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.
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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of the private sector, these teacher retirement plans were tax-deductible and all earnings were tax-deferred until withdrawn.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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Ed,
One is that I’ve come to love your tables! They lay things out so well and are easy to follow. Another is that I’m so happy I’ve found this blog at my young age (23). I definitely intend to teach for at least 10 years or more and look forward to your next post about how you manage to live on your income. This is me thinking out loud but I wish there was an easy way to find other teachers that are on a similar path. A passing thought is all.
Jonathan,
We have another fan of tables…awesome! You’re setting yourself up very well by learning about personal finance in your youth. I am very very excited for you. Maybe I should profile teachers who are pursuing financial independence. There are quite a few educator out there who are hammering their finances.
Having a few teachers interviewed would be awesome! Though I’m not at the stage to be interviewed (pre-service) I and others would benefit from other teachers being interviewed about personal finance and financial independence.
Ed,
Why did you back out of the 529 Plan? Are you both vested in TRS? Why do you prefer the traditional IRA vs ROTH?
Currently, maxing out our ROTH IRA’s and pumping funds into 457. Once debt is paid down next year I can max out 457. How much will this offset our tax liability? We’re both educators. I’m in year 22 and my wife is in year 17. Love reading your blog and Mr. Money Mustache. Y’all both inspire me to save more & spend less. Thanks and keep blogging!
Greetings Michael,
I decided to add to my son’s UTMA account instead of his 529 plan. He already has about $40k in his ESA and 529 plan, so I figure he’s got enough to get him through college. Plus, I’ll continue to fund his ESA at $2k a year. As for TRS, yes we’re both vested and we’ll get our pensions at age 60. I always go for tax-deductible retirement plans because I’m big on controlling my taxes. I can always do a Roth IRA conversion if I want to increase my Roth IRA balances. (I did a $30k conversion last December.)
You might want to explore how shifting to traditional IRAs might enable you to increase your savings. It might allow you to max out your 457 while also saving in your 403b (if you have both at your job). The numbers get crazy when you start maxing out your 457-403b-IRA-HSA accounts. Plus, you’re married…times 2! Thanks for the encouraging words. I realize that I’m a sporadic blogger, but those of you who actually derive value from my posts keep me going. My goal is to see more teachers in charge of the finances. Thanks again. Ed
“He already has about $40k in his ESA and 529 plan, so I figure he’s got enough to get him through college.”
Do you mean $40k in total or 40k in each? I ask because the school I attend (a public state school), the in-state tuition is equivalent to many states out of state tuition.
He has $40k total in the ESA and 529 accounts. With ESA contributions of $2k a year, he should have about $90k when he’s 18. That’s all I’m going to save for his college because I have a problem with setting aside so much money for academia. I actually plan to encourage him to hack his undergraduate degree and go directly to grad school. If he gets a scholarship, he could also get some of his ESA money out tax-free. That should motivate him to do his best.
Thanks, Ed. I was pumped about switching to a traditional IRA but I don’t think I qualify for the deduction. 119k for married couples is the cut if u have retirement plan., however, I’m going to start feeding my 457 more this year.
Check and see if your 457 contributions bring you under that threshold. You never know…
Thanks for the post and encouragement!
I want to understand how you were able to max out your 403 and Trad Roth. My HR said that if I max out my 403 I can’t fund Trad Roth to lower my taxable income. Does it make sense? Sorry for the ignorance…
Oh, it’s because of the adjusted gross income, right? $69,000 for single and $95,000 to $115,000 to couples. :o(
That might be what they’re talking about. How do those numbers compare to your own?
Jurema,
I don’t understand that at all. If you have income, you should be able to fund them both unless you have passed the phase-out limits. Show that link to your HR people and let me know what they tell you.
Very much looking forward to your second FAQ – also glad to see you blogging again.
I love reading your plan and savings rate. It inspires me every time you post your numbers. I might be taller, but you’re definitely more educated on playing the system. Enjoy your stay in Mexico.
Actually Josh, I’m just longer in the tooth. Can you imagine how many tricks you’ll have up your sleeve when you’re 53? I’m openly jealous of all you young FIRE aficionados because you’re everything I wasn’t at your age: focused, pragmatic, and in control. When I look back at the kegger-me, I shake my head and laugh. What was I thinking? At least I eventually came to my senses.
Looking forward to FAQ #2! I always find your posts inspiring. Thanks for the motivation!
Thanks Casey. I’m working on it right now. It’s nice to be appreciated! Ed
#teachergoals
We’ve got a long way to go, but we’re getting there (kind of). So glad you did this breakdown!
I was just listening once more to the podcast you gave on ChooseFI this past April. Two questions: (1) I take it you chose to invest in an IRA and not a Roth IRA because it (like the 403(b) and 457 plans) allowed you to shelter more pretax money (?) and (2) I just noticed you mentioned renting during the time you were building up your wealth. I gather from your perspective, investing in a house is something you would be reluctant to do (at least at the start of your journey) because despite the fact that the interest on a mortgage is tax deductible, the principal payments are not (?)
David,
We prefer using the traditional IRA because, like you said, it allows us to avoid taxes. However, we do like Roth IRA because of their tax benefits, so we have plans for an IRA conversion ladder this year, next year, and beyond. This method allows us to move money to Roth status within our “pain-threshold” limits.
As for renting vs. buying, we had a home during the early part of our journey. We liked it, but we were not committed to staying in the area. Plus, we bought too much house and spent a lot of time maintaining the place. I’m not sold on the tax benefits of buying a house. If you like where you’re living and plan to stay a 10 years or more, I say buy a home. However, that also depends on home prices in your area…home prices have gone nuts in parts of the US.
Last December we bought our current home for $68k. We are loving our new right-priced and right-sized home. Thanks for reading and listening.