New To Financial Independence at 40

We prepared emotionally and financially for the ax to fall for nearly five years, but when it finally did we weren’t ready. The timing was terrible. As each round of layoffs passed and we weren’t impacted, we pushed thoughts of it more and more into the background. So, when the layoff finally did come to our pseudo single-income household, we were right in the middle of planning a trip to Europe and had just finished a bathroom remodel. And then, to add insult to injury, our air conditioner conked out in August in Atlanta. Fun.

Personal Background

In 2014, Jason’s corporate job was doing a huge round of layoffs and I was sure our single income was going away. We had two small children (5 & 3 at the time) and I was a stay-at-home-mom. I’d started a blog to keep my adult brain busy when the youngest was 6 months old. But, it wasn’t bringing in the big bucks or anything. Extra income, yes, replacement income not so much. I set out to replace Jason’s income with my own in case he was laid off.

I’d also joined an MLM the year before, which I was casually using and sharing on my blog and with friends since I really enjoyed the products. Knowing the income potential of that MLM was greater than that of the blog alone, I continued sharing more intensely in the next few months. By the time the layoffs actually hit six months later, I’d matched Jason’s monthly income (minus the benefits) between the blog and the MLM. And, bonus, he didn’t get laid off. At that point we were suddenly a two-income family. I call it a pseudo single-income household because the blog/MLM income can vary widely. Not to mention it could go away at any time.

So, phew, we made it through that, now what? Knowing what I know about FI now, we probably should’ve started saving more of our income and cutting our expenses way more (we were already pretty frugal since we’d been raising kids on a single income). Maybe start a retirement account for myself and increase Jason’s 401k contributions. But, I did do a few things right. I hit my student loans hard and paid them off (FINALLY) within two years. We maxed our HSA each year and always contributed at least the employer match to Jason’s 401k. We remained free of consumer debt. (I’d eliminated that when the kids were babies since we needed that space to pay our expenses rather than paying credit card companies). I kept our Ramseyfied $1000 emergency fund intact in a high yield no-penalty CD.

But, we’re not robots. So, when my student loans were paid off, we started planning a celebratory trip to Disney and Universal. And, while I did get a great deal and use some travel rewards points for this amazing trip, it wasn’t free. We also took several other smaller trips and then started planning the BIG trip. The 10-year anniversary trip (we never did a honeymoon because we were in a minimal-spending phase when we married due to debt) to the United Kingdom and Ireland. Again, we used some travel rewards and planned, but it wasn’t free. Around the same time we decided to remodel our bathroom and that also wasn’t free. So, of course, after the bathroom was complete and I was using 0% cards and paying off $5000 chunks each month and after the deposit and airline tickets for our UK trip were paid, the ax finally fell with surprise unannounced layoffs in March 2018.

We briefly discussed cancelling the UK trip, but knowing it was the trip of a lifetime and that we’d likely never schedule it again, we went ahead with it. Gulp. Spoiler alert: we don’t regret it.

Jason was laid off when we had about $20,000 floating on the 0% cards. Suddenly that deadly credit card debt that we’d had when the kids were babies was back. Was I going to be able to pay it off now before the 0% went away? Why, oh why, did we do this to ourselves?

We went to Europe, had an amazing time and made lifelong memories. We got back from Europe and our air conditioning stuck the shiv into my frugal heart when it conked out in August in Atlanta. So, cue another $5000 in debt.

Thankfully, the promo on those 0% cards that I never thought I’d not pay off almost immediately lasted through the next September 2019. Once our high school friend clued Jason into the FI world, I started listening in and, eventually, hatched a plan. Step one was, in spite of that evil credit card debt, I’d flesh out our 3-month emergency fund. This $1000 Ramsey business wasn’t going to cut it anymore if we were going to live solely on my wacky unpredictable income.

So, instead of doing what my heart really wanted me to do—knock out that debt fast—I paid the minimum amounts for a bit and socked away all the extra income (minus the health insurance we needed to pick up since we were now solely self-employed). By December, I had three months of living expenses in a high-yield savings account and a partially funded Roth IRA.

At that point I talked to my CPA about our taxes for 2018 and I decided to switch contributions from my fledgling Roth IRA to a traditional IRA. So, in January and February, I fully funded my 2018 traditional IRA and partially funded my 2019 traditional IRA. At our talk in December, my CPA thought we’d be at a 9% effective tax rate and, when we finished taxes, we ended up closer to 5%. In 2017, our effective tax rate was 14%, so we shaved 9% off of our effective tax rate even though somehow, even with the layoff, our AGI ended up slightly higher in 2018 than in 2017 (thanks in part to a generous severance package).

In March, I decided to create a solo 401k so I stopped contributions to the 2019 IRA in case I’m over the $103,000 MAGI for the 2019 year that would allow me to contribute fully to both. I should still be able to get partial tax credit so I’m leaving the $1000 contribution I already made to the 2019 traditional IRA alone for now. If magic happens, I can always recharacterize it in December. Meanwhile, I plan at minimum to contribute $6000 on the employer side and $6000 on the employee side of my solo 401k for 2019, doubling the amount I would’ve been able to contribute to an IRA. My business is an LLC filing as an S-Corp, so I’m allowed to contribute 25% of what I W2 myself on the employer side and the $19,000 cap on the employee side. Hopefully, I’ll be able to get closer to that $19,000, but we’ll have to see how the year goes.

As for those dreaded credit cards, they’re still sitting at 0% but I have them set to autopay monthly in the amount of the total left divided by the months remaining on the 0% promo. So, I’m getting a free loan until September, basically. It is so difficult to not just pay them off, but with savings accounts earning more than 2%, it just makes sense to leave my cash alone and let that automated plan play out.

How Did We Get Here at 40?

We’ve spent some time flogging ourselves mentally about not finding FI until 40. You know the drill, “what if we’d known this 10 years ago? Or 20?” I’d read Dave Ramsey and Dani Johnson and all sorts of personal development books. And I’m generally naturally fairly frugal. Our monetary downfall was always food. We enjoy eating out with family and friends. And then, once we were no longer financially struggling as a young single-income family, vacations. So, we did OK. But we were nowhere near the 50% savings rate, which, after I’d paid off my student loans, we completely could’ve been.

But here’s the old bait and switch I think a lot of GenXers experienced. When we grew up, our parents worked one job for 30-40 years and then received their pensions and healthcare and the gold watch upon retirement. This is what we were raised on. Yet, somehow when we got into the workforce, there was little upward mobility at a single company. In order to achieve more, you had to switch companies. This was so not a thing in our parents’ day and job hopping felt wrong. My pre-kid resume is full of jobs at different companies in 2-3 year bits. Sometimes even one year. Because the only way for me to get a higher paying or higher responsibility job was to work somewhere else. All of those jobs at the companies I was at were filled. And, morbidly, unless that person has died since, that’s still the case in some of these companies 15-20 years later.

Prior to 2018 when I scrambled to create an IRA myself, I had two other IRAs left from these jobs. One was eaten entirely by fees. The other, happily, had a bit of money in it (less than $1000) that I rolled over into Vanguard. Yay. I never once had a job that offered a pension or even a 401k and most required you to work at the company from six months to a year prior to contributing to the plan. The best opportunity I had was that Simple IRA that I rolled over and that was only available in the last six months of my employment there.

Jason’s career was a little different. He started when pensions were still alive. Hallelujah, right? Alas, six years in, his corporation decided that was no fun anymore and stopped the pension and switched over to 401k (and then started progressively lowering the company match portion on that). So he’ll get something like $240 a month when he is 65 for that pension. Woo. Party. Thankfully, we weren’t totally stupid and we did contribute at least up to the ever-diminishing match each year and also didn’t spend all of our HSA balance. But, between the two, his retirement fund when he was laid off after 18 years of working at one company was less than $100,000. Plus, whatever that pension is worth. Side note: yes, I rolled his 401k into an IRA at Vanguard and it’s in VTSAX and VBTLX now.

As a couple, we’re an interesting case study I suppose on the different paths GenXers took in our weird in-between pension and 401k/IRA retirements. Jason stayed put and did pretty well compared to some of our generation, but was still unceremoniously booted halfway through the 40-year-career plan. I did less well in retirement plans and hopped around all over the place. Even though I moved up, I felt like I wasn’t really getting anywhere. But, as an accidental entrepreneur, I was able to eventually nearly double his salary (though unfortunately without the healthcare and retirement benefits). Our differences also included me going full on in the education path (master’s degree) and him leaving college to go to work without a completed degree. So, of course, he always made more than I did. But, we do have one thing in common! Both of our careers are dead or dying (mine was in print journalism and his in landline technology support).

We made a choice when I was pregnant with our first for me to stay home, at least initially, with the kids. After all, daycare would’ve cost nearly as much as my salary. Little did we know, 10 years later, that decision would allow me to triple my salary and allow our family to stay afloat when the 40-year-career path came crashing down for our previously primary income.

Now What?

We’re 41 and 40 now, and we’re honestly just beginning our intentional retirement plan. Yes, it’s daunting when I read about those in their 20s and 30s who already have eight gazillion dollars in their retirement funds and are traveling the world with their families. But, we’re at least not starting at zero and we’re (mostly) looking forward rather than backward.

Will we get to retire early? Probably not. But, we can make smarter decisions from here on out and at least be financially independent. And maybe even side hustle FI, since I guess that’s what we’re currently doing now that my side hustle has become our only income.

In the future, we plan to redirect more to my solo 401k even if Jason is still unemployed. If we can stand it, we’ll even max it out. In tax years 2019-2025, I plan to take advantage of the 20% business income discount from 199A by starting a Roth Conversion Ladder for Jason’s IRA (the former 401 rollover). My CPA and I will work out the exact details, but I figure as long as I roll over about the equivalent of 20% of my pass-through income (the part that’s discounted each year) or the amount between our AGI and the top of the 12% bracket, it’ll be kind of a wash taxwise.

We also plan to create Roth 401ks for the kids as they can be paid for their photos and contributions on my website. We’ll encourage them to use some of the college hack techniques we’ve learned about such as dual enrollment (already checked and it’s available at the high school for which we are zoned), AP courses, CLEP tests and attending state school if they choose to go to college.

We also plan to get more intentional about travel rewards to pay for those vacations we love to take. After all, now we don’t have to worry about whether Jason can get off work. Silver livings, hah!

Eventually, we’d love to slow travel with the kids or even move abroad but I haven’t figured out if it’s possible for the kids to attend public school in other countries if we aren’t permanent residents. There’s a lot of work to do, but at least now we know (mostly) how to do it, thanks to FI and our friend David.

By Kristi Arnold of Veggie Converter: Easy, Organic, Family-Friendly Recipes