Our situation has changed, need another look - lower income Case Study

[icemodeled]

Hi! We recently moved from Ohio to southwest Florida. We love it so far but need to revaluate our situation. We sold our rental properties in Ohio and have taken jobs in FL. We are currently part time and working to up a build a business here. It is our goal to become self employed again here. We have also considered going back into rentals or maybe a vacation rental here or purchasing a route (had one in Ohio - Snyder of Hanover and did well) We do not want to rush into anything though but those are other options to.

We made some profit off the rentals and our home in Ohio. That with our previous savings we paid cash for our home in FL. We have a large amount of cash in a checking account that we must decide what to do with, as it's not earning us anything.

We have always been quite frugal, when we were making double what we make now our spending wasn't any different. We cut our hair at home, got rid of cable 3 years ago, Rent books and movies free at the library, do not drink which saves money and do not splurge on luxuries. We like free local events, hiking, being outdoors in general and at home hobbies(painting, drawing, exercise, cooking, crafts, etc). Our biggest splurge category is dining out. We do enjoy going out with friends, family or date nights.

We're both on board with the idea of FIRE and have made some great strides but feel it won't be possible given our current income and savings. If we can get a good business going and be self employed we are content to keep working. If not, we definitely would love to retire early. I feel so far behind with retirement saving. No debt though and I just recently started learning about investing - wow a lot I never knew about and much to learn! We have no kids but would like to within a few years. Anyways, here's our current case study.

Life Situation: married filing joint, I am 29 and husband is 28. No kids but would like to have a child within the next few years by age 35. Living in southwest FL. Part time employed, working on business to build and be full time self employed again.

Income after tax: $2000 a month
Florida has no income tax, big difference from Ohio.

Other Ordinary Income: Side jobs ~$500 a month extra

Current expenses:
Internet $30
Home Ins $54
Property Taxes $150
Car ins $65 (2 cars, liability only)
Water $30
Electric $55
Phone $52
Health ins $45
Gas $130
Groceries $200
Dining out $120
Entertainment $25 (normally not used)
Household $20
Car maintenance $25
Home maint $25
Pet $150 (he is on 3 meds for epilepsy)
Personal $80 (we each get $40 in 'fun money')
Church $100
Misc $50
Total Monthly Expenses: $1406

Assets:
Home $140k
2008 escape $3000
1997 ranger $1500
Traditional IRA (me) $1700 invested with Vangaurd in VTI
Cash $40k
TOTAL $186200

Liabilities:
No mortgage, credit card or car debts

Specific Question(s):
My biggest questions are where should we focus on next. I know we need to start contributing to the IRA, we haven't in awhile. It was a 401k with an old job I rolled over. I would like to add $200-300 a month to it minimum. I plan to max it out this year actually with the cash we have on hand. It will be over $3000 balance then and will change it from VTI to VTSMX. Does this seem like a good plan?

I'm also debating if it should be a traditional or Roth. We would probably feel more willing to contribute more to a Roth knowing we can withdraw at any time if needed. Our income is fairly low and it's doubtful we will ever go into a higher tax bracket, unless we do very well with business in future. So I don't think a traditional makes as much sense for us as it would for others in high tax brackets. I was thinking to change my traditional IRA into a Roth (currently with Vangaurd). Thoughts?

What's the best plan for the $40000 in our checking account? I like to have a good safety net but I'm sure this is more then enough. Had considered moving a chunk to Capital one 360 or ally bank where it gets higher interest rate. With planning to have a child in the near future I would like some savings kept for that also. Other ideas?

My parents want us to start an annuity at some point. They did and will be getting paid from it for the rest of their lives in retirement. Is this something we should begin now? What are thoughts on annuities, specifically at our ages?

Any advice or anything that stands out to you would be great to hear! Thank you!

[Hargrove]

Having a paid-for home dramatically lowers your FI number, so you're not behind in savings except compared to the most frugal or rich people out there. I would have invested the remainder of money you paid on the house and just paid the down for the best interest rate and no PMI, but that's already done.

Gas and groceries are a little high, and the pet care is high, but that's really it. There's no smoking gun in your budget.

I would not convert a TIRA to a Roth IRA while I am working, since it would get destroyed by the taxes. You could do the small-business version if you do start a business and contribute a ton extra.

You can't convert from VTI to VTSMX as far as I know. VTI can be sold and the proceeds (after taxes, if any) can be put into VTSMX, but VTI is the ETF equivalent of VTSAX and doesn't convert. It's VTSMX that can convert freely to VTSAX over 10k, and either can convert to VTI, but not the reverse.

Health insurance is far more important than having 40k lying around when it comes to having a child. The big budget item for them is really daycare. Your dining out budget will likely get absorbed pretty quickly, as you won't be dining out as much.

What exactly would you imagine needing anything like 40k in cash for? A HELOC could cover any immediate cash needs for a tiny interest rate while the 40k grows. I would put the whole thing in VTSAX (taxable) and pay monthly to max out the IRA separately (or start a new IRA if you wanted to change the type of IRA, and then max that one out).

Annuities are a horrible idea always. This is the equivalent of overpaying an entire team of financial managers to manage your money, poorly, for you. What would you do with the money? What you're doing now - put it in index funds. What would they do? Probably the same thing, but they'd take a pile of it away first for the service, and for every year they did basically nothing else with it. I assume you don't believe they give you more money back than you give them, so since you know what VTSMX is, I'm guessing you have no need of an annuity.