Author Topic: 29yo couple looking for advice  (Read 4492 times)

APBioSpartan

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29yo couple looking for advice
« on: March 30, 2021, 09:02:23 AM »
Hello Mustachians! 

To get started, I should note that I am familiar with the financial order of operations, roth conversion ladder, etc.  I'm just hoping to get some thoughts and real-world experience from others in this group since we are young and have lots of time to make both good and bad decisions. 

A little background, my wife and I are high income earners in a MCOL (ish) area (Denver).  We're looking to make the move this year back to our home state of Michigan to buy a home and start a family.  We're hoping to buy a modest home <2x gross annual income and ideally have 2 kids.  Common questions:
  • Debt: None
  • Income: $228k base + 30-40k bonus potential (wife's income will reduce by ~20k with the move)
  • Investments: ~$320k (26k is in a brokerage.  Rest is retirement accounts)
  • Total Net Worth: ~$370k

The piece that I would like some advice/thoughts/real world experience on is asset allocation.  My brain, and the internet, tell me that I should continue to focus on maxing out tax advantaged accounts and figure out a roth conversion ladder at some point.  However, our situation is slightly unique because my wife will likely work after I leave my job and her high income will likely take away some advantages of the conversion ladder.  We will also have a high income relative to our housing choice, so we would likely be able to pay things off rather quickly (5-10 years?) if we really dial in and focus.  Anywho, my heart is telling me that I should instead focus more on risk mitigation.  This would be a much less optimal path that acknowledges that we are likely "coast-FI" with our investments/current age, and instead I could divert most of our excess funds to paying off the house that we buy and setting aside a few years of expenses in a brokerage account.  This would give us more flexibility with the mid-term end-goal being no debt, easily-available money for anything life throws at us, and coast FI with retirement accounts. 

Face punches are welcome if I should just keep listening to my brain and not my heart.  Though, I welcome experiences/thoughts/advice and hopefully there are others that will benefit as well.  Thanks in advance. 

seemsright

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Re: 29yo couple looking for advice
« Reply #1 on: March 30, 2021, 09:12:42 AM »
I am sure others will have more dialed in advice. But income that high you will have many many options. Make sure you understand the taxes, and optimize that end.

At 29 it is hard to made bad choices when it comes to investing and the like. This would be a time to try things, learn things and keep pushing ahead.

My number one tip is to figure out the big picture you are working toward and work towards it every day.

Kids can be expensive. Daycare is expensive, babies do not need as much as marketing tells us. Save as much as you can when you kids are little because preteens...damn my bank account is crying. I am glad I only have one. I am buying new shoes every other month, and she is crazy hard on clothing.   

FIRE 20/20

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Re: 29yo couple looking for advice
« Reply #2 on: March 30, 2021, 03:45:39 PM »
What is your typical annual spending?  I realize you might not be able to give an exact number because of the pending move, but a ballpark number would be helpful.

Do you expect your wife to continue to work until normal retirement age?  If not, then the Roth ladder should still work after she's finished.  I may be missing something, but I'm having a hard time seeing where you get any benefit at all from not maxing out your tax advantaged accounts even if she continues to work. 

It sounds like your other question is about whether or not you should pay down the mortgage as a risk mitigation approach.  This is one of the hottest topics around here and I think you'd get more by searching for one of those extremely long threads.  The search function on this forum sucks, but there's a sticky that describes how to use the google site search to find what you need.  However, I think what you'll find is that if you have a very high income and a relatively inexpensive house it just doesn't matter very much either way.  If you start to look at $1M homes then you'll almost certainly want to keep your money working for you in the market, but the advantages to that drop as the home value to total assets ratio drops. 

But overall I think I agree with @seemsright 's comments.  Based on the little bit you've written it seems as though you have good spending habits if your total net worth is your savings rather than an inheritance and you have a very high income.  That combination is spectacularly powerful and really overwhelms any optimizations you might adopt.  If I were you I'd work on staying on track with carefully avoiding hedonic adaptation and higher spending while also continuing to find ways to lead a good and happy life.  Basically, people with low spending and high income are likely to get a lot more life benefit from keeping stress at work low, enjoying life, and not worrying about clipping coupons and paying/not paying their mortgage early. 

I will say that having a ton of money in a brokerage account and a mortgage seems like it gives you a lot more flexibility than having no mortgage and less in your brokerage.  But for many people (me included) the feeling of not having a mortgage is amazing even if it's sub-optimal. 
« Last Edit: March 30, 2021, 03:49:12 PM by FIRE 20/20 »

Sandi_k

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Re: 29yo couple looking for advice
« Reply #3 on: March 30, 2021, 07:13:59 PM »
As someone who prioritized tax savings through my career, I can say that the conversion ladder is very painful now, in our 50's. I'm making more money than I ever expected, but our pre-tax accounts are 94% of our savings.

We're pulling off the bandaid anyway, over the next 4 years. I will have a generous pension, and the reversion to the old tax brackets in 2026 make it a reasonable choice. What really clinched the decision was the RMDs at 72, and the "singleton" tax rates, once one of us passes.

So my advice would be to do pre-tax for the employer accounts such as 401(k), but also do a Backdoor Roth for both of you each year - give up the deductible IRA. Yes, you lose some tax advantages, but you'll have a much more evened-out set of accounts from which to draw, should you retire early, and once you get to RMD territory. And there is no doubt that a backdoor Roth is superior to a taxable brokerage account.

reeshau

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Re: 29yo couple looking for advice
« Reply #4 on: March 30, 2021, 08:50:41 PM »
We're looking to make the move this year back to our home state of Michigan to buy a home and start a family.  We're hoping to buy a modest home <2x gross annual income and ideally have 2 kids.  Common questions:
  • Income: $228k base + 30-40k bonus potential (wife's income will reduce by ~20k with the move)

Just first have to say that a $450k house is quite the McMansion, almost anywhere in Michigan.  I bet you can do pretty good for a Mustachian lifestyle on 1x that income.

You are 29, with a high income.  If you have modest spending at all, you should be generating taxable investments even after maxing tax-advantaged accounts.  I am 49, and using my taxable account, plus a good cash pile, to thread the needle for the next decade, allowing headroom for Roth conversions without running afowl of the ACA.  Many people scoff at having tax diversification, but I find it quite useful.  For the most part, I fell into having it, following the investment order and hitting maximums.  But I'm glad I have it.

Ed Slott was just recently on the Afford Anything podcast talking about this; the issue with too-big trad IRA's, and what to do about it.

Laura33

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Re: 29yo couple looking for advice
« Reply #5 on: March 31, 2021, 07:11:56 AM »
First, congratulations!  You are off to a great start with that amount of savings that young.  If you can avoid lifestyle creep, you'll be ready to FIRE before you know it.  A few suggestions from someone a little further down the road:

1.  You are right to be thinking about minimizing your downside risks, but not necessarily about what you're focusing on to do so.  Do you have disability insurance?  What about life insurance, particularly when you have kids?  What is the job market like in MI where you intend to move to -- are there multiple companies where you two could get comparable jobs if the first ones don't work out?  If you build a plan around making over $200K, you are vulnerable in the short-term to losing the jobs you need to achieve that plan. (AMHIK)  What kind of EF do you plan to maintain to tide you over in the event of a job loss?

2.  I would encourage you to think not just about the different boxes to check -- paid off house, post-tax investments, etc. -- but also about the optimal time to check them.  For example:  I firmly agree that you want to go into FIRE with a paid-off house, because it lowers your monthly nut and thus gives you more flexibility in the face of temporary challenges.  But there is much less benefit to paying off the house before you FIRE; the house will appreciate the same amount regardless of whether you have 1% equity or 99% equity, and if you can't make the payments, the bank will be more than happy to foreclose in either scenario.  OTOH, the power of compounding means that the most valuable dollar you have to invest is the one you are investing today.  So the optimal path is to focus now on tax-sheltered investments, and then as you get closer to FIRE, shift as needed to getting the house paid off. 

3.  Don't worry right now about having "too much" in a tax-sheltered plan; really, if that's the worst problem you have, you're golden.  The reality is that unless you plan to work for 20-30 years, for most people tax-sheltered investments alone will not be enough to get you where you want to be when you want to be there.  So it is very, very likely that by the time you are ready to FIRE, you will already have built up a pot of taxable investments you can access.  But even if not, that is a worry for your final years before you FIRE.  Really all you need is enough to get you through the first five years while you start the Roth conversions -- and if you've maintained a solid emergency fund, that alone will get you through a good chunk of that.

4.  Your biggest risk, other than dramatic injury/illness or job loss, is lifestyle creep.  This tends to happen fairly invisibly, particularly when you add kids to the equation.  You'll need to watch out for that -- but you should also re-evaluate your priorities as your life changes. Once you have kids, you may decide it's worth working a few years longer in order to pay for college or some medical treatment they need; or you may decide that no lifestyle is worth spending more time apart from your kids and it's time to FIRE ASAP.  So maintain your humility, continue to think about the life you really want to lead as a family, and maintain your flexibility.  The good news is that a MMM-style lifestyle with low fixed expenses puts you in a great position to make those adjustments, no matter what you choose.

Good luck!

ericrugiero

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Re: 29yo couple looking for advice
« Reply #6 on: March 31, 2021, 08:31:16 AM »
The investment order thread is full of good advise.  I paid off my home but looking back I'm not sure I would do it again.  Like others above, I'd suggest building up your tax advantaged accounts along with some taxable accounts that can be used to pay off the mortgage before FIRE. 

You might check to see if you (or your wife) have access to after tax contributions in your 401K with immediate rollover to Roth.  This (Mega backdoor Roth) is a great option.   

APBioSpartan

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Re: 29yo couple looking for advice
« Reply #7 on: April 12, 2021, 06:29:07 PM »
What is your typical annual spending?  I realize you might not be able to give an exact number because of the pending move, but a ballpark number would be helpful.

We don't formally budget, so it's hard to say.  That said, we both make about the same, max our 401k's, and still live on only her salary.  So, this would likely be like a 60%+ savings rate?

APBioSpartan

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Re: 29yo couple looking for advice
« Reply #8 on: April 12, 2021, 06:31:02 PM »
We're looking to make the move this year back to our home state of Michigan to buy a home and start a family.  We're hoping to buy a modest home <2x gross annual income and ideally have 2 kids.  Common questions:
  • Income: $228k base + 30-40k bonus potential (wife's income will reduce by ~20k with the move)

Just first have to say that a $450k house is quite the McMansion, almost anywhere in Michigan.  I bet you can do pretty good for a Mustachian lifestyle on 1x that income.

Mostly agree.  We're not looking for a McMansion by any degree, it's mostly a neighborhood thing.  An entry level home in the best neighborhood would be around 400k while a decent home in a less-nice area would be 200-300k.  We're still toying around with whether we should do one or the other, but I don't think the finance side should be an issue.  More about how quickly we want to pay it off. 

APBioSpartan

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Re: 29yo couple looking for advice
« Reply #9 on: April 12, 2021, 06:45:00 PM »
First, congratulations!  You are off to a great start with that amount of savings that young.  If you can avoid lifestyle creep, you'll be ready to FIRE before you know it.  A few suggestions from someone a little further down the road:

1.  You are right to be thinking about minimizing your downside risks, but not necessarily about what you're focusing on to do so.  Do you have disability insurance?  What about life insurance, particularly when you have kids?  What is the job market like in MI where you intend to move to -- are there multiple companies where you two could get comparable jobs if the first ones don't work out?  If you build a plan around making over $200K, you are vulnerable in the short-term to losing the jobs you need to achieve that plan. (AMHIK)  What kind of EF do you plan to maintain to tide you over in the event of a job loss?

2.  I would encourage you to think not just about the different boxes to check -- paid off house, post-tax investments, etc. -- but also about the optimal time to check them.  For example:  I firmly agree that you want to go into FIRE with a paid-off house, because it lowers your monthly nut and thus gives you more flexibility in the face of temporary challenges.  But there is much less benefit to paying off the house before you FIRE; the house will appreciate the same amount regardless of whether you have 1% equity or 99% equity, and if you can't make the payments, the bank will be more than happy to foreclose in either scenario.  OTOH, the power of compounding means that the most valuable dollar you have to invest is the one you are investing today.  So the optimal path is to focus now on tax-sheltered investments, and then as you get closer to FIRE, shift as needed to getting the house paid off. 

3.  Don't worry right now about having "too much" in a tax-sheltered plan; really, if that's the worst problem you have, you're golden.  The reality is that unless you plan to work for 20-30 years, for most people tax-sheltered investments alone will not be enough to get you where you want to be when you want to be there.  So it is very, very likely that by the time you are ready to FIRE, you will already have built up a pot of taxable investments you can access.  But even if not, that is a worry for your final years before you FIRE.  Really all you need is enough to get you through the first five years while you start the Roth conversions -- and if you've maintained a solid emergency fund, that alone will get you through a good chunk of that.

4.  Your biggest risk, other than dramatic injury/illness or job loss, is lifestyle creep.  This tends to happen fairly invisibly, particularly when you add kids to the equation.  You'll need to watch out for that -- but you should also re-evaluate your priorities as your life changes. Once you have kids, you may decide it's worth working a few years longer in order to pay for college or some medical treatment they need; or you may decide that no lifestyle is worth spending more time apart from your kids and it's time to FIRE ASAP.  So maintain your humility, continue to think about the life you really want to lead as a family, and maintain your flexibility.  The good news is that a MMM-style lifestyle with low fixed expenses puts you in a great position to make those adjustments, no matter what you choose.

Good luck!

Great advice, Laura.  Really appreciate it!