DINKs in a HCOL area FIRE plan - please critique/advise, thanks!

[nopaSF]

(edit - added monthly expense details - thanks @abe)

Hello Mustachains -

Recently found forum and the wealth of information here.

I wanted to get some thoughts and advice on my situation from the community.

My wife (30) and I (31) both working professionals in a very HCOL area. We have no kids (yet). I wanted to see if we could benefit from some of the wisdom on this board, specific to our longer term plans.

Here's our situation:

Annual Gross Income: $450,000

Pre-Tax Savings (401k, HSA, etc): $45,000

After tax take home: $275,000

Fixed Expense (Rent + Utilities) : $27,000

Variable (Groceries, Transportation, Insurance): $8,000

Discretionary (Travel, Restaurants, Shopping, Health): $30,000

Total  Monthly Expenses
Home / Rent   $2,100
Travel + Taxi   600
Food / Dining   700
Shopping + ATM   800
Entertainment   550
Personal Care / Health Fitness   350
Bills & Utilities   175
Auto / Transport   165
Total Expenses   $5,440






Estimated after- tax savings: $210,000
+pre-tax savings               :    45,000
Total annual savings              $255,000



Retirement Assets: $320,000
Taxable Assets: $320,000
Liabilities: $0
Net Worth: $640,000


Asset Mix:
Indexed equities: 50%
Single name small cap equities: 25%
Cash: 25%


Our goals is to FIRE in 3-4 years at age 34/35 after reaching 25x our current annual expense run-rate of $65K, which is roughly $1.6M. We're at ~$600K now so almost to the halfway point. I figure if we can save $250K annually we'll get there in about 4-5 years, if my asset mix of mostly stocks and cash returns ~4% per year. Does that sound achievable?

We squeezed our expenses down from ~$100K last year to $65K this year after moving to a new rental apartment and setting a budget for ourselves. We still plan to take at least 2-3 vacations a year, usually including 1 international trip purchased with miles.

Current plans for post FIRE; we do like the idea of the Roadtrek RV and traveling around the country. Would love to hear from others who have gone this route.


Questions:


We pay a lot in taxes - how to reduce?
Where else to invest? RE in our area is not a cash flowing market, we may look out of state.. where?
Any other ways to lower expenses below ~65K... annual rent to be close to office jobs is ~$25k, not necessary post-FIRE
Other ways we should be thinking about to generate passive income to eventually move away from full time desk jobs?
Helpful skills to learn in advance of RoadTrekking?
Where to BUY land? - Low COL areas / foreign countries where land is cheap ( Belize, Panama) - we prefer warm weather..


Thanks!




[/list]

[Scortius]

I'll take a stab at this!

I'll assume you're in SF due to your user name.

The first thing I'd note is that you need to decide if you want to retire in the Bay Area (or wherever you live now), or if you're willing to relocate to a LCOL area once you retire.  That decision will have long term ramifications on how you want to set up your final portfolio goals.

IF you want to stay, then I would say it is likely worth it to aggressively enter the RE market and buy a house.  SF and SV are going to be seeing an influx of tech workers over the next 10-20 years at least, and current zoning means that there's just not going to be any room.  Land is VERY valuable and will only remain so.  If you intend to stay for the rest of your life, get in asap.

On the other hand, if you intend to leave, then I would stay away.  You're making so much money that your horizon is quite short.  10 years or so will not be long enough to make a RE purchase worthwhile.  Rent and save!

I don't have a lot to say on taxes other than maxing your combined Traditional IRA and 401k contributions.  At your income there are probably other avenues that are worth pursuing, like charitable contributions, foundations, etc, but you should consult a professional.

As for investments, it really doesn't matter how much you have, it's just damn hard to beat passively managed index funds.  You may want to earmark portions of your portfolio for some higher risk activity because you have the flexibility, or you may actually want to diversify into more stable investments because you're already so well off.  That's a personal decision.

If you do live in SF, don't compare your expenses to those who live elsewhere.  65k can be very reasonable in the Bay Area.  Frugality is a lifestyle, not a fixed number.

As for other passive income streams, yes, real estate is a good bet.  If you want to be more hands off, you can eventually look at purchasing apartment buildings and hiring a management company (apartments generally have a higher ROI than single occupancy houses).  Or you could simply invest in REITs.  Or bonds for that matter.

As for where to buy land, that's also a personal choice, but if you're doing it for yourself, I would wait until you've had a chance to travel and visit the places you might consider.  There's no rush as you're young.  Take 10 years, travel the world.  Stay in places and live locally for 2 or 3 months.  Then, after you've sampled different countries, cultures, environments, etc, you may find there was one that you remember as 'special'.  That's when you start the process of buying foreign land.

Good luck!

[Abe]

Questions:

We pay a lot in taxes - how to reduce?
Where else to invest? RE in our area is not a cash flowing market, we may look out of state.. where?
Any other ways to lower expenses below ~65K... annual rent to be close to office jobs is ~$25k, not necessary post-FIRE
Other ways we should be thinking about to generate passive income to eventually move away from full time desk jobs?
Helpful skills to learn in advance of RoadTrekking?
Where to BUY land? - Low COL areas / foreign countries where land is cheap ( Belize, Panama) - we prefer warm weather..
Thanks!

Welcome to the forum! You're doing a good job already not blowing money on Maseratis and such. There may be some tweaks that could speed up your goals, though.

Taxes - do either of your jobs have a non-qualified deferred compensation plan? This may be useful especially if you retire in the next few years and have low expenses. Basically it's an agreement by the company to pay you some percentage of your current income starting a certain amount of years from now (ostensibly when retired, otherwise it's pointless). Then you'll get to pay way lower taxes. Here's some information on those:
https://www.fidelity.com/viewpoints/retirement/nqdc

Otherwise, make sure you're taking deductions on state income tax and charitable donations. Since you're renting, there's no mortgage interest deduction. You are unlikely, based on income, to qualify for any of the other deductions. (I've been on the hunt for more for my parents for 15 years!) At least when you retire the taxes will drop dramatically.

Real Estate - that's a complicated question. Search for posts by arebelspy for information on that, he's the expert. That being said, I'm not sure you really need to diversify if you invest in stock and/or bond index funds. You could consider REITs if you really want more real estate exposure. Keep in mind whatever money you spend on real estate will need to make more than interest from index funds to be worth it. Also, if you're going to be away for long periods, you'll need a management company that further eats into profits. With your current and planned assets I doubt you can afford to buy rental units in California sufficient to make it worth your time. There's a lot of information on this in the real estate sub-forum.

Reducing costs - not sure, you'd have to give more details on discretionary expenses and decide what's worth it to you. Look at how case studies are done and post more information.

[nopaSF]

Thanks @abe and @scortius! Very helpful information.  I guess I should have posted this in the "case studies" section!

I think we are leaning against remaining in the area long term, we do have roots here but working for another 30 years to pay off a very expensive home in the area is not that appealing to us (at least currently).

NDQC sounds intriguing I will take a look at this. Would it clue your employer in to the fact you are looking to retire early?

[Hargrove]

Your expenses could be cut by at least half or two-thirds, HCOL or not. But that's not even your big fish, because your income is so high.

You have a ton of money in cash. If you're Warren Buffet, and you treat cash as a kind of stock option for picking up the markets and shaking the money out of them, good for you, Oracle of Omaha!

If you are NOT, in fact, Warren Buffet, you should probably invest at least most of that cash so it can go to work for you.

[MattC]

Wow; you guys are definitely in a good place.  My only other thought is that real estate is probably not your best investment; imho real estate is best for lower income, handy folks who want to bootstrap their way to higher net worth.  You get something distressed/undervalued and with elbow grease it becomes more valuable and cash positive; however it never becomes truly passive income since you've always got to maintain/manage things.  Sure you can outsource all that stuff, but that outsources your profits as well.  You make so much at your current day jobs that there's really no sense in competing with millions of lower-paid-and-more-real-estate-savvy Tom Dick and Harrys to wrangle a few thousand dollars a year out of a property.  They'll eat your lunch, or at the very least force you to expend a bunch of effort to make less money than you make in your stock/mutual fund investments.  You're in an ideal position to just rent whatever real estate you need as you go through life unless you buy your home in the place you're staying for a long time.  Keep things simple.

You're at the point where it makes sense to talk to a tax pro, though.  The deferred comp could work, and there could be other strategies, but that's not my area of expertise.  Betterment (per a few of the mmm blogs) could be an option in your situation as well because of their tax benefits. 

[boston swiss]

Hi,  I thought I'd chime in (first reply I've ever made to a post) as I feel in some ways your situation was similar to mine when I was in the SF/Bay area (if that's where you are), although you are much further ahead than I was at 31/congratulations on a great achievement.  I think your spend rate is great if you are in the SF area given your income.   My spend rate was approximately the same when I was in the Bay with no kids and I'm now 41 with a NW higher than you have calculated,but my reality is that I have a few years before I could meet my definition of FIRE.    I know it seems challenging, but as you get closer to the 25x number, particularly given your age, the types of investment choices you choose will make a difference as to whether 25X is adequate as will family planning (if you intend to have kids) as your x will shift.  For instance,  if you choose real estate investments  vs. index portfolio, 25x is not meant to cover that scenario. 

As we're a family of three and  expecting another child in July, I can also say that it may be worthwhile to think about the housing you would need if you did want a family and the cost of schooling for those kids in that area (including higher education)into the x of you 25x.  Also, since you are dual income, you may need to factor in either one person staying at home or child care costs.    I'm realizing that many who have completely FIRE'd and are using RE investments as a primary source of income did not only get to a cash flow that meets their expenses,and in at least one  case far exceeds it  by thousands  of dollars per month with a significant cash reserve  to offset RE  repairs/vacancies.  If you are not going the RE  route to FIRE, I would likely look to the Physician on FIRE numbers re: FIRE,which start to get into the 33-40X range.  High?  Not in my opinion.  Probably about right. 

Also, I tend to agree with those thinking SF real estate is not a good play right now.  I was surprised to see an earlier poster say that it will keep going up.  It's already insane and people with high paying jobs cannot afford to buy in the areas they would like, can't see it going up too much further. I sold a home in the Peninsula in 2015 and it has gone up another 200k since I sold it; in my opinion the RE market  there is  on the high end of the curve.  Let's not forget the RE prices in SF circa 2010-2012 which came down a long way with much less inventory.

Hope this is helpful.  Again, just a guy looking back and seeing a similar situation to my own in 2012 or so (before kids lol!).
 

[Abe]

NDQC sounds intriguing I will take a look at this. Would it clue your employer in to the fact you are looking to retire early?

It could depending on how long you contract to have payments deferred. One possibility is figuring  out "I have x years of living expenses saved that I can access after retirement, I want to start receiving deferred payments in x+1 years." The caveats to mention is that you don't legally have that money until the deferment starts, so if the company goes bankrupt you may have to fight for your compensation due. This is similar to any pension agreement (which this kind of is). These contracts should be drawn up by a lawyer and discussed in detail to avoid those issues.

[Ocinfo]

You're pretty well set, just a question of waiting a few years regardless of what relatively small tweaks you make at this point...One option you might consider is living internationally, which could greatly reduce your tax burden if your job supports telework. This can be a nice way to pad your stash once you're almost done since you could ask your employer and if they say no then you're done working in a year anyhow but if they say yes you'll get an extra boost...


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[nopaSF]

Thanks for the reply @bostonswiss, @MattC, and @Hargrove.

@BostonSwiss - Can you expand on why using 25x for a equity index portfolio is inadequate? Does the 25x pertain mainly to RE investing?  That just seems odd to me because I would expect lower through the cycle returns from real estate (From 1890 to 1990 the appreciation in US housing was just about zero) but maybe leverage compensates for the lower return profile. So you're saying that 33x-40x is more appropriate (if conservative) for a mostly indexed equity/fixed income portfolio? Also - just curious how did having your first kid change your expenses / retirement outlook? 

@MattC - This is a great point of view. I hand't really thought about real estate investing like that before but I like where your head is at. Especially where prices are currently at it seems marginal returns from REI are likely below that of equities, especially if you figure how much blood/sweat/tears would go into the latter. Thanks!

@OCinfo - Haven't looked into international working but sounds interesting esp with the ~$100K foreign income exclusion!

[boston swiss]

Hi nopaSF,


I meant it the other way, i.e. 25x does not work for a RE investing portfolio.  I came to understand this when I included my RE equity in my NW, and then realized  25x  would not be enough. 

I 'll next go to the  first child question, as I think this ends up factoring into your question about what multiple is optimal for a conservative person (in my experience at least).  I calculated my expenses similar to the way you did...but what I did not include in  my X calculation when I was without kids was   a) the amount you would like to put aside for spending on your child annually b) the amount you would like to put aside for kids education and c) the amount of tax you must pay as your X is post tax.  Factor all of that in, and my multiple has gone up to the 30x plus range. Of course, you could just state that my original x had changed and you would be correct.

Hope this helps.  I only mention it as it's easier to course correct at the beginning of the trail as there are frictional costs to getting out of your RE investments and with the great income/spend rate, and you likely have alot of options.  Wishing you the best of luck! 

[nopaSF]

makes sense - thanks boston swiss

[nopaSF]

Thanks RandomPoster - That cash isn't earmarked for anything right now. I just like holding a bit of cash to invest in various opportunities as they arise. Agree its very tough to make #'s work from a CF perspective in the bay are rental real estate right now, but not impossible. Thanks for the link I will take a look.