Reader Case Study: New job, FI checkpoint and a new home?

[jamesbond007]

Filing Status: MFJ (37/34), 1 dependent (DD/7), Very HCOL area.
Gross Salary Per year: Me: $270,000K base, 20% bonus, $32,500 RSU (From March). Until now it was around $240K total | Spouse: Approximately. $15,000
Pre-Tax: Me: 401K max out + employer match ($10K until now but $5K from March) | Spouse: None offered at work.


Current Expenses Monthly:
PITI+HOA+HO Insurance: $2236
All Other Expenses: $2533 (Been living on this budget forever and it hardly changed. We don't spend all of it each month)


Total Monthly Expenses: $4769 ($57,228 per year)


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


Assets:
401K:
Approx. $250K in Vanguard Target retirement 2050 fund. (Old employer 401K)
Approx. $205K in Fidelity Large blend (New employer 401K)


Roth IRA (Via backdoor):
Approx. $40K each of Spouse and mine VTSAX


Taxable Assets:
Approx. $425K in VTSAX across spouse and mine.
Approx. $18K in Wealthfront (I didn't pay much attention to the mix. I transferred $10K 5.5 years ago and left it there)
Approx. $19K left in old employers RSU plan (All vested 5 years ago)
Cash: $34K


Immovable Properties:
House:
Approx. Market Value based on recent comps is $555K (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: $322K remaining principal @ 2.625% 30 yr fixed (Refi'd Sep 2020)


Questions:

• Planning to purchase a new house as we are pushing the limits in the current house, in terms of space and schools. Max house budget $1.2M. Will sell the current house. Will liquidate some investments for downpament and re-invest the proceeds from the sale to replenish and pay taxes. Shall we do it?  I realize there will be a huge increase in savings due to my new job. We are not thinking about buying the house because of the new job. It has been in my head for a good 2 years. We've put it off but each day we feel tight in our current. So it must be a real need?
• How are we doing, in general?
• Plan to set aside about 300K for DD's college expenses. Shall I put in 529? No incentive in CA.
• New employer offers mega backdoor Roth. Shall I do it? Part of me says yes but I have to look into my monthly cashflow. I will look at the first 2 paychecks to determine.
• Any other advice?

[chagan]

Mega backdoor Roth is not a common offering, I would seriously suggest grabbing that opportunity with both hands. You might have to make some adjustments towards your monthly cashflow but the bkdoor is worth it. Your monthly expenses are very reasonable, assuming you have taken everything into account.

[jamesbond007]

Mega backdoor Roth is not a common offering, I would seriously suggest grabbing that opportunity with both hands. You might have to make some adjustments towards your monthly cashflow but the bkdoor is worth it. Your monthly expenses are very reasonable, assuming you have taken everything into account.

Good to know. Yes my monthly expenses include everything I usually spend, and it has some built in buffer too. We don't spend all of it every month. I usually have about $200 or so left each month.

[zolotiyeruki]

Here's my first question:  do you see yourself staying in the same HCOL area when you retire?  You currently have about $1MM saved up.  Hypothetically, you could quit right now, take your $225k equity and buy a house outright in a LCOL area, and your remaining $30k/year expenses would be a 3% SWR.  If you're planning to stay in the area, then yeah, you'll need to work a few more years.  Liquidating some of your investments, and then replenishing them, is a valid approach, as long as you resist the urge to spend the money first :)

Is there anything you could do with your current residence to make it feel less cramped?  You can do a lot of renovations/additions for the additional $600k you're considering spending on a new house.  You mention schools as also being an issue.  Could you buy a smaller/cheaper house in your desired area, and renovate it to better meet your needs?

$300K for college?  Holy smokes!  On the subject of 529's, the tax benefits are on both ends--normally deductible when you contribute, and tax-free when you spend it on education.  And the federal tax benefits would still apply, right?  It'd be a pity if DD went somewhere cheaper, didn't spend all the money, and you ended up paying penalties.

Mega backdoor Roth?  Yes.  If you're gonna be paying taxes on that income anyway, you might as well take full advantage of the mega backdoor Roth.

Your budget is pretty under control, and without more specifics there's not much to nitpick.

[jamesbond007]

Staying the HCOL area? Yes. All my family and friend circle are here. I even tried moving to a slightly LCOL area for a year and am back to this HCOL area.


My idea is to replenish my investment account as soon as I sell my current house, which is a condo. Based on the current market value I'd be getting about 200K in cash (Including profit which I don't have to pay taxes on) which approximately the amount that I am planning to put down as down payment (240K). So net, after paying taxes on my withdrawals, I'd replenishing about 180K back into my investments.


Anything I could do to my current? Not much really. It is a condo. Those townhome style condos. Not much I could do.


$300K for college: I know this is a stretch and I am thinking worst case scenarios. I live in CA where we get no tax benefit by contributing to 529s so I've not done it. I would like save it up. If the kid really needs it and is brilliant, then I will come to rescue. If not, we will have it for travel as this would be bonus savings :)


My budget has been like this for a very long time and I have all my needs met and then some. I don't see it increasing anytime soon, except for the new mortgage which would be offset by my increase in pay. I understand that, I could keep my current home and retire even faster but I am only 37. I want to work at least until I am 50 as of my current thinking so I am not really in a rush technically speaking. I will be FI much before that but I will reconsider work when I am FI.

[zolotiyeruki]

Alright, so it boils down to this: You have enough saved up to cover all your living expenses besides a house.  You'll take on approximately $1MM of debt for the mortgage, which works out to $4,200/mo (assuming 3% interest and a 30 year loan).  Your current investments will grow over the next 13 years, and will probably hit $2.5MM by the time you hit 50.  At that point, you'll owe $675k, and your investments will still be enough to cover both your living expenses and the mortgage.

Is there anything other than family and friends that keeps you in that location?  13 years is a long time to work in order to stay closer to family.  I'm not saying you're wrong, it just sounds like a higher price than I'd be willing to pay.

[jamesbond007]

Is there anything other than family and friends that keeps you in that location?

It is mostly family and friends. We are not the type of people who make friends wherever we go so this is a little important. Even for the Kid all her cousins are here and same age group. Being a single kid, they are her family. Plus the weather is nice :) I guess there are a lot of places in the US where the weather is nice. We've considered Seattle metro area once and it is still in consideration but we cannot make up our minds.

Our main priorities in order are:
1. Good schools through high school
2. Family & Friends
3. Weather
4. Outdoor travel (Hiking/Biking), national parks, nature or at least within an hour or 2 driving distance.
5. Local cultural diversity
6. Preferably not conservative (We are not and we don't mind but I don't want to live in a far-right community)

[Sandi_k]

1) I would not lock up $300k in a 529, especially since CA gives you no tax advantage.

2) I would take $75k from the sale of your condo, and "superfund" a 529; that's considered a 5 year contribution all at once. That would then be invested and have time for growth.

3) Anything in excess of your regular retirement contributions, and the spousal IRA, should go in a brokerage account, which you can draw on for college.

4) Or you can pay extra on the new house's mortgage. Equity is not counted in Expected Family Contribution calcs for college. Realistically, you will have too high an income, and too many assets to get anything other than merit aid for your kid's college.

[jamesbond007]

1) I would not lock up $300k in a 529, especially since CA gives you no tax advantage.

2) I would take $75k from the sale of your condo, and "superfund" a 529; that's considered a 5 year contribution all at once. That would then be invested and have time for growth.

3) Anything in excess of your regular retirement contributions, and the spousal IRA, should go in a brokerage account, which you can draw on for college.

4) Or you can pay extra on the new house's mortgage. Equity is not counted in Expected Family Contribution calcs for college. Realistically, you will have too high an income, and too many assets to get anything other than merit aid for your kid's college.

Oh I did not about super funding 529. I will look into it.

[Sandi_k]

1) I would not lock up $300k in a 529, especially since CA gives you no tax advantage.

2) I would take $75k from the sale of your condo, and "superfund" a 529; that's considered a 5 year contribution all at once. That would then be invested and have time for growth.

3) Anything in excess of your regular retirement contributions, and the spousal IRA, should go in a brokerage account, which you can draw on for college.

4) Or you can pay extra on the new house's mortgage. Equity is not counted in Expected Family Contribution calcs for college. Realistically, you will have too high an income, and too many assets to get anything other than merit aid for your kid's college.

Oh I did not about super funding 529. I will look into it.

https://advisor.my529.org/fall-2020/supercharge-a-529-college-account-by-superfunding-it/

[lutorm]

I assume this new job was a huge step up in income? With that level of income and expenses it seems you should have accumulated way more in savings, esp taxable, in just a few years?

[jamesbond007]

I assume this new job was a huge step up in income? With that level of income and expenses it seems you should have accumulated way more in savings, esp taxable, in just a few years?

This new income will be in effect from next week. The last 5 years it was 60% less.

[lutorm]

This new income will be in effect from next week. The last 5 years it was 60% less.

That's huge. Congrats!

[jeroly]

I'm wondering if there's some middle ground between your current $550k home and a $1.2mm home?
I certainly understand the allure of a nice big fancy house but it seems like more than your savings and income can comfortably sustain.
 
I also really question your "pushing the limits in the current house, in terms of space and schools" statement.  You have ONE KID WHO IS SEVEN.  Unless you are in a studio or very small one bedroom apartment, you have enough space.  (As I said above, I understand the allure of big space, but that's a want not a need and with hedonic adaptation it could quickly also feel like not enough space)  It's not like you have three kids in a one bedroom apartment (which my friend in SF, a high-earning lawyer, is managing to do).  It's not like you're living in a tiny house either, which a good number of families somehow manage to do.

As far as the schools issue goes - well this statement sets up all sorts of red flags in my brain, so examine those motivations closely and ask yourself if it's really true that the local public school is not able to educate your seven year old effectively through fifth or sixth grade at least.