got to experience being a head coach and administrator, my wife was able to teach a new subject, and our son attended an excellent elementary school.  We took frequent beach trips to Florida and Jekyll Island, visited relatives in the area, grilled out with regularity, attended wild game suppers at church, ran the Gate River Run twice, went trail running and squatching around the Alapaha river, visited the Okefenokee Swamp, ate awesome AYCE BBQ and seafood here and here, worked out more, ran more, read more thanks to Mrs. Jackie, and greatly improved our mental and physical health via overall stress reduction.  

My Big Boy Bringing Me Home to the Finish Line!

Finally, the best part about our time in Echols County was its people.  We were constantly invited to church functions, Sunday lunches, hunting club breakfasts, and birthday-holiday-graduation parties.  Basically, we were treated like family.  We loved our time in Echols County; everyone should have such a "crappy" job.  

Federal Income Tax: How to Determine Your FREE Money

Taxes…everybody complains about them, but nobody does anything about them.  If you want to control your tax obligations, you first need to determine how much “free money” the government allows you to earn in a given year before it starts taxing you.  Free money is your 0% effective federal income tax bracket; any money earned after your free money limit is going to be taxed.  Once you know at what point the government starts taxing your income, YOU can decide how much you will pay in taxes.

There are three components to your free money calculation:  the standard deduction, your personal exemptions and any tax credits you qualify for.  Here is a basic breakdown of these three free money factors.

Standard Deduction – To calculate your standard deduction you have to first determine your filing status.  Depending on your circumstances, you will file as single, married filing jointly, married filing separately, or head of household.  For 2013 these amounts range from $6,100 to $12,200.  Use these websites to find your standard deduction:  site 1, site 2

Personal Exemptions – The personal exemption represents the level of income that is exempted from taxation.  Generally, each member of a household is granted a personal exemption, so a family of three would qualify for three personal exemptions.  In 2013, the personal exemption amount is $3,900, so a family of three would have personal exemptions totaling $11,700 ($3,900 * 3).  Read about personal exemptions here.     

Credits – A tax credit is a beautiful thing; it allows the taxpayer to eliminate a tax obligation.  In the U.S. a common tax credit is the child tax credit allowed for “qualified children” under the age of 17.  Each qualified child represents a child tax credit of $1,000.  So, since the first tax bracket is 10% bracket, one child tax credit enables the taxpayer to earn $10,000 tax-free ($1,000 / .10).  Two child tax credits would double the amount to $20,000, etc.  Read about the child tax credits here.  Be aware that there are quite a few tax credits available to individuals, so do research and find out which might apply to your situation.  Useful link

What it all means to our situation.  The best way to illustrate “free money” is to show you how we determine our tax-free money.

2013 Free Money for Federal Income Tax Purposes
Standard Deduction	Filing status:  married filing jointly	$12,200
Personal Exemptions	$3,900 * 3	$11,700
Credits	1 child ($1,000 / .10)	$10,000
2013 “Free Money” Total		$33,900

Now that we know our free money we can make informed tax decisions.  For example, we try to keep our income limited to 10% federal income tax bracket.  For 2013, the 10% tax bracket is applied to the first $17,850 for a married couple filing jointly.  What does this mean?  Easy, we add our free money to the maximum amount of the 10% bracket to determine how much we can earn before we hit the next tax bracket of 15%:

Free Money	10% Bracket Maximum	Total
$33,900	$17,850	$51,750

Now, before I lose you with all this sexy tax talk…what the heck does this mean?  It means that on the first $51,750 of income, we will owe “only” $1,785 in federal income tax.  How is that?  Remember, the free money is free and the next level of money is taxed at only the 10% rate.  So, 10 percent of $17,850 is a “mere” $1,785.  Take a look at our effective tax rate for our federal income taxes: 

Total Money	Total Federal Income Tax	Effective Tax Rate
$51,750	$1,785	3.45% ($1,785 / $51,750)

By knowing our free money, we are able to take control of our federal income taxes instead of simply complaining about them.  Controlling your tax liability is a necessary step to our wealth building and eventual early retirement. 

Final note:  taxes are specific to each individual’s situation.  This is what we are currently doing; this is not intended as tax advice to anyone.  Get tax advice if you need it because you do not want to mess around when dealing with Mr. Tax Man.  

2013 Goals

Okay, it’s time to state a few goals that we hope to reach in 2013. Our savings goals are in the box below. We plan on saving over $100,000 by maxing out all of our retirement, educational and health savings accounts. Since I will turn 50 this year, I am now eligible for the catch-up contributions to my various retirement accounts. Consequently, I will be able to add an extra $1,000 to my IRA and $5,500 to both my 457 and 403b accounts; this will result in an extra $12,000 to my retirement savings. Getting older is not all bad.

2013 Savings Goals
Accounts	Self	Wife	Total
457	$23,000	$17,500	$40,500
403b	$23,000	$17,500	$40,500
IRAs	$6,500	$5,500	$12,000
Health Savings	$6,450		$6,450
Total Retirement and Health Savings			$99,450
Educational Savings	Son	Others	Total
Coverdale ESA	$2,000	$0	$2,000
529 Plan	$300	$300	$600
Total Educational Savings			$2,600
Grand Total			$102,050

Our spending goal this year is to live on $51,750. That number is based on our “free money” plus the 10% federal income tax bracket. Our free money is $33,900 and the 10% federal income tax bracket (for a married couple) tops out at $17,850. That means that we can earn up to $51,750 before we hit the 15% tax bracket. This means on $51,750 of income we would pay $1,785 of federal income tax ($17,850 * 10%). That is an effective federal income tax rate of 3.5% ($1,785 / $51,750); we can live with that! You can expect a future post on how we determine our “free money” as we do our yearly tax planning.

2013 Spending Goals
Free Money	10% Federal Income Tax Bracket	Our Spending Limit for 2013
$33,900	$17,850	$51,750
2013 Federal Income Tax Due   & Effective Income Tax Rate
Federal Income Tax Due: ($17,850 * 10%)		$1,785
Effective Federal Income Tax Rate: ($1,785 / $51,750)		3.5%

Our debt goals are pretty simple: avoid more debt and continue reducing current debt. To that end, we will continue paying an extra $150 a month on our mortgage while also paying $500 a month on our credit card debt. Since our 0% credit card will expire in April, we are looking for a new 0% card that will have a free balance transfer. We will park any surplus money in our HELOC account to keep the balance as low as possible. While we do not like having this level of debt, we believe our savings come first. That said, if we get the chance to nuke the credit card debt, it will be slain in 2013.

2013 Debt Goals		January 1st, 2014
Mortgage	$150 Monthly Prepayment	$59,768 (at 5.875%)
HELOC	Park surplus money here	$35,000 (at 2.9% currently)
Credit Cards	$500 Monthly Payment	$2,000 (at 0%)
Total Projected Debt at End of 2013		$92,728

Our health goals for 2013 are:

1. To continue adhering to our No-Low-Slow Carb diet. I started this dietary change in 2011 and feel so much better. I lost 35 pounds, my energy increased, my post-meal “sleepies” disappeared, and my exercise routine became much easier to do. Since I do most of the cooking, Mrs. Better Half also follows the diet (more or less) and has experienced the same health benefits.
2. After an overindulgent Christmas season, my weight started creeping up on me. As I write the post, I weigh 245 lbs.…that is about 10 lbs over my ideal weight. My goal this year is to keep my weight between 230 to 235 lbs.
3. This year I want to perfect my Minimalist Workout Routine. It consists of abdominal exercises, basic Pilates, T-bar swings and a few targeted slow-count lifts with free weights. I perform this routine twice a week and it usually takes less than 35 minutes to do.
4. My last goal is to keep on running. A good week for me is three to five runs per week; each run is at least 30 minutes long with one 1-hour run per week. This year I would like to run one half-marathon and one 25K run in 2013.

My professional goals for 2013 are:

1. To better my future job prospects, I plan on adding three certification areas to my teaching certificate: biology, middle school reading and middle school math. You never know when these certification areas might come in handy and land you a job.
2. This year I would like to work on developing The Millionaire Educator website. Currently, I have no clue what I am doing and I do not post enough. Well, that is going to change. I plan on writing at least one post per week, so I should have 52 or more posts next January. I also need to learn about other blogging and website options. If you have any suggestions, I would love to hear them.
3. I have two book ideas that I have been working on…off and on. I really need to get these things written this year. The first book I need to write is:  The Millionaire Educator: How to Build Wealth on a Teacher’s Salary. The second book I want to write is:  How to Hack a College Degree in One Year for Under $5,000. What do you think about those book titles? Would want to buy such a book?

My personal development goals are:

1. To continue using Memrise to build on my Chinese, French and German language skills. I am currently working my way through the first 1,000 words in each of the languages. I think I can get through the French and German courses this year. I am not so sure about the Chinese course, but what the heck. Time to grip it and rip it!
2. Over the last three months I have completed 17 hours of FEMA independent study courses; my goal is to complete 30 hours. I am completing these courses in the event that I need some college credits to renew my teaching certificate. I also take the courses to illustrate how individuals can use them to pickup general elective credits for whatever reason they might need them.
3. I want to pass the CLEP Humanities test this year! These six semester credit hours can be used to renew my teaching certificate.

Those are the main goals that we hope to achieve this year. Some are very ambitious, but we are going to pursue them nonetheless.  Are we crazy?  Send me a comment or email and let me hear about your grand goals for 2013.

Next post: Tax Planning: How to Determine Your Free Money

2012 Financial Accomplishments

Happy New Year to any and all Millionaire Educator readers!  Overall, 2012 was another great year in many ways.  Financially, we made out like bandits by savings over $91,000 in our various accounts.  Once again we maxed out all of our retirement accounts, funded various educational accounts, and started a health savings account at Alliant Credit Union (link).  Professionally, we left our jobs and moved back to our home in west Georgia.  My wife landed a job at a middle school and I took a job at my old high school.  Unfortunately, it only took me about ten days to realize that I had made a mistake; I should have realized that I was too burnt out to take a new job.  I next did what I had to do and resigned.

Ever since late August I have been on a self-imposed sabbatical.  I now occupy my days with jogging, exercise, books and cooking.  All in all, my decision to resign was the best thing for me, but I was not happy about my abrupt departure.  I hated bailing out on co-workers and friends who were depending on me to do a bang-up job teaching.  I also felt bad about leaving a lot of awesome students behind.  Like I told my friends:  if I could have sucked it up, I would have buckled down and hammered the job.  Regrettably, I did not have the mental energy to pull it off.  In short, I am glad I quit the job, but for a while I felt like a “loser” for quitting.  However, don’t worry too much about me because this cat on to his next life.

As part of my new life I plan on taking my blogging a little more seriously.  Not that I am going to become Mr. Highbrow suddenly.  Instead, I just plan on putting some of my financial thoughts to virtual paper for the whole world to see.  Who am I writing for?  In my mind, my readership is (will be) students, co-workers, other educators and  good ol' personal finance aficionados.  Over the years, I have had a number of requests from students and co-workers to write my ideas out for them.  Blogging will force me to finally get up on it!  I plan on writing about both money and educational topics.

Okay, enough about how I plan on resuscitating this blog.  Here is something that will get your attention.  My wife and I are both humble teachers who socked away over $90,000 in 2012.  How did we do it?  Here, take a look…   

First and foremost, we FULLY funded all of our retirement accounts.  We started maxing out ALL our retirement accounts in 2010.  We will try to do the same in 2013, but more on that in a future post.  

Retirement Contributions for 2012
Retirement Accounts	Self	Wife	Total
457 Plan	$17,000	$17,000	$34,000
403b Plan	$17,000	$17,000	$34,000
Traditional IRA Accounts	$5,000	$5,000	$10,000
403b pension	$2,475	$2,092	$6,892
Total 2012 Retirement Savings	$41,475	$41,092	$82,567

 In 2012 we also continued funding various educational accounts for our son and our nephews and nieces.  Here is the summary: 

Educational Contributions for 2012
Educational Accounts	Son	Relatives	Total
Coverdale ESA	$2,000	$0	$2,000
GA 529	$300	$300	$600
Total 2012 Educational Savings	$2,300	$300	$2,600

When you tally up the contributions and add our health savings account to the bottom line, it looks like this:

The Grand Tally!
Retirement Savings	$82,567
Educational Savings	$2,600
Health Savings Account	$6,250
Total 2012 Savings	$91,417

Thus far, this is the most money we have ever saved in a year.  While were not “super wealthy,” we are happy with our savings prowess.  One last thought:  the financial numbers you see here are intended to illustrate the possibilities of steady and committed savings.  Writing about money always has a bragging feel to it…at least to me it does.  That is not the intent of this blog.  Instead, I hope that these blog posts will help readers take action to improve their financial bottom line.  Regardless of the economy or your current financial situation, IT CAN BE DONE! 

Next post:  2013 Goals