Author Topic: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?  (Read 11504 times)

terrifictim

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Hi Everyone,

Been reading MMM for a while now and figured that this is probably the next step. I've been frugal for a while (engineer with an aversion to spending) but figured there's still alot where I could do better. I've also been inspired to start biking to work more (thank you beautiful San Diego weather)!

EDIT: I'm a heavy work traveler (25-50% of the year on the road). So many of these numbers are low simply due to spending 1/2 my time in my place with the other half of my time being on the company dime (i.e. meals)

Life Situation:
IRS Filing Status: Single
State Income Tax: 6.3% (CA)
Federal Tax Bracket: 28%
Exemptions: 4
Dependents: 0
Location: San Diego, CA

Gross Salary: $106,000 or $8,860/month

Pre-Tax Deductions:
Company 401K: $1150 /month. Company adds $3200/yr
Roth 401K: $620 /month
HSA: Company doesn't offer
FSA: 600/yr
Insurance: $80 /month

Other Ordinary Income:
None

Qualified Dividents & Long Term Capital Gains:
None

Rental Income, Actual Expenses, and Depreciation:
None

Adjusted Gross Income:
$7600 /month

Taxes:
Federal Income: $1167 /month
Social Security: $544 /month
Medicare: $128 /month
CA State: $468 /month
CA SDI: $80 /month

Monthly Average Expenses:    EDIT: These are averaged over time. Took my MINT budget results for the last year.
Mortgage   $1,070
Rent   $0
HOA   $405  (Covers Water, Trash, Outdoor Gardening, and Roof/Outside Stud Maintenance). I still think it's too high but they do cover a reasonable amount of  expenses.
Property Tax   $250
Mortgage Insurance   $0
Home/Rent Insurance   $83
Beauty Shop   $0
Bicycle Maintenance   $12
Cable TV   $0
Car Insurance   $53
Car Maintenance, Registration, etc.   $47
Charitable contributions   $300
Child activities    $0
Childcare   $0
Christmas/Holidays   $10
Clothing/Shoes   $20
College "Qualified Educational Expense"   $0
Computer (paper/software/etc.)   $0
Credit card fees   $0
Dental Insurance  (if not paid pre-tax)   $0
Dentist   $0
Dining (Lunch/Dinner/Etc.)   $100
Gifts (not charitable contributions)   $0
Dry Cleaning   $0
Electricity   $45
Emergency Fund   $0
Entertainment   $15
Financial Fees   $0
Fuel/Public Transport   $50
Gas/Oil for heating   $0
Groceries   $80
Hair Care   $0
Home Alarm System   $0
Household; Maintenance   $50 (Partially Covered by HOA - I'm responsible Studs in)
Internet   $40
Landscaping/Yard work   $0 (Covered by HOA)
Life Insurance   $0
Medical (Doctor, Hospital, etc.)   $0
Medical Insurance (if not paid pre-tax)   $0
Medicine (OTC + Prescription)   $0
Miscellaneous   $50
Parking/Tolls   $0
Pets   $0
Phone (cell)   $20
Phone (landline)   $0
Recycling/Trash   $0 (Covered by HOA)
School (non-college)   $0
Sports/Recreation   $0
Subscriptions (paper/magazines/etc.)   $0
Travel/Vacation   $20
Umbrella Insurance   $0
Water/Sewer   $0 (Covered by HOA)
Wine/Beer/Tobacco   $20
Work/Professional fees   $0
Non-mortgage total   $1,670


Assets:

Townhouse valued at $360,000 (Zillow estimate)
T.Rowe Price Company Retirement Account: $107,000 (Working on transitioning away from the 2055 Retirement Plan @ 0.76% MER to lower cost plan @ 0.15% MER) (87% Stocks, 8.6% bonds, 4.4% other)
Vanguard Taxable Account: $7,000 (92% Stocks, 0% Bonds, 8% Other)
Ally Savings: $4,100 @ 1.2%
Emergency Fund: $30,000 (I know this is really really high relative to others). My job has us purchase travel with personal credit card and then reimburse us - but it's not uncommon to have $5-10k expense waiting to be reimbursed.
Total Assets: $515,000

Liabilities:
Mortgage: $206,000 remaining on a $231,200 mortgage. Been aggressively paying it off so after 2.5 years I'm about 5 years paid off. PMI is 1070 per month. EDIT: Interest Rate is 3.75%
Credit Card Debt: $0 (Always Paid In Full)
Student Loan Debt: $0 (State College with a Full Ride)
Auto Loan Debt: $0 (Used car paid in cash)

When I did my calculations for FI I used the following:
Planned Withdrawal Rate   WR   4%   
Annual Savings Invested   S   $48,552    $/yr
Annual Expenses in Retirement   E   $20,040    $/yr
Current Assets Invested   A   $114,000    $
Investment return   r_   5%   
Time to FI   t   6.25   yr
Saving rate      70.8%   

In conclusion, I currently enjoy my job but don't want to be a slave to it. Please let me know if you have any questions. I'm slowly increasing my financial literacy but still have a ways to go. (I attached my spreadsheet for reference in case anyone wants to check my inputs).
« Last Edit: October 06, 2017, 08:34:45 AM by terrifictim »

OkieM

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #1 on: October 05, 2017, 08:16:30 PM »
This is vastly more detailed than most, and usually that means things are good. You might want to look at maxing out the regular 401k, especially with how much you are paying in taxes. And using a Roth would also not be very tax efficient.

Other than that just the HOA fee looks horrifying. That is $121,500 extra you have to save to FIRE.

ixtap

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #2 on: October 05, 2017, 08:36:08 PM »
Is this a snapshot or averaged over time?

I ask, because setting aside $50/ month for home maintenance seems extremely optimistic, as does $0 for dental, but perhaps that is rolled into the FSA. Not to mention some soap for hygiene and laundry.


Laura33

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #3 on: October 06, 2017, 07:20:32 AM »
Holy shit, how do you eat on $80/mo in groceries?  That's phenomenal.  Does that include things like toothpaste and deodorant and cleaning supplies too?  Or is that part of the "household" category?  I do see the $100 in eating out, which can be improved if you are interested, but most folks who spend very little in groceries have much larger restaurant bills, so the overall picture is still good.

I am guessing that some of these categories are estimates, because there are so many round numbers.  If you do not track expenses, I'd suggest doing so, because it's easy to miss the dribs and drabs that pop up here and there.  Normally I would also suggest setting up a "sinking" fund for things like replacing appliances and cars and such, but I think your fluffy emergency fund has that well-covered.

What is your mortgage rate?  My one significant suggestion is that you will very likely do better keeping your mortgage and investing that money in the market instead, given how low current rates are.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #4 on: October 06, 2017, 08:47:16 AM »
OkieM:
Thanks for the thought. Doing it to this level of detail was definitely helpful for me to get a better sense of where I'm at.
I'm close to the maximum of 18k per year for the regular 401k (16k as of now + 4 more paychecks still to go). And yeah - I suppose a ROTH isn't buying me anything good right now since I'm hoping to get down from this 28% bracket as soon as possible.
Yeah, I don't enjoy the HOA fee. But (added above) they cover water/sewage, recycling/trash, landscaping/yardwork and some of home maintenance (roofs) that the effective HOA cost isn't as bad.

ixtap:
This is averaged over time. I took my mint budget for the past year and got the average spending amounts and used them. I will say that dental covered by insurance and that the house is small but in good condition - so maintenance up to this point has been pretty minor.

Laura33:

That's one of the advantages of being gone alot. I double checked the number against my MINT average for the past year and yeah it was at $83 /month for groceries. Related to that I buy the off brand toothpaste, deoderant, and cleaning supplies as needed. So that number is pretty low (i.e. maybe another $5 a month added to groceries).
These numbers are rounded to the nearest $10 (unless it's a single exact payment) based on my MINT averages for past year. Figured that would be close enough for a financial snapshot.
Mortage rate is 3.75% (also added above). I tend to be like Canadian Torque in this - I know that the market could likely generate a better rate but I really want that mortgage gone.

OkieM

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #5 on: October 08, 2017, 11:18:35 AM »
Itís your choice, but I spend $60/mo to my city for water, trash, sewage, and recycling. I spend less than $10/mo on my lawn since I usually get all the equipment/supplies I have needed on Craigslist. I just buy a tiny bit of weed killer for my beds from Loweís. If you are in a condo/townhouse the sq footage of your roof is probably small. An asphalt shingle roof for a 1200 sq ft roof would cost $5000-6000 and last 20 years so that is about $25/mo and that is before discounting cash flow!

So you might at least think of a different place for FIRE unless you want to work an extra year for the HOA. With HOAs you also donít have control of how they might change rules or future fees. That is all up to a board that probably doesnít have the same interests as you.

Gronnie

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #6 on: October 08, 2017, 08:21:55 PM »
I'm close to the maximum of 18k per year for the regular 401k (16k as of now + 4 more paychecks still to go). And yeah - I suppose a ROTH isn't buying me anything good right now since I'm hoping to get down from this 28% bracket as soon as possible.

Just double checking here because of the way this is worded, you know that the COMBINED limit is $18,000 right? You can't do $18k in Traditional and then more in Roth.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #7 on: October 09, 2017, 08:50:16 AM »
OkieM:
You're absolutely right - I don't think this place is my FIRE place. However it is a very close to work location that was the cheapest property I could find. Once I no longer need to be close to work - I'll be finding somewhere else.

Gronnie:
I'm doing the $18,000 in the 401K and then the $5,500 in the IRA. I was contributing to a ROTH IRA, but realizing it's better to contribute to a traditional IRA.

Raenia

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #8 on: October 09, 2017, 09:32:50 AM »
Make sure when you calculate your expected expenses in retirement, you are accounting for the fact that you currently have a lot of expenses paid by your employer.  For instance, once you're not getting meals paid by the company while travelling, your grocery spend will increase to compensate.  Same for health insurance, dental, etc.  20k/yr is possible, but pretty aggressive, so make sure you're accounting for everything and give yourself enough buffer.

Other than that, your expenses look very good.  Agree that you're better off with a trad IRA at this point, in addition to maxing your 401k.  You're in very good shape!

Kayad

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #9 on: October 09, 2017, 10:00:35 PM »
Congrats, you are crushing it both on income and expenses.  All these suggestions amount to trimming of the sails, at most:

1.  You know that your employers 401k contribution doesn't count against your max personal contribution, yes?  Something not adding up, as you say you will hit that 18k but your monthly contribution is only 1150k (x12= 13800).
2.  Agree with Laura33 that paying off that low interest, tax advantaged mortgage is sub-optimal use of the cash.  You are likely to hit fi sooner investing.  While I get that there is a psychological aspect of owning your home outright, for me that sense of stability would be pretty limited given the hefty hoa and property tax payment.
3. Property insurance seems two or three hundred too high, but maybe a California reality (?).  Might shop around and/or consider raising your deductible.

Obviously, your home is by far your biggest expense, though that really doesn't seem that bad for socal.  I guess the one "low-hanging fruit" is whether you could maintain your job and move your home base to somewhere lower cost.  But you don't need to do something that drastic to hit your goal unless you want to.

I'm also jealous of all the cc rewards you get to rack up with your work arrangement. 

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #10 on: October 10, 2017, 09:26:38 AM »
Raenia:
Good reminder on this. You're absolutely right - my grocery bill and a couple other expenses will probably multiply 1.5-2X when I'm no longer traveling. I'll probably want to increase my FI # to reflect that my expenses will go up during retirement. Otherwise thanks for the encouragement!

Kayad:
1. I'd forgotten that I had contributed more to the 401K at the beginning of the year and then had ratcheted it down. Thus I'm going to hit the 18k even though the numbers don't match. I think for 2018 I'm just going to do a consistent amount every paycheck rather than trying to do any sort of timing.
2. The more forum posts I've been reading have been slowly prodding me along your recommendation. Coming from a background where my parent's were big Dave Ramsey fans - I think I've taken the concept of no debt a little too intensely. Since I don't have a problem with sticking to a savings strategy, I'm not the ideal target for the pay off house early concept. And I agree, considering the property tax and HOA (650) are ~= to the mortgage payment (1070), the reduction in expenses is not going to be as drastic as might otherwise be. Definitely looking forward to not dealing with an HOA in the future.
3. I've done the State farm combo (auto + house) which was the best deal I found while I was buying the property. It's worth it again for me to take a fresh look - but I doubt I'll find better.
Other. Agreed, it's a reality of living in socal. It's an option I've considered - but not one that's viable with my current position. And yes, the CC rewards are a huge benefit. I've done some calcs and determined between the hotel, rental car and airline points earned it's anywhere from $2-10k a year in perks (+ the huge credit score boost it's given).

robartsd

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #11 on: October 10, 2017, 10:21:50 AM »
Assets:[/b]
Townhouse valued at $360,000 (Zillow estimate)

Liabilities:
Mortgage: $206,000 remaining on a $231,200 mortgage. Been aggressively paying it off so after 2.5 years I'm about 5 years paid off. PMI is 1070 per month. EDIT: Interest Rate is 3.75%
I'm assuming you meant payment is $1070 (PITI), not private mortgage insurance is $1070 month. Based on your value and mortgage, I'm guessing you had a large enough down payment to avoid PMI. If not, look into getting PMI removed, your current loan to value ration should support no PMI. At an interest rate of 3.75%, I would not be aggressively paying the mortgage down.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #12 on: October 11, 2017, 07:02:31 PM »
robartsd:
Correct, got my acronyms mixed up. Yes, my principal and interest is $1070, I did put the downpayment of 20% and have no PMI. And I think I'm slowly getting on board the no mortgage early club - I'm confident I can be just as dedicated with putting in those extra amounts into my Vanguard taxable account instead of the mortgage.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #13 on: November 09, 2017, 05:45:04 PM »
Update for the beginning of November:

* Hit my $18,000 401K contribution for the year. This is the 2nd year in a row I've maxed it. I think my goal for next year is to try to even out my contributions so I hit my number during the last paycheck of the year.
* Reduced the amount of cash on hand from $30k to $25k and moved $10k of it from BOA savings account earning 0.05% to Ally earning 1.20%.
* Will pay just the normal PITI for mortgage for this month, and use my excess funds to pay into Vanguard.
* Increased my Vanguard taxable account from $7k to $11k
* Created Vanguard Roth and Traditional accounts. Funded Roth to 4.0k and Traditional to 1.5k
* Bought an electric bike used off craigslist for $300 and biked 3-4 days each week of the past month. At 6 miles round trip figured I saved ~ $60 in car costs, but more importantly dropped 5 lbs!
* Made more of an effort to cook using budgetbytes. Made a couple great crockpot recipes that I will go back to. This coincided with being a very limited travel month - my grocery bill went up significantly ($80 to $200) but purchased alot of food that will last (both pantry and meats I can freeze).
* Helped SO with her '95 camry finally giving up the ghost (blown head gasket @ ~ 300k miles). Helped talk her down from getting an all new clown car and went with a gently used car (2014 camry @ 40k miles) at $13k. She had to go car loan (ugh), but got good rates from the local credit union. She also is seeing it as a big bad debt so optimistic no lifestyle creep will set in.

My next goal is to convert VTSMX to VTSAX in my taxable account. Current bal is at $6k, so hope to hit this goal to ring in the new year.

msheldon

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #14 on: November 10, 2017, 08:18:52 PM »
Does your employer 401k allow for the mega back-door Roth option? Above 18k you can contribute after tax money and then immediately (or monthly or whatever) convert it to Roth. This gives you an extra ~35k of tax advantaged savings you can use each year.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #15 on: November 13, 2017, 09:03:54 AM »
msheldon - No, nor can I contribute to an HSA. So My Investment Order has a few less rungs on it.

ritz

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #16 on: November 13, 2017, 03:19:59 PM »
Update for the beginning of November:
* Created Vanguard Roth and Traditional accounts. Funded Roth to 4.0k and Traditional to 1.5k

Assuming that this is your IRA, you make too much money to deduct traditional contributions. You should only be contributing to your Roth IRA.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #17 on: November 13, 2017, 04:32:08 PM »
ritz - correct me if I'm wrong, but the MAGI for single filing is $118,000. Since I'm below that, I should be able to contribute the whole $5,500. Since I'm at a high tax bracket, I intend to contribute the full $5,500 next year to traditional.

Lady SA

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #18 on: November 13, 2017, 06:42:52 PM »
The MAGI for single filers is actually more like $73k. I think it is around $118k for married filers.

https://www.irs.gov/retirement-plans/plan-participant-employee/2018-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work

If you can't deduct for a traditional IRA, then you should do the roth (you are possibly in the range where you make too much to qualify for a trad deduction but not enough to NOT qualify for a roth). Less-optimal tax advantaged savings is better than non-tax advantaged savings (which is what a non-deductible trad IRA would be).
« Last Edit: November 13, 2017, 06:45:05 PM by Lady SA »

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #19 on: November 13, 2017, 07:43:35 PM »
Lady SA - I learn something new every day. I hadn't realized that MAGI was also dependent on whether you had a retirement plan at work, although I guess it makes sense. Do you have a link/calculator that helps list this out? I'm planning on working on my budget soon for next year.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #20 on: January 30, 2018, 06:32:18 PM »
Hi All,

Some big updates since last I posted. I got engaged (Yay!) to the SO. I did my best to channel MMM in my engagement ring purchase but still spent more than I probably needed to ($2k). We are also working to balance the large friends and family guest list (150ish) with a desire for an affordable wedding. Our top choice is a backyard wedding reception with a mountain top wedding. Initial estimates are $12k - which is much more than MMM but not horrible for SOCal.

However, I could use some help from finances/taxes standpoint. Our plan is to get married Oct 2018 which would qualify us to file jointly for next year. So as we work on joining finances - here's my plan (based on MDM's list). (I plan on putting up a revised case study spreadsheet for our combined budget soon)

Our combined working income is going to be about $170k. We anticipate another $10k from the rental. She is a public school teacher and so can contribute to both a 403b and a 457. I have a 401k through work. We both own condos - we plan to move into one and rent out the other.

1. Do any replenishing of the emergency fund needed.
2. Fund both our IRAs (most likely Roth)
3. Pay off her auto loan ($15k). It's only at 2.69%, but this is a loan that's not doing any good.
4. Pay off enough of her mortgage to get her below 80% LTV to take off of the PMI from her payment.
5. Max all of our retirement accounts pre-tax. This should allow us to put $55,500 into retirement and reduce our tax burden significantly.
6. Pay off the minimum on both of our mortgages each month. Right now I'm firmly in the don't pay off camp (3.75% APR on both).
7. Contribute excess to taxable account.

 Sorry for the somewhat disjointed nature of this post. This year will be a slow process of joining finances and figuring out what works collectively/effectively.

reeshau

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #21 on: January 30, 2018, 07:30:00 PM »
msheldon - No, nor can I contribute to an HSA. So My Investment Order has a few less rungs on it.

Just to ask the dumb question: are you saying this because you do not have a high deductible health plan?  (If so, you lucky devil)  If it's just because your company does not offer an HSA, you can get one yourself, as long as you are in a qualifying plan.
« Last Edit: February 03, 2018, 12:06:27 PM by reeshau »

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #22 on: February 19, 2018, 11:21:21 AM »
reeshau - Correct, I do not have a high deductible health plan. So I have very low medical costs which is probably better than having the HSA.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #23 on: February 19, 2018, 11:58:31 AM »
I also have a question on real estate that I'm hoping people can help with. My fiancee had also bought her own place a few years ago. Now that we're planning into moving into one place, I'm looking for advice on what to do with the 2nd property. Our places are about 40 minutes away - she is a teacher so we are hopeful she can get move districts. My office is only 3 miles from where I live so it makes it really advantageous to make this our residential property.

Property 1. 2BR/1.5BA (1172SF) Townhouse
Market Value:   $370,000 (Zillow)
Original Purchase price:   $289,000
Original Mortgage Amount:   $231,200
Interest Rate:   3.75%
Mortgage Term:   30 years
Term remaining:   27 years, 4 months
Mortgage Remaining:   $201,175.93
Estimated Rent:   ~$2,200/month
Principal and Interest:   $1,070.72
Taxes: $3,100/yr
Insurance:   $1,060/yr
HOA costs:   $405
Deferred maintenance notes:   HOA covers all exterior. Roof just replaced via HOA. Putting aside $200/month to cover expected maintenance in future.
Other notes:   This home is in San Diego, CA. Location is a very desirable school district and most properties in this area are 750k-1.5M range. Most condos in this area are currently in the 350k-450k range.

Property 2. 2BR/2BA (936SF) Townhouse
Market Value:   $313,000 (Zillow)
Original Purchase price:   $251,000
Original Mortgage Amount:   $225,000
Interest Rate:   3.75%
Mortgage Term:   30 years
Term remaining:   28 years, 3 months
Mortgage Remaining:   $218,840.79
Estimated Rent:   ~$1,800/month
Principal and Interest & Taxes:   $1,369.80/month (includes $50 in PMI) that will be removed in 4 months once we get an updated appraisal to lower the LTV ratio.
Insurance:   $660/yr
HOA costs:   $330
Deferred maintenance notes:   5k in plumbing performed when place bought.
Other notes:   This home is in San Diego, CA. Location is close to beach.

Neither of these satisfies the 1% rule (especially with the HOA fees) so I wouldn't have bought either of them from a pure cash flow basis. Given that we will have two properties, however, which of these options would be recommended (note: see earlier posts for the non-real estate portion of my financial profile. For tl:dr, maxing out all retirement accounts and expect to have combined income of $160k once married)
1. Live in Property #1 and rent out Property # 2. This is my current thinking. In this scenario Property 2 is slightly cash flow negative(the rent covers the mortgage+taxes+HOA fees). We pay property manager + maintenance fees out of our combined income. We somewhat optimistically bank on rent increasing to put us into cash flow positive - but take advantage of the mortgage paying off every month by itself.
2. Live in Property #1 and sell Property #2. I've seen some suggestions on other case studies that would recommend this. Would nominally yield $45k after closing costs. Reason I don't like this is that having the mortgage for only two years means lots of closing costs paid relative to value of house.
3. Other strategy (Sell both and rent?)


Related to this, planning on having 1-2 kids in the 4-8 year window. This would most likely require us to move to a new property.

Gronnie

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #24 on: February 19, 2018, 05:59:00 PM »
Option two.

The previously paid closing costs are a sunk cost and shouldn't play a factor in your decision (unless you are planning on buying a different rental property instead, then you could factor in having to pay closing on the new one vs not on the already owned property).

swashbucklinstache

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #25 on: February 19, 2018, 06:09:48 PM »

<snip>

I got engaged (Yay!) to the SO.

<snip>

3. Pay off her auto loan ($15k). It's only at 2.69%, but this is a loan that's not doing any good.
6. Pay off the minimum on both of our mortgages each month. Right now I'm firmly in the don't pay off camp (3.75% APR on both).

Yay!

Can you rectify #3 and #6 for me? Once you have the car and the house and the two loans, what's the difference? Reading this, if it were me and I had neither cash flow nor cash reserve concerns and nothing else out of the ordinary coming along if I would hold off overpaying on #6 I would definitely hold off overpaying on #3 at those rates. I'd argue that loan is doing good if it is allowing you to invest 15K on margin at a < 3% rate a.k.a. cheap leverage. If I were to buy a car today I would use a loan at that rate even if I could buy it with cash...would you? What about a house?

On housing, no way would I hold a property where the money doesn't work and HOA is high. Too much risk and being a landlord is more work.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #26 on: February 20, 2018, 08:53:15 AM »
swashbucklinstache - The main difference I see between #3 and #6 is that the car loan requires higher levels of insurance, and is what I would call a "bad loan" aka it's going to a non net-worth asset. However, I agree that from a financial standpoint the loan is cheap enough that it's not mathematically optimal.

swashbucklinstache, Gronnie, and others - Some additional thoughts running through my mind that makes it seem like #2 is not such a slam dunk. Let me know if these are valid considerations or they would still keep you suggesting option #2.
  • Right now all of my tax-advantaged accounts are being filled, so I'm not sure where I would best put the profit from the sale. The obvious answer seems to be just to put it in the Vanguard brokerage account
  • Related to #1, the tax situation seems like it will be significantly worse if I sell. I'll be paying a high premium on the taxes as they will be in the 160-200K AGI range.
  • Even with the change in tax law we are planning on itemized deductions (charity donations). With the two mortgages + the charitable we will be over the 24k standard deduction.
  • Both loans are at great rates (3.75%). Keeping both rather than selling one means we can have double the cheap money we would otherwise.
  • All properties I am seeing in San Diego don't meet the 1% rule (our places are actually closer to 1% than most).
  • We have a family friend property manager who is trusted and responsible. We wouldn't have that in other areas of the country
  • We are not currently interested in getting into full-time real estate. Keeping this property allows us to be more diversified

I'm not opposed to selling the property, but I do want to make sure that it's a better decision in the long term. Our plans are to be here for the next 5-10 years at a minimum.

MrThatsDifferent

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #27 on: February 20, 2018, 12:48:51 PM »
I like option #1.  I think one main property and one investment property is pretty good diversification. The rent will almost cover the mortgage. Your fiancť can add what she was paying for the mortgage to Prop #1, speeding that up and paying it down quicker. Iíd keep both and then, when youíre ready, sell Prop #1 for a place for kids, keep Prop #2. Why? Cause in 25 years, youíll have it paid off and the kids will be out the house and you might want to use it as your beach house.

boarder42

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #28 on: February 20, 2018, 12:58:16 PM »
swashbucklinstache - The main difference I see between #3 and #6 is that the car loan requires higher levels of insurance, and is what I would call a "bad loan" aka it's going to a non net-worth asset. However, I agree that from a financial standpoint the loan is cheap enough that it's not mathematically optimal.

swashbucklinstache, Gronnie, and others - Some additional thoughts running through my mind that makes it seem like #2 is not such a slam dunk. Let me know if these are valid considerations or they would still keep you suggesting option #2.
  • Right now all of my tax-advantaged accounts are being filled, so I'm not sure where I would best put the profit from the sale. The obvious answer seems to be just to put it in the Vanguard brokerage account
  • Related to #1, the tax situation seems like it will be significantly worse if I sell. I'll be paying a high premium on the taxes as they will be in the 160-200K AGI range.
  • Even with the change in tax law we are planning on itemized deductions (charity donations). With the two mortgages + the charitable we will be over the 24k standard deduction.
  • Both loans are at great rates (3.75%). Keeping both rather than selling one means we can have double the cheap money we would otherwise.
  • All properties I am seeing in San Diego don't meet the 1% rule (our places are actually closer to 1% than most).
  • We have a family friend property manager who is trusted and responsible. We wouldn't have that in other areas of the country
  • We are not currently interested in getting into full-time real estate. Keeping this property allows us to be more diversified

I'm not opposed to selling the property, but I do want to make sure that it's a better decision in the long term. Our plans are to be here for the next 5-10 years at a minimum.

you should look into DAF's Donor Advised funds if the charitable contributions are whats pushing you over the 24k - you can better optimize your tax planning if you do so and either invest more or give more.

robartsd

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #29 on: February 20, 2018, 01:00:42 PM »
swashbucklinstache - The main difference I see between #3 and #6 is that the car loan requires higher levels of insurance, and is what I would call a "bad loan" aka it's going to a non net-worth asset. However, I agree that from a financial standpoint the loan is cheap enough that it's not mathematically optimal.
Convert the difference in the insurance premiums to an effective interest rate on the loan, then decide if the loan is worth paying off.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #30 on: February 21, 2019, 03:12:36 PM »
Hi All,

Lots of life has happened since last I posted. Now that all the dust has settled with getting married, renting out the SO property, and combining incomes and expenses, figured it was worth taking the updated budget and spreadsheet to the MMM community for insight. Anything that jumps out? Currently no kids but planning on having in next year or two but trying to stay financially responsible before we have them.

Me: 30
DW: 28

Life Situation:
IRS Filing Status: Married
Dependents: 0
Location: San Diego, CA

Gross Salary 1: $113,000 or $9,428/month
OT: Anywhere from $0-10K depending on how much I travel
Bonus: Anywhere from $0-$6k depending on how company does

Pre-Tax Deductions:
Company 401K: $1,584/month. Company adds $3200/yr
HSA: Company doesn't offer
FSA: 600/yr
Insurance: $80 /month

Gross Salary 2:  $4475/month or $53,700/yr
OT/Bonus: None

Pre-Tax Deductions:
Company 403b: $1,584/mth
Pension: $550/mth

Adjusted Gross Income:
$11,521/month

Other Ordinary Income:
None

Qualified Dividends & Long Term Capital Gains:
None

Rental Income, Actual Expenses, and Depreciation:
Rental Income: $1850/mth or $22,200/yr
Rental Expenses: $5000/yr (HOA Fees + Prop Mgmt+ $200 for misc per year). Have only had this for a few months so far and expecting this to go up.

Post-Tax Deductions:
Roth IRA (Me): $6000/yr
Roth IRA (DW): $6000/yr

Monthly Average Expenses (These are averaged over time. Took my MINT budget results for the last 6 months.)
Mortgage   $1,070
Rent   $0
HOA   $405
Property Tax   $250
Mortgage Insurance   $0
Home/Rent Insurance   $37
Beauty Shop   $0
Bicycle Maintenance   $0
Cable TV   $0
Car Insurance   $145
Car Maintenance, Registration, etc.   $33
Charitable contributions   $990
Child activities    $0
Childcare   $0
Christmas/Holidays   $25
Clothing/Shoes   $30
College "Qualified Educational Expense"   $0
Computer (paper/software/etc.)   $0
Credit card fees   $0
Dental Insurance  (if not paid pre-tax)   $0
Dentist   $0
Dining (Lunch/Dinner/Etc.)   $162
Gifts (not charitable contributions)   $25
Dry Cleaning   $0
Electricity   $40
Emergency Fund   
Entertainment   $14
Financial Fees   $0
Fuel/Public Transport   $101
Gas/Oil for heating   $20
Groceries   $256
Hair Care   $20
Home Alarm System   $0
Household; Maintenance   $50
Internet   $44
Landscaping/Yard work   $0
Life/LTD Insurance   $0
Medical (Doctor, Hospital, etc.)   $50
Medical Insurance (Enrollment Premium if ACA)   $0
Advance Premium Tax Credit (use negative)   $0
Medicine (OTC + Prescription)   $10
Miscellaneous   $250
Pets   $0
Phone (cell)   $100
Phone (landline)   $0
Recycling/Trash   $0
School (non-college)   $0
Sports/Recreation   $0
Subscriptions (paper/magazines/etc.)   $0
Travel/Vacation   $50
Umbrella Insurance   $0
Water/Sewer   $0
Wine/Beer/Tobacco   $87
Work/Professional fees   $0
Non-mortgage total   $3,194


Assets:
Primary Residence valued at $400,000 (Zillow estimate)
Rental Residence valued at $320,000 (Zillow Estimate)
401K: $142,000
403b: $12,000
Vanguard Taxable Account: $33,000 (100% VTSAX)
Roth IRA: $17,000
Cash on Hand/Emergency Fund: $38,000 (I know this is really really high relative to others). My job has us purchase travel with personal credit card and then reimburse us - but it's not uncommon to have $5-10k expense waiting to be reimbursed.
Total Assets: $980,000

Liabilities:
Mortgage: $195,320 remaining on a $231,000 mortgage. Rate is 3.75%. PITI is 1069/mth. I had been aggressively paying this off initially - now I've switched to investing extra into taxable rather than  paying off principle.
Rental Mortgage: $214,420 remaining on a $225,850 mortgage. Rate is 3.75%. PITI is 1045/mth.
Credit Card Debt: $0-$5k on a given month (Always Paid In Full)
Student Loan Debt: $0 (State College with a Full Ride)
Auto Loan 1 Debt: $0 (Used car paid in cash)
Auto Loan 2 Debt: $12,939 remaining (7 years @ 2.69 for a $15k 2014 Toyota Camry). PITI is $210/mth
Total Liabilities: $429,105

Total Net Worth: $551,000



« Last Edit: February 22, 2019, 11:42:43 AM by terrifictim »

MrThatsDifferent

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #31 on: February 21, 2019, 11:46:00 PM »
Nice update, youíve come far in two years! I think you have everything sorted. Your biggest expense is charity and thatís going to be your call. Iím of the mind that if your in accumulation phase working towards a FIRE goal, best to funnel that into investments and then when you get to FIRE donate your time, but thatís just me. You donít have an HSA, is that because neither of you have it as an option? If you have kids, forecast the increase in expenses and saving for college and how that will impact your FIRE plans. Otherwise steady as it goes.

doggyfizzle

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #32 on: February 22, 2019, 09:34:20 AM »
OP, are you still traveling a lot for work?  If so, and youíre still able to pay for your expenses with your own CC, Iíd look into opening a couple credit cards to optimize cash back from spending that can be invested.  For meals, Iíd suggest Cap1 Savor (4% on dining), Ft Knox for Gas (5% back), and a card that earns at least 3% for travel (maybe Chase Reserve).  Iím also in CA, and I have a CC from a local credit union that awards 5% cash back on gas and travel up to $6k, per year.  If youíre looking at 5-10k a month in travel expenses and can earn about 4% back on that, thatís almost $5k a year in tax free cash back that can be used to invest in either taxable or t/Roth IRA space.

robartsd

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #33 on: February 22, 2019, 09:50:01 AM »
Why aren't you maximizing tax advantaged space?

401k: 792/mo * 12 mo = 9502/yr (about half of the contribution limit).
No contribution to a plan sponsored by employer of Salary 2 (is this where the 403b with 12k balance is located?)
No Roth IRA contributions listed (6k available for each of you) - if you can max two employer sponsored tax deferred plans (401k and 403b) you should easily get your modified AGI below the limits for direct Roth contribution. You might be able to get under this limit with just maximizing contributions to just the 401k. No traditional IRA funds means you can backdoor Roth IRA if you exceed the modified AGI for direct contributions.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #34 on: February 22, 2019, 11:44:03 AM »
Why aren't you maximizing tax advantaged space?

401k: 792/mo * 12 mo = 9502/yr (about half of the contribution limit).
No contribution to a plan sponsored by employer of Salary 2 (is this where the 403b with 12k balance is located?)
No Roth IRA contributions listed (6k available for each of you) - if you can max two employer sponsored tax deferred plans (401k and 403b) you should easily get your modified AGI below the limits for direct Roth contribution. You might be able to get under this limit with just maximizing contributions to just the 401k. No traditional IRA funds means you can backdoor Roth IRA if you exceed the modified AGI for direct contributions.

Robartsd,

Oops - I am doing those things but forgot to move them over from the spreadsheet to the post. I've updated my original post to reflect those changes.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #35 on: February 22, 2019, 11:48:00 AM »
Nice update, youíve come far in two years! I think you have everything sorted. Your biggest expense is charity and thatís going to be your call. Iím of the mind that if your in accumulation phase working towards a FIRE goal, best to funnel that into investments and then when you get to FIRE donate your time, but thatís just me. You donít have an HSA, is that because neither of you have it as an option? If you have kids, forecast the increase in expenses and saving for college and how that will impact your FIRE plans. Otherwise steady as it goes.

MrThatsDifferent ,

Thanks for the encouragement! Agreed - our biggest expense after housing is charity - something that's important to both of us. I do like the thought of thinking about charity from a time rather than money standpoint. And yes - understand that kids are going to upend this budget - which is why being as diligent on this now will help us when we no longer are DINKS. Correct - neither of us have the option of an HDPD so can't do the HSA.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #36 on: August 12, 2019, 02:03:33 PM »
All,

Coming back to the MMM community for some additional brainstorming/advice.

Since last post (Feb 2019):
*DW decided to switch from full-time teaching to part time teaching (15-20 hrs/week) for the 2019-2020 school year. This has significantly improved both her mental/physical health and by proxy mine as well.
*We are going to start trying for pregnancy at the end of this year.

Our current dilemna is with regards to our primary residence. Per details in previous posts we had each bought a place in HCOL (San Diego) before we met and when we were married moved into one (mine) and rented out the other. Our primary residence is a 2BR/1.5BA 1100 SF 2-Story Townhouse. It has served me/us well up to this point. Currently, however, DW is expressing that she is unable to fully "nest" due to the combination of: us not having bought the place together so she doesn't feel like it's fully hers + concern that the layout is not well suited for raising a child + being able to host grandparents/others who would visit. Her desire would be to move into a larger house 3BR/2BA ~1750 SF in the same general area.

The question I'm trying to answer is when/if do we move into a bigger place, and if so do we sell 0, 1, or both properties?

Key details below:
Adjusted Gross Income: $12,500/month (Anticipated - mine is known, DW is waiting on final numbers, $1850/mth for rent). If we rented mine out I believe we could get $2200/month.
Retirement Contributions: 19k/yr for 401k + 2x $5500 Roth IRA.

High Level Monthly Expense: $7k with both mortgages or ~$3.5k without. Currently our surplus has been going into the taxable account.
*Auto/Home/Rental/Umbrella Insurance: $215
*Auto Loan: $243
*Gas/Fuel: $200
*Auto Service: $33
*Internet: $44
*Mobile Phone: $100
*Gas/Electric: $65
*Eating Out: $300
*Groceries: $300
*Charity: $1000
*Shopping: $200
*Home Maintenance: $150
*Mortgage (2x) + HOA (2x): $3100

Property 1 (Current Primary): $420k Zillow estimate. $190k mortgage remaining.
Property 2 (Rental): $330k Zillow estimate. $210k mortgage remaining

$200k Pre-Tax Retirement
$20k Post-Tax Retirement
$50k Taxable Account
$50k Cash on Hand

Total NW: $650k

Desired Property Cost: $600k which is ~$3k/mth mortgage with 20% down payment.

I know the plan is to buy smallest house you can tolerate - but is 1100 SF unreasonably small for raising a young kid? Current Fire projections show us being able to FIRE in 2030 - but it's not quite close enough to be able to convince her to stick it out until that point. I'm trying to balance being wise/frugal but also not being unnecessarily restrictive. Open to suggestions and comments.

Ben Kurtz

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #37 on: August 12, 2019, 07:23:43 PM »
There is a strong case to sell both when you move; but at the very least sell one. As you already know, the rental analysis is not favorable on these properties.  If you didn't own the properties and had the chance to jump into them as rental investments, would you?  On these numbers, the answer ought to be no.  So don't let inertia carry you along too far.

Past transaction costs are sunk, and you're better off just biting the bullet on selling costs, so you can come up with a down payment on your next property without having to shift even more net worth from diversified securities investments into concentrated San Diego real estate assets.

When should you move? In my experience (and the experience of many friends with kids), 1,100 square feet ought to be more than adequate until your first child is around 1 year old.  At first, children are very small and immobile and don't take up much space.  Many parents will keep the bassinet or crib in the master bedroom during the first year; at the very least, they can be parked there when the grandparents visit and take up the second bedroom.  In most countries, even highly developed European counties, 1,100 square feet is plenty even if you have 2 kids.  But let's concede that your wife is American and not particularly badass in this regard.  Still, if you start trying for kids within the next few months, moving day is probably 2 years away.

Another advantage to moving when your first kid turns 1: You won't buy the wrong house.  Meaning, by that point you and your wife will probably have developed well-informed views as to whether you will stop with a small family or aim for a larger one.  The ethos around here is not to buy more house than you need, but at the same time, it's also about overall efficiency.  Buying and selling houses every few years, when at least one member of the family is not a real estate professional, racks up a lot of transaction costs and hurts your efficiency.  So if you're sold on the idea of having a larger number of children, you might try moving straight into a 4 bedroom house, or look very carefully for that 3 bedroom house with room to grow -- a basement or attic you can easily finish into more living space, or a lot with enough size and the right zoning to accommodate an extension -- so you don't have to go through needless extra cycles of buying and selling.  Your views on the subject of family size might be more solid by the time you've survived your first.

robartsd

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #38 on: August 13, 2019, 02:33:54 PM »
So she listed 3 concerns:
  • Property was yours before you got together, so not fully hers. This is an emotional rather than rational reason, so can't really be reasoned through; but a discussion about this might be able to change the emotion.
  • Poor layout for raising a child. There might be some substance here when youngster is self mobile, but sometimes a little creative thinking can help.
  • Need space for grandparents to visit. Most of the time it is cheaper to put them up in a nearby hotel than to purchase a house that has enough space to host them. Of course everyone's emotions get in the way here too - it's somehow acceptable to expect hosting in the form of a guest bedroom but unacceptable to accept hosting in the form of a hotel room.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #39 on: August 14, 2019, 02:12:34 PM »
Ben Kurtz - thank you for the good advice. I always appreciate when you comment on other case studies and value your insight into mine.

I agree - these are not good rental investments per the 1% rule. We've gotten somewhat lucky with our appreciation up to this point - but I know banking on continued appreciation is not a good strategy. Especially with the high HOA fees for both units- it really kills their investment potential. My current thinking says to sell our current primary since that would give us ~200k which allow for a good downpayment on the next. I still somewhat like keeping the other property as a rental since the location is good (near large military base) and the rents have been going up even since we've had it.

In regards to when to move - I certainly would like to stay in our current space as long as possible. We would nominally be increasing our monthly budget by $2k + all of the supplemental lifestyle inflation that occurs along with it. In addition our current location is ideal from work standpoint (3 miles) and going to this new location would add to the commute (15-20 miles). Unfortunately SFH are even more expensive in our current town ($700-800k) which is causing us to look elsewhere.
From a non-financial viewpoint, however, I am working on making sure I understand her concerns and not dictating to her. Reading the MMM articles/threads about having the SO on board is helping me frame the discussion as less "here's how much we would lose by moving" and more "here's the better quality of life we can get by staying put for another year or two". I'm sure this will be a continuing discussion.

I do like your idea of buying the right house by waiting. Certainly the cost to go from 3-4 bedrooms can beless than the transaction cost of buying a house - waiting a couple of years and then selling and buying again. Being intentional about the space is key.

robartsd - thank you for your advice as well.

Agree on all three - these concerns are definitely driven by emotional concerns - so spreadsheets won't necessarily work. Per my comment above, reading the SO on board posts and discussion will be the way to go for us to come to a decision.
I do agree on the layout - I'm trying to identify specifics of "poor layout" and see if there's ways to address. Certainly a 2nd floor full bath and a galley kitchen are not ideal - but perhaps getting into some basic home "flow" websites can help us do some optimizing.
We also definitely have more stuff than needed - so I'm sure doing some Kondo-ing will do wonders.

I'm glad to hear that while her concerns are valid I'm not out of line for trying to make our current situation work. This won't get solved in a day - but I appreciate the feedback.