Case Study: Follow up & Health Check

[jamesbond007]

Filing Status: MFJ (37/34), 1 dependent (DD/6), Very HCOL area.
Gross Salary Per year: Me: $270,000K base, 20% bonus, $32,500 RSU per/year (Vested March from March 2022 for 4 years) | Spouse: Approximately. $13, 440
Take Home: Me: $12,644 per month (Not including bonus which equals $2250 per month assuming 50% withholding worst case) Spouse: Approx. $875 per month
Pre-Tax: Me: 401K max out + employer match ($5K) | Spouse: None offered at work.


Current Expenses Monthly:
PITI+HOA+HO Insurance: $2236 of which P+I is $1305 per month.
All Other Expenses: $2700 (Been living on this budget forever and it hardly changed. We don't spend all of it each month and it has everything that I ever spend down to the dollar.)
Savings Rate: 68.7% of Take-Home Pay


Total Monthly Expenses: $4936 ($59,232 per year)


Expected ER Expenses: Same as current assuming I must pay for my own insurance and my current mortgage is paid off.


Assets:
401K:
Approx. $255K in Vanguard Target retirement 2050 fund. (Old employer 401K)
Approx. $218K in Fidelity Large blend (New employer 401K)


HSA:
$7200 (Maxing out. of which $1200 is being contributed by employer)

Roth IRA (Via backdoor):
Approx. $43,400 each of Spouse and mine VTSAX


Taxable Assets:
Approx. $425K in VTSAX across spouse and mine.
Approx. $18.5K in Wealthfront (I didn't pay much attention to the mix. I transferred $10K 5.5 years ago and left it there)
Approx. $20.3K left in old employers RSU plan (All vested 5 years ago)
Cash: $74K (Got a new job so got a sign on bonus and cashed out old employer's vacation. I will dump this into VTSAX or superfund 529 for DD)


Immovable Properties:
House:
Approx. Market Value based on recent comps is $580K (Bought for $440K with 20% down 5 years ago)


Other:
Car 1: Maybe $7K (Paid off)
Car 2: Maybe $52K (Paid off)
Gold: Approx. $17K


Liabilities:
Mortgage: $321K remaining principal @ 2.625% 30 yr fixed (Refi'd Sep 2020)


Questions:

• I previously considered purchasing a house for $1.2M but if you have seen my other posts. I gave up on that idea as I cannot compete in the current bubble. So decided to stay put in my current condo and dump more money into VTSAX.

• I subtract about $550K (Home valuation) and $300K assumed college expenses for the kid from my net worth. The assumption here is that I need a place to live and in retirement I must pay for insurance out of pocket until I qualify for Medicare. So the current PITI I pay for my mortgage, I am assuming I would pay for insurance and hence I am keeping that expense on. Am I doing this right?

• Property taxes increase at a maximum of 2% per year where I live. How do we factor this in retirement expenses?

• Plan to set aside about 300K for DD's college expenses. Shall I put in 529? No incentive in CA. I have $74K sitting in cash right now due to job changes recently. Last time, a fellow mustachian suggested super funding a 529. Is it worth it in my case? If so, how much should I be saving for college? No clue. Is $300K too much? too less? I am thinking DD potentially going to Johns Hopkins or Stanford med school worst case. :)

• Any other advice? Am I done right now? based on 3.5% withdrawal, my calculation is saying that I can be FIRE'd by Dec 31, 2026 without assuming any growth and just principal.

• Employer offers ESPP with a 15% discount on stock price. This is a no brainer so I will be maxing out on this one.

• we plan to rent out our condo and rent a house or an apartment near better schools when DD reaches middle school age and move back into our condo when she goes to college. Is this a right approach instead of buying a house. DD is still 6, by the way. Has a long way to go.

• I plan to work till I am 50. So, I have lots of buffer time to fill the gaps (At least, 6 years if things go South between now and then) and use that extra cash to pay off my mortgage.

[reeshau]

You are definitely not done right now.  At $60k expenses, 3.5% would need $1.7M liquid.  But you have a big shovel, and have done well not to fall into lifestyle inflation.  It's good to lay out a plan now, because whatever the future is, you are going to be there in a hurry.

Regarding the house payment / insurance.  It's not a bad tradeoff as a first swag; you would be well covered.  But even unsubsidized, your house payment would be 2x a nice policy for the 3 of you.  (Of course, you did not break out the costs that remain from your current payment; maybe that's more than half?)  You can price this directly, of course, through the ACA marketplace, and find out some real numbers.

Further on that, if you just refi'd to a 30 year, last year, how are you getting that paid off by age 50?  It seems like you have been on the path of mortgage is good / rate of return arbitrage.  Have you recently changed your mind?  If so, are you looking to accelerate payments, or cash something in, in your last year?  This decision can be a big factor in the growth of your stache, and your portfolio choices, as well as requiring tax planning for any lump sum event.

Regarding college:  $300k is an astronomical number.  What result are you shooting for?  Unsubsidized Ivy League, paid for?  Top State college, but she earns her fun money? The answer depends entirely on your philosophy and your target.  Of course, you can mega fund it now, and let it grow as she ages.  There are a million ways to cut this, but for what It's worth I did $10k a year from years 0-5, so for my 6-year-old I have about what you would have now if you dropped your cash into it.  With no further funding, I am shooting for half your amount, with the expectation state school is paid for,  If my DS shoots higher, than It's either been as a family project / goal, or It's on him for the difference.  The good thing about mega funding now, is that it maximizes the time for tax-deferred growth.

[jeroly]

Regarding college:  $300k is an astronomical number.  What result are you shooting for?  Unsubsidized Ivy League, paid for?  Top State college, but she earns her fun money? The answer depends entirely on your philosophy and your target.  Of course, you can mega fund it now, and let it grow as she ages.  There are a million ways to cut this, but for what It's worth I did $10k a year from years 0-5, so for my 6-year-old I have about what you would have now if you dropped your cash into it.  With no further funding, I am shooting for half your amount, with the expectation state school is paid for,  If my DS shoots higher, than It's either been as a family project / goal, or It's on him for the difference.  The good thing about mega funding now, is that it maximizes the time for tax-deferred growth.

I disagree. $300k is not out of range for a private school, room and board, without scholarships, for four years, in ten years from now.

Consider the hack of using your HSA to save for college as it shelters assets from FAFSA consideration and is tax sheltered.  You will need to save all your healthcare related receipts from now through college to justify your account withdrawals though.

You’re in great shape financially. I’d also add in as a savings goal $300k for end of life care. At your current savings rate, you should be able to get there in another six years or so if the market goes up at historically typical rates. Thirteen more years of saving and investing should make it a slam dunk.

[jamesbond007]

You are definitely not done right now.  At $60k expenses, 3.5% would need $1.7M liquid.  But you have a big shovel, and have done well not to fall into lifestyle inflation.  It's good to lay out a plan now, because whatever the future is, you are going to be there in a hurry.

Regarding the house payment / insurance.  It's not a bad tradeoff as a first swag; you would be well covered.  But even unsubsidized, your house payment would be 2x a nice policy for the 3 of you.  (Of course, you did not break out the costs that remain from your current payment; maybe that's more than half?)  You can price this directly, of course, through the ACA marketplace, and find out some real numbers.

Further on that, if you just refi'd to a 30 year, last year, how are you getting that paid off by age 50?  It seems like you have been on the path of mortgage is good / rate of return arbitrage.  Have you recently changed your mind?  If so, are you looking to accelerate payments, or cash something in, in your last year?  This decision can be a big factor in the growth of your stache, and your portfolio choices, as well as requiring tax planning for any lump sum event.

Regarding college:  $300k is an astronomical number.  What result are you shooting for?  Unsubsidized Ivy League, paid for?  Top State college, but she earns her fun money? The answer depends entirely on your philosophy and your target.  Of course, you can mega fund it now, and let it grow as she ages.  There are a million ways to cut this, but for what It's worth I did $10k a year from years 0-5, so for my 6-year-old I have about what you would have now if you dropped your cash into it.  With no further funding, I am shooting for half your amount, with the expectation state school is paid for,  If my DS shoots higher, than It's either been as a family project / goal, or It's on him for the difference.  The good thing about mega funding now, is that it maximizes the time for tax-deferred growth.

Added more detail to the post. My P+I on the mortgage is $1305 per month. Based on the current math, I should be FIRE by the end of 2026. I would still have 6 more years of working time when I plan to pay off my mortgage with the earnings. I guess I shouldn't call FIRE until then? :)

[jamesbond007]

Regarding college:  $300k is an astronomical number.  What result are you shooting for?  Unsubsidized Ivy League, paid for?  Top State college, but she earns her fun money? The answer depends entirely on your philosophy and your target.  Of course, you can mega fund it now, and let it grow as she ages.  There are a million ways to cut this, but for what It's worth I did $10k a year from years 0-5, so for my 6-year-old I have about what you would have now if you dropped your cash into it.  With no further funding, I am shooting for half your amount, with the expectation state school is paid for,  If my DS shoots higher, than It's either been as a family project / goal, or It's on him for the difference.  The good thing about mega funding now, is that it maximizes the time for tax-deferred growth.

I disagree. $300k is not out of range for a private school, room and board, without scholarships, for four years, in ten years from now.

Consider the hack of using your HSA to save for college as it shelters assets from FAFSA consideration and is tax sheltered.  You will need to save all your healthcare related receipts from now through college to justify your account withdrawals though.

You’re in great shape financially. I’d also add in as a savings goal $300k for end of life care. At your current savings rate, you should be able to get there in another six years or so if the market goes up at historically typical rates. Thirteen more years of saving and investing should make it a slam dunk.

Thanks for the tip about end-of-life care. Particularly good point. A couple of friends of mine opted in for Universal Life Insurance for this purpose but I am not very inclined to do so as I don't see the benefit. Do you think taking it is a good idea?

[jeroly]

Regarding college:  $300k is an astronomical number.  What result are you shooting for?  Unsubsidized Ivy League, paid for?  Top State college, but she earns her fun money? The answer depends entirely on your philosophy and your target.  Of course, you can mega fund it now, and let it grow as she ages.  There are a million ways to cut this, but for what It's worth I did $10k a year from years 0-5, so for my 6-year-old I have about what you would have now if you dropped your cash into it.  With no further funding, I am shooting for half your amount, with the expectation state school is paid for,  If my DS shoots higher, than It's either been as a family project / goal, or It's on him for the difference.  The good thing about mega funding now, is that it maximizes the time for tax-deferred growth.

I disagree. $300k is not out of range for a private school, room and board, without scholarships, for four years, in ten years from now.

Consider the hack of using your HSA to save for college as it shelters assets from FAFSA consideration and is tax sheltered.  You will need to save all your healthcare related receipts from now through college to justify your account withdrawals though.

You’re in great shape financially. I’d also add in as a savings goal $300k for end of life care. At your current savings rate, you should be able to get there in another six years or so if the market goes up at historically typical rates. Thirteen more years of saving and investing should make it a slam dunk.

Thanks for the tip about end-of-life care. Particularly good point. A couple of friends of mine opted in for Universal Life Insurance for this purpose but I am not very inclined to do so as I don't see the benefit. Do you think taking it is a good idea?

I strongly recommend against non-term life policies unless you are ultra high net worth, and term life only for the cases it is merited (ps you seem to be one of those cases as your spouse would see a huge drop in income).

[jamesbond007]

Regarding college:  $300k is an astronomical number.  What result are you shooting for?  Unsubsidized Ivy League, paid for?  Top State college, but she earns her fun money? The answer depends entirely on your philosophy and your target.  Of course, you can mega fund it now, and let it grow as she ages.  There are a million ways to cut this, but for what It's worth I did $10k a year from years 0-5, so for my 6-year-old I have about what you would have now if you dropped your cash into it.  With no further funding, I am shooting for half your amount, with the expectation state school is paid for,  If my DS shoots higher, than It's either been as a family project / goal, or It's on him for the difference.  The good thing about mega funding now, is that it maximizes the time for tax-deferred growth.

I disagree. $300k is not out of range for a private school, room and board, without scholarships, for four years, in ten years from now.

Consider the hack of using your HSA to save for college as it shelters assets from FAFSA consideration and is tax sheltered.  You will need to save all your healthcare related receipts from now through college to justify your account withdrawals though.

You’re in great shape financially. I’d also add in as a savings goal $300k for end of life care. At your current savings rate, you should be able to get there in another six years or so if the market goes up at historically typical rates. Thirteen more years of saving and investing should make it a slam dunk.

Thanks for the tip about end-of-life care. Particularly good point. A couple of friends of mine opted in for Universal Life Insurance for this purpose but I am not very inclined to do so as I don't see the benefit. Do you think taking it is a good idea?

I strongly recommend against non-term life policies unless you are ultra high net worth, and term life only for the cases it is merited (ps you seem to be one of those cases as your spouse would see a huge drop in income).

Makes sense. I will look into it.

[zolotiyeruki]

Do you plan to stay in CA when you retire?  Will it be an option for you to relocate somewhere with a lower cost of living (specifically, housing and taxes)?

WRT saving for DD's college, you might set up a taxable account in her name, and gift $15k/year to it.  Then, when she's in college, she'll be taxed at her own marginal rate when withdrawing those funds, which should be lower than yours.  Maybe.  Although if she's spending $75k/year at school, and you and DW are only spending $60k, that might not be true.  If DD takes a part-time job in high school, I'd recommend setting up a Roth IRA and having her max it out.  Those contributions can be withdrawn penalty-free to help pay for college if need be, and the gains will eventually be available tax- and penalty-free for her after a few more decades of compounding.

Out of curiosity, why do you plan to work until age 50?  That's 13 years from now.  You're projecting to become FI in five years, at age 42.  Are you expecting to retire when DD leaves the nest?

If you *have* to live in a house near better schools during DD's JH/HS years, then you'll need to run the numbers through a rent-vs-buy calculator to see if they work out.  For the six years or so, yeah, the realtor fees and closing costs would make it harder to justify a purchase.

[jamesbond007]

Do you plan to stay in CA when you retire?  Will it be an option for you to relocate somewhere with a lower cost of living (specifically, housing and taxes)?

Yes & Yes. :) Sorry for a confusing answer. It's hard to predict 13 years down the line. But as of now, plan to live in CA. I may even move to Thailand or India for all I know. Not sure.

WRT saving for DD's college, you might set up a taxable account in her name, and gift $15k/year to it.  Then, when she's in college, she'll be taxed at her own marginal rate when withdrawing those funds, which should be lower than yours.  Maybe.  Although if she's spending $75k/year at school, and you and DW are only spending $60k, that might not be true.  If DD takes a part-time job in high school, I'd recommend setting up a Roth IRA and having her max it out.  Those contributions can be withdrawn penalty-free to help pay for college if need be, and the gains will eventually be available tax- and penalty-free for her after a few more decades of compounding.

Will open a Roth IRA for DD when she starts working. Are my contributions considered gift in to DD's taxable account? If so, should I pa a gift tax? My big question is is $300K enough, too less or too much? I am thinking the worst case scenario where she goes to the best med school, private and out of state. I don't know.

Out of curiosity, why do you plan to work until age 50?  That's 13 years from now.  You're projecting to become FI in five years, at age 42.  Are you expecting to retire when DD leaves the nest?

Yes, although my numbers tell me that I should be FIREd by the end of 2026, I thought I'd bored figuring out what to do. I cannot sit at home doing nothing. So I thought I will work for as long as I want knowing that my needs are taken care of. And by the time I am 50, DD leaves for college. So whatever I accumulated in the last 7 years (extra) can be used towards our travel, buffer for any market downturns, unforeseen situations etc. I plan to at least do some work to get the EITC.

If you *have* to live in a house near better schools during DD's JH/HS years, then you'll need to run the numbers through a rent-vs-buy calculator to see if they work out.  For the six years or so, yeah, the realtor fees and closing costs would make it harder to justify a purchase.

I thought about it. I plan to rent out my condo and find a comparable condo near better schools and it would be a wash. Worst case, maybe I'll spend another $200 more in rent and rental income costs etc. I didn't think it was worth purchasing a house just for that. But if the housing market goes down in the next 5 years, I might buy and sell one of the properties by the time we retire and pay off mortgage for the other one with the proceeds. One of the reasons, besides what I already mentioned, to work till 50. Just in case.