Ms. FP and I have a sort of general plan as to how we plan to use our money over the next decade or so. The plan isn’t rock-solid though. There are a lot of balls in the air and we’re at a point in our life where we aren’t quite sure what the world might throw at us. We’re getting married in the spring, Ms. FP is still completing her residency, we have her student loans to pay off, and of course, kids and other major life events will pop up. Needless to say, it’s important that we’re okay with rolling with the punches.
Luckily, both of us aren’t particularly big spenders. The skills we’ve learned from living on less than we earn and saving money should hopefully continue throughout our life, even if our best-laid plans don’t come to pass.
Even though this is pretty subject to change, I thought it might be helpful to share our basic 10-year plan.
One thing to note. As a lawyer and dentist couple, there’s no doubt our incomes are higher than most people. Admittedly, it’s much easier to save when you have a big stash to work with. Still, I think there is value in seeing how we’re thinking about our money as we plan for the future.
Our Current Situation
I’ll start with myself. As many of you know, I paid off $87,000 in student loans 2.5 years after graduating from law school. During that time, I made between $110,000 and $125,000 per year. By earning six figures early in my career, I was able to pay off my debt pretty quickly.
(If you’re looking at paying off a huge amount of student loan debt fast, you need to be earning a pretty high salary. There’s really no way around it. You can pay off student loans with a low salary, but it’ll take you much longer.)
Getting rid of my student loan debt has set me up pretty nicely. I wasn’t very happy in my big law firm job, but once my student loans were paid off, I didn’t have to worry about the big paycheck anymore. Dropping the student loan debt put me in a position where I was able to take a job that I thought was a better fit for me, even if the new job came with a $50,000 pay cut.
My salary in my current job is $75,000 per year and as of 2016, I’m saving around $25,000 each year into tax-advantaged accounts. The benefits that come with this new job are also pretty darn good, as I’ll explain later.
As for Ms. FP, she’s currently in a residency earning a whopping $0 per year. You read that correctly. She gets paid nothing during her residency. She’ll be finished with her residency in 2018 when we’ll both be 31 years old. From there, we actually aren’t quite sure what type of money she will pull in. Our best guess is that she’ll earn somewhere in the neighborhood of $200,000 per year to start. Ms. FP also has around $131,000 left in student loan debt.
The Definite Plan: Pay Back Ms. FP’s Student Loans ASAP
Once Ms. FP finishes up her residency, our immediate task will be to clean up her student loans. Assuming I’m still working in government and she is pulling in a good six-figure income, I imagine that we’ll have a pretax household income of around $250,000 to $300,000 per year. If we’re paying 40% of that in taxes, that would leave us with around $150,000 to $180,000 of income left over. If we live on $50,000 (which should not be hard for us to do) that should leave us with around $100,000 to $130,000 left to throw at student loans each year.
What does this mean for us? If I’m doing the math right, it would seem that we can wipe out Ms. FP’s student loans within 1 or 2 years. We’d be around 33 years old, and ideally, have no student loan debt remaining. That’d really put us on good footing for the rest of our lives.
The Vague Plan: Save As Much As We Can
Here’s where our plans are a bit vaguer. Assuming we’re making a household income of around $300,000 with no student loans remaining, I think we’d strive for a goal of saving $100,000 per year. Ideally, we’d save in the below manner:
My Defined Contribution Pension Plan: Somewhere between $8,625 and $11,500 (Total amount is 11.5% of my salary)
My 457(b): $18,000
My Backdoor Roth IRA: $5,500
……………………………………………………….
Ms. FP’s 401(k): $18,000
Ms. FP’s Backdoor Roth IRA: $5,500
……………………………………………………….
We’d try to keep ourselves on a high deductible health plan, which would allow us to contribute $6,750 to an HSA. Since we’ll have a high income, it wouldn’t be too difficult to pay out of pocket for medical expenses as needed
Assuming my income is at the lower end ($75,000), we’re looking at being able to put away $62,375 in tax-advantaged accounts. That still leaves $37,625 leftover, which would be invested in a taxable brokerage.
A couple of advantages I see. My own job has a pretty sweet benefit where I can max out my 457(b) and put 11.5% of my salary into a defined contribution pension plan, which essentially acts like a 401(k). This means I can put away much more than what I’d be able to put away if I were in a job that only had a 401(k). Another amazing thing that I discovered is that the 457(b) has no early withdrawal penalty, which means that it might very well be the ultimate vehicle for folks considering early retirement.
Saving around $100,000 per year for 10 years with an average return of 7% would leave us with around $1.47 million by the time we’re 43 years old. This doesn’t include any of the amounts we’ve already saved in our nest egg. Add just 5 more years of continued saving and that amount grows to about $2.68 million! I think we’d be able to survive on that.
Things That Might Trip Us Up
Buying a house. Ms. FP bought a house before she started dental school. It’s worked out so far. She lived with roommates while she was in school and it’s not too expensive for us to live in right now. We’re going to try to avoid getting house crazy, but I think buying a nicer (not necessarily bigger) house will probably be in the cards at some point. Ideally, we’d keep our current house and rent it out, which would give us another source of income.
Kids. We’re planning to have kids and this will add a ton of expenses that might make it impossible for us to keep putting away huge sums of money. I haven’t dug deep into this area, but I know childcare is expensive, especially with two working parents. Whether our goal of saving $100,000 per year is possible while also raising kids remains to be seen.
Ms. FP’s Practice. Ms. FP is most likely going to buy a practice, which will be a really expensive undertaking! Doing this basically means that any plans for Ms. FP to retire early likely won’t be possible. The good thing is, at the moment, Ms. FP has no plans to retire early. She loves what she does and as a medical professional, feels that she has an obligation to continue working, especially since there is a dental shortage forecasted in the next 10 years.
Lifestyle Inflation. This one is a big thing to consider. We like to think that we’re above that, but are we really going to be able to avoid buying all those nice things when we have money coming in?
Income Fluctuation. Another factor that we can’t really predict. Our incomes might not stay consistent. We really don’t know what will happen in the next 10-15 years, but things beyond our control might make it impossible for us to keep saving at a really high rate.
The Future Is Still Unwritten
So that’s a basic outline of where we are right now and what we would like to do with our income over the next decade or so. Paying back Ms. FP’s student loans is a definite must and that’s really the immediate next step in our journey. After that, it’s about playing catch up and saving as much as we can to make up for the years of savings we’ve missed during our 20s.
What do you think? Does this plan seem doable to you?
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the sharing economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the sharing economy and you can see all the ways he makes extra income every month in his side hustle reports.
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Great plan…but your right kids change everything, but in a good way. Saving money, having a plan, retiring early is all great, but with kids time flies so fast. Something you can’t get back is time. I know people that work so much to earn so much to become financially independent. That will provide more free time, but your kids will only be 4 or 8 or 16 once. Time with them and experiences with them is truly priceless.
Totally agree! I don’t have kids, but would definitely like to be able to have more time with my future unborn children. Its part of the reason I took a $50,000 paycut – in order to get a job that would give me back more of my time. It’s my hope that if we keep saving and whatnot, we’ll be able to take that time back.
Great plan! As you said its important to roll with the punches. It was not clear if you plan to max out your 401K from the start. If you are in a high tax bracket it might make sense to max that first and then work the student loans. I still carry my student loan since the rate is low (1%) and its tax deductible.
You know, we’re quite eager to pay down that student loan debt! I think we’ll be able to max out our pretax accounts and still pay off Ms. FP’s loans. Unfortunately we won’t be eligible for tax deductions since our income will be too high.
That’s awesome that you’re student loans have such a low interest rate. I actually refinanced my loans down to about 2%, but decided to just go ahead and pay them off so that I could start fresh. It might not have been the mathematically correct move but it definitely felt good for me on a personal level.
The future is definitely unwritten. You’re about to enter the decade of your lives where a lot is going to be happening (like you mentioned)… kids, house, etc.
You’ve started on the right foot and are much further ahead than I was, but you’ll definitely be seeing some changes to your plan (in a good way). Keep your eye on the prize, but stay flexible and you’ll come out far ahead! 🙂
— Jim
You are definitely right Jim! I think these 30s are just so hard to plan, but I thought it might be helpful to at least have a general idea of where we are going. Definitely hoping we’re on the right foot.
Your thinking is very good Mr. FP. Especially taking full advantage of tax deferred savings. Smart.
Like the thinking re keeping house desires in check. Be comfortable but don’t get crazy. It costs a lot to run a home. The bigger the home, the more things need fixing!!
You are right to plan for big costs for kiddy care. Both before they go to school and when they are at school (pre school and after school care and summer camps.) at peak you can be looking at $2000-$2500 per month if you have two kids. Of course it depends where you live but that is the price in suburban Boston area. It is a big relief when those costs go away I can tell you. I would also start funding kids 529 plans as soon as they are born. College costs are only heading in one direction. North.
I am assuming you would be all equities in your asset allocation. I would go VTSAX perhaps throw in an international fund and REIT at 10% each. Nothing fancy is needed. Just keep expenses for your chosen funds super low. The other big unknown is how annual returns are going to play out over the next decade and beyond. Jack Bogle is projecting we will be lucky to see 4% total. I would map out projections certainly lower than your 7% assumption but that’s just my opinion. We can’t predict but we can prepare.
Happy saving!!
Thanks Mr. PIE. I’m currently in a 100% stock allocation. I’ll likely share that information in a coming post, especially since I just switched jobs a few months ago and had to pick my new asset allocation. I’m definitely a low fee index investor!
I didn’t think that 7% was a particularly high assumption. I’ve always thought it interesting that back in the 90s, people assumed future returns would be in the double digits. Post recession, people have assumed single digit returns. I think there’s a study out there showing that people assume returns based on what has recently been happening. I figured 7% seemed right.
Are you planning with assumptions of a 4% return or less?
Hi there.
Yes, around 4-5%
Of course higher will be a great bonus!!
Our withdrawal rate should be about 2% when we hit FIRE in two years so our portfolio will still tick upward.
Ben Carlson did a great post on his blog entitled A Wealth of Common Sense and I think the title was related to Bogle expected return formula if you want to do a search. Worth a read.
I wonder if you’re both making the same assumption. Mr Pie – Are you saying 4-5% without including inflation? If so, you’re predicting only a 1-2% nominal return on money?
@Financial Panther – Are you assuming 7% return but not discounting for inflation? I think that’s a reasonable assumption.
Exactly right. I’m assuming a 7% return with inflation. A 1-2% nominal return on our money over the next couple decades seems really low to me. Yes, the 2000s were a terrible decade, but for every 2000s, we can also just as easily get a 1990s decade. I trust the American economy to keep growing, so I think 7% is a reasonable, conservative long term rate of return.
Great plan Mr. FP! I feel the same way about you in terms of paying of student loans ASAP. I’m about half-way through myself. I think you’re definitely starting out on the right foot and are way ahead of where I was at that point in time.
One thing that I think will definitely help in your savings is the Lifestyle Inflation. The longer you can put this off the better, especially when it comes to paying off student loans quickly.
Thanks! That’s great that you’ve been able to crush your student loans so fast. As a doctor, you’ll definitely have the income coming in to do it, so as long as you avoid the lifestyle inflation as well, you’ll be done with them soon. Probably will end up being ahead of 99% of other docs. Ms. FP will be doing the same thing once she starts getting that big paycheck.
I definitely think the plan is doable with 2 high income earners. I know you mentioned that your wife wasn’t planning on retiring early…but are you? I’m an attorney (also in government) and the pension is a bit of a golden handcuff. Plus we live in a high cost of living area (NYC) and my wife doesn’t have a high income…and has considered becoming a SAHM at some point. Still I often fantasize about retiring early. Also, congrats on paying off those student loans. I’ve kept mine around but back when I was in law school, I was able to consolidate them and many are in the 2% range so I’d rather invest than pay them off quickly.
Thanks for stopping by Andrew. I’m still a bit on the fence about whether I’m planning to retire early or not. I definitely know I want to at least be in a position by the time I’m in my 40’s to not have to work if I didn’t want to – i.e. be financially independent. So I guess, whether I actually keep on working or not will really be an “it depends” situation. (I know, a great lawyer answer).
Whether to pay off those student loans or not is definitely a personal decision. I refinanced my loans down to a 2% variable rate, but I ultimately opted to just pay them off because I wanted to keep a good cash flow, especially since I was planning to take a paycut.
One thing about my gig is that we don’t have a defined benefit pension. It’s a defined contribution pension, which basically means it’s not a real pension, but more like a 401(k). No issue for me because I trust the long term outlook of the market. The nice thing is that my employer contributions vest immediately, which means if I do walk, I still keep everything the state has put into the defined contribution pension plan.
FP,
Thanks for sharing this insight into your personal savings, investments, and expenses. As a few others have mentioned, I think you’re right in maintaining flexibility so that you can spend time with your kids as they grow. I listed to a Radical Personal Finance podcast this morning that emphasized the same thing: FI is wonderful, but delaying it a year or two is likely a good trade in exchange for spending once in a lifetime moments with your family.
Great job in developing your 10 year plan! That reminds me… 🙂
Thanks DS. This is definitely a pretty vague plan, and definitely not set in stone! I still thought it was a good exercise to at least have a general idea of where we are going. Life will definitely change pretty fast though during my 30s, I know that.
I love the plan. Especially that you are utilzing the back door Roth IRA. I feel like that is one of the more under utilized financial investments today.
My son is about to turn one and I had friends and family tell me that things would be different but I had no idea. It’s a lot more fun than I anticipated but has also meant that my wife has scaled back on her work hours which we didn’t necessarily anticipate before she got pregnant.
Anyway…that’s awesome that you have a plan in place. Most people have no idea what they’re doing tomorrow let alone a couple of years down the road.
Good point about your wife having to scale back her work hours. That’s a definite potential wrinkle in our plan. Dentists are typically paid based on the work they produce. Depending on how kids and pregnancy go though, Ms. FP could potentially have to scale back on work, which could drastically change our income. We’ll see what happens.
What’s so great about this is you have thought it through and have a solid plan in place, yet you are allowing for flexibility with the life changes you will inevitably face (kids change things pretty significantly!). Honestly, I wish I had started making plans like this much, much earlier in life!
Thanks Amanda! We definitely know that things will change. It’s pretty hard to plan for your 30s it turns out, especially when you aren’t married yet and have no kids – two things that REALLY change up your life.
I think it’s really necessary to plan ahead so you always have an aim to go for and not just let the time passing by. 7% yearly return should be achievable (historically stocks have returned around this over inflation). Nevertheless it surely will be a bumpy ride with 100% stocks, I’m expecting at least one market crash during the next 10 yrs period. I’m currently making some back testing on this subject and when such crash happens during the 10 years can really make a difference.
Besides of the financial stuff the most important life investment is also on your list: good luck with the baby project! 🙂
Thanks for stopping by Roadrunner. We definitely understand that it’ll be a bumpy ride. No way to know whether there will or will not be a crash in the future, but as long as we keep investing and ride them out, I’m sure we’ll be okay. Since we’re right now in the wealth accumulation phase, the most important thing for us to do is just get as much saved as we can.
Solid plan. I think it is holistic enough to cover all the basics while leaving room for what life throws at you. Kids are going to be great and with a foundation like that there will be no stress!