What is F.R.E.E.? Financial resilience, empowered early.
Editor’s note: This month we’re talking about Financial Independence (FI) and Nav.it’s take on designing your personal finances to achieve it. For some, FI is a goal that is associated with early retirement, popularized by the FIRE movement. For others, true independence from work is a far-off goal, second to experiential wealth. True FI is hard to attain, but regardless of our income or financial obligations, we CAN implement the FREE method to make our finances more resilient to economic shocks (COVID-19, for one) through an empowered money mindset, tools, and community to make incremental changes over time that fund action and enable our goals.
By Alexander Johnson | 11 June 2020
A comfortable, financially independent retirement is the goal sought by many. How one achieves that is often thought of as complicated, and to worry about when you’re older. In reality, the earlier you’re able to start saving the better off you will be. As a teacher in Massachusetts I have a reliable pension plan that I will be able to utilize when it is finally time to retire. I have a ways to go, I’m only in my twenties. But I’m excited by my work and don’t really have a desire to “retire early.” But I do want to fund all the other things that I’m excited about, while feeling confident that I’ll be financially independent when I’m ready.
Understanding Your Financial Picture
I’m meticulous by nature, but I’d be lying if I said retirement was something that I actively thought about. I know it’s important, and I know that it is something that I should pay more attention to… but right now, the idea of actively putting money towards it just isn’t feasible. As a member of the MTRS (Massachusetts Teacher Retirement System) an automatic 11% is deducted from each paycheck. This is money I never see so it is also money I never think about. I’m ineligible for Social Security, so that money is not taken out. If I wanted to, I could invest additional money into a 403(b) and/or a 457 Deferred Compensation Plan. However, with my current financial restraints that automatic 11% is plenty.
Currently, the primary financial focus is the reduction and eventual elimination of my student loans. Paying down debt is how I plan for long-term financial resilience, and contributing to that goal is how I’ve empowered my financial picture early– as in the minute I left college. When that goal is accomplished, about two years from now, I will be able to reevaluate my financial situation. Until my loans are paid off however, the idea of contributing more to my retirement isn’t even pinging on my radar.
Contributing What You Can When You Can for Future Financial Independence
The 11% that I automatically contribute to the MTRS averages to about $244/pay period. In an ideal world, I’m not really sure what I’d contribute to a separate retirement fund. Perhaps an extra $266/pay period to either a Roth IRA or 403(b) to start, that way it events out to a nice $500/pay period.
The MTRS has a very detailed and exact formula used to calculate the pensions of its employees. Retirement benefits are based on years of service and either (a) average salary of the last 5 years OR (b) average salary of 5 highest paying years. Whichever of those is highest, you can qualify for a pension of 80% of your salary (yeah, 80%) provided you have met the age and years of service requirement. In order to get the MOST benefits I will have to work in education for 38 years total, allowing me to retire at 60 with a pension valued at 80% of my salary. I have incentive to buckle in for the long haul. In Massachusetts, your salary in education is based on 2 key factors; the degrees/college credits you’ve obtained and your years as an educator. As a teacher, it is required to take courses, seminars, training events etc. to earn what are known as Professional Development Points, which are required in order to keep your teaching license.
Taking Action – What My Financial Resilience Plan Looks Like
This sounds fine, you think, but how does it look with numbers behind it? It’s less daunting than you think. I was perhaps the most overwhelmed my first year, so I broke it down for all the new grads out there.
Year One
- Pay = $1,113/per cycle every two weeks, amounting to $2226/mo
- Loans = $1800/mo. Remember, my financial resilience was based on paying down debt. I implemented a very aggressive repayment, which was enabled by my financial allies (my parents and my now-fiance.) You can read about that debt repayment method here.
- Gas = $35/tank, 6 times per mo, amounting to $210/mo
- Limited self to $20-$25/week “play money”, the rest goes to savings.
If you’re adding these numbers up, you’re probably thinking, “what savings?” Debt has interest associated with it, so it makes more sense to throw all of my extra money at paying down the debt because that interest instead stays in my pocket instead of going to the bank. No savings account has interest that comes close to matching what my student loan interest is.
My fiance, Ryan is an engineer with very little student debt, so we tackle our financial goals as a unit. He focuses on building an emergency savings for financial shocks while I crush my debt, instead of letting it crush us. Once my debt is payed off, we’ll have about $20,000 of additional income plus many thousands saved in interest that will stay in our pocket over time. A sizable portion of that will go into savings, but at that point we may also be ready to look at investments, which will contribute to our financial independence. Whether that’s sooner than 60, well, we’ll just have to see.
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