FI for Colorado Teachers Part 5: Case Study 1: Teacher Married to a Teacher

TL; DR: This is the fifth in a series of posts for Colorado teachers about Financial Independence and takes an in-depth look at three scenarios for two teachers married to each other to achieve Financial Independence and retire early (two scenarios at age 45, the other one at age 42).

Part 1 in this series describes the “what” and the “why” of Financial Independence. Part 2 discusses the process of “how.” Part 3 looked at the possible “what its” and “yeah, buts” objections to accomplishing FI. Part 4 discusses how knowing the rules around taxes can allow you to optimize your finances and help you achieve Financial Independence. This post will look at three scenarios for a teacher married to a teacher, and lay out some possible paths to achieving Financial Independence and retiring early (or achieving “work optional” status).

When discussing finances in general, and especially when discussing the idea of Financial Independence, many folks just feel overwhelmed and don’t know where to start. The basic premise behind this entire series of posts is to try to lay out possible paths that teachers in Colorado could take in order to achieve Financial Independence in a way that can help them overcome that feeling of being overwhelmed and give them the confidence in order to pursue it.

While previous posts have laid out the “why”, the “process”, looked at some of the possible “objections”, and then talked a bit about tax optimization, this post is going to be a case study that gets very, very detailed in what this might look like for a married couple who both happen to be teachers, starting from very early in their careers all the way to an early retirement in their forties. I started with this scenario because it happens to be my scenario (well, the being married to a teacher part, not the retiring in our forties part), but also because it is a scenario that actually happens fairly often. (And, again, I’m saying “teacher” married to a “teacher”, but this applies to any PERA-covered employee married to another PERA-covered employee, but focuses on the ins and outs of what a teacher career-path looks like.) In future posts I will look at other scenarios, including a teacher married to a non-PERA covered employee, a single teacher, and teachers who are already well into their career.

As mentioned in part 3, any kind of long-term projection like we’re trying to do with this case study relies on assumptions. A lot of assumptions. Some – perhaps all – of those assumptions will be incorrect, sometimes by a little and sometimes by a lot. That doesn’t mean you can’t do the projection, it just means that you have to realize the numbers won’t be exact and the decisions you make along the way will likely change as you adapt to the reality of what actually happens.

This is one of the reasons why so many people don’t try to do these projections for themselves, because they figure it won’t be accurate. But by not laying out a general path, they end up making decisions (or, usually, not making decisions) that make the goal very difficult to achieve. This post lays out three different versions of possible paths that will help you achieve Financial Independence, as long as you are willing to be flexible and adaptable along the way to adjust for any changes in the assumptions. You will also be able to make a copy of the spreadsheets I’m going to share and change the assumptions or the specific numbers that apply to you in order to make your own model. The idea is that, for many people, they have to be able to see the big picture laid out in some detail in order to realize it’s even possible. That’s what I’m attempting to do here.

So, let’s get to the three scenarios. Each of the scenarios is similar, but each also has at least one significant variation that necessitates looking at them separately. The reason for that is to try to match three of the most likely general scenarios a married teaching couple might be looking at, to give you a good base to make any modifications for your specific circumstances. For each scenario, there will be a description of the scenario and the particular variation we are examining, and then each scenario will link to an additional document and a spreadsheet. The additional document will lay out all the assumptions, give a “key” for the accompanying spreadsheet, and then give a year-by-year description of what’s going on in the scenario. The spreadsheet will show a year-by-year breakdown of the decisions and financial impacts of those decisions, taking the teachers from their first years in the profession, through an early retirement (if they choose, could be “work optional”), all the way through their retirement years (I stop at age 90, but that doesn’t mean you have to).

Similar to the discussion about assumptions, the spreadsheet also makes a form of “assumption” by some of the “decisions” I’ve made each year along the way while constructing the spreadsheet (“decisions” meaning choices I’ve made in the spreadsheet for how you’ll possibly behave in the future). It’s very important to realize that those “decisions” are not set in stone, those are just examples chosen to show what is possible as well as to try to optimize your savings and investments based on the tax code and your goal of Financial Independence. There are likely “decisions” that could optimize this better than what I chose, and there may be reasons why you want to make different “decisions” along the way, which is where you can make your own copy of the spreadsheet and play some “What ifs?” of your own. Either way, the spreadsheet should help you to be able to see what’s possible and what trade-offs you’ll have to make, and that should help you figure out if this is a path you’d like to take.

For each of the following scenarios, you really have to click through to the linked document and spreadsheet for each one to get the full impact. What’s below is just a brief intro to each scenario.

Scenario 1
This example assumes two married 25-year old teachers with Master’s degrees, about to start their 3rd year of teaching in 2020, with one one-year-old child. They were hired before July 1, 2019 (which matters in terms of how their PERA-includable salary is calculated, as well as when they are eligible to retire). This scenario assumes they are both eligible to purchase 5-years of PERA service credit based on employment they had during high school and college, and that they both choose to purchase those years as soon as they are eligible (which is when they have earned 5 years of PERA service credit). This scenario lays out a path for being able to retire at age 45, and shows the amount available to spend each year while they are working and each year after they retire. It assumes no earned income after age 45, but many folks will continue to have some earned income during this “work optional” phase of their career.

Please note that while I’ve gone over all the spreadsheets many, many times, there is still a possibility that there is a mistake (or more than one). It could be a mistake in a formula, or it could be a mistake in overlooking some aspect. Please, please, please, if you find something that you think might be incorrect, let me know so that I can take a look and adjust it.

Scenario 2
This example assumes two married 25-year old teachers with Master’s degrees, about to start their 3rd year of teaching in 2020, with one one-year-old child. They were hired before July 1, 2019 (which matters in terms of how their PERA-includable salary is calculated, as well as when they are eligible to retire). This scenario assumes they do not choose to purchase any PERA service credit based on non-PERA covered employment during high school or college. This scenario lays out a path for being able to retire at age 42, and shows the amount available to spend each year while they are working and each year after they retire. It assumes no earned income after age 42, but many folks will continue to have some earned income during this “work optional” phase of their career.

Please note that while I’ve gone over all the spreadsheets many, many times, there is still a possibility that there is a mistake (or more than one). It could be a mistake in a formula, or it could be a mistake in overlooking some aspect. Please, please, please, if you find something that you think might be incorrect, let me know so that I can take a look and adjust it.

Scenario 3
This example assumes two married 23-year old teachers with Bachelor’s degrees starting their first year of teaching in 2020. Assume they earn their Master’s degree by age 25 and have one child at age 26. They were hired after July 1, 2019 (which matters in terms of how their PERA-includable salary is calculated, as well as when they are eligible to retire). This scenario assumes they do not choose to purchase any PERA service credit based on non-PERA covered employment during high school or college. This scenario lays out a path for being able to retire at age 45, and shows the amount available to spend each year while they are working and each year after they retire. It assumes no earned income after age 45, but many folks will continue to have some earned income during this “work optional” phase of their career.

Please note that while I’ve gone over all the spreadsheets many, many times, there is still a possibility that there is a mistake (or more than one). It could be a mistake in a formula, or it could be a mistake in overlooking some aspect. Please, please, please, if you find something that you think might be incorrect, let me know so that I can take a look and adjust it.

After looking at some or all of the scenarios in-depth (the links to the doc and the spreadsheet for each), remember to look back at Part 3, the “What Ifs?” and the “Yeah, Buts” to recall that this is a choice. You should align your goals with your values, and you may choose to do some things differently than I’ve schemed out, or not to do this at all. That’s perfectly fine, of course, but be intentional about it.

For example, some folks will look at the “net to live on” columns in these different scenarios and say that’s just not possible. Well, first, realize that is the actual amount you can spend, not your total “income”, which is different than the way a lot of folks think about their spending. And, second, realize that it is possible to live comfortably but not extravagantly on that amount of money, you just have to decide if it fits with your values and goals. I encourage you to actually think it through and then make some decisions that do align with your values and goals, don’t just let your financial life “happen” to you.

  • Part 1: The Concept
  • Part 2: The Process
  • Part 3: The “What Ifs?” and the “Yeah, Buts”
  • Part 4: Tax Optimization
  • Part 6: Case Study: Teacher Married to a Non-Teacher
  • Part 7: Single Teacher

FI for Colorado Teachers Part 4: Tax Optimization

TL; DR: This is the fourth in a series of posts for Colorado teachers that looks at the tax code and discusses how you can optimize your financial decisions to take advantage of it. Hint: most people don’t take full advantage of the tax code.

Part 1 in this series describes the “what” and the “why” of Financial Independence. Part 2 discusses the process of “how.” Part 3 looked at the possible “what its” and “yeah, buts” objections to accomplishing FI. This post builds on part 2 and discusses how knowing the rules around taxes can allow you to optimize your finances and help you achieve Financial Independence.

Taxes are an interesting thing. Most folks will begrudgingly admit that they are necessary, but then often go on to complain about how much they have to pay or how unfair the system is for X reason. While there are certainly good arguments that can be made about the fairness of the system and how it could be improved, there are also ways that you can make decisions to address how much taxes you pay. To be clear, this is not cheating on your taxes, this is simply knowing the rules and making decisions to take advantage of those rules. If people would take the time to learn the rules and then adjust their decisions, they might not complain about how much they pay (or, more realistically, complain a bit less).

I am not a tax expert, nor can we go in-depth on all the various aspects of the tax code in this post. But there is some pretty basic information that you can use to your advantage, and some specific aspects that apply just to teachers, both of which you can use to optimize your finances. Spending just a little bit of time learning about the rules and then adjusting your decisions can have a big impact over time.

First, a quick reminder about how Federal taxes work (very simplified, but helpful for our purposes). You have a certain amount of income, some of it earned (your paycheck) and some of it is not (interest, dividends, capital gains, etc.). Some of that earned income you can “shelter” from taxes by investing in tax-deferred accounts, and some if it is automatically sheltered from taxes (your PERA contribution, your insurance premiums if you choose to take them pre-tax, your HSA contributions if you have them, dependent care expenses, etc.).

You then have some deductions to your income which, for the vast majority of taxpayers now, is going to be the standard deduction, with a few other deductions that might apply (for example, teachers also have the $250 teacher expenses deduction they can take).

You then end up with your taxable income, which is taxed using a progressive tax rate (that is adjusted for inflation each year), which means some of your taxable income is taxed at one rate, some of it at another, and perhaps some of it at yet other rates if you have a large taxable income. (Note that some of your unearned income, like qualified dividends and long-term capital gains are treated differently. This is important and we’ll talk about this eventually.) For example, in 2019 for a married couple, the first $19,400 in taxable income is taxed at 10% and any amount over $19,400 and up to $78,950 is then taxed at 12%. If you have taxable income above $78,950 but below $168,400, it gets taxed at 22% (and it continues above that, but most teachers won’t need to worry about that).

Many folks don’t completely understand how this progressive system works and think that all of their taxable income is taxed at whatever tax bracket they are currently in, which can lead not only to misunderstandings about tax policy, but sometimes some poor decisions around your taxes. For example, if your taxable income is $75,000, then the tax you would owe would be $8,612, which is an effective tax rate of 11.48%, not the 12% that many people think that $75,000 would be taxed at. ($19,400 at 10% is $1,940, the remaining $55,600 to get us up to $75,000 is taxed at 12%, which is $6,672 in taxes, for a total of $8,612.)

But it gets even better, because many people don’t actually owe that amount because they also get tax credits. Tax credits are different than tax deductions. Tax deductions get subtracted from your income to then determine your taxable income, but tax credits are dollar-for-dollar offsets to the tax you owe. The most common one for many people is the child tax credit, which is currently $2,000 per child (with up to $1,400 of that refundable). So, for the example above, if they had one child they would owe $6,612 in taxes, not $8,612. There are many other tax credits that could apply, so it’s important to investigate those based on your situation.

State taxes in Colorado are much simpler, as they take your federal taxable income, perhaps make a few adjustments, and then calculate your state tax at a flat (not progressive) rate of 4.63%. This means that all the ways you can lower your federal taxable income (deductions, tax-sheltering, etc.) also lowers your Colorado state tax owed, and then there are a few Colorado-specific tax credits you might be able to utilize (one of the most common is contributions to the Colorado 529 college savings plan are exempt from Colorado state taxes). Also, a quick plug (pun intended) for the Colorado Alternate Fuel Tax Credit, which is a $5,000 tax credit for an electric vehicle (and that’s refundable), which means if you have at least $7,500 in federal tax liability, then you can take a whopping $12,500 in total tax credits if you buy an electric vehicle (subject to phase out limits – Tesla and soon Chevrolet will begin ratcheting down).

Sorry if that was more (or less) than you needed, but we needed to set the stage for the next part of our discussion, which is about how best to take advantage of those rules on your path to financial independence. We’re going to focus on four areas: tax-sheltered accounts, Section 125 deductions, HSA contributions, and possibly optimizing to get the Savers Tax Credit.

Tax-sheltered accounts come in two main variants – pre-tax and post-tax. Pre-tax accounts are things like 401k/403b/457/Regular IRA accounts, where the money you contribute does not get taxed in the current year, but then gets taxed when you withdraw it during retirement (hopefully). Post-tax are the Roth variants of those, where the money you contribute is post-tax, meaning you do pay taxes on that money in the current year, but then any investment earnings you receive do not get taxed, so when you withdraw during retirement there is no tax liability.

For many folks, particularly if you are on the road to Financial Independence and will be considering retiring (work optional phase) early, the pre-tax accounts are the ones you want to focus on. (This post will not be able to go in-depth on why this is probably preferable to using Roths, but there are many resources on the web that discuss this.) This lowers your taxable income (both Federal and State, and often keeps you in the lower tax brackets), allows your investments to grow tax free, and sometimes helps you qualify for the Savers Tax Credit (more on that in a minute).

Every public school teacher in Colorado has access to PERA’s 401k plan (which is a good one). Most teachers then also have access to a 403b and a 457 plan. The 403b is going to be through a vendor other than PERA, but the 457 could be through PERA or that other vendor. Having access to that 457 is a huge advantage for teachers (and most public employees), because it not only allows you to shelter additional money, but also allows you to access that money when you are younger with no penalties (which is huge if you are planning on retiring/work optional at a younger age). (If your district does not offer you a 457 plan, talk to your Human Resources department ASAP. Even if they don’t want to deal with an outside vendor, setting it up with PERA is very easy for your district to do since they already are setup for the 401k.)

In 2019 you can contribute up to $19,000 to your 401k or your 403b – the limit applies to the combined amounts you can put into one or both of those accounts. (If you are over 50 you can contribute an additional $6,000, so up to $25,000). Note that this is per person, so if you are married your spouse can also contribute up to $19,000 (or $25,000 if over 50). But an important point to understand, particularly as your income increases as you grow older, is that you can also contribute up to $19,000 (or $25,000 if over 50) to your 457 plan. That’s in addition to the 401k/403b contribution. Essentially, public employees have double the amount they are able to shelter. (And, in fact, the 457 plan even has an additional “last-three-years” catch-up provision that can effectively allow you to contribute twice as much – $38,000 currently – each year for the last three years you are with with that employer.)

And the 457 is even better than the 401k/403b, because it’s considered “deferred compensation”, which means that you can access that money as soon as you leave that employer. This is different than a 401k/403b, where if you access the money before age 59.5 you may have to pay a penalty. (Note, there are ways to access a 401k/403b before age 59.5 without a penalty, but a 457 is so much easier if you have that option.) This means that if you do achieve Financial Independence and enter the “work optional” stage by quitting your teaching job, you can immediately access any money in your 457 to use as living expenses, even if you are way short of 59.5.

When we get to the case study posts (starting with part 5), we will go more in-depth on how to use this in the best possible way, but here are the two most important points to remember:

  1. Invest as much as you can in your 457 plan and increase it every year until you max it out.
  2. Once you max out the 457, invest as much additional as you can in the 401k/403b.

Many folks look at that and say, “That’s great, but I need money to live on.” That is certainly true, but keep in mind that since these contributions are coming out pre-tax, they don’t actually reduce your net pay by your total contribution. For example, if you contribute $19,000 in a year to your 457, and you normally would be in the 22% federal tax bracket (plus 4.63% Colorado tax bracket), your net pay “only” decreases by $13,940. Now, that’s still a fair amount of money, but it’s a lot less than $19,000. (And, as we’ll see, it might actually be even less than that if you can qualify for the Savers Tax Credit). As you’ll see in the case studies, if you can rein in your lifestyle expenses, most folks can actually save more than they think.

The second area to be aware of is Section 125 Plans. This refers to the part of the tax code that allows you to receive part of your income pre-tax if it is used for particular expenses. The added benefit for teachers is that it comes out pre-PERA contribution (although that will be changing for new hires hired after July 1, 2019). What are these particular expenses? They include insurance premiums (health, dental, vision, etc.), dependent care expenses (child care), and flexible spending account contributions (unless you have a high-deductible health plan, which we’ll discuss below).

All of these end up being expenses you can pay with pre-tax dollars (and pre-PERA dollars for current PERA employees), which can save you a significant amount of money. Again, if you were going to be in the 22% federal tax bracket, plus the 4.63% Colorado tax, you would save 26.63% of the total you spend on these areas. Plus, if you’re a PERA employee hired before July 1, 2019, you save an additional 8% on your PERA contribution (and that will be increasing over the next few years to at least 10% as part of the legislation passed in 2018). (Note that if it is coming out pre-PERA, you want to stop doing this in your last 3-5 years of employment in order to maximize your Highest Average Salary calculation. The amount you “lose” in tax savings during those years is more than made up for in pension income over time.)

If you have access to a High Deductible Health Plan (and most teachers do), then you also have the ability to contribute to a Health Savings Account (HSA). Employers also often kick in a small amount to your HSA in order to encourage you to sign up for the plan. Your contributions do not come out pre-PERA, but they do come out pre-tax and pre-FICA. HSA’s are known as “triple-tax-advantaged” accounts, because they are the only accounts that allow you to contribute pre-tax, earn pre-tax, and withdraw pre-tax. Basically, you never pay tax on this money (as long as you use it for medical expenses). And unlike an FSA, you don’t have to “use it or lose it” each year, can can carry over any balance for as long as you want.

You also have the option to invest this money, which can help it grow even more. From an FI perspective, this is an amazing account, especially if you can afford to not withdraw any money for medical expenses along the way and just let it grow tax free. As long as you save your receipts, you can always withdraw the money in the future when you need it, or you’ll likely have future medical expenses anyway. If you never have medical expenses (unlikely, but it could happen), then you can still withdraw it after age 65 and simply pay taxes on the withdrawals (but no penalty).

If you do have a High Deductible Plan, you can’t also contribute to an FSA (the HSA takes its place). But many district will have a Limited Purpose FSA that you can contribute to, and that money can be used for dental and vision expenses, but not health expenses. While this is “use it or lose it”, if you can estimate your out-of-pocket dental and vision expenses for the year, this is an extra tax strategy you should take advantage of.

Finally, as promised, we’ll talk about the Savers Tax Credit. In order to encourage folks to save for retirement, the Federal Tax code will actually give you money to help save, as long as your income is below a certain threshold. Because all of the previously discussed items (401k/403b/457/HSA/FSA/Section 125 plans) reduce your income threshold, if you can take advantage of enough of them you might also qualify for at least some of the Savers Credit. For example, in 2019 if you’re married and your adjusted gross income is below $64,000, you can claim 10% of your contributions to 401k/403b/457 plans as a tax credit, up to a total of $4,000. So, in our previous example where we discussed that contributing $19,000 to your 401k only reduced your net pay by $13,940, it may actually only reduce your net pay by $12,040, because you might get $1,900 from the Savers Tax Credit (assuming your income is adjusted gross income is low enough to qualify for the 10% Savers Credit). For many teachers, this is possible in your first few years of teaching, as you’ll see in the case studies posts.

There are more tax strategies we could consider, and we certainly will when we discuss the withdrawal stage of Financial Independence, but this gives you the overall approach. By understanding the tax rules and adjusting some of your decisions based on them, most folks can actually save (and invest) much more than they thought. While you can still complain about your taxes, you’ll have actively made some moves to reduce what those taxes were, which will help you on your path to Financial Independence.

  • Part 1: The Concept
  • Part 2: The Process
  • Part 3: The “What Ifs?” and the “Yeah, Buts”
  • Part 5: Case Study: Teacher Married to Another Teacher
  • Part 6: Case Study: Teacher Married to a Non-Teacher
  • Part 7: Single Teacher


FI for Colorado Teachers Part 3: The “What Ifs” and the “Yeah, Buts”

TL; DR: This is the third in a series of posts for Colorado teachers that discusses some of the possible objections people have as to why they can’t achieve Financial Independence. Hint: if it aligns with your values, the objections are easily overcome.

Part 1 in this series describes the “what” and the “why” of Financial Independence. Part 2 discusses the process of “how.” This post will focus on some of the objections people typically make when discussing whether achieving financial independence is possible, the “what its” and the “yeah, buts”.

First, a reminder that this series of posts is not saying that everyone should do this, it’s simply trying to show you a path on how you can do this if it aligns with your values and what you want for your life. So some of the following, especially the “yeah, buts”, might be valid for what you want. But this post will address those under the assumption that achieving financial independence and a “work optional” stage of life earlier than is traditionally expected is aligned with your values and is something you want to pursue.

The What Ifs?
Any time you try to make a long-term financial plan, you have to make a lot of assumptions. When we get to the case studies (starting with part 5 in this series), you’ll see assumptions that are made about inflation, investment returns, cost of living increases to the salary schedule, advancement on the salary schedule, increases in insurance costs, increases in the various limits in the tax codes, and many more. While we try to make reasonable assumptions for all of these, they are still assumptions, and actual experience will not match those assumptions exactly. Sometimes reality will be “worse” than the assumptions expect, and other times it will be “better”, but it will never be perfectly correct.

There are three ways to deal with this. First, many of the assumptions are interconnected, so when the actual experience is different than one of the assumptions, other of the assumptions are often affected in a similar direction and that helps balance it out. Second, you can try to make the assumptions on the more “conservative” or “less beneficial to you” side of things. For example, lowering the assumed investment return or increasing certain tax limits by smaller amounts each year. The spreadsheets in part 5 and the other case studies will allow you to make those changes, but they already have some “conservative” assumptions built in (like tax brackets and contribution limits increasing at a rate slightly below the assumed inflation rate). Third, and perhaps most importantly, is the idea of flexibility. As you live your life and actually experience whatever happens, you can (and will) make adjustments that can keep you on the financial path you’ve chosen.

So, what is the most common “What If?” that people are concerned about? The rate of return on investment is usually the biggest one. We have historical data that can give us a decent estimate on what that rate of return will likely be over a long time period, but – as all the advertisements say – past performance is no guarantee of future results. Plus our plan can be impacted a lot by something called “sequence of return risk”, in which when you get high or low investment returns can have a significant impact on your planning. (See this and this and this for more on sequence of return risk.)

How best to deal with this? You can adjust the assumption yourself in the spreadsheet, you can be flexible and make adjustments along the way (like increasing your savings rate to help make up for lower returns), or – and this is a big one – you can change your timeline a little bit. If investment returns are lower than your assumptions, that doesn’t mean your plan is kaput, but it might mean that your path to financial independence takes two or three years longer than originally projected. While that may not be ideal, keep in mind that what many folks should be comparing that to is a lifetime of “work not optional” and not achieving financial independence until their late 60s or so. Keeping in mind that context helps keep things in perspective.

There are many other “What Ifs?” that can come into play, like losing a job or illness. The way I think about those are two-fold. First, those are “What Ifs?” that will affect you whether you are trying to achieve early FI or not, and if you are doing the work to achieve early FI you will be in better shape if those “What Ifs?” happen than if you hadn’t been on this path. Second, this is another case where being flexible comes in. You can (and will) make adjustments along the way. Again, this is true whether you are trying to achieve early FI or not, but will actually be easier if you are.

The “Yeah, Buts”
The “What If?” objections can be addressed by changing the assumptions in the spreadsheet or being flexible and adaptable along the way, but the “Yeah, Buts” are a bit different. These typically fall into the category of, “I just can’t” or “It’s not realistic to….” . It’s important to keep in mind two things here. First, it is possible and realistic. But second, it may not be something you choose to do. This goes back to the idea that this path is not for everyone but, if it does align with your values and want you want out of life, than you can make the choices that make it possible and realistic.

So what are some of the “Yeah, Buts”? First is often, “Yeah, but I can’t live on that amount of money.” As was discussed in part 2, if you make good decisions around the “big three” of spending, then it is indeed possible.

Second is often, “Yeah, but I need a new car to get to work and therefore I’m going to have a car payment.” As also discussed in part 2, ideally you would live close enough to work that you (or at least one of you if you’re married) don’t have to drive to work, you can walk, bike or take public transportation. But, if you do need to drive, there are many, many, many reliable and affordable used cars that will save you a tremendous amount of money and don’t require a car payment (or, at worst, require a temporary car payment that you can then pay off within a year or two).

Third is often, “Yeah, but you assume that I’m starting out without any debt but I do have debt.” This might very well be true, although my hope is that we do a better job in the future of helping young folks not start out in debt. But, if you do have debt, your first steps will be to eliminate that debt. Does that mean you can’t achieve financial independence? No, it just means it might take you a few more years to get there, and it might mean that you have to work a bit harder making some additional money in the early years through additional responsibilities or side hustles in order to help you pay off that debt.

Fourth is often along the lines of, “Yeah, but as I make more money, I deserve to be able to spend more of it.” There’s nothing wrong with that, if that’s what you want. But if you sit down and figure out what actually makes you happy and fulfilled, and you determine that additional spending on top of meeting your needs and some of your basic wants doesn’t provide any more happiness or fulfillment, then you can increase your spending very modestly as your income grows and still have a very comfortable, but not extravagant, lifestyle.

Think back to how you lived in college, or perhaps your first few years out of college when you didn’t make much money. Most people were able to live just fine and were reasonably happy. If you can control “lifestyle inflation” as you start to make more money, then you can modestly increase your spending, life a happy and fulfilled life, and be on the path to Financial Independence. Again, it’s about choices and what you value, and then aligning your lifestyle with those values.

There are many additional “Yeah, buts” that we could discuss, but the response to those objections is generally along the same lines: align your lifestyle with your values, make adjustments as necessary, and then live your life. If the freedom and flexibility of achieving financial independence decades sooner matches up with your values and your desires, then you can overcome the “Yeah, buts”. If the “Yeah, buts” seem like too much of a sacrifice, then you can choose a different path.

  • Part 1: The Concept
  • Part 2: The Process
  • Part 4: Tax optimizing/401k/403b/457/Section 125
  • Part 5: Case Study: Teacher Married to Another Teacher
  • Part 6: Case Study: Teacher Married to a Non-Teacher
  • Part 7: Single Teacher


FI for Colorado Teachers Part 2: The Process

TL; DR: This second post in a series for Colorado teachers describes in general terms the process of “how” you would design a path toward Financial Independence. Hint: it’s pretty straightforward.


Part 1 in this series describes the “what” and the “why” of Financial Independence. This post will focus more on the process, the “how” do you achieve it. While future posts will go into more (perhaps excruciating) detail, this is just a high-level discussion to give an overview of the most important factors you’ll need to look at and the most important decisions you’ll want to make. To be clear, there is not “one right way” to do this, but most folks’ approaches include many common themes, so we’ll explore them here.

In some ways, achieving Financial Independence is remarkably straightforward – spend less than you make, and then save and invest the rest. There are several important decisions you have to get right (the “big rocks”), and then a bunch of smaller decisions you can make (the “little rocks”) that will certainly help, but aren’t as critical, and then the even smaller decisions that will probably have very little effect (the “sand”). The main categories of personal finance are earning, saving, investing, and spending (lifestyle). Within each of these categories (and they are very much interconnected) there are just a few, relatively simple, “big rocks” you have to get right (or mostly right) in order to achieve Financial Independence.

Your earnings – how much you make from your job – is obviously an important piece in your financial picture and your ability to achieve Financial Independence. But many folks think you have to earn a very large salary (say, six figures) in order to do this, and that’s just not the case. It is certainly much easier to do this the larger your salary is, and there is definitely a lower limit in terms of practicality (if you’re making minimum wage, then there’s not much room for saving and investing). So, there is definitely some privilege involved here, but perhaps not as much as many folks think.

Since this series is aimed at Colorado teachers, we can throw out both the six figures and the minimum wage and talk about salaries that typically begin somewhere between $35,000 and $45,000 a year and then increase over time. In future posts I will use the salary schedule for Littleton Public Schools (which starts at just over $40,000 with a BA degree) as that is the district I’m most familiar with and is reasonably representative of the salaries along the Colorado Front Range. (Salaries outside the front range are often lower, but often so is the cost of living.)

Because almost all school districts in Colorado have a well-defined salary schedule, it makes it reasonably easy to predict what your future salary will be and what, if anything, you can do to increase it. (While there is some inherent uncertainty regarding future salary schedules based on future economic events, we can make some reasonable assumptions about annual cost-of-living increases to the salary schedule that should be close enough to allow us to plan.)

There are four main ways to increase your salary as a teacher in most districts: have more years of experience, increase your level of education, take on extra roles, and move into administration. Accumulating more years of experience happens automatically and, for the purposes of this series, we will assume you don’t move into administration. (If you do move into administration, obviously your salary will increase and make achieving FI even easier.) So, to maximize your earnings as teacher, you should focus on increasing your level of education and perhaps taking on extra roles.

As most teachers have figured out, it pays to increase your level of education so that you can move horizontally as well as vertically on the typical salary schedule. So from the beginning of your career you should be focused (financially) on moving horizontally through the different education levels as quickly as you can until you hit the “maximum” educational level on the schedule. For most folks, that means getting your Master’s degree and then accumulating additional hours beyond that to the max on the schedule. (Some districts have a PhD category, but most folks probably don’t want to go that far.) For example, on LPS’s salary schedule they recently added an MA+90 category, so to maximize your income you want to get your Master’s as soon as possible and then start accumulating additional hours until you reach MA+90.

The second way to increase your income is to take on additional roles. This is often coaching, sponsoring an activity, or working athletic events. Again, looking at the LPS schedules, you can make anywhere between about $1,200 and $4,000 coaching or sponsoring an activity the first year, and then get small raises each year you continue after that. You can also work athletic events (supervising, taking tickets, working the chain gang, etc.) to earn additional money (not sure what the current amounts are, they are low but not insignificant). Obviously, if you have the time and interest, you can combine several of these options, perhaps coaching in two or even all three seasons, or coaching in one season and working athletic events in the other two seasons. How much you take advantage of this will depend on your interests and preferences as well as your goals that we discussed in part 1.

Finally, you can increase your income outside of your school employment. This can be working a second job (often during the summer) or doing side hustles (with tutoring being a natural one for teachers). Again, how much you take advantage of this depends on your personal preferences and your goals, but you can increase your income by a not insignificant amount with a reasonable time commitment.

Saving and Spending (Lifestyle)
These two “rocks” go together because they are pretty much inseparable. It’s surprising to some people that your savings rate is the most important factor in achieving Financial Independence, not how much you earn on your investments (although that is important as well). Your savings rate is really determined by your spending rate, and your spending rate is really determined by your lifestyle. So, ultimately, the most important factor in your financial well-being and your possible attainment of Financial Independent is your lifestyle.

To be perfectly clear right up front, you don’t have to live like a monk in order to achieve Financial Independence (not that there’s anything wrong with that). But it is really important that you live within your means and, actually, live below your means (which is how you increase your savings). Like most everything else in life, this is a choice, but it’s one that we often make on autopilot. This is where being intentional in how you want to live your life can make such a huge difference.

There has been a ton of research in the last few years that indicates that, once you achieve a certain level of income, happiness and personal fulfillment do not increase simply be earning more money. It is necessary to achieve that initial level of income that covers your basic needs (and at least some of your wants), but after that making more money doesn’t correlate with increased happiness and fulfillment. In general, the research also indicates that “possessions” don’t increase happiness, but “experiences” do. As a teacher in Colorado, you make enough (particularly if you increase your earnings as mentioned above) that it is very possible to achieve this level of income to meet your needs and some of your wants and still have enough left over to save (and eventually invest) in order to be on the path to Financial Independence.

There are three “big rocks” that you need to focus on in terms of your spending: housing, transportation and food. While there are certainly many additional “little rocks” that can help make a difference, housing, transportation and food are the majority of most people’s spending and the areas that you want to focus on.

Americans have a love affair with the idea of a house. It’s a certified part of the “American Dream” and, when combined with expectations from those around us, often ends up being an area we overspend on. There are many blog posts you can read on this topic, so I’ll try to keep this reasonably short.

Whether to rent (an apartment or a house) or buy is a very personal decision, but don’t assume that buying is always the right answer. I grew up in a time when the conventional wisdom was that renting was “throwing your money away” and that you should try to buy a house as soon as possible because it was an “investment.” Turns out that when you look at the numbers, a house does not have a particularly good return on investment when compared with other investing opportunities. The main reason that many people believe that it does is because it’s really a “forced savings”, so it does end up being many people’s best investment because it’s really one of the few investments they consistently put money into.

This is not to say that buying a house is a bad idea, but you should buy a house because you value living in a house and not because you think it’s the right thing to do financially. For many folks, renting is actually the better option financially (but, again, that’s moot if you want to live in a house that you own). If you do decide to buy a house, it’s very helpful if you’re extremely thoughtful about doing it.

Again, conventional wisdom when I was growing up was to “buy the biggest house you could afford” and then “trade up to the biggest house you can afford when you’re able.” From a Financial Independence perspective, those are both wrong. You should buy “the smallest house that meets your needs” and try to “never trade up” by making your first home purchase your “forever” home. (The transactions costs around buying and selling a home, moving, and making improvements to the house are a huge drag on your saving and investing, especially if you do it multiple times.) The key is to identify your values and act accordingly. Since buying bigger and more expensive houses doesn’t automatically lead to more happiness and fulfillment, buy a house that meets your needs (and no more), so that you can focus your financial resources elsewhere in ways that do increase your happiness and fulfillment.

Renting (either an apartment or a house) is often the better alternative financially, allowing you to save (and invest) more as well as allowing you to be more flexible in where you live. As we’ll discuss in the transportation section, minimizing your commute (and the expenses associated with that commute) is a huge driver (no pun intended) of both financial success and happiness. Renting often gives you more flexibility on where you live, which often allows you to optimize your commute (walking, biking or public transportation). You can (and should) also do this when considering buying a house, but there is often less flexibility on location when buying instead of renting. Just like with buying, when making the decision to rent you also want to rent the smallest and least expensive place that meets your needs.

After housing, transportation is often the biggest budget item for most people, and it’s also one of the easiest ones to spend less on. Many folks I know just assume that a car payment (and often two of them) is a given, but it really isn’t. When I was growing up, buying a used car was a bit of a gamble because used cars weren’t very reliable. But cars made much better today and, if you choose from the particularly reliable ones, buying a used car is not much of a gamble and will save you a ton of money. While some folks will even need a loan for a used purchase, it should be much smaller and you should be able to pay it off quickly.

Even better than buying a reliable used car is not buying a car at all. If you can eliminate one (or more) cars from your life, you will save a tremendous amount of money. Most people really don’t have any idea of how much their cars are costing them. This is where the location of where you live (either renting or owning) is one of the most important “rocks” to get right. If you live close to where you work (ideally where both of you work if you’re married, but at least one of you), then you walk, bike, scoot, or take public transportation to work (and also increase your health).

And if you do own a car, get a reasonably-sized one. SUVs are incredibly popular in Colorado, daily I see a single driver commuting to their job on paved and well-maintained roads. Most people would be better served by a sedan or hatchback and, on the few occasions you really need an SUV, rent one, you’ll come our way ahead financially (and, by the way, might help avert climate catastrophe). If you want to optimize even further, consider a nice used plug-in electric vehicle or fully electric vehicle (not a lot of good used fully electric yet, but there will be in the next few years). You’ll also save a ton on fuel and maintenance.

There has been a lot of discussion about Avocado Toast and the Latte Effect lately. While I think this has taken up way too much bandwidth, there are some ideas here worth considering. The key again is to be intentional about how you spend money on food and drink and to align it with your values. As a simple rule of thumb, the more you eat at home, the better off financially (and typically in terms of your health) you’ll be. As a teacher, you typically don’t have the opportunity to go out for lunch when you’re working, so you have an advantage over other working professionals that bringing your lunch is pretty typical (although some folks purchase a lunch in the cafeteria – you want to make that be a rare thing).

Going out for dinner is a wonderful thing, but should be done occasionally and not three to four times a week (that includes picking up fast food). Most folks, if they align their food habits with their values, will discover that eating a nice meal at home together is not only financially wise, but provides them greater happiness and fulfillment. If you want to get together with friends, consider hosting (or attending) a pot-luck. You’ll have more quality time with your friends, spend less money, and likely eat healthier.

The amount spent on food is the third “big rock” of spending, next to housing and transportation. If you can optimize all three of them, then you’re savings rate will increase and then you’ll have money to invest and be on the path to Financial Independence.

Many people are intimidated by investing and think they can’t possibly do it right, so therefore Financial Independence is out of their reach. It turns out that investing is really the easiest of the “big rocks” to do well. Your savings rate is more important than your investment returns, and your spending rate determines your saving rate, so you have a lot of control over two of the most important factors that affect your investing.

Because you are investing for the long-term, investing is really pretty easy. The specifics can vary significantly based on your situation and your risk tolerance, and you can perhaps achieve a slightly higher return by tweaking your investments and making them more complicated. But, in general, you should invest in a broadly diversified equity index fund and forget it. (See this and this for more, or get his book.)

Your biggest decisions revolve around which type of accounts to invest in (401k/403b/457/Roth IRA, regular taxable brokerage account, etc.). In part 4 of this series we’ll go into this more in-depth but, in general, you want to maximize the amount you can put into 401k/403b/457 type tax-advantaged accounts and, if you do want to retire early, also invest in some regular taxable brokerage accounts (so that you can draw on these funds when you retire earlier than is typical). As a Colorado teacher covered by PERA, you definitely have access to the PERA 401k program (which is a good one), but you likely also have access to a 403b or a 457 plan. If you do have access to a 457 plan, especially if it’s PERA’s, that’s the one you’ll want to invest in first because you can access that money more easily before age 59.5. (More on this in part 4.)

A key area related to investing (and, it turns out, related to how much you have to spend to live on) is to think more intentionally about your taxes. While we certainly utilized tax-advantaged accounts along the way, this is one of the areas where we could’ve improved the most. By learning the rules around taxes you can optimize the use of your income and tax-advantaged accounts available to you. Much more on this in part 4.

So, those are the big rocks. Be more intentional about the lifestyle that makes you happy and fulfilled. Make spending decisions that align with your values and your goals in order to increase your savings rate, including making better decisions around housing, transportation and food. Know the tax rules and utilize tax-advantaged accounts in a way that optimizes your savings, spending and investing, and invest in broadly diversified equity index fund(s).

Is it really that simple? Yes, and no. As we’ll see when we get to the case studies, long-term planning like this relies on many, many assumptions, and those assumptions will not always be spot on. In addition, some people will argue that some of the lifestyle decisions that are needed to live beneath your means are unrealistic. So, in part 3 of this series I’ll spend a bit of time discussing the “What ifs?” and the “Yeah, buts.”

  • Part 1: The Concept
  • Part 3: The “What ifs?” and the “Yeah, buts”
  • Part 4: Tax optimizing/401k/403b/457/Section 125
  • Part 5: Case Study: Teacher Married to Another Teacher
  • Part 6: Case Study: Teacher Married to a Non-Teacher
  • Part 7: Single Teacher

Financial Independence for Colorado Teachers Part 1: The Concept

TL; DR: This is the first in a series of posts that will lay out a possible path for Colorado teachers to achieve Financial Independence and retire* early. This post looks at the concept of Financial Independence and discusses a little bit of the “what” and the “why”.

*Retire only if you want to, but certainly achieve a “work optional” stage of life much earlier.

This is the first in what will be a series of posts discussing how Colorado teachers can achieve financial independence. (Actually applies to any Colorado public school employee, not just teachers, but will focus on teachers.) This post will focus on the concept of financial independence: what it is, why you might want to achieve it, and the basic outline of what it takes to get there.

There are many, many, many excellent resources online (some of which I’ll link to at the bottom of this post) that are better written, broader in scope, and more in-depth. But I decided to write this series because, as far as I know, there is not any that are devoted specifically to Financial Independence for Colorado teachers. The path to Financial Independence is different for everyone, but there are certain aspects of being a teacher in Colorado that make this an easier path and are worth exploring in detail (notably Colorado PERA and the specifics of the Colorado state tax code). My hope is that this can be a resource for Colorado educators to adapt some of the terrific information that is available elsewhere online in light of the added options that PERA and the state tax code give you.

If you’ve ever explored anything financially related online, you have probably come across the acronym FIRE, which stands for Financially Independent Retire Early. (I will include some links to resources at the bottom of this post you might want to investigate.) While the FIRE concept may seem to be pretty well defined, there are many different approaches, definitions, and opinions about exactly what it means, so let me give you my take as a frame of reference for this series of posts. (Not that you have to agree with my take, but just as a common understanding for these posts.)

It seems to me that there is often a misconception of financial independence that it’s all about money. In my view, it’s not. Money is the means but not the end. Financial independence is, at its essence, exactly that – meaning that you don’t have to be employed and earning income in order to meet your financial needs. When you “achieve FI”, that means you have enough savings and investments to live off of even if you never earn another dollar at a job. That doesn’t mean you have to retire, the ‘RE’ part of FIRE, but it means you can if you want to (or circumstances dictate that you have to). Some people refer to this as a “work optional” stage.

So if FI is not about money, what is it about? I think it’s about living your best life and the life you want to live. It’s about making the most of your limited years (time is not a renewable resource) and about maximizing the time you have to do what you want. It’s about being intentional about life and not just letting life happen to you, but taking a little bit of time to plan the life you want to lead, one that aligns with your values, and then take the steps to allow that to happen. Perhaps that doesn’t seem all that different than what most people do, plan for the future. But this is taking it one (or two) steps further than most people do and being much more granular about the financial aspects of your future in order to achieve the life you want to live.

One of the unfortunate things about American society (I’m focusing on the United States in these posts) is the lack of knowledge and open discussion about money and finances. In many families, money is a taboo subject, and most schools do little or no real financial education. As a lifelong educator, it saddens me that we don’t make an effort to really educate our students about money and finances. Not because money or wealth is important in and of itself, but because of the tremendous impact finances and financial decisions have on everyone’s life. (If I was pressed to name the two most important subjects we should teach in K-12 education, it would be Physical Education and Financial Education, as those are so important throughout everyone’s life, yet we devote very little resources to teaching them.)

That doesn’t mean society doesn’t talk about “Money” with a capital ‘M’. We are inundated with stories about making money and wealthy people, bombarded with marketing encouraging us to buy things, and often social pressures to look and dress and own the correct things to fit in. But that’s as far as it goes for most folks, we get the pitch for all these things that are “desirable”, but not the knowledge and resources to manage our financial lives in a way that matches up with our goals and our values. FI is about achieving your goals and living your values. That may include retiring early or it may not – it’s about making decisions that optimize meaning and happiness. Once you achieve FI you may still continue to work, but you’ll continue because you want to do the work, not because you need the paycheck. And if at that point in your life you are ready to do something else, you won’t be restricted from making a change because of the need for that paycheck.

I think most folks would think that my family has done really well financially along the way, and we have, but if I knew what I know now back when we were first starting our careers, we would have achieved financial independence much earlier. So this series is intended to help some of you, if you decide this is the path for you, to do it better than we did. So what does it take to get there? Future posts will go into more detail, but it generally boils down to spending less than you make, and then saving and investing the rest. It’s also about making smart lifestyle choices (living within and actually below your means), and understanding the math of things like compound interest and how your taxes work.

Below you will find links to subsequent posts in this series (as the posts are written, the links will become active), as well as links to some excellent FI(RE) bloggers and other resources that you may want to investigate if you want to go down the rabbit hole and learn much, much more about this idea.

  • Part 2: The Process
  • Part 3: The “What ifs?” and the “Yeah, buts”
  • Part 4: Tax optimizing/401k/403b/457/Section 125
  • Part 5: Case Study: Teacher Married to Another Teacher
  • Part 6: Case Study: Teacher Married to a Non-Teacher
  • Part 7: Single Teacher

Some excellent resources to learn more about FI(RE)