Author Topic: Can I FIRE with a Mortgage?  (Read 2258 times)

Acastus

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Can I FIRE with a Mortgage?
« on: July 19, 2017, 11:02:02 AM »
I am trying to decide if I am ready, and I am looking for advice.

A little about me:  Age 55, Spouse 54, 1 teen kid. Work is not a pleasure. I want at least a sabbatical, possibly a complete FIRE, preference now is to create a side gig level job after the sabbatical. Washington healthcare discussions are making me nauseous with uncertainty. Refinanced house 1 year ago to reduce cash flow. We plan to downsize about the time it balloons. Refi also allowed a big increase in 401k contributions.

I plan to finance a good chunk of the kid's college, starting in 2-3 years. It feels like the short term, < 5 year, 'stashe is doing double duty, but on paper it works.

$100k   Current income
    13k   Fed, state, FICA tax
    24k   401k contribution
      9k   401k match
    7.5k  HSA contribution
      2k   insurance
-----------
  $51 k  Net income, $4250/mo + $630 HSA = $4880/mo

Monthly Expenses [some are budgetary, based on Quicken tracking]

540 P&I Mortgage [owe 135k, refi to 5/1 ARM @ 2.375% 1 year ago]
690 Property tax
280 Utilities - gas, electric, cable, internet, water
  85 Cell Phone x2
  30 Media - Netflix, NY Times,
430 Car loan [owe 11k, @ 0%, 25 payments to go]
100 car insurance
150 petrol
130 life insurance
400 Medical/dental - some legacy expenses. Hope to reduce this.
600 Groceries & sundries
250 Dining
400 Vacation budget
350 Mad Money - entertainment, toys, extra dining
-------
4435 /mo.  I plan to budget $60k in retirement spending. Health insurance cost is hazy.
4035 /mo   non-medical

I have been living this budget for 6 months as a pre-FIRE trial, and it works pretty well. I had to dip into savings once to cover a big month, but I am getting back to even.
Retirement budget - Expect medical to remain about the same. Should qualify for ACA subsidies. ACA will be better insurance than my current $7150 deductible, but slightly higher premium. Expect income taxes to drop to $5k.

Assets

250k House [not counted]
2009 Saturn Aura, 2014 Toyota RAV4  [not counted]
-----------
445k Roth IRA's [150k are contributions]
745k IRA
120k 401k
  15k HSA
220k Taxable stock & bond mutuals
  30k Cash
-------
1575k total

Liabilities

135k House mortgage
  11k Car loan

Retirement plan: 
* Retire car loan. There are no savings other than piece of mind. That is worth a bit.
* Spend taxable + 401k for 4 years until 59 1/2. Then finish building Roth ladder.
* Plan to spend up to 150k on kid's college. Plan for the worst, hope for the best. They are on their own for law school, if that works out.
* Downsize or at least pay off mortgage in 4-6 years. We can probably reduce liability by at least 50k. That makes the remaining 60-70k a lot easier to kill.
* Concern - I don't have enough money over the next 4 years to FIRE, pay off mortgage, and finance college without taking a hit on IRA penalties and having to pay the full price, 15k/yr, for health insurance. I think everything works if I stretch it out a couple years.
« Last Edit: August 09, 2017, 03:10:15 PM by Acastus »

Lepetitange3

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Re: Can I FIRE with a Mortgage?
« Reply #1 on: July 19, 2017, 11:09:17 AM »
With an ARM, I'd kill the house payment.  Yes it's great now...but you're not selling yet and you don't have a crystal ball.  Also the car payment ...cmon this is MMM, no car payments.

Why life insurance?  If you're going to FIRE and you own the house and car, do you need life insurance?  Seems unnecessary.

$850 (groceries+dining) is obscenely high for 3 people.  I have 6, including a teen, we are less than half that.  Take a look at the rein in the grocery spend thread.  I will assume you're only dining out at places you really love and not for convenience.

For $400/mo vacation budget, i think you need to be looking at travel hacking.

Mad money-- is this all the rest of it?  Like any misc etc?  And you have a mad money  item when you just showed numbers that your expenditures are greater than your net?

Playing with Fire UK

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Re: Can I FIRE with a Mortgage?
« Reply #2 on: July 19, 2017, 11:49:32 AM »
Yes, you can FIRE.

Your budget of $60k has some space above your $4.4k spending (assuming this is accurate). Your $1.5M stache will support this.

Your mortgage and car payment (for shame), legacy medical costs, won't last forever, adding to the buffer. Your household costs will reduce long term when your child becomes independent.

You have considered college costs, ACA costs, and don't have other costs you expect to increase (I assume).

You have some leeway to reduce your spending if necessary (based on vacations, groceries, dining and extra dining, I hope). If this represents the minimum acceptable spending for you then maybe think again. To me, this spending looks obscene, particularly as it is above your net, but you do you.

You are open to the idea of a side gig or returning to work if necessary. More buffer.

Have you calculated the most tax efficient way of drawing from your pots and how much tax you will pay? I can't tell if taxes are included in your $60k annual budget.

If work is unpleasant, don't do it. Go, be free.

fuzzy math

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Re: Can I FIRE with a Mortgage?
« Reply #3 on: July 19, 2017, 02:05:37 PM »
I would never crap on someone's choice to finance a vehicle at 0% unless it was a clown car. The same people who say don't pay off your house, and use credit card rewards suddenly become debt adverse for vehicles.

Playing with Fire UK

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Re: Can I FIRE with a Mortgage?
« Reply #4 on: July 19, 2017, 02:23:27 PM »
You are right FM, there is a difference between buying more car than you can afford on credit and taking advantage of interest-free credit for a car you were planning to buy, at the price you can afford and would have paid without credit.

I've never encountered 0% credit on the same terms as cash, but that doesn't mean that the OP hasn't.

Lepetitange3

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Re: Can I FIRE with a Mortgage?
« Reply #5 on: July 19, 2017, 02:31:22 PM »
0% does imply buying new for a car though....

KungfuRabbit

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Re: Can I FIRE with a Mortgage?
« Reply #6 on: July 19, 2017, 02:55:15 PM »
Are you planning on downsizing?  Owing 135k is not a lot, but the $8,000+ / year property tax tells me you either have a mansion or live in a HCOL area. In my neck of the woods to get that high you'd need a million $ 7,000 aq ft mansion.  So that is my first red flag of sorts.

Second, cable tv and Netflix?  Both? 

Third, life insurance?  You are paying over $1,000 / year for life insurance - what does that get you?  You are already a millionaire that can retire, your wife and child would be fine.  If you drop dead your wife's expensss would go down (less health care for one...) so her numbers would be even better. life insurance only make sense to non mustachians that live in a constant debt cycle and would be homeless if they lost an income stream.

Technically your numbers work out for 4% withdraw rate, but trimming some expenses and buffering it with a part time gig would be preferable in my opinion.

Playing with Fire UK

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Re: Can I FIRE with a Mortgage?
« Reply #7 on: July 19, 2017, 03:07:59 PM »
0% does imply buying new for a car though....

That was my thought too. But I'm not certain. Also, the OP is fairly new and has a reasonable question. I don't feel like the initial replies crapped overly on the car loan but I wouldn't want that to be the reason that the OP didn't return.

Acastus

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Re: Can I FIRE with a Mortgage?
« Reply #8 on: July 19, 2017, 07:50:06 PM »
With an ARM, I'd kill the house payment.  Yes it's great now...but you're not selling yet and you don't have a crystal ball.  Also the car payment ...cmon this is MMM, no car payments.

Why life insurance?  If you're going to FIRE and you own the house and car, do you need life insurance?  Seems unnecessary.

$850 (groceries+dining) is obscenely high for 3 people.  I have 6, including a teen, we are less than half that.  Take a look at the rein in the grocery spend thread.  I will assume you're only dining out at places you really love and not for convenience.

For $400/mo vacation budget, i think you need to be looking at travel hacking.

Mad money-- is this all the rest of it?  Like any misc etc?  And you have a mad money  item when you just showed numbers that your expenditures are greater than your net?

Thanks all for the feedback. A few specific answers on my personal philosophy:

Mortgage - was refinanced specifically because we do not want to stay in this town. It allows money to go to savings, and I upped the 401k by 18k just this year. There are better, more interesting cities within 100 miles, but I don't want to pull my kid from High School in the middle.

Life insurance - I am within 12 years of full social security, by my spouse will only get partial if I die before starting it. It represents about $ 40k/year annuity with a COLA. I am insuring against the partial loss of the income stream. This is due to phase out after kid's college, my age 63.

Vacation - We would like to do a big vacation, like Europe, Australia, or Denali every 2-3 years plus normal state side weeks. I think 5k/year is reasonable, but I will learn more about travel hacking. I do not travel for work, so I did not think it works as well for me.

Groceries - have been climbing and we are working on that. I would be happy to get this to 450. This includes everything found at the store - food, HBAs, household supplies, pet supplies, booze. We pack lunches, and we don't buy coffee out regularly. We buy ingredients and cook them. The family is content with 1 dinner out per week, plus the occasional weekend lunch. It is a treat every time we do it.

Property Taxes - Upstate New York, from Buffalo to Albany, has insane taxes. Most towns near the cities pay 3.5-4% of house value in taxes. Sorry Texas, your taxes are low. This is a big part of savings I hope to realize when we downsize.

Car - was purchased new, 3 years ago. I have had poor luck choosing good used cars. My current method is to buy new and hang onto the car 10+ years. The amortized cost is a lot better than 3-5 year flippers, and I get a completely worry free car for 5 years, then a regular car for 5 years, then an old car until it dies.
« Last Edit: July 20, 2017, 12:00:04 PM by Acastus »

Acastus

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Re: Can I FIRE with a Mortgage?
« Reply #9 on: July 25, 2017, 11:18:10 AM »
Thanks again for the valuable critiques. I expected some face punches for my not-totally-mustachian spending, so don't feel like you are scaring me off. I am shooting for a frugal gourmet lifestyle, rather than a tightwad gazette lifestyle, and  many here seem to better at it than I am so far.

I would like to reduce expenses, and I think it will be pretty easy to squeeze $200-300 out this year. It will be a little here and there, not a single item. I will feel more comfortable with a cushion on top of minimum to achieve a SWR. Larger 1k savings are a few years off, but part of my goal. It is better to start with longer term savings as a nice bonus, rather than a need for the plan to work.

DarkandStormy

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Re: Can I FIRE with a Mortgage?
« Reply #10 on: July 25, 2017, 01:13:56 PM »
Obviously your expense will potentially skyrocket with college coming up for your kid.  That said, you've already hit your FI number using a 4% SWR.  $60K x 25 = $1.5m.  But you noted college, moving, etc. will cause your spending over the next few years to increase.  Keep in mind that your ~$4800/month budget now includes the car that will be paid off in a couple years.

Also note that you will start receiving some social security income (right?) in the not too distant future.

I could run through and face punch you on $1,800 of petrol per year, or how you're overpaying for your cell phone plan or spending too much on food but it seems trivial in your case.  You're at FI.  It sounds like you want to work through financing your kid's college (undergrad) years and then move to the RE - more of a peace of mind to make sure you can finance college + moving.  Could you cut expenses to make it work with just your stash?  Sure.  Do you want to sacrifice that lifestyle for a couple years?  It doesn't sound like it to me.
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Dragonswan

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Re: Can I FIRE with a Mortgage?
« Reply #11 on: July 25, 2017, 03:15:32 PM »
Ah, a person after my own heart.  I am also hoping for a gourmet or luxurious, if you will, retirement.  In your situation I would work for two more years.  Use that time to pay off the car and put money aside for the child's education. Also during those two years pay your medical expenses out of pocket; this allows the HSA to grow and will serve as a partial buffer to changes in the health care system when you do retire. 

Your stache would grow to ~1.76 million without you adding another dime to it (assumes a modest 6% increase each of those years). This would give you 70K a year income at 4% SWR.  Any money you actually save during those two years should go into Roth IRA (if you already have one that's aged 5 years) or taxable account.  This will help bridge the gap until you tap your taxable retirement accounts at 59 1/2 (although you can check out the thread on being able to tap those accounts earlier without penalty).  Just some food for thought.

jlcnuke

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Re: Can I FIRE with a Mortgage?
« Reply #12 on: July 25, 2017, 04:13:17 PM »
You have $1,425,000 after I take out $150k for the kid's college fund. That's a 4% withdrawal rate of $57k/year. That alone, based on your projected $60k, would be insufficient IF we ignore SS completely. If you assume you'll start getting $40k/year in SS like you mentioned, then it seems that the numbers are more than adequate, even if you discount that amount by 25% assuming SS takes a cut going forward.

Putting $1.425M for 40 years with $30k/year SS starting in 10 years, FIRECalc gives you a 95.3% success rate at a $70k/year spend rate.
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yachi

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Re: Can I FIRE with a Mortgage?
« Reply #13 on: July 27, 2017, 11:28:42 AM »
RE: Social Security & life insurance
It looks like you and your spouse are only 1 year apart in age, in that case, there is only a one-year difference between when she would be able to have full social security benefits and when you would be able to have them.   Also, a widow caring for your children under 18 (or 19) can get additional benefits as part of Social Security survivor benefits.  I'm only halfway to ER, and in my mid 30's but I was surprised to find out that I don't need to carry life insurance because of how high my Social Security survivor benefits would be.

Your widow or widower can receive:
reduced benefits as early as age 60 or full benefits at full retirement age or older.

See here:
https://www.ssa.gov/planners/survivors/onyourown2.html