Author Topic: How Having Children Impacts FIRE Goals / How to Proceed  (Read 6461 times)

supernova2

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How Having Children Impacts FIRE Goals / How to Proceed
« on: February 23, 2015, 03:25:39 AM »
Hello fellow Mustachians,

I am hoping to receive some feedback on my financial situation, especially in light of some very recent additions to our family (twin children).  First, I'll give a background on our income and assets.   

INCOME: Between my wife and I our current combined salaries amount to approximately $140,000.  I also own/manage some rental properties in a nearby college town and net approximately $20,000 in additional profit a year via that means (very conservative estimate).  I also estimate that we probably receive around $23,000 per year in dividend/capital gain distributions from holdings in our taxable accounts at this point.

Below is a recent breakdown of our current assets:

Liquid Assets:
Taxable Accounts - $713,000 (combination of Vanguard and other brokerage accounts)
Roth Accounts - $239,000
Traditional 401k - $68,000
Cash - $48,000 (funneling into taxable accounts/Roth IRAs weekly/monthly)
Liquid Net Worth - $1,068,000

Real Estate Assets:
Residence - $215,000 (No debt)
Rental Property 1 - $120,000 (No debt)
Rental Property 2 - $144,000 (Owe $69,000 / 3% mortgage note)
Rental Property 3 - $70,000 (Owe $40,000 / 2.75% mortgage note)
Rental Property 4 - $57,000 (No debt)
Vacant Lot - $50,000 (No debt) and hope to build there one day
Real Estate Net Worth - $547,000

Total Net Worth: $1,615,000

EXPENSES: I have not done as good a job as I have in the past of tracking this, but I estimate that we spend an average of approximately $2,200 to $2,500 per month.  We could still trim a little bit of fat but I won't go into too much detail because the primary point of this post is not to see where I can clean up some expenditures. 

My wife and I are in our early-to-mid 30s.  We currently max out our 401ks and Roth IRAs and contribute several thousand per month into taxable brokerage accounts.  Both of our cars are 15 and 6 years old (owned outright), and we live in a relatively low cost-of-living city in the Bible Belt.  Overall, I believe that we are doing well financially.  We've been ambitious and aggressing saving, with both of us on the same page since we began our careers/relationship.  At this point in time, however, I am hoping I can get some fellow mustachians' take on a few issues... 

1. First and foremost (as I prefaced above), my wife just gave birth to twin babies, an unexpected (but very satisfying) challenge.  Now, we have to consider the costs of health insurance for four people in early retirement as opposed to three (my original projections were based on early retirement for us and one child).  As such, it seems more important for at least one of us (either my wife or I) to continue working for an extended period for this benefit alone. 

2. Raising children is obviously an immense responsibility, and one we take very seriously.  I am still trying to reconcile my desire to achieve our financial goals as soon as possible with the fact that time is much more rare (and thus valuable) now.  We have to raise responsible children into this world.  Can anyone else here relate to "compromising" their early retirement goals with the newfound goal of raising children?

3. Besides the health insurance factor, the presence of two children will greatly restrict my mobility for managing our rental properties effectively.  Regarding the rental properties, they have been good money-makers for us but they do not come without their headaches.  As I have gotten older I have become less patient with these headaches and at times I have started to consider life without the rental properties.  It takes a minimum of 30 minutes to drive to any of the properties from our principal residence (At this point I also do not feel comfortable outsourcing the property management function to a third party, as I know that no one will keep as close an eye on the properties or find as qualified of tenants as I would).  So far I have considered selling 2 of the 4 rental properties, believing that I can perhaps find a better work-life balance (not to mention have much less stress) just worrying about two properties.  This whole issue is a struggle for me--for my entire life I have always been about trying to make the greatest rate of return as possible, and "willingly" taking a step back from that is a huge adjustment.

4. I know a lot of folks will look at our net worth and probably say that we can go ahead and retire early, but another goal of ours is slightly UN-mustachian... While we own our current home outright and it does technically meet our needs, we are not huge fans (it's on a busy road and I anticipate needing slightly more space with the children around) and we hope to custom build a house on our plot of vacant land.  I'm not even sure what the price-per-square-foot cost would be (we're still a few years away from trying to look into this goal), but I imagine it could easily surpass $400,000 on a 3,000 square foot home.  This last bullet point might be a bit off topic from the rest of this message, but it's still a financial/life benchmark I hope to achieve one day.

The root of my stress is that I feel like I've been very successful up to this point, and it's just difficult to consider "taking a step back" with respect to my financial goals at this point.  I would love anyone's feedback on my current situation... especially anyone else who has retired early while having multiple children; how children (expected or unexpected) impacted your early retirement and investing goals; how you tackled the health insurance issue.  And anyone who has sold off money-making assets such as rental property and instead focusing on a more passive income vehicle (that make less money) and how that made you feel.

I highly value others’ unique perspectives and experiences. 

ShoulderThingThatGoesUp

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #1 on: February 23, 2015, 05:27:11 AM »
Spending lots of time with your very young children benefits you and them for the rest of your lives. Working a little longer after they start going to school is worth it.

I have a niece and nephew whose father is so focused on being a roaring success that he's hardly ever home on weekends or before they go to sleep. It's not worth anything like that. You now have a new priority list, and your children are #1.

From what you have said, I would sell the rentals.

lakemom

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #2 on: February 23, 2015, 05:54:37 AM »
From reading your post, IF it was me, I would have us both quit our primary jobs (use COBRA for a month or so for insurance while you source/purchase private insurance), keep the rentals because if you found an extra 50 hours per week (from quitting the job) would the rentals still be such a drain on time? I would think no.  Start tracking and trimming your monthly spending immediately so that living below the 45K per year your investments/rentals throw off becomes 'easy' and then cruise through your children's childhood enjoying every minute you have with them.  Once they start school full time in 6 or so years you can think about going back to work if you 'want' to or simply continue to grow the rental income.  Or maybe even better yet....you find you can leave the financials on cruise control and continue to do what you want when you want for the rest of your lives.

fa

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #3 on: February 23, 2015, 07:53:49 AM »
I am unfortunately not in a position to respond to all your questions.  A few thoughts.  Our medical insurance covers "family", which means any and all children regardless of the number.  So in my situation, one or 2 kids makes no difference.  Have you looked into this?  Maybe it is not an issue for you either.

I have 2 kids.  We live very comfortably in a 2500 sq ft house and we essentially don't use 1/3 of our house.  We could easily live in a 2000 sq ft home or even smaller.  That might be something to consider because a 3000 sq ft brand new home will have a huge negative impact on your finances.  That financial burden would be hard to mitigate if needed, depending on the housing market at that time.

Congratulations with the twins.  That is exciting. Best of luck to you.

2Birds1Stone

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #4 on: February 23, 2015, 09:08:30 AM »
Sounds like you are pretty much FI now!

Between your rental income and the massive portfolio you have a lot of freedom to shift to a one income family, to both take some time off work, or to shift to a part time work scenario. Cherish the time with your family, you have a very solid financial house.

merula

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #5 on: February 23, 2015, 09:19:05 AM »
It sounds like you and your wife essentially have three jobs: one primary gig for both of you, and managing the rentals. Based on your expenses, even with additional cost of healthcare, you can pay for your current expenses with one job without hurting your (substantial) savings. Heck, you might even be able to do it with half of one of your primary jobs.

If I were in your shoes, I'd pick one job. Maybe one of you really loves what you do; the other one quits and you sell the rentals. Maybe neither of you likes your job and the idea of only having to deal with the rentals sounds appealing.

You're currently spending $30,000/year. Estimate that healthcare and various other child expenses adds another $10,000/year. (I think that's an overly conservative estimate since you're not going to pay for daycare if you're not working, but let's go with it.) That means your annual spending is $40,000 and therefore you would need savings of $1,000,000 to support that spending at a 4% withdrawal rate. Congratulations, you're already there, with just your liquid assets!

But wait, you want to build a house for $400,000? No problem! You could do this any number of ways:
  • Sell the rentals, build your dream house with the proceeds ($282,000) and a small withdrawal from your taxable accounts; sell your current house to pay back the taxable accounts.
  • Just use your taxable funds and pay yourself back when you sell your current house.
  • Use taxable funds, but don't sell your current residence. Add it to your rental portfolio and generate an extra $30,000 a year in rent.

You're in an awesomely enviably position. You have clearly worked hard to get yourself in that place, so pat yourself on the back. Do whatever you want to; money doesn't have to enter into your decisions.

Somewhat Southern

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #6 on: February 23, 2015, 09:40:54 AM »
Congratulations on the twins. I'm in a somewhat similar situation. We're similar in age, twins are almost 2, and we bought our "forever" home just before they arrived which is about the same size/cost as what you're planning for. I don't have any rental properties, but our liquid net worth's are in the same ballpark. FWIW, here are my thoughts:

The next year is going to be a lot of work. However, I think that in the long run twins are actually easier as they start walking, talking, and entertaining each other. For us, things got much easier when they became mobile around 9 months as they could crawl to what they wanted instead of getting upset and you having no idea why. Now that ours are starting to talk and communicate, it's even easier. The fun to effort ratio keeps getting better and better.

So with that background, my recommendation would be to take your foot off the gas a bit, and enjoy the next couple of years. You don't get to do it over again. You're in fortunate position where you can do that. For us, it meant my wife scaling back her work significantly to be at home with the kids. She still works 1-2 days/week, and we have a combination of family and friends that assist with child-care. For her, having some adult interaction has been good.

My goal is to be FIRE by 40 at the very latest (should be earlier if things stay on their current trajectory), and this is with some admittedly un-mustachian spending ($4-5K/month, excluding mortgage). However, we still save over 50% of our income, so still exceptional outside of the MMM community.

Your call on how you "take your foot off the gas" if you choose to do so. If one of you can keep employment for insurance purposes, that removes that issue. Selling the houses seems like a reasonable option as well. Only you can define the specific plan.

The opportunity and experience of raising twins is something only a small percentage of us get. So make the most of it.
« Last Edit: February 23, 2015, 09:44:52 AM by Somewhat Southern »

SunshineGirl

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #7 on: February 23, 2015, 09:53:23 AM »
We resisted hiring a property manager for YEARS because we didn't think we'd be able to find a good one. We finally were at the "sell it or hire a manager" point, hired a manager, and not only are we getting great management, but we're making about the same because our vacancies get filled so quickly now vs. in the past - turning over an apartment and showing it was a time suck.

I think you should try hiring a manager before you sell. It's not a decision you have to live with forever. We said we'd do it for six months and re-evaluate. Verdict: We're thrilled and wish we'd done it ten years ago.

I also think you should feel OK with hiring lots of household help for the next couple years (cleaning & babysitting), and keep on keeping on. You're moving into snowball territory, where all your good decisions are going to start compounding and set you up very nicely.

supernova2

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #8 on: February 27, 2015, 01:19:04 PM »
Thank you all for your thoughtful and substantive responses.  It's good to hear various perspectives from sensible, like-minded (for the most part!) folks.  It just goes to show that there's no 100% way of living that works for all people as they pursue FIRE, as everyone's definition of FIRE differs.  Furthermore, I have found that my idea of FIRE has evolved as I have gotten older.

I have come to the realization that it would be best for my happiness long-term to sell off some of the rental properties.  I will fix one up and put it on the market this summer, and then next summer I will probably put another one up for sale.  I will get hammered on recaptured depreciation, but I honestly don't mind.  The rentals have served their purpose and it is time to ease into something else as my time becomes more valuable.  Another factor is that one of my good friends passed away unexpectedly while still in his 40s (and in great physical condition) recently, so that makes me realize how valuable time is as well.

My wife and I are in good financial shape, based on our expenditures (even though they will obviously climb as the little guys' age).  I have noticed that I have tended to maintain a "keeping up with the Jones's" approach when it comes to saving/financial planning.  I always want to do more....to save more faster.  To have more of a failsafe/cushion in case things ever go bad.  I'm doing my best to distance myself from this mindset and realize that you don't have to always go 110 MPH and sometimes going 50-60 MPH is OK.  You'll still hit your goals, but it might take another year or two (or five).  And hopefully I'll start to obsess about it less. 

My wife and I have discussed her moving to a 30 hour work week at some point in 2016, so that she can spend more time with the twins.  Between that decision and the decision to sell some of the rental properties (which will free up more of my time and provide peace of mind), we will see how much attention we can provide the little guys.  Then if that goes well and our financial house continues to strength (though perhaps not as efficiently as it once was), we can look at working even less at that time.

I do think one of us will continue to work for quite a while (maybe we can take turns?!) to simplify the health insurance issue for us.  I'm not sure what's going to happen to ACA within the current political climate (a topic for another post whatsoever).

On a slightly different note, does anyone have any suggestions on where to invest the proceeds from a rental property sale (aside from the standard VTSAX suggestion, which is a sound one)?




merula

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #9 on: February 27, 2015, 03:49:36 PM »
Since you seem to be a fan of real estate as an investment, what about a REIT?

waltworks

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #10 on: February 27, 2015, 09:04:40 PM »
You're done. What is the question, here? Quit your damn job and enjoy helping your twins grow up.

-W

kiwigirls

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #11 on: February 28, 2015, 12:47:46 AM »
From reading your post, IF it was me, I would have us both quit our primary jobs (use COBRA for a month or so for insurance while you source/purchase private insurance), keep the rentals because if you found an extra 50 hours per week (from quitting the job) would the rentals still be such a drain on time? I would think no.  Start tracking and trimming your monthly spending immediately so that living below the 45K per year your investments/rentals throw off becomes 'easy' and then cruise through your children's childhood enjoying every minute you have with them.  Once they start school full time in 6 or so years you can think about going back to work if you 'want' to or simply continue to grow the rental income.  Or maybe even better yet....you find you can leave the financials on cruise control and continue to do what you want when you want for the rest of your lives.
+1

nobody123

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #12 on: February 28, 2015, 09:20:23 AM »
Congratulations on your success to this point.  It looks like the prevailing sentiment is, "You've won, so quit playing the game."  Here's my two cents:

Personally, I wouldn't keep a job just for insurance.  There was insurance available before the ACA, and there will be insurance available if any or all of the ACA is repealed.  However, if you actually like what you're doing, one or both of you might want to keep working in some capacity.  I love my kids, but if I had to spend 24x7 with them I would go bonkers.  My SAH wife loves being a mommy more than she ever liked her career, but she still does occasional freelance work just so she can talk to grown ups about something non-kid related.  Kids are a huge adjustment; I wouldn't make rash decisions about your careers until you settle into your routine.  It sounds like that's what you're going to do.

My wife first balked at moving from our ~1900 square foot home into our current ~3000 square foot home when kid #2 came along, and neither of us can imagine having to go back to the smaller house with two active boys, especially in the winter when you can't send them outside.  You already bought the lot for your dream home, and you can cash flow a 15 year mortgage on your dividends / capital gains from your taxable account, so why not go for it?  I find it hard to believe that you can just give up on a dream goal like that when you have the means to make it happen.  What's the point of amassing a huge 'stache if you don't enjoy the benefits that it provides?

I would also, as someone else suggested, hire a management company for your rentals.  If you are still getting an acceptable rate of return after a year, keep them, otherwise sell them.  As you stated, the time drain is the main concern with them, and you have the money to essentially 'buy' time by using the management company.  Even if you have decided to get out of the rental business gradually, it will at least free up your time now.



The Resilent Dame

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #13 on: February 28, 2015, 01:20:34 PM »
I'm wondering why having 4 rentals is such a headache. Is it because the rentals are for college students? Have you thought about selling those rentals and purchasing ones in regular residential neighborhoods?

I ask because my husband and I own rentals and spend very little time on a regular basis on them. Every now and then a tenant moves out and we do some repainting, repairs, etc. But overall, it isn't much time. We have a son, and bring him along. He's 5 now and already understands the concept that we have invested in these properties, we fix them for other people and other people pay us to live there.

We own a few other businesses as well, and maybe because they are so people-management intense, the drama of rentals pales in comparison. Once we sell all of our businesses, we will continue to grow our rental portfolio to give us some things to do in "retirement."

Anyway, just wondering if changing up the type of rental may change your experience overall. We've never rented to college students, but I can imagine the amount of work due to turnover would be huge in comparison to long-term tenants.

Gin1984

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #14 on: February 28, 2015, 02:04:56 PM »
Congratulations on your success to this point.  It looks like the prevailing sentiment is, "You've won, so quit playing the game."  Here's my two cents:

Personally, I wouldn't keep a job just for insurance.  There was insurance available before the ACA, and there will be insurance available if any or all of the ACA is repealed.  However, if you actually like what you're doing, one or both of you might want to keep working in some capacity.  I love my kids, but if I had to spend 24x7 with them I would go bonkers.  My SAH wife loves being a mommy more than she ever liked her career, but she still does occasional freelance work just so she can talk to grown ups about something non-kid related.  Kids are a huge adjustment; I wouldn't make rash decisions about your careers until you settle into your routine.  It sounds like that's what you're going to do.

My wife first balked at moving from our ~1900 square foot home into our current ~3000 square foot home when kid #2 came along, and neither of us can imagine having to go back to the smaller house with two active boys, especially in the winter when you can't send them outside.  You already bought the lot for your dream home, and you can cash flow a 15 year mortgage on your dividends / capital gains from your taxable account, so why not go for it?  I find it hard to believe that you can just give up on a dream goal like that when you have the means to make it happen.  What's the point of amassing a huge 'stache if you don't enjoy the benefits that it provides?

I would also, as someone else suggested, hire a management company for your rentals.  If you are still getting an acceptable rate of return after a year, keep them, otherwise sell them.  As you stated, the time drain is the main concern with them, and you have the money to essentially 'buy' time by using the management company.  Even if you have decided to get out of the rental business gradually, it will at least free up your time now.
I had to COBRA prior to the ACA because I could get no health insurance, for any cost.  If I had not found a job with insurance prior to my COBRA running out, I would have had no insurance.  So, no, for some people there was not non-employer insurance prior to the ACA.  That was one of the main points of the ACA.

supernova2

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #15 on: March 02, 2015, 09:40:43 AM »
I'm wondering why having 4 rentals is such a headache. Is it because the rentals are for college students? Have you thought about selling those rentals and purchasing ones in regular residential neighborhoods?

I ask because my husband and I own rentals and spend very little time on a regular basis on them. Every now and then a tenant moves out and we do some repainting, repairs, etc. But overall, it isn't much time. We have a son, and bring him along. He's 5 now and already understands the concept that we have invested in these properties, we fix them for other people and other people pay us to live there.

We own a few other businesses as well, and maybe because they are so people-management intense, the drama of rentals pales in comparison. Once we sell all of our businesses, we will continue to grow our rental portfolio to give us some things to do in "retirement."

Anyway, just wondering if changing up the type of rental may change your experience overall. We've never rented to college students, but I can imagine the amount of work due to turnover would be huge in comparison to long-term tenants.

That's a legitimate question, and I guess I'll go into a bit of background that I did not initially intend to delve into.  In addition to our own four rental properties (we used to have five but sold one last year), I also manage a few for some friends/family members (I was eager to make a buck anyway I could as long as I had the time to do it).  I have started transitioning out of this role as well (they are aware of my desire to free up time and we have been taking steps to execute this plan).  Having said that, there are numerous factors that have led to stress/frustration.  First, I feel like I have been largely fortunate with the tenants I have found, but even when I do everything the right way you can still lose the tenant lottery (e.g., had a 780+ credit score renter who stopped paying and then delayed moving out several times but then left behind some damages) on occasion.  I was well equipped to handle situations like that pre-children, but less so now.  Second, finding quality/trustworthy (and cost efficient) service people to tend to the properties can be a struggle.  I love our HVAC guy (whose been with me for the past 10 years) but have had somewhat less success with plumbers and electricians (fortunately, electricians are not needed too often).  Third, over the past 12-15 months I find myself waking up in the middle of the night worrying about random things (e.g., How's the fence door holding up at so-or-so property?  Did those renters at so-or-so property fill in the dog-dug hole alongside the home foundation?) that I honestly didn't think about when I was younger.  I am pretty self-aware, but this has been an alarming red flag for me and why I have wondered if down-sizing my real estate portfolio might be a wise decision.  I also think when I had less skin in the game (e.g., when I only had $20k in equity in a house) these issues were far less worrisome to me.

All of our properties are at least 3 bedroom/2 bathroom houses (one 4 bedroom/2 bathroom house) that were built in the last 15 years.  It's interesting what you say about college renters.  In my experience, college-aged renters have been, by and large, our best tenants.  It seems to be a lot easier for 3 college students to come up with $325 each than to expect a single income family to come up with $975 on the 1st of every month.  A lot of them seem to have parents who are willing to prepay for the whole semester, or some receive financial aid and will pay a lump sum to cover rent for the rest of a given semester.  Having said that, you are correct that college students do turnover frequently (only once have I had them stay for longer than two years).

I do like what you said about taking your 5 year old with you when working on a vacant property.  I love that he understands the concept already.  Very encouraging.

supernova2

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Re: How Having Children Impacts FIRE Goals / How to Proceed
« Reply #16 on: March 02, 2015, 09:50:36 AM »
Congratulations on your success to this point.  It looks like the prevailing sentiment is, "You've won, so quit playing the game."  Here's my two cents:

My wife first balked at moving from our ~1900 square foot home into our current ~3000 square foot home when kid #2 came along, and neither of us can imagine having to go back to the smaller house with two active boys, especially in the winter when you can't send them outside.  You already bought the lot for your dream home, and you can cash flow a 15 year mortgage on your dividends / capital gains from your taxable account, so why not go for it?  I find it hard to believe that you can just give up on a dream goal like that when you have the means to make it happen.  What's the point of amassing a huge 'stache if you don't enjoy the benefits that it provides?


+1.  Thanks for this reminder.  We are actually looking forward to this project at some point.  I have thought about compromising this goal in the past (new construction is not mustaschian in the least) but I like to think of it as a reward when we approach our defined finish line.  Having said that, I might change my mind after I meet with some builders/architects!