When Mr. FAF and I were two poor graduate students, our biggest wish at the time was to get a full-time job.
We would love to have a good salary, but as they say, beggars can’t be choosers.
All we wanted was a stable source of income to support ourselves and have our son back with us.
After both of us got a full-time job, however, we have upgraded our goal to becoming millionaires and retiring early. Before joining the personal finance community, I always thought it was a far-fetched dream.
I was more concerned with how best to save money, do well at my job to be promoted and get a raise, and pay off our mortgage as fast as we could.
The mortgage payoff plan
I didn’t have any plan and just continued doing what I’ve been doing all my life: trying to save money and paying off debt (i.e. our mortgage).
Mr. FAF, however, has been talking about having $5 million when he’s 50.
Mr. FAF has dreams many of which ended up dissipating after a couple of months. Some of them became a reality.
I just nodded my head in approval when I heard about his dream. He didn’t tell me any specific plan, and I didn’t bother to ask. In my mind, it’s just one of those dreams that he has to keep him motivated about his work.
Aspirations don’t have to always be realistic as long as they have a positive influence on your behavior. I think Mr. FAF picked number 5 since it’s between 0 and 10. It’s just a totally random number.
Mr. FAF’s retirement plan
I have long heard about the power of maxing our the 401(k). Up until one month ago, neither of us contributed anything to our retirement accounts.
I just have an employer-sponsored account where my employer contributes an X% of my annual salary. We just tried to stay under budget and put as much disposable income towards our mortgage as possible.
Many fellow bloggers and readers have pointed out that we should slow down our mortgage payment and invest in our retirement as well. I heed the great advice and have decided to ramp up our 401(k) contribution.
After his second day at work, Mr. FAF brought home a package of Vanguard paperwork to fill out. He needed my help with the process since he didn’t know much about retirement and investment.
I think we were almost on the same page. But I was a bit further ahead thanks to all the wonderful FIRE blogs that I follow. When Mr. FAF was filling out his health insurance and retirement contribution form, we got into a heated debate.
I insisted that Mr. FAF should max out his 401(k) contribution with $1,500/month or $18,000/year. At first, Mr. FAF thought it was too much. After being a poor student for 6 years, I think he wanted to have more take-home income to support his family than seeing it lowered by $1,000/mo due to the seemingly far-fetched retirement dream.
I made the mistake of not showing him a chart where a maxed out contribution could take him in 10-20 years. And it’s because I didn’t know the answer.
I hadn’t plugged in the numbers in any calculator. I just knew it was a good idea since many personal finance gurus said so. Mr. FAF reluctantly agreed to max out his 401(k) contribution at my suggestion.
My retirement plan
For some reason, I think my age of 30 is too old to be in debt but still too young to worry about retirement. Boy, was I wrong.
Whenever I come across a post about 401(k), I would feel really uneasy about not contributing to my retirement at all. Am I making a mistake? Should a paid-off house be our utmost priority?
Those questions bothered me so much that I had to log into my Vanguard account and poke around. The final trigger that changed my mind was J. Money’s post “$20 Does The Trick!“.
We can start investing even $20 into our future instead of worrying about the big $500 or $1,000. We can start small and win big one day.
With that in mind, I decided to contribute $500/month to my 403(b) (I work for a nonprofit). The next question was whether I should pick the traditional 403(b) or Roth accounts or both? I felt so lost. I’ve read multiple arguments for one or the other, and there’s no best answer to the question.
The turning point for me was when I found the Pretax v. Roth calculator in my Vanguard online account. It was and still is one of the biggest discoveries about retirement I’ve made in my entire life. It would change our plan and our lives forever.
I am currently 30 years old. I plug in different combination of numbers to see where I will end up at the age of 60 (the age when I can start withdrawing from my 403(b) without a penalty. And the numbers just blew my mind.
If I max out my 403(b), I will be a millionaire at the age of 55 with $1,034,453. At the age of 60, I will have $1,572,591. If Mr. FAF maxes out his 401(k), he will be a millionaire at the age of 60, five years after me, with $1,077,131.
Mr. FAF starts contributing to his 401(k) five years later than me (35 v. 30 years old) with $90,000 less. But at the age of 55, I will have $495,460 more than he does ($1,034,453 v. $681,197). I will be a millionaire and can retire 5 years sooner than Mr. FAF.
That shows the power of maxing out our retirement accounts early!
It’s decision time. After seeing the power of compound interest and investing early, I was convinced and decided to max out my 403(b) account. Mr. FAF started contributing to his retirement in September, and I did in October.
2017 is coming to an end, so throwing $36,000 in pre-tax money to our retirement accounts is impossible. Mr. FAF’s monthly contribution is $1,500 while mine is $2,000 for 2017.
But starting next year (2018), we will each contribute $18,500/year each or $37,000 in our pre-tax money in order to build our wealth. We will “forget” about that money and put the rest of our disposable income towards our mortgage while keeping a healthy emergency fund for 3 months and avoiding consumer debt at all costs.
The key question you might want to ask is: Would I have done it differently had I known these numbers earlier? I might have. But I think the answer is still No. When Mr. FAF was still in school, both of us didn’t even know if he’d be able to get a job. Sometimes I still think it’s a miracle that he did.
I wanted to make sure that if I lost my job, we wouldn’t lose our house, and we still had savings to weather a financial storm. Having a place to live and avoiding a foreclosure was our priority.
After we became a two-income household, however, we have more financial stability and wiggle room in our budget. We can now think about building wealth without constantly fearing a foreclosure. Being homeless was and still is one of my biggest fears in life.
That said, I am glad I came across the Pretax v. Roth calculator. It’s simple, straightforward, and visual. It opens my eyes to the power of compound interests and investing early. And this is the path Mr. FAF and I will follow from now on.