Can I FIRE with a Mortgage?

[Acastus]

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.

[Lepetitange3]

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]

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]

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]

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]

0% does imply buying new for a car though....

[KungfuRabbit]

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]

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]

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.

[Acastus]

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]

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.

[Dragonswan]

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]

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.

[yachi]

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

[Larsg]

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.

Agree here, keep your 11K in an index fund or etc that will at least earn you 3% or more and do the slow payment bleed at 0% - I would not leave this money on the table.

I think you're FI, you just need to figure out the final logistics of cash flow, tax optimization, etc as others have called out.

Congrats!

[Dicey]

If you know you're not going to stay in your house, rushing to pay it off is extremely sub-optimal. Ride out the re-fi for four more years. Don't prepay in the meantime, either. Keep cranking down the expenses to see how little you can comfortably live on.

If you really want to kill the mortgage when your ARM adjusts, consider raiding the kid's college fund. They can get scholarships,  choose less expensive colleges, or a variety of other options. If said kid is expecting $150K in free college money, better discuss it with them first. You could create an incentive to spend less by offering them a portion of the savings upon matriculation, for example.

You can totally do this!

[SwordGuy]

You can get a full college education at an in state university for way, way less than $150,000.  For 99.99% of all college students, there is simply no legitimate reason to go out of state or to an expensive private university.  In NC, for example, if your kid goes to a state university within commuting distance and lives at home, they can get an undergraduate degree for less than $45,000.

If you **TRULY** have a child prodigy (as opposed to just wishfully thinking you do), it **might** be worth a different university choice.  Otherwise, you'll just be throwing money away by subsidizing your kid's 4 year tourism adventure out of state.

On a technical note, based on your description of what you did, you refinanced to INCREASE cash flow by reducing fixed monthly expenses.   Terminology matters.  Are you planning on re-locating to a LCOL area after you FIRE?   Make sure you do so at least a year before your kid starts university so they get the in-state rate.   And don't put that off until the last minute, otherwise you could get stuck with a high cost house in a bad market.  Of course, if you put $100k of that college fund into the house and leave $50k for college, they can still get a good education for free and you can pay that mortgage off a whole lot faster if you are not going to relocate.

[Acastus]

I am a proponent of choosing the school that is the best fit for the student. That is a multifaceted choice, and finding the schools that want you is just as important as you wanting the school. My wife and I went to, and met at, an elite university, and while we both came out with some debt, it was the right place for us. I would like to think we have recovered pretty well. I would like this  to be an option for my kid, assuming the school will accept. New York has several solid state schools, and Canada has lower cost good schools, and is close by. I have nothing against saving some money. The question is what is the best school for the kid. I want to plan for the worst and hope for the best. If the kid can get into Columbia or Cal Tech, I don't want to have to say no because of money. 

[Check2400]

Some thoughts that more knowledgeable persons will be able to comment on:

College:  You have 150K in Roth contributions that you can take out without tax consequences (right?).  Sounds like you have college funded there--if it weren't such a small window you could pull that and put it in a 529 for the next 4-5 years? 

Some might say now is the time to sell high, so maybe you could pull that for paying off the mortgage?  (this is bad advice, but we're spitballing here).  That money, or working a bit longer, could be used to pay off the car loan, saving 430/month plus lower car insurance.

I know most of your retirement funds are tied up in an IRA and not a 401k, but isn't a roth ladder only for taking money out prior to age 59.5?

Since you're retiring at age 55, you will be able to access your 401k money immediately per the retirement exception (provided your 401k is all in that company's plan).

Money wise you can do it-the only question is tax optimization. 

One of the other journals here put in a 1 year notice (mentally, if not in real life).  That seemed to help her trudge through 1MY syndrome by saying "today is my last November 14th at my job ever."  Is your job one that you could give advance notice but would still keep you around during that notice?

If you want my wholly off the cuff recommendation, stick through this year, since it is all holidays anyways, and then front load the full 401K contribution (check to see if match is by calendar or amount, you can get dinged by caps on matches front loading).  Then when you have that done 4-5 months in, give notice, and you're set.  During those 4-5 months, work on living off savings and investments for a feel of it, and to give you confidence. 

No matter which way you cut it, you're going to be fine unless Harvard comes calling. 

[Dicey]

If the kid can get into Columbia or Cal Tech, I don't want to have to say no because of money.

If the kid is so good that one of them comes calling, they'll also bring their wallets.

[Acastus]

College:  You have 150K in Roth contributions that you can take out without tax consequences (right?).  Sounds like you have college funded there--if it weren't such a small window you could pull that and put it in a 529 for the next 4-5 years? 

<snip>

I know most of your retirement funds are tied up in an IRA and not a 401k, but isn't a roth ladder only for taking money out prior to age 59.5?

Since you're retiring at age 55, you will be able to access your 401k money immediately per the retirement exception (provided your 401k is all in that company's plan).

Money wise you can do it-the only question is tax optimization. 

One of the other journals here put in a 1 year notice (mentally, if not in real life).  That seemed to help her trudge through 1MY syndrome by saying "today is my last November 14th at my job ever."  Is your job one that you could give advance notice but would still keep you around during that notice?

If you want my wholly off the cuff recommendation, stick through this year, since it is all holidays anyways, and then front load the full 401K contribution (check to see if match is by calendar or amount, you can get dinged by caps on matches front loading).  Then when you have that done 4-5 months in, give notice, and you're set.  During those 4-5 months, work on living off savings and investments for a feel of it, and to give you confidence. 

No matter which way you cut it, you're going to be fine unless Harvard comes calling.

There are a couple other uses for the Roth ladder that I see:
1. Tax flexibility - Use your tax situation to convert as much IRA to Roth as makes sense every year. Spend matured Roth money as your expenses dictate. This decouples taxes from spending somewhat. Once you no longer face the penalty, I agree this may be more work than it is worth. You can just switch to pay as you go from the IRA.
2. Convert as much IRA to Roth to reduce RMD's at age 70 1/2. Assuming you have excess money in there now.

Already earmarked the Roth money for college if needed. Plan to spend 401k for expenses immediately.  So check and check. I have been living my retirement budget for all of 2017, and it is going relatively well. Actual spending is projected at 57k unless something happens in December. That does not include taxes. I project them to be 3k fed + 2k state, so I may be slightly over the 60k. I have another 100k since my initial post, so that should cover it.

[marty998]

I'm not entirely sure a 4% WR estimate is appropriate for their circumstances, given they are already at age 55....

If the OP comes from a line of long-life genes then yes they may need to do a bit more planning, but if you've both got less than 30 years to go potentially a 5% WR is more appropriate to base all calcs on.