These days saving over $100,000 a year is a given for us. Whenever we take jobs, we are certain that we’ll save at least six figures. You can take that to the bank. Upon hearing such bold statements coming from two public school teachers, people are shocked and asked how the heck we do it. My answer consists of two elements: the mental aspect and the nuts-and-bolts component.
I. Mental Aspect: Mind Flip
Years ago my wife and I viewed our jobs as current income streams that allowed us to enjoy an awesome lifestyle. We weren’t high-rollers, but we could eat out whenever we wanted, go for drinks, and take week-end trips and nice vacations. If we needed or wanted something, we simply bought it: clothes, books, music, cable TV, etc. All of our consumption was made possible thanks to our two-income household. However, in 2009 we realized that we could better optimize our finances to achieve our financial goals faster.
In order to optimize our finances, we completely flipped our thinking regarding our jobs. Instead of viewing them as current income streams, we began to view our jobs as future income streams. We decided that whenever we took new teaching jobs, we would do so with one financial goal in mind: to save as much money as possible. From that moment on, we began to live below our means by adopting a cost-cutting, frugal lifestyle. To our surprise, the change came naturally to us, and it never felt like a sacrifice.
After committing ourselves to hardcore savings and frugal living, the next step was to determine how and where we would save our money.
II. Nuts-and-Bolts Component: Savings Plans Galore
In August of 2002, my wife and I began teaching in Georgia, and that year we learned all about teacher retirement plans. We were surprised to learn that teachers had two 401k-style plans: the 403b and the 457 (also commonly referred to as a “deferred compensation” plan). Like the 401k plans of the private sector, these teacher retirement plans were tax-deductible and all earnings were tax-deferred until withdrawn. In other words, contributions to the plans would be deducted from our taxable income while any earnings on the money were not taxed until we began taking money out. Wow, what an opportunity! Even better, we learned that educators were allowed to max out both accounts. Because of their favorable tax treatment, we decided to do the majority of our savings in our tax-deductible retirement accounts. Nowadays, this means that any future jobs that we might take will afford us the following savings opportunities:
- 457 plan * In 2017 the maximum contribution allowed is $18,000 with an extra $6,000 catch-up contribution for individuals over 50 years old. Let’s see, we’re over 50, so: ($18,000 + $6,000) * 2 = $48,000 of combined 457 savings.
- 403b plan * The contribution limits are the same as the 457 plan above. Same exciting savings math = $48,000 of combined 403b savings.
By contributing our entire paychecks into these accounts, we will be able to save $96,000 a year. There is nothing mysterious or illegal about this savings maneuver; it’s just not very common. (I like being part of the .01%!) It’s ironic that teachers, who are generally viewed as underpaid in comparison to their private-sector counterparts, are allowed to fully contribute to two retirement plans. Go figure, but wait…there’s more. We also have two other savings plans available to us: our traditional IRA accounts and our family health savings account (HSA). Once again, these accounts are tax-deductible and all earnings are tax-deferred. Here are their savings opportunities:
- Traditional IRA’s * In 2017 the maximum contribution allowed is $5,500 with an extra $1,000 catch-up contribution for individuals over 50 years old. More fun with math: ($5,500 + $1,000) * 2 = $13,000 of combined traditional IRA savings.
- HSA * The 2017 HSA contribution limit for a family is $6,750 ($3,400 for an individual) with an extra $1,000 catch-up contribution for individuals over the age of 55. We can add $6,750 to our HSA.
Our traditional IRA accounts and our HSA allow for another $19,750 of annual savings. When this amount is added to our teacher retirement plans, we get a total savings of $115,750. (I feel a table coming on…) Keep in mind that these savings are tax-deductible with tax-deferred growth. Here’s what these savings look like in table form:
Even after maxing out all of the accounts above, we still have a few other savings options:
- Coverdell ESA * This an educational savings account that allows for maximum contributions of $2,000 a year. While the contributions are not tax-deductible, their earnings grow tax-deferred. As long as the money is used for qualified educational expenses, ESA distributions are tax-free. We have contributed the maximum to our son’s account since 2006.
- 529 College Savings Plan * We used to contribute $25 a month to the Georgia Path to College 529 plan. Current contributions = $0.
- Taxable Mutual Fund * In 2015 we opened a taxable mutual fund to start saving money outside of our retirement plans. We currently add $65 a month to this mutual fund.
- UTMA Account * This is our son’s mutual fund account that is under our control until he turns 18. We currently contribute $35 a month to this account.
It’s important to note that the savings options above are NOT tax-deductible, so they will not shrink your tax bill. Consequently, I advise that you always fund these accounts last. We found that after funding our various retirement accounts, there wasn’t much money left to contribute to our taxable accounts. We usually contribute about $3,000 a year to our various after-tax accounts.
I hope I’ve answered your question about how we save so much money. As you can see, we make our salaries disappear by fully funding our retirement accounts. In my eyes, the beauty of this method is that it maximizes our savings while minimizing our taxes. It’s not always easy to save so aggressively, but our hardcore-savings approach has enabled us to double our net worth since 2009.
Yeah Ed, But…
Alright, thanks to my mind-reading powers, I can hear Doubting Thomas and Negative Nelly yammering on about why they could never do what we did. It goes something like this:
“But Ed, you were able to work your plan because you’re so much more awesome than me. You’re smarter, taller, better looking, and funnier. You’re all that and a bag of chips.”
Taller, probably (except for Josh). Funnier, certainly. Better looking, your call (see picture below). But smarter, uh nope. This plan requires a room-temperature I.Q. to set it up. The hardest part of the plan is having the patience to enjoy your optimized, frugal lifestyle while you wait for your retirement savings accounts to mushroom. After a few years of learning to live “low-on-the-hog,” you’ll realize just how little a good life can cost. By then, you’ll be well on your way to getting FIRE’d! If you’re a teacher who can fog a mirror, you have the following savings opportunities:
Take a look at that table above and memorize it. Teachers, young and old, raise your hand if you’re debt-free. Okay, great…put your hands down. Next, raise your hand if by the grace of God, you have a $5-10k nest egg in a taxable account (not a retirement account). If you raised your hand on both counts, you might be on the cusp of a golden opportunity. Do you follow me? (Hint, hint: it appears that you might have money to live on while you max out some accounts.) This leads to our next FAQ:
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