Life Situation: Married couple aged 30 and 28. Married Filing Jointly. No children. Living in Boulder, Colorado.
Gross Salary/Wages: $162,720
Individual amounts of each Pre-tax deductions:
401ks: $36,000 ($18,000 each)
HSA: $6,750
Medical/Dental/Vision insurance premiums through employers: $1,292.62
Total Pre-Tax Deductions: $44,042.62
After-Tax annual savings:
Roth IRAs: $11,000 ($5,500 each)
Cash/Taxable Stocks: $26,500
Total After-Tax Savings: $37,500
Other Ordinary Income: Sporadic AirBnB income from renting out our spare bedroom and interest earned on cash savings. Rough estimate of $2,500 annually. Over the past year we’ve used this little bit of income to offset one-time expenses for setting up our recently purchased condo. In our planning I don’t count it as income and don’t count the expenses. I’ve listed it here for tax considerations only.
Qualified Dividends & Long Term Capital Gains: None
Rental Income, Actual Expenses, and Depreciation: None
Adjusted Gross Income: $121,177.38
Taxes:
Federal: $16,571.85
FICA: $11,931.71
State: $4,647.47
Total Tax: $33,151.02
Current Expenses (annual amounts):
Mortgage: $17,100 (P&I: $15,360, T&I: $1,740)
HOA Fees: $3,684
Debt Payments (auto loan): $3,468
Travel: $5,850
All other household expenses: $16,884 (groceries, gas, utilities, entertainment, shopping, etc.)
Total Expenses: $46,986
Expected ER expenses: $40,000 annually
While our current annual expenses are nearly $47,000, much of this can be reduced after FIRE. The auto-loan payments will be gone at that point. The travel expense is a luxury that we can be flexible with. Our mortgage and HOA fees can be drastically reduced by renting out our current fancypants condo (rental income would cover the full monthly mortgage and HOA payment) and moving somewhere more affordable or doing some “slow travel” in more affordable countries. Even with all these reductions, I still want to leave buffer for medical insurance/expenses, which seems like it could be a very costly expense, especially with the current uncertainty around Obamacare’s future. So I think $40,000 is a reasonable estimate.
Assets:
Old Person Money
401ks: $148,359
HSA: $12,358
Home equity: $90,000 (planning to keep this home as a long term investment)
Total: $250,717
FIRE Money
Roth IRAs: $50,495
Taxable Stocks: $25,200
Cash: $109,670 (This large number in cash is due to a recent unexpected inheritance from my wife’s father. We received $125,000. Used $25,000 to pay off student loans, and intend to use the other $100,000 to dive into real estate investing. The other $9,670 is cash we already had.)
Total: $185,365
Total Assets: $436,082
Liabilities:
Auto Loan
Current Balance: $15,000
Monthly payment: $289
Rate: 2.75% fixed
Before you face punch us, please know that this is our only car for the household and we drove our last shared car until the wheels fell off at 18 years of age. We expect this car to last us another 10+ years.
This loan was just begun a couple months ago and has 5 years of payments left. While we could pay this off, we intend to just continue making monthly payments due to the very low interest rate.
Total Liabilities: $15,000
Specific Question(s):
Up to this point we have been “casual” mustachians, striving to keep a high savings rate, but without a definite FIRE plan or timeline. We’ve gained enough momentum now that we’d like to better define our strategy. We’re looking for opinions from you fine folks on how to best proceed from here.
We’ve enjoyed putting a lot of our savings towards maxing out 401ks and HSAs to get the tax benefits, since our income puts us well into the 25% bracket. However, we've recently been thinking about shifting away from these Retirement accounts, taking the tax hit now, and instead putting our savings into something we can more easily access during FIRE years before age 60.
I'm familiar with the strategy of saving enough "old person" money in these accounts and then shifting towards taxable/roth savings for FIRE purposes. I think we are nearing this point. However, part of me also thinks why not just continue putting the money in 401ks and plan to pay the 10% penalty for early withdrawal during our FIRE years. Assuming we both have quit our day jobs, we would now be down in the 10-15% tax brackets, so at worst we are breaking even on our ultimate payment to the IRS, but have had the benefit of tax-free compounding interest up to that point. We might be able to utilize a Roth IRA ladder to ease this burden as well, but figure if we go this route it would be best to conservatively plan on having to pay the 10% penalty.
At the same time, we've been leaning towards the idea of saving cash each year to put towards real estate investing for some rental income during FIRE. We feel this could provide a more steady income during FIRE years, rather than being at the mercy of the stock market. But stocks have served us well thus far…
What do you think is our best strategy forward? Thanks for your input!