Reader Case Study - First, Kill All The Lawyers

[MacBury]

OK with baby on way you will either drop down to one income or employ a nanny.

Nanny here in London costs £45k out of net income so around USD65k which I'm guessing is NYC rate.

Crazy hours won't see baby so I'd suggest taking couple years out. This will cut income in half to net 100k.

Expenses will also go up and you'll probably want more space.

You'll find your savings will drop close to zero during the first couple of years. This happened to us. If you choose private school they might stay close to zero longer.


Now retirement planning. I reverse engineer the problem. Ask how much freehold house do I want to live in?

Let's say 1,000,000 (equivalent to approx 3000k rent per mth for entire retirement)

Then ask what are my annual costs excluding housing expenses. What need to live on in retirement.

50,000 x 25 = 1,250,000

Therefore you will need net assets of 2,250,000

Paying down student loan is low hanging fruit. Then Max out tax efficient retirement plans given your high marginal tax rates.

[eudaimonia]

I made mention that OP was accredited, that in itself was to make a point. They have enough money/income to make bolder moves. This isn't a typical case study where the OP has a car loan at 6.9% and we jump in and say refi, or they have 2 credit cards with high interest vs. a car loan and which to pay off first.

True anyone with $10k can take advantage of IB's margin offer, however I would not advise it to someone without a much large asset base, and even someone with a much larger asset base (like you said accredited doesn't mean sophisticated), however the OP did say there portfolio was diversified, based on there income, the mention of diversification and the portfolio size, I am making the assumption (Ass out of you and me) that they can handle the margin account to save a shit ton of interest, ~$2200/month.

As far as a margin call, they would have to lose 73+% if they are borrowing $400k on $1.1M assuming Reg(T), but IB uses Portfolio margin so you would get better then 50% leverage based on your assets so if you have any bonds in that portfolio you would need to draw down like 80-85%... So it is extremely unlikely that a margin call would happen. Especially if the goal is rapid debt reduction and the loan balance is being reduced with the surplus income which seems to be on the high side.

It may not have come across well in the post but I like the idea quite a lot and thank you for contributing a more sophisticated approach.

Yes, it would take a very very large drawdown (the chance of which is quite infinitesimal) but I wanted the OP to be aware that there are risks associated with it and to understand those risks before moving forward with what is actually quite a brilliant bit of advice.

[Mister Fancypants]

I made mention that OP was accredited, that in itself was to make a point. They have enough money/income to make bolder moves. This isn't a typical case study where the OP has a car loan at 6.9% and we jump in and say refi, or they have 2 credit cards with high interest vs. a car loan and which to pay off first.

True anyone with $10k can take advantage of IB's margin offer, however I would not advise it to someone without a much large asset base, and even someone with a much larger asset base (like you said accredited doesn't mean sophisticated), however the OP did say there portfolio was diversified, based on there income, the mention of diversification and the portfolio size, I am making the assumption (Ass out of you and me) that they can handle the margin account to save a shit ton of interest, ~$2200/month.

As far as a margin call, they would have to lose 73+% if they are borrowing $400k on $1.1M assuming Reg(T), but IB uses Portfolio margin so you would get better then 50% leverage based on your assets so if you have any bonds in that portfolio you would need to draw down like 80-85%... So it is extremely unlikely that a margin call would happen. Especially if the goal is rapid debt reduction and the loan balance is being reduced with the surplus income which seems to be on the high side.

It may not have come across well in the post but I like the idea quite a lot and thank you for contributing a more sophisticated approach.

Yes, it would take a very very large drawdown (the chance of which is quite infinitesimal) but I wanted the OP to be aware that there are risks associated with it and to understand those risks before moving forward with what is actually quite a brilliant bit of advice.

Thanks... And as much as I would like to take credit for the briliance like it was my idea... I happen to get postcard advertisements from IB at least monthly for this strategy... I have no need peronally... But I'm there demographic...

I agree you need to understand the risks... But I also think you have to make smarter moves when you have more options available to you. Wealth begets wealth... It takes money to make money

[MacBury]

This is silly idea. We have just had huge bull market post 2008.

If we enter bear market stocks down say 25% applying leverage your 700k will lose 40%.

Be very careful with leverage in equities.

[pagoconcheques]

OP is 8 months away from having a kid, an 18-year financial commitment (or 22 if you pay for or at least subsidize college).  Given current job satisfaction levels for this couple, they will not both be practicing law in Manhattan (or in any big-city firm) for another 18-22 years and may be near their income peak right now. 

DC is a funny real estate market.  Apart from the DC area being generally counter-cyclical, as someone pointed out, it is also subject to huge real estate turnover every time there is a new administration in the White House.  The 2016 election will bring a new president along with the associated staff and trickle down; there will be thousands of cars plying local roads sporting license plates from the new president's home state.  These people will buy homes.  The ones who moved here for the current administration will probably stay, having cleverly burrowed their way into regular GS or ES jobs in the government and wanting to give some continuity to their kids who are in the local schools. 

There are several problems with an old house in DC.  DC gentrification has not spilled over into DC schools which range from marginal to downright scary.  With a child on the way, even if the OP decides to move back to the DC they love, they will end up in NoVA or suburban MD where the schools are good.  The only school advantage to DC is that your kids can pay in-state tuition at any state school in the country (as long as the family annual income is under a million dollars). 

We've considered buying in DC to retire there, but have realized it makes no sense to own unless we occupy. 

OP should assume getting rid of the old DC house is a given, but since it carries itself it might be wise to wait until early 2017 when there should be plenty of demand.  If you have a good tenant, perhaps they would consider shifting to renting with an option to buy.  Bear in mind that getting rid of a tenant who doesn't want to leave (not saying that's the case) can be very difficult in DC so there is always the possibility of taking a hit of several months rent while you go through that process. 

[dragoncar]

This is silly idea. We have just had huge bull market post 2008.

If we enter bear market stocks down say 25% applying leverage your 700k will lose 40%.

Be very careful with leverage in equities.

You're not thinking fourth dimensionally!  He wouldn't be applying additional leverage so much as restructuring debt.  The leverage has already been applied in the form of the mortgage.

[Mister Fancypants]

This is silly idea. We have just had huge bull market post 2008.

If we enter bear market stocks down say 25% applying leverage your 700k will lose 40%.

Be very careful with leverage in equities.

You're not thinking fourth dimensionally!  He wouldn't be applying additional leverage so much as restructuring debt.  The leverage has already been applied in the form of the mortgage.

I love the Doc Brown reference :)