Author Topic: Reader Case Study –Plan for ER in 15yrs at 47.  (Read 6902 times)

Thoughtful Mule

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Reader Case Study –Plan for ER in 15yrs at 47.
« on: January 28, 2015, 09:25:36 AM »
Earned Income:
•   I work in the power generation industry as an engineer.  My earned income is 105K

Expenses:
•   Primary Residence Monthly PITI : 1427 (including $70 PMI for a couple years)
•   Student Loan payments: 346
•   Car Insurance: 47
•   Gas: 100
•   Car Payment: 0
•   Groceries: 300
•   Eating out: 200
•   Bars and night life: 100
•   Cable / internet: 120
•   Electric: 120
•   Water: 40
•   Phone: 0 (company paid)
•   Other:  1000 (this includes quite a bit of home improvement, travel and vacations, hobbies, auto maintenance, etc.)

•   Total expenses come out to around 4K / mo

ER Expenses:
Not much different than today’s expenses minus the student loans and mortgages. Some stuff may shift around, but the overall number will be around 3K per month, livin’ large.

Rental Property
•   Income from roommate at primary residence: 600 (likely to end soon)
•   Monthly rent from rental property: 1445
•   PITI: 1060
•   Other expenses (estimated long term monthly average):  320

•   Cash flow wise, the rental property is around break even.  This is a long term investment for debt paydown, inflation hedging, and possible rent and home value appreciation.

Assets
•   Roth IRA: 58K (Vanguard VTIVX)
•   401K: 157K (Also primarily in a low fee target retirement fund)
•   Savings account: 25K
•   Primary Residence: 160K
•   Rental Property: 190K
•   Truck: $2.5k

•   Total Assets: 590K

Liabilities
•   Primary Residence: 151K (15yr mortgage at 3.25%)
•   Rental Property: 153K (30yr @ 4.7%)
•   Student Loans: 29K (average interest rate around 4%)

•   Total Liabilities: 333K

Savings Plan:
Currently I am maxing out my 401K at work, plowing 18% of my pretax income into a mix of index funds labeled as a target retirement fund. My company generously contributes another 6% on my behalf.  I am maxing out a Roth IRA through Vanguard as well, and a company sponsored HSA, into which my company pays 700/year.

The remainder goes into my savings account, currently earmarked for a real estate purchase. In the past year and a half, I used this account to purchase a rental property and refinance my (formerly underwater) primary residence. I am looking for another single family home to move into and renovate for a future rental.  I don’t mind property management and plan to carry it as a part time job through retirement.

My current savings plan breaks down as follows:
•   Debt Paydown: 13% of income
•   Pretax retirement and HSA:  21% plus 6% match
•   After tax retirement: 5%
•   After tax cash savings: 20%

•   Total Savings Rate: 55-60%

I know there are some super smart people on this forum.  I'm looking for advice on the following:
•   Feel free to critique my spending, I can take it. Keep in mind that suggestions may have to pass through the wife.
•   I am currently 32 years old and would like to retire at 47.  Is the structure of my savings plan right for this?
•   At some point should I stop contributing to the tax advantaged accounts and save in a taxable account?
•   What might my withdrawal plan look like? How can I avoid heavy fees and taxes on early withdrawals?

Thank you in advance,
Thoughtful Mule
« Last Edit: January 28, 2015, 02:37:33 PM by Thoughtful Mule »

divsnowball

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #1 on: January 28, 2015, 09:32:24 AM »
First of all.... Why do you have 25k in savings when you could practically wipe out your student loans with that?

waltworks

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #2 on: January 28, 2015, 09:36:58 AM »
Your long term rental is pretty terrible on cash flow. I'd sell, take the equity, and pay off the student loans.

Never stop contributing to tax advantaged while you are working. Google "roth pipeline" or "SEPP".

-W
« Last Edit: January 28, 2015, 09:43:30 AM by waltworks »

thd7t

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #3 on: January 28, 2015, 09:38:48 AM »
Is your primary mortgage a Conventional?  What is the earliest date that you can eliminate PMI?  At $840/year, it's a chunk that you'd be much better off being rid of.  It's sort of like non-deductible interest on a small portion of the loan.  Pay down to PMI to eliminate at the earliest date possible (24 months from inception of the loan).

DecD

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #4 on: January 28, 2015, 09:40:32 AM »
You've got a quarter of your expenses in the nebulous "other" category.  For assistance in tackling your budget, I recommend separating this out a bit more so you get suggestions other than "cancel cable"!

divsnowball

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #5 on: January 28, 2015, 09:46:13 AM »
You gotta read the whole blog start to finish.  Its obvious given the facts you havent taken into account everything that MMM publishes

Thoughtful Mule

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #6 on: January 28, 2015, 09:50:42 AM »
First of all.... Why do you have 25k in savings when you could practically wipe out your student loans with that?

True. The highest interest rate loan is 4.8% with a principal balance of 23K. I could kill it.  The payment is $160 for some ungodly number of years. To me this seems like a fairly weak use of cash, though sitting in a savings account forever is worse.

I'd really like to leverage it into another single family residence with owner occupant financing, possibly another 15 year loan to coincide with my proposed RE date.

divsnowball

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #7 on: January 28, 2015, 09:52:48 AM »
Just wipe it out immediately.  You cant be FI with debt. 

Thoughtful Mule

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #8 on: January 28, 2015, 10:08:24 AM »
Your long term rental is pretty terrible on cash flow. I'd sell, take the equity, and pay off the student loans.

Never stop contributing to tax advantaged while you are working. Google "roth pipeline" or "SEPP".

-W
Walt, thank you for the advice on withdrawals, I am going to dig into this some more. What are your thoughts on financial advisors or accountants for early retirees.  Can they help with planning, or are they too caught up in "conventional wisdom" to be useful?

Do you own rental property? I'd love to hear about your strategy.

Is your primary mortgage a Conventional?  What is the earliest date that you can eliminate PMI?  At $840/year, it's a chunk that you'd be much better off being rid of.  It's sort of like non-deductible interest on a small portion of the loan.  Pay down to PMI to eliminate at the earliest date possible (24 months from inception of the loan).

It is a 15 year conventional loan with around $600 applied to principal every month, the PMI should be gone in short order.  I had the option to pay PMI as a lump sum at the refi, but the numbers worked out better paying monthly

You gotta read the whole blog start to finish.  Its obvious given the facts you havent taken into account everything that MMM publishes
. Could you be more specific?

waltworks

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #9 on: January 28, 2015, 10:16:44 AM »
Read some of the case studies on the RE board. Your rental is probably awful because:
-You basically don't cash flow at all. You are *probably* actually losing money in a holistic analysis. Google "50% rule" for an explanation.
-Rentals are risky (unexpected repairs, job loss in the area drops rent, tenant flips out and damages/skips town/sues you, etc) moreso than people think.
-RE historically appreciates at about the same rate as inflation. If you want that, just buy TIPS and forget the headache.

I own 2 rental properties now, and have owned several others in the past decade or so. I hope to own none by the end of this year, as they have all appreciated past the point where it makes sense to hold onto them. Now is not a particularly good time to be buying or holding rentals in MOST parts of the US. If you are not getting 1%+ of the market value of the house in monthly rent, sell the place. Your money will do better elsewhere.

-W

thedayisbrave

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #10 on: January 28, 2015, 10:29:00 AM »
waltworks nails it right on the head.  Your rental is not making sense #s wise.  With a purch price of $190K, you should be commanding AT LEAST $1900 in rent every month and clearly that's not happening.  I totally agree that you should sell it & use your equity to pay off your student loans.  You'll have a lot more freedom that way and you can then direct your SL "debt payments" toward either more aggressive saving/a rental property that will cash flow properly (ie NOT "break even").

You say spending changes have you go through your wife... so do are your #s for 2 people? There's still plenty you could cut in half (like bars/nightlife and miscellaneous) and still be livin' large. 

Yes, definitely read more about the Roth Pipeline and SEPP.  Max all tax-advantaged vehicles possible, and then start contributing to taxable. 

As far as accountant and financial advisor... I have a CPA and it makes life a whole lot easier, but you don't necessarily need one.  I don't really see the need for a financial advisor either but YMMV.  You can get plenty of info from this board and other similarly great ones such as Bogleheads (you can post a case study/portfolio review there if you're considered about whether you're invested in the right things etc.)  Sure it's still random people on the internet, but it's a pretty great community for a buncha strangers ;)

nereo

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #11 on: January 28, 2015, 10:32:53 AM »
Just wipe it out immediately.  You cant be FI with debt.
Whaaa??? of course you can be FI with debt.  For many of us, strategic carrying of debt is part of our FI strategy.  For example, I have over $17k in SL debt and ~$150k in mortgage debt, all at or under 3% interest, and my current plan has me FI long before the mortgage will be paid.  Simply put, I trust I can get >3% return on my investments.  OP's has a bit higher interest rate on his/her SL, but I certainly wouldn't put it into the "pay it off immediately" category.  He/she is wise to at least consider whether there's a better use for the money.
« Last Edit: January 28, 2015, 10:44:50 AM by nereo »

AlanStache

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #12 on: January 28, 2015, 10:42:52 AM »
...
You gotta read the whole blog start to finish.  Its obvious given the facts you havent taken into account everything that MMM publishes
. Could you be more specific?

Start here:
http://www.mrmoneymustache.com/all-the-posts-since-the-beginning-of-time/

Sorry to be a smart as.  Alot will be answered in those articles.  Feel free to skip the plumbing and peak oil articles if you like.  They do go by fast and are all well written.  You seem like a big boy, and doing back ground reading will help you more fully understand what is going on and be able to explain it to your other half.  We would love to answer specifics but maybe you getting a good big picture view first would help.


nereo

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #13 on: January 28, 2015, 10:43:37 AM »
Quote
I know there are some super smart people on this forum.  I'm looking for advice on the following:
•   Feel free to critique my spending, I can take it. Keep in mind that suggestions may have to pass through the wife.
•   I am currently 32 years old and would like to retire at 47.  Is the structure of my savings plan right for this?
•   At some point should I stop contributing to the tax advantaged accounts and save in a taxable account?
•   What might my withdrawal plan look like? How can I avoid heavy fees and taxes on early withdrawals?
1) One of your biggest categories is "other" - until this is broken down further it's hard to comment much but I suspect there's a lot of fat you can trim here.
Also, as Walt mentioned your rental property isn't doing you any favors.  Either find a way of increasing the rent, refinancing the loan (4.7% is high in today's market) or sell the sucker off.  $600 for groceries in, eating out and bars  - not horrible but could be reduced if FIRE is your primary goal.  Cable + internet: it's silly/unhealthy/waste-of-money to have both.  Cut cable, stream shows and watch less TV. 
2) The structure is fine outside of the areas I mentioned above.
3) You should max out your tax-deferred accounts, which it sounds like you are already doing.  It also sounds like you are already putting 20% into after-tax savings accounts.  If you sell the condo, cut your budget and/or get a raise you'll have a bit more to put into this category.  This should give you a nice cushion to use a Roth-pipeline once you hit FI/RE
4) research Roth Pipeline and SEPP.  Both can help you substantially reduce your payments.  If you make your rental generate revenue, that's another income stream.  But ultimately we're just making educated guesses about what the tax-code will be like in 2030.

TexasStash

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #14 on: January 28, 2015, 11:00:36 AM »
Just wipe it out immediately.  You cant be FI with debt.
Whaaa??? of course you can be FI with debt.  For many of us, strategic carrying of debt is part of our FI strategy.  For example, I have over $17k in SL debt and ~$150k in mortgage debt, all at or under 3% interest, and my current plan has me FI long before the mortgage will be paid.  Simply put, I trust I can get >3% return on my investments.  OP's has a bit higher interest rate on his/her SL, but I certainly wouldn't put it into the "pay it off immediately" category.  He/she is wise to at least consider whether there's a better use for the money.

let me try to get at what I think divsnowball was saying:

The loan in question was the student loan, which is different than a mortgage. You can be FI technically with both, but your point about strategic use of debt doesn't really apply here. Student loans are a strategic use of debt until you have the job, at which point they become essentially just a liability since it no longer has any bearing on future income (though it appears the OP made good use of said liability for a pretty good job). The calculation here is pretty simple: If you are just going to have 25k in a savings account, you'd definitely be better off wiping out some of the SL debt and getting a guaranteed return on it. Sure, you could say that it should be shifted to the market or another investment, but I think paying the SL off is a solid idea.

I think the broader point I would make is that the OP should stop with the advanced strategies until the non-mortgage debt is paid off. It's clear he is not making money off the rentals at the moment, so why not knock out the debt and then worry about whether he can improve the rental picture? Got to walk before you can run on the way to FI.

nereo

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #15 on: January 28, 2015, 11:14:34 AM »
Just wipe it out immediately.  You cant be FI with debt.
Whaaa??? of course you can be FI with debt.  For many of us, strategic carrying of debt is part of our FI strategy.  For example, I have over $17k in SL debt and ~$150k in mortgage debt, all at or under 3% interest, and my current plan has me FI long before the mortgage will be paid.  Simply put, I trust I can get >3% return on my investments.  OP's has a bit higher interest rate on his/her SL, but I certainly wouldn't put it into the "pay it off immediately" category.  He/she is wise to at least consider whether there's a better use for the money.

let me try to get at what I think divsnowball was saying:

The loan in question was the student loan, which is different than a mortgage. You can be FI technically with both, but your point about strategic use of debt doesn't really apply here. Student loans are a strategic use of debt until you have the job, at which point they become essentially just a liability since it no longer has any bearing on future income (though it appears the OP made good use of said liability for a pretty good job). The calculation here is pretty simple: If you are just going to have 25k in a savings account, you'd definitely be better off wiping out some of the SL debt and getting a guaranteed return on it. Sure, you could say that it should be shifted to the market or another investment, but I think paying the SL off is a solid idea.

I think the broader point I would make is that the OP should stop with the advanced strategies until the non-mortgage debt is paid off. It's clear he is not making money off the rentals at the moment, so why not knock out the debt and then worry about whether he can improve the rental picture? Got to walk before you can run on the way to FI.
Ok - that makes a lot more sense than a blanket saying that "you can't be FI with debt".  Lots of people are FI or even have ER with a lot of debt.
I wholeheartedly agree that a savings account is a silly place for money when you are paying 4% interest on student loans, but the OP did at least have an idea of putting that money to work:
Quote
I'd really like to leverage it into another single family residence with owner occupant financing, possibly another 15 year loan to coincide with my proposed RE date.
That said, I agree with you assessment: the OP is getting ahead of himself/herself and needs to walk before running.  Rental property #1 isn't doing so hot, so I wouldn't push getting rental property #2 until that problem has been tackled. 

Thoughtful Mule

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #16 on: January 28, 2015, 11:44:19 AM »
1) One of your biggest categories is "other" - until this is broken down further it's hard to comment much but I suspect there's a lot of fat you can trim here.
Also, as Walt mentioned your rental property isn't doing you any favors.  Either find a way of increasing the rent, refinancing the loan (4.7% is high in today's market) or sell the sucker off.  $600 for groceries in, eating out and bars  - not horrible but could be reduced if FIRE is your primary goal.  Cable + internet: it's silly/unhealthy/waste-of-money to have both.  Cut cable, stream shows and watch less TV. 
2) The structure is fine outside of the areas I mentioned above.
3) You should max out your tax-deferred accounts, which it sounds like you are already doing.  It also sounds like you are already putting 20% into after-tax savings accounts.  If you sell the condo, cut your budget and/or get a raise you'll have a bit more to put into this category.  This should give you a nice cushion to use a Roth-pipeline once you hit FI/RE
4) research Roth Pipeline and SEPP.  Both can help you substantially reduce your payments.  If you make your rental generate revenue, that's another income stream.  But ultimately we're just making educated guesses about what the tax-code will be like in 2030.

1) Haha, yes the other category is all fat, but a lot of it is what makes life enjoyable.  I've got home improvement and maintenance taking up a good chunk of that, maybe 200-300/month average.  Vacations are another good chunk, around 200-300.  Gifts for other go in there.  Of course there is some frivolous spending which does little for anybody. I track it, but could tighten up some.

The cable is in my fiance's name and I cant easily convince her to give it up.  I've tried, but am not willing to turn it into a battle.  I think eventually we'll get there.

I think the rental property should get it's own thread, that way I can put out some more details.  I dont believe it's as bad as everyone is saying. Rent could come up a little.  I had people waiting on the lawn for a showing and had zero vacancy for my first turnover. I could hire a manager and break even cash-flow wise, but doing it myself, it puts money in my pocket.  The area has a great long term outlook.  At the end of its life, this home could be rehabbed for a nice boost on the retail market.

2/3/4) noted, thank you for the feedback.

waltworks

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #17 on: January 28, 2015, 11:53:14 AM »
If you want to post a thread on the rental, please do - but will you go read all the existing 50%/1% rule debate already out there first? I'll summarize for you: long term maintenance and vacancy/management expenses (if you are doing this yourself, what are you paying yourself/hour? That's a job, not an investment) generally mean that 50% of your gross goes to overhead. So you have $700 or so a month left over to pay the mortgage. Not good.

You can win on appreciation. I think, however, that people have forgotten that in general, appreciation tracks inflation. The last 15 years or so were an aberration. You might get lucky and have bought in the right place at the right time. Or you might not have.

In any case, if you want to defend the rental, please do your homework first. If you bought it without actually knowing anything about RE investing and just figured the rent was more than the mortgage... good luck to you. You will need it.

-W

divsnowball

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #18 on: January 28, 2015, 12:08:38 PM »
The overarching theme of this blog is not only making more money, but cutting down expenses.  Cut out your loans and "Other" category if you even want to be in the area of early retirement.  Early retirement requires both increasing income and aggressively cutting expenses. 

Can't comment on much of the rentals, but personally I would be debt free (and even own my own house outright) before pursuing rental property.  In a pinch (ie recession), if you lose your job and real estate tanks... youre left with 2 mortgages (that might even be underwater) and student loans.  I would call myself relatively risk averse, but Im cutting expenses and knocking out loans before I pursue more debt financed real estate

Thoughtful Mule

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #19 on: January 28, 2015, 01:04:38 PM »
If you bought it without actually knowing anything about RE investing and just figured the rent was more than the mortgage... good luck to you. You will need it.

-W
Bit of an assumption, but I agree with the statement.

nereo

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #20 on: January 28, 2015, 01:46:42 PM »
Can't comment on much of the rentals, but personally I would be debt free (and even own my own house outright) before pursuing rental property.  In a pinch (ie recession), if you lose your job and real estate tanks... youre left with 2 mortgages (that might even be underwater) and student loans.  I would call myself relatively risk averse, but Im cutting expenses and knocking out loans before I pursue more debt financed real estate
You have your method and there's nothing wrong with it.  I'd just do something different.  Let's say I have $17k in loans at a low interest rate and $17k that I could use to pay off my loans (scenario 1) or invest (scenario 2).  I'd much rather invest that money instead of paying off my loans, even if (by some magic crystal ball) I knew a recession was on the horizon.  Here's why - in scenerio 1 (pay off loans) I enter the recession with no liabilities and no assets.  If I loose my job or have an emergency I'm really screwed, and can only take on high-interest debt.  Scenerio 2: I still have a loan payment but I have maybe $13.5k left.  Even if I have an emergency and/or job loss, I still have money I can tap into at an absurdly low interest rate (in effect I'm borrowing from myself).  Plus, I'd have the option of deferring my loans because of economic hardship.  It still hurts, but much less so.  If I had no loans and no money, I have far fewer tools in my economic toolbox. 
Quote
The overarching theme of this blog is not only making more money, but cutting down expenses.  Cut out your loans and "Other" category if you even want to be in the area of early retirement.
again, I'll just say that's ONE way of doing it, and I don't entirely agree that the overarching themes of this blog are either making more money or cutting down expenses. Cutting day-to-day expenses always helps FI, but cutting out loans at the sake of investments isn't necessarily a smart thing to do.  Take MMM as an example - he's written extensively about taking on another mortgage as a rental property after ER, and how he has had MORE debt in ER than when he reached FI.

Thoughtful Mule

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #21 on: January 28, 2015, 02:32:31 PM »
Can't comment on much of the rentals, but personally I would be debt free (and even own my own house outright) before pursuing rental property.  In a pinch (ie recession), if you lose your job and real estate tanks... youre left with 2 mortgages (that might even be underwater) and student loans.  I would call myself relatively risk averse, but Im cutting expenses and knocking out loans before I pursue more debt financed real estate
You have your method and there's nothing wrong with it.  I'd just do something different.  Let's say I have $17k in loans at a low interest rate and $17k that I could use to pay off my loans (scenario 1) or invest (scenario 2).  I'd much rather invest that money instead of paying off my loans, even if (by some magic crystal ball) I knew a recession was on the horizon.  Here's why - in scenerio 1 (pay off loans) I enter the recession with no liabilities and no assets.  If I loose my job or have an emergency I'm really screwed, and can only take on high-interest debt.  Scenerio 2: I still have a loan payment but I have maybe $13.5k left.  Even if I have an emergency and/or job loss, I still have money I can tap into at an absurdly low interest rate (in effect I'm borrowing from myself).  Plus, I'd have the option of deferring my loans because of economic hardship.  It still hurts, but much less so.  If I had no loans and no money, I have far fewer tools in my economic toolbox. 
Quote
The overarching theme of this blog is not only making more money, but cutting down expenses.  Cut out your loans and "Other" category if you even want to be in the area of early retirement.
again, I'll just say that's ONE way of doing it, and I don't entirely agree that the overarching themes of this blog are either making more money or cutting down expenses. Cutting day-to-day expenses always helps FI, but cutting out loans at the sake of investments isn't necessarily a smart thing to do.  Take MMM as an example - he's written extensively about taking on another mortgage as a rental property after ER, and how he has had MORE debt in ER than when he reached FI.

There is certainly a strong appeal to being debt free.  The main word there is FREE.  However, my brain is more of an optimizer and that means the student loans are a low priority due to the above stated reasons.  I also like the idea of debt as an inflation hedge. 

nereo

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Re: Reader Case Study –Plan for ER in 15yrs at 47.
« Reply #22 on: January 28, 2015, 03:04:18 PM »
There is certainly a strong appeal to being debt free.  The main word there is FREE.  However, my brain is more of an optimizer and that means the student loans are a low priority due to the above stated reasons.  I also like the idea of debt as an inflation hedge.
My response was to divsnowball's comment, although you can take from it what you like.  Paying off your loans would be a fine use of that money.  Investing it could be another fine use.  Letting it sit in a savings account earning <1% interest is a poor use of funds.
I'd just like to re-emphasize what Walt was saying about real-estate.  It certainly can be a great investment but you need to do your homework, and there's lots of info on the real-estate & landlord section of these forums, among elsewhere.  From what you've said your current rental just has you treading water.

Also, I've never understood the euphoric feeling people talking about when they discuss finally being "debt-free".  Sure, but now you're also "money-free".  Biggest financial regret I have is being pressured by family members to pay off a SL that would have averaged <1% for the last six years. Oh well.