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The is the third part in a series examining educator wealth building scenarios. In the first two installments, I looked at how fairly standard career /life paths can lead to significant wealth by retirement. In today’s post, we look at a new teacher driven to FIRE (Financial Independence Retire Early.)
The Teacher FIRE Path Plan
Jamie is a new teacher, starting out at 24 with a Master’s degree and $93,000 in student loan debt. Jamie bounced around in a few jobs before going back to get a MAT and enter education. Education is a passion, but Jamie knows that interests can change and wants to have the choice to work anywhere, anytime, anyplace. So, Jamie builds a path to financial independence with the intention of retiring from full-time work before 40.
Here are the key components of the plan:
Maximize Salary As Quickly As Possible
Jamie will analyze the teacher contract to determine the best way to maximize teaching income.
Use PSLF (Public Service Loan Forgiveness)
With almost $100,000 in student loan debt, Jamie plans to work for 10 years and make payments on an income based repayment plan. Therefore, keeping taxable income as low as possible is important. The PSLF payment will be included in total spending.
Use Educator Investment Options
To keep taxable income low, Jamie will emphasize contributions to 457b, 403b, an HSA and a traditional IRA each year.
In 2019, the allowable contributions for those accounts:
$47,500 in pre-tax options! The number of tax advantaged investing options is a bonus to being an educator. Jamie will not cap all these at first, but reaching the max as quickly as possible is the goal. (Note: I will assume a growth of $500 / year in contribution limits every five years.)
The 457(b) will be the first priority because of the option to withdraw the funds upon separation from an employer. Essentially, Jamie will treat this as a brokerage option upon reaching FIRE.
Jamie chooses the Traditional IRA over the Roth option because it helps keep taxable income lower for the income based repayment option in PSLF.
While keeping taxable income low is a goal for PSLF income-driven repayment, it does not override earning as much income as possible. Jamie knows that the more you earn, the more you can invest, and the quicker your path to fire.
Jamie will earn every extra dollar possible by pursuing side hustles. It might be a crazy ten years, but freedom in mid-30s is the ultimate goal.
Keep Expenses Low
Jamie is willing to live lean for ten – fifteen years in order to have options later. The goal is to start with annual expenses of $25,000 a year and keep spending increases to 2% annually.
Choose Location Carefully
To maximize income and investment options while minimizing expenses, Jamie is willing to select a location carefully. The ideal location will include:
- A school district with
- Good starting salary
- Opportunities to increase income
- Good 403b/457b options
- Ability to walk / take public transit to work
- Overall reasonable cost-of-living
Rather than use a specific district salary schedule, I’m going to assume a starting Master’s salary of $45,000 a year. Salary will increase by 5% per year – a 3% experience step and 2% COLA. I’ve reviewed dozens of salary schedules – these are not unreasonable numbers. (See Pittsburgh teacher salaries for an example that actually exceeds these assumptions.)
I’ll assume a pension contribution rate of 8% and a total tax rate of 20%. Again, these numbers are not outside the norm.
How Does It Play Out?
Jamie starts out in year 1 and focuses on learning the craft of teaching. A quick contract review shows that it would take 36 credits to make roughly $1500 more a year. Jamie decides pursuing additional education is an inefficient way to increase salary, since the plan is to leave the profession in 10 – 15 years.
The contract contains a provision that pays an additional $4000/year for National Board Teaching Certification, so Jamie plans to achieve that in year 4.
Year 1 is overwhelming, so Jamie doesn’t take on any additional work. After that first year though, the goal is to earn at least $10000 in additional income. Jamie does this initially through working extra jobs and side hustles on weekends and in the summer.
Jamie hits a savings rate of 50% in year 3 by doing some extra side hustling.
In year 5, after achieving NBPTS certification and acquiring skill in teaching, Jamie applies for adjunct work at a local college. Each class pays about $3000. It’s doable to teach a class every quarter and one or two over the summer. This makes it easier to hit that $10000/year target. In later years, it allows Jamie to increase extra income to $12000 and then $15000.
Jamie invests each year in the following order:
- Max 457b since it can be withdrawn upon separation
- Max HSA due to the triple tax advantages and the need for healthcare later
- Max IRA in a Fidelity account
- Max 403b (Jamie likes the options/fees here the least)
The 10 Year FIRE Walk
It’s a tight ten years. Most of the time is spent working, which helps keep costs low. Fortunately, Jamie enjoys the job.
In Year 10, Jamie hits two remarkable milestones:
- Jamie meets the PSLF requirements and no longer has any student loan debt. This makes the spending limit more bearable. The peace of mind from having almost $100k in debt gone is motivating.
- Jamie maxes out all pre-tax accounts for the first time!
Jamie makes a decision. Financial independence is in sight, but a large amount of money is locked up in retirement accounts.
The 457b account is accessible on separation, but the other accounts are a little trickier to withdraw from. Jamie no longer needs to keep taxable income low for PSLF.
Therefore, Jamie drops contributions to the 403b and IRA, but doesn’t give up the sweet advantages of the HSA. Jamie begins contributing more to a brokerage account.
Jamie could walk away now, earn a little bit of money and be okay. According to the 4% rule, invested assets could spin off about $20k/year.
Jamie doesn’t plan to stop working entirely, so this is appealing. Yet, a few more years of teaching will increase net worth to the point where passive income exceeds annual spending.
Jamie makes a last push.
FIOR! (Financial Independence Early Retirement)
In year 14, after focusing for more than a decade on financial independence, Jamie chooses optional retirement at 36. It was consuming, but worth it. Fortunately, the job wasn’t a mindless grind.
Jamie’s numbers after year 14:
|Withdrawal Rate to Meet Spending:||3.65%|
Jamie is ready to explore new options! A 3.65% withdrawal rate is a little risky long term but Jamie expects to earn at least $15,000 a year for the next ten years. That will enable a lower withdrawal rate to let the net worth continue growing. Sometime later in life, Jamie will have access to a small pension from the 14 years of working. That also provides some buffer in case of a bad sequence of returns.
Summary – A Lean FIRE Walk
There are definitely faster ways to FIRE, if that’s what you are pursuing. But, if you want to make a difference in your job and pursue lean FIRE, Jamie shows it can be done through teaching and side hustling.
At 36, Jamie can choose how to live and earn money – the ultimate goal of financial independence!
For more traditional paths, with higher spending, check out the previous two entries in the series:
If theoretical frameworks (even those based in real-world data) aren’t your thing, check out the stories of real educators in the Educator on FIOR series.