Case study: Help with maximizing investments for FI 6-9 years away

[debdoesnotbrew]

First post on the forum, so hello :). My hubby and I went to Camp Mustache 2016 and wanted some thoughts on our situation and path to Badassity.

Life Situation: Married Filing Jointly, age 29 and 37 with baby#1 coming in March, living in Seattle. She commutes 27 mi, 2x week (other days takes public transport) and he commutes 35 mi, 5x week (but moving to 5x/week vanpool)

Gross Salary/Wages: $214k total; $144k for me, $70k for hubby

Individual amounts of each Pre-tax deductions:

$36,000 for 401k ($18k/each)
$15,500 for Employer Match (for his/hers 401k plus HSA)

After-tax contributions :
$6,000 ESPP (my employer allows for this)
$261 Life insurance (my employer subsidizes the rest)

Rental Income, Actual Expenses, and Depreciation:
Rental property in Tacoma, WA
Income: $40,000 (Accounts for 10% vacancy)
Expenses: $30,000 (Mortgage @ 4.25%, utilities, and $200/month maintenance)
Depreciation: $2,400
Taxable income: $6,600

Adjusted Gross Income: Approx $180k

Taxes: $41,974
Federal: $27,418
SS: $11,517
Medicare: $3039
No state taxes:)

Untaxed Income:
$22,200 coming from ADU in our primary home (we just finished @ end of 2016 so don't have this calculated in our taxes yet)

Current expenses:
Mortgage: $28,898 annual (Primary home, 3.75%)
Non-Mortgage total: $43,375 annual

Breakout
Property Tax and Insurance: $7094
Cable TV: $18 month / $216 annual (hubby likes NFL)
Car insurance: $63 month / $752 annual (2 cars; 2012 SUV and 2004 Audi sedan)
Car maintenance + reg: $55 month / $660 annual
Charitable contributions: $19 month / $228 annual **we are ashamed this is so low, we plan to increase substantially next year
Clothing/shoes (all other misc shopping i.e. Amazon): $237 month / $2844 annual
Credit card fees: $59 month / $708 annual (includes $450 Citi Prem card w/ $500 of benefit)
Dining Out: $202 month / $2424 annual
Gifts: $115 month / $1380 annual
Electricity: $23 month / $273 annual
Entertainment: $20 month / $240 annual
Fuel: $250 month / $3000 annual (will go down as hubby just found vanpool for commuting 5x week)
Gas for heating: $57 month / $684 annual
Groceries: $343 month / $4116 annual
Household: $54 month / $648 annual
Internet: $48 month / $576 annual
Life insurance: $22 month / $264 annual
Medical: $416 month / $4992 annual (Paid out of HSA in the past but will pay out of pocket in future; accounts for all of the prenatal dr visits)
Parking/Tolls: $70 month / $840 annual ($8/day toll each time she commutes)
Pets: $39 month / $468 annual
Phone: $31 month / $372 annual (she gets $75/month employer reimbursement)
Recycling/Trash: $27 month / $323 annual
Travel/Vacation: $740 month / $8880 annual (we won't ever cut this)
Umbrella insurance: $19 month / $227 annual
Water/Sewer: $53 month / $637 annual
Beer making: $44 month / $528 annual (his biggest hobby)
Student Loans: $141 month / $1692 annual (at 1.75% and 3.25%)

Total "leftover" to invest: $6182 month / $74k annually

Assets:
His 401k: $174,000 invested across multiple; mostly in < .1% funds, highest expense ratio is .65% for about $40k of this
Her 401k: $130,000 invested at 100% BTC Lifepath 2050 with .16% expense ratio + mgmt fee
Safety net: $18,000 in Betterment, 40% Stock | 60% Bonds
Individual brokerage: $1000 in stock awards from employer
Cash: $25,740 (we each like to keep approx. $10k in our bank account)
HSA: $6050, invested at 100% in VIGRX

House 1 (Primary residence): Recently appraised $842k at refi; owe $520k with 3.75% 7 year ARM.
House 1 ADU rental income (stated above): $22,200
House 2 (Rental): Zestimate of $440k; owe $267k with 4.25% 30 year (26 years remaining)
House 2 Rental income: $40,000 (full details listed above)
Car 1: 2012 Kia Sportage, paid off, ~$13k value, 28k miles
Car 2: 2004 Audi A6 Sedan, paid off, ~$6k value --> we will likely sell and replace with 2013 Leaf for $7k 
Also, we have a great marriage and a really cool dog, plus my in-laws all live nearby and are super great people. We consider those assets!

Future State:
For full disclosure, our situation will be changing as we have a baby on the way in March. I get 6 months of paid leave (WOO!) and starting in September, the plan is for hubby to stop working and be a full-time dad. This will change our income and tax situation. He may still find some fun work part-time pursing hobbies around brewing or dabble in blogging.

Our goal after FI is to do some travel before kid(s) start school (maybe even take a mini-retirement) and move to a lower cost of living area with good schools and great people (Boise?!).


Specific Question(s):
The main questions we have are regarding maximizing our investable money. All of our free cash went to our home remodel last year (adding an ADU) so we feel a little like newbies and are almost overwhelmed by options with what to do now. (We are 6-9 years from FI based on this exercise)
   • We both have $27k+ left against the annual IRS limit. Need input on how and if we maximize this:
      ○ Could put $5.5k in a traditional IRA annually and do a backdoor ROTH conversion - seems like a no brainer to do this
      ○ Employer allows for after-tax 401k contributions, but these can NOT be rolled over to a ROTH IRA while employed at the company. Is it worth it to do this anyways (up to the limit) without knowing when she'll leave the company, knowing we can convert it later? (I.e. Does future benefit of no tax on gains outweigh potential for high taxes on the gains to principal)
      ○ Or, should we forego this and put into a regular investment account to allow for flexibility of withdrawing funds when we are FI in 6-9 years?
   • Should I max out my Employee Stock Purchase Plan at 10% discount? What are the risks/benefits?
   • We have about $500k worth of equity in both of our homes that we've got in our backpocket as the ticket to expedite to FI should we want to make that move. (Currently 2/3 of our net worth). We could just sell both homes, put the profits into an index fund and we are well on our way to travel, etc, though we'd need to account for cost of rent/mortgage for the future. How should we think about when to pull the trigger on this?
      ○ House 1 is our current residence with approx $400k of equity and rapidly growing (Seattle is booming) plus $1850/month income from ADU.
      ○ House 2 is a rental property with approx $200k of equity plus approx $500/month in net cash flow (not accounting for maintenance). We are tentatively thinking to keep this property and at FI date, move into this home for at least 2 years (at least as legal residence while traveling) to avoid taxes on sale.
• We have our first baby on the way in March. What else should we be thinking about financially that we may not have thought of?

[yachi]

I can't believe you don't have many more responses.  I'll post to bump it up.

Are utilities at your rental really high?  I'm getting taxes, insurance and utilities at like $854/month.  Do other landlords pay utilities in this area, or is it something that can be billed to the tenant?  I ask because I would want to bring in more than $500/month on $200K in equity, but in my area rentals make their money on cash flow instead of appreciation.

Taxable accounts can be fine if you're filling it with buy & hold stocks like Berkshire Hathaway.  It doesn't pay dividends so you incur no taxes until you sell.  Hopefully you sell in a low tax bracket in retirement.

[boarder42]

You say you'll never cut travel spending but have you looked at travel hacking - we spent 10 days in hawaii this year in a jeep/first class flights/five star resort - all of that was free.  we went on a 14 day Med cruise in a balcony with booze included. - cost 1500 including excursions. 

there are creative ways to cut that or make it go much much farther.

[brandonbrews]

Utilities at the Tacoma house average $350/mo.  We rent rooms out individually and found it's easier to include utilities in rent than have the renters split the costs up.  The rent is still a little under market value and we'll likely raise it a bit (~$250) this summer. 

As for travel hacking, we've done some and have used miles in part or full for trips to Europe and Hawaii.  We can probably improve our efficiency with it a bit.  But we are also happy taking the low-hanging travel hacking fruit and not extracting every last point. 

Really, we're open to any and all ideas on how to optimize going forward, especially with some big life changes on the horizon. 

[neo von retorch]

Hi there! We have some similarities (I'm 37, she's 32; we're on a break from TTC, though. We have a cool dog! Similar income, expenses, have a second property as a rental. Trying to retire in ~7 years, etc - our rental is even done with individual rooms while we cover utilities.)

If you haven't stumbled across this, it might help: http://forum.mrmoneymustache.com/investor-alley/investment-order-65299/msg1333153/#msg1333153
The gist is - order of best return on investment to worst. Company matches are 100%. Tax-advantaged can be ~25%. Minimize debt interest and fees.

While you're talking about specifics, it's always good to have all the basics covered, and to develop your own personal Investment Policy Statement.

[boarder42]

Property Tax and Insurance: $7094
Cable TV: $18 month / $216 annual (hubby likes NFL)
Car insurance: $63 month / $752 annual (2 cars; 2012 SUV and 2004 Audi sedan)
Car maintenance + reg: $55 month / $660 annual
Charitable contributions: $19 month / $228 annual **we are ashamed this is so low, we plan to increase substantially next year
Clothing/shoes (all other misc shopping i.e. Amazon): $237 month / $2844 annual Extremely high
Credit card fees: $59 month / $708 annual (includes $450 Citi Prem card w/ $500 of benefit)  Sell AU spots to recoup and make money here
Dining Out: $202 month / $2424 annual  seems high to me could be cut
Gifts: $115 month / $1380 annual  wtf are you buying for 115 a month after spending 202 eating out and 237 on clothes and shoes
Electricity: $23 month / $273 annual
Entertainment: $20 month / $240 annual  you're eating out and buying too many clothes for this part to exist
Fuel: $250 month / $3000 annual (will go down as hubby just found vanpool for commuting 5x week)
Gas for heating: $57 month / $684 annual
Groceries: $343 month / $4116 annual
Household: $54 month / $648 annual
Internet: $48 month / $576 annual
Life insurance: $22 month / $264 annual  you dont have kids you dont need this even when you have kids its probalby not necessary based on the SSA survivor benefits
Medical: $416 month / $4992 annual (Paid out of HSA in the past but will pay out of pocket in future; accounts for all of the prenatal dr visits)  dont pay out of HSA save that and let it grow tax free and use money that would be invested in taxable accounts to pay now.  this money can be refunded after FIRE doesnt have to be when the expense occurs
Parking/Tolls: $70 month / $840 annual ($8/day toll each time she commutes)
Pets: $39 month / $468 annual
Phone: $31 month / $372 annual (she gets $75/month employer reimbursement)
Recycling/Trash: $27 month / $323 annual
Travel/Vacation: $740 month / $8880 annual (we won't ever cut this) insanely high easily could be 0 and get more
Umbrella insurance: $19 month / $227 annual
Water/Sewer: $53 month / $637 annual
Beer making: $44 month / $528 annual (his biggest hobby)
Student Loans: $141 month / $1692 annual (at 1.75% and 3.25%)

[Catbert]

Definitely do backdoor Roths for 2016 and 2017.

Employee stock purchase plans can be great with a built in 10% gain.  Just ensure that you don't have too much stock in one company.  4% max of your overall portfolio is a good rule.  If it were me I'd probably buy the stock at 10% discount.  Then sell once I'd met the minimum period for a long term capital gain (versus short term).  That assumes that it is a "good" stock which you would otherwise buy.

[brandonbrews]

@neo von retorch - My long-lost brother from another mother!  I should correct a typo / mathematical error in the original post; my lovely wife tried to deduct an extra year from my age so I'm actually 38 (coming up on 39!).  Regardless, it sounds like we're on very similarly shaped paths.  Thanks for the links.   

@boarder42 - Thanks for the feedback!  I was hoping to get some no-nonsense critiques so it is much appreciated.  Some home improvement rolls up under shopping but regardless, our Amazon and gift spending is definitely high.  I have a personal issue with selling AU spots so we refrain from it.  We've been trying to do more date nights while we can pre-baby but that should subside a bit.  I wasn't aware of the SSA survivor benefits, so thanks.  We'll likely let the HSA grow now that we understand its potential as an investment vehicle.  The travel budget is very high and will likely be curbed by the baby and more travel hacking.  It won't go away but should go down a bit as we learn to wax our growing mustache.  Hopefully. 

@mary w - Thanks for confirming that aspect of things.  And yeah, it's MSFT.

[Axecleaver]

You'll actually do better with the Roth 401k contributions, because you have more "room" to contribute. You can roll it over into a Roth IRA after you retire.

If your plan allows Roth 401k conversions, you can contribute after tax dollars up to the cap of $51,000. So let's say in your case, you're contributing the maximum 18,000 pretax, and getting $7,000 in employer match. You can contribute up to $26,000 after-tax. (18+7+26=51).