I think the time is right to challenge that notion. In many ways, working for the government is the perfect place to plan for and achieve early retirement. I see a few keys items as something that might give us the leg up on other professions. I want to focus on the following: 453b retirement accounts and their advantage, pension programs, and the ability to discharge student loan debt which as we know is quickly becoming the life mortgage.
Student Loan Discharge:
Student loans are something that affect a good deal of us. We go to college to help us find meaningful work that will provide financially but also provide purpose and meaning. Working for the government can accomplish both and knowing that your daily work serves a mission that is helping those who surround us in our cities, states and country can be a gratifying feeling. However; the way student loans are being handed out to unprepared young adults is putting a lot of people in harms way after college is over. The universities seem to be in bed with the student loan industry and the amount of money that is being charged to get an average education at an average university is unbelievably high.
One of the many benefits for working for the government is being able to discharge student loans after 10 years. Pay attention here because you need to make your payments on time, and stay the course. If you take advantage of this program from the start, you could be absolutely debt free heading into your early to mid thirties if you make good decisions in other parts of life. The student loan forgiveness program is to encourage talented people to make a commitment to working for the government and in return you can have any remaining balance after 10 years forgiven. That is a hell of a deal and something the private sector will not receive. Of course the best option is not to go into debt for school but for many of us, it is too late. For someone dreaming of financial independence, student loans are an albatross hanging around the neck. This flexibility will allow you to get rid of a major debt if it is not fulfilled after 10 years. That is a major win for government employees! Now lets pair this with something even more powerful that may cut back your student loan payments while getting money invested at the same time. Income based repayment plans coupled with 453b retirement accounts!
The Power of 453b:
What is a 453b? That is the government version of a 401k. Normally the employer will not contribute because there is a pension but we can get to that later. The 453b acts like a 401k and the max in 2016 is $18,000. There is a range of options to invest in and the costs are pretty low. The options in my plan are a range of broad based index funds and target date funds that will change allocations the closer you get to retirement. As many people seeking financial independence do, I sought out the fund mirroring the S&P 500 broad index. In our system, it seems to be the one with the highest returns year to year. So why is the 453b give us an advantage over normal folk in the private sector? It just so happens that 453b accounts allow for early withdraws without fees! Yes that is right. If your goal is an early retirement, you can make withdraws without getting into shuffling money around each year trying to save yourself from early withdraw fees. That does not mean that you don't want to move this to another account slowly. There are probably some benefits to finding other ways to protect yourself from taxes but that is a conversation best had with a certified financial planner. You saw in the last paragraph that I mentioned income based student repayments in the same breath as the 453b. Why? Simple, if you max out your 453b every year you will lower your taxable income and the student loans you make will be lower because your taxable income is lower. Don't think that you are pulling one over on the government. This is set up perfect for the government employee to save, save, save! You can save tons of money for retirement while decreasing your student loan bill. Guess what happens after 10 years? You guessed it, your loans are forgiven and you just put $180,000 into your account. Think about the compounding interest. I do understand that many government entities are cutting back on pensions so I want to take note of that here. If you are in a 401k or some other plan where the employer contributes a match, this is even more of an incentive to max out and get all of the money possible. Do not leave a dime on the table. We can get into ways to save money so you can afford to max your account out later but for now just take this advice to heart: MAX OUT YOUR F-ING ACCOUNTS!
My favorite part. If you are like me and you are in a pension plan, you are making relatively small contributions to something that will help fill your income gap in retirement. You may work 10 years or you might work 35 years but this extra shot of money will help you fulfill your needs once you hit a certain age. My current program is PERS II. That means when I retire, the pension will take my highest three years of income and look at how many years I worked. From that they will do a calculation that will double the years worked to provide me with a yearly sum that will be paid out monthly. I do not earn $100,000 a year but for simplicy sake lets say I do and that was my final salary for the last three years of work. If I work for 20 years, they will multiply the number of years by 2 to give me a percentile of 40% . I will then receive 40% of my highest three years which will be $40,000 a year. Ok, it is not a ton of money and inflation will probably eat into it but it is something. I know most of us don't earn $100,000 so the number will be much smaller. Let say you earn $50,000 and you run the same calculation. That means instead of $40,000 you will get $20,000 a year. Again, that is not a ton of money but if you are saving, investing and living a fulfilling lifestyle free of lifestyle creep and trying to keep up with the Jones, this is meaningful money.
Keep in mind that if you retire when you are 35, the amount of money you receive at 65 will not be worth as much and that inflation will mean that even your highest years of earning may be a distant call from what wages are 20 years from that moment. However, if you are saving in other ways and living frugally, that money should just be an extra padding that kicks in as you are aging.
I know we all have challenges and anything can happen. What I learned over the last few months is if you can cut back on ridiculous spending, you have the opportunity to really plan for the future and absolute financial freedom. What can prepare you better for possible furloughs, government cutbacks, and other hard times that can come with working for the government? Living well below your means gives you the power to know that you can live with 40%, 50%, 60% or even 70%-80% less of what you are making now. That might hurt a retirement plan but it is also liberating to know that the lifestyle choices now gives you a certain freedom from fear that others might not possess. That is all for now!