My spouse and I are in our mid and late 30s, living in an expensive suburb of NYC. We are already pretty entrenched into a very expensive lifestyle that has been sustainable thus far due to high incomes, but if something unexpected were to occur we would be in financial danger.
Here is your real concern and what you are really asking for help with, how to deal with the unexpected and this is the right place for that as pretty much the goal of Mustachianism to set your life up financially so no matter what unexpected situations occur there is no danger.
First off, it is important to note that both my spouse and I are of like mind in our desire to change our situation. We both like our jobs (one is very stable, the other is driven by the financial markets), and find fulfillment, intellectual challenge and social benefits from our careers. So you could say that our primary objective is to make sure we are financially stable in the event of the unexpected, with a very close second being retiring as early as possible.
Here is the first unexpected situation that can come up; one of your jobs is driven by the financial markets. Clearly your lifestyle is driven by your high dual income, if you suddenly lost the financial driven job and couldn't replace it could you sustain your lifestyle what would you cut first, would the stresses on you marriage and home life be too much for family even if you could get by financially. I will discuss some more about both the stress and the financials below as you have other details where they make more sense to comment.
I think our problems lie in trying to ‘fit in’ with our peer group. We both went to top tier universities and graduate schools, and the reality is none of our friends from school are into living drastically below ones means, or if they are they are embarrassed to show it. It isn’t fashionable for an Ivy League grad on the fast track to talk about pinching pennies and how to stretch a dollar in a budget. So we play along..
You have heard the replies of many Ivy League grads on here already that this is simply not the case. If anything most people are associating this more with Wall Street excess then the Ivy League which is far closer to the truth and the combination of Wall Street and the Ivy League which is a very small subset of the population and also in a very small geography the metro NY area. You have also heard many comments from people who are ex-Wall Streeters who have left your lifestyle. I work with the traders who worked their way up from the pits as well as the Wharton and Harvard grads who were recruited, in both groups there are those who fit into your demographic and those who don't. These are your choices and you have made them. I had the choice to be a trader, I choose to write the software instead as I love technology I work less hours have less stress and spend more time with my family. I am fine with a much smaller pay check and bonus. I still have all my Ivy League friends though and those from the state schools all are really cool.
While we could live a much simpler life, the reality is we enjoy a lot of the trappings that money can buy and, to be honest, I think we trick ourselves into feeling that we are ‘socially accepted’ and that we’ve ‘made it’. The area we live in is plagued with this disease of showing how well you are doing (even if you’re not) and keeping for the sake of assimilation. It’s an expensive habit and obviously shows some of our insecurities – but at this point we are pretty well committed (with tons of sunk costs) so are just trying to make the best of the situation and hoping to make it to retirement, early or not, while still providing for our children’s experiences (trying very hard to give them all of the things that we did not have growing up).
Your choice, you like the lifestyle... No problem with that if you are happy with the choice then keep it up. But you clearly state it shows insecurities, it’s an expensive habit, you probably regret the sunk costs, regardless of the fact that they are sunk or not. You are just hoping to make it to retirement, after giving your children what you have decided is what you think is best (I'm not judging you decisions on what is best by the way, that is completely up to you, just make sure you understand the choices you make).
Our incomes come from large, stable institutions that have both been around for over 100 years. We are both doing well in our careers with expected promotions and pay rises over time, but the landscape for financial institutions in particular is changing pretty dramatically, so we are not counting on necessarily making the incomes of people above us, but instead budgeting on total compensation to keep up with inflation over time.
I told you I would come back to the loss of the financial market driven job, I worked for Lehman Brothers up until the end, and it was a stable 150 year old institution. I remember the very calm voices mails we got from Dick Fuld (CEO for those who don't know) about the company’s future; the early RSU's to take advantage of the stock's upside 4 months before the bankruptcy. The funny thing is a few years later I heard weekly voice mails from Lloyd Blankfein and they sounded almost identical to those of Dick Fulds. So my only advice to you is don’t bank on the stability of a job from a 100 year old company, you never know when the next financial crisis will hit and there will be another financial crisis, Fannie and Freddie and going to be wound down, the Fed balance sheet needs to be deleveraged, Russia is on a land grab and who knows people are still unemployed in droves in the real world.
In terms of investments, since a lot of our income as well as job security is dependent on financial market stability over time, we have taken the conservative route of using the stock market rally over the last 2 years to get completely out of stocks altogether (which still leaves a significant passive exposure due to deferred compensation allocation – see below), allocating the funds towards debt repayment (highest rate on any loan is 4.625%) and investing in private real estate deals (LLCs managed by professional investors, targeting high single to low teens returns in non-speculative transactions). We have a lot of exposure to NYC metro area real estate already given our two properties, but the deals we invest in are in other parts of the US and our view is that with historically low interest rates and inflation that will probably increase over time we would prefer to keep our investments in assets that should not only give solid real returns but also do well in inflationary environments and provide a bit of a hedge. Our 401k’s are in cash and short-term bond funds, and our self-directed IRAs are invested in the real estate deals and other business ventures via trust companies.
That is still a fairly high risk portfolio, you are highly concentrated with restricted stock and/or employee stock options in one or two financial firms, you have equity in two properties in the NYC metro areas, and the remaining assets are then in other privately managed real estate transactions throughout the country and short term bonds and cash. The correlation between your asset classes is way too high and you do not have enough diversity. If either of the companies goes under your stock is gone, if interest rates go on a tear the principal in your bond funds can lose a lot of value more then you will make in interest and dividends. Real estate is up in the air and you are in private deals so they are a crap shoot, some are awesome others are mine fields. I would think considering your professions you would have a more diverse investment portfolio.
Here are the stats (income/expense/saving totals are monthly):
Assets:
2 homes: $4,100,000 total value (Zillow)
Deferred Compensation (pre-tax): $2,100,000 (half of which has vested; fully vests over the next 4 years, and keep getting more each year as part of annual compensation “bonus”; closely tied to financial market returns as a lot of it is in company stock and equity-like instruments; if made redundant everything would vest immediately unless were terminated for ‘cause’ for doing something unethical)
Retirement Accounts (401k, IRA): $825,000
Taxable Investments: $250,000
Cash and Equivalents: $5,000 (to pay bills; cover spending, bank account minimums)
Total Assets: $7,280,000 (not including “stuff” like cars, jewelry, etc.)
Liabilities:
Combined Mortgages: $2,600,000 (4% and 4.625% fixed rate fully amortizing 30yr mortgages, which mature in 20-25yrs)
Home Equity Line of Credit: $370,000 (4% rate until 2017 at which point will have to renew; we sweep all excess funds into this account to pay down balance; available credit of $130,000)
Credit Cards: $23,000 (we pay these off every month; $15,000 on cards with 0% intro offers on purchases to a certain date, at which point we would pay down to $0 balance)
Private School Tuition for 2 kids: $1,025,000 (this is the total cost in today’s dollars, which in my mind is a rough inflation adjusted estimated total until they graduate high school, assuming the cost doesn’t grow faster than our 4% marginal cost of borrowing; {Edit to save space}
College Education: $450,000 (2 x 4yrs at $56k/year, inflation adjusted estimate; we actually are of the mind that the kids should contribute to their college costs via scholarships, internships, grants and loans if needed, so this is a bit conservative)
Total Liabilities: $4,468,000 (including private school tuition and college costs)
I don't really agree with your math, you are putting future liabilities against current assets. You save for college and pay as you got for private school, those liabilities don't count against your current assets. Unless you are pre-paying for the tuition for all 12/13 years then you only need to account for the amount you pay now.
I also wouldn't count non-vested RSU or stock options as assets, only vested assets, they are only yours when they vest, they are contingent on your employment and you assume that is going to continue as such, what if you get another job offer and it is too good to turn down, they may not buy you out, but that leaves a million bucks on the table. It’s not yours until it’s yours.
So you have:
Assets:
2 homes: $4,100,000 total value (Zillow)
Deferred Compensation (pre-tax): $1,050,000 (half of which has vested;
Retirement Accounts (401k, IRA): $825,000
Taxable Investments: $250,000
Cash and Equivalents: $5,000 (to pay bills; cover spending, bank account minimums)
Total Assets: $6,230,000
Liabilities:
Combined Mortgages: $2,600,000 (4% and 4.625% fixed rate fully amortizing 30yr mortgages, which mature in 20-25yrs)
Home Equity Line of Credit: $370,000 (4% rate until 2017 at which point will have to renew; we sweep all excess funds into this account to pay down balance; available credit of $130,000)
Credit Cards: $23,000 (we pay these off every month; $15,000 on cards with 0% intro offers on purchases to a certain date, at which point we would pay down to $0 balance)
Total Liabilities: $2,855,000
Net Worth: $3,375,000
Now you haven't indicated you children’s ages so you have roughly a $1.45 million education savings goal over I will guess a 10 to 15 year period not counting investment returns on those savings. And each year that goes down as you will pay current tuition on private school out of current income and/or savings. So hard to calculate the moving target based on the information you provided.
Also as side note not sure if you have HELOC on both properties but if not see if you can get one on the 2nd property at a lower interest rate and see if you can shift some of the mortgage to the HELOC to reduce the monthly payment.
You are already using you first HELOC as a sweep account to mortgage accelerate as that saves on interest until your bills come due, good call :)
Income:
Gross Income (pre-tax/401k): $71,000 (base salaries of $34,170, the rest is annual bonus with varying payment/vesting schedules throughout the year; I took the combined average over the last 5 years – our incomes have generally been increasing but obviously fluctuates a bit given one of our jobs is in finance and the wild swings in the market over the last 5 years)
Rental Income: $6,000 (this just covers our total costs for the rental property before depreciation so net cash flow is $0)
Total Income: $77,000
Expenses:
Taxes (Fed, State, City, SS, Medicare): $24,600
2 Mortgages (PITI): $18,200
Charitable Giving: $2,500
Property Maintenance: $2,300 (for both properties combined: snowplowing, budget for anticipated repairs over time, etc.)
Landscaping: $2,000 (both properties, grass cutting, hedges, spring/fall cleanup, 6.4 acres total)
Live-In Help: $1,800 (this is salary in addition to room/board)
Country Club: $1,770 (includes all meals, drinks, fees, summer camp)
Groceries/Household Items: $1,640 (this is for 4 adults and 2 children)
Vacations: $1,250 (flights and some hotels are paid via miles/points from credit cards and flights/stays for work travel)
Utilities: $1,120 (primary residence only: cable/internet/phone/wireless, electricity, natural gas heat, water – quite high due to sprinklers in summer to maintain that nice lush lawn we pay so much for)
Kids’ Activities: $685 (all lessons, fees, activities, tutoring)
Shopping: $500 (gifts, personal items, miscellaneous – plug account)
Auto Insurance/Maintenance: $480 (3 cars, all 2007 model or newer: 2 for commuting – the above mentioned Leaf and showoff machine, 1 small SUV for the grandparent/nanny to take kids to schools and activities)
Public Transportation: $330 (train tickets, subways)
Gasoline: $230
Restaurants/Eating Out $200
Entertainment: $80 (Netflix, iTunes, Movies, etc)
Total Expenses: $59,795
Savings:
401k: $4,600 (including employer matches)
Mortgage Principal Payments: $4,170 (included in mortgage payments in expense above)
Income less Expenses above: $11,205
Total Savings: $19,975
This is also a little cryptic... You should relist this with just your base pay (net after taxes) not counting any deferred (stock compensation) and then list any one time annual cash payment you get as part of your bonus. Then list all of your expenses that you pay monthly but not redundantly mortgage is part of expenses and savings etc... This becomes too confusing for people to follow.
So make 3 simple sections
Net income (actual money you have to spend every month)
Actual monthly expenses
Savings
Nothing should be in more than one section, people here are smart enough to know mortgage principal is considered savings, feel free to break you mortgage payment out and include the interest in expenses and principal in savings.
Retirement scenarios:
If I take the after-tax (40% marginal rate to make things simple even though our effective tax rate is much less) values of the deferred compensation and retirement accounts in the ‘Assets’ and subtract out the ‘Liabilities’, I get to a net worth of $1.642mm. However this does not take into account owning a house outright, which I would estimate we should conservatively budget for $1.2mm for the areas we are considering living, bringing us to $442k net worth.
On the expense side, once the nest is empty and the house is paid for (downsizing eventually to the $1mm house mentioned directly above) as well as the rental house is sold, I think we can very comfortably get monthly expenses to $7,000/month or $84,000/year. Note that this includes having to pay for a live-in to help with care of an elderly parent.
Assuming we can continue to save roughly $20k/month, the stock market doesn’t crash (which would decrease the value of the deferred comp and make a finance job’s income and outlook less rosy) and a 3% withdrawal rate (we’d like to leave behind some money for kids and charitable orgs that we support, without paying Uncle Sam any death taxes), we estimate our retirement date to be 9-10yrs from now [$84k/0.03 = $2.8mm; $2.8mm - $442k = $2.358mm; $2.358mm/$20k/month = 118 months = 9.8 years].
Of course this 10year plan assumes everything goes smoothly and unexpected cost increases and expenses and income decreases don’t occur. We are hoping for the best and planning for the worst.
Thanks for reading.
I have already gone over where I disagree with your math on your net worth, I don't agree with how you project out your net worth into the future to determine when you will have the assets you need to retire based on you current or project spending.
So instead I will discuss your current not quiet worst case scenario… Losing a single job, worst case would be losing both.
Right now you have $250k in taxable investments locked up in private real estate deals, so I am assuming those are not that liquid (could be wrong). You have $1.05 million in vested RSU's or stock options that you have access to if you needed in an emergency. Not sure what your selling restrictions are and if you have any unrealized gains built in if they are short or long term etc., but you would not have access to the full amount of taxable investments if you needed them in an emergency. Based on your tax bracket you would pay 20% federal capital gains tax, 8.82% NYS capital gains, 3.8% payroll tax (go Obamacare for high income earners). So let’s ballbark it’s and say you can walk away with $900k after taxes if you liquated everything (that assumes the deferred comp was intact post job loss).
So in the end if you lost a job you have $130k of liquidity in a HELOC available to fund your lifestyle. Now your taxes would drop with the income drop so the $24k in taxes would drop as well proportionally. The $6k on the rental would cover the $6k in PITI expenses, but the remainder of your $59k of monthly expenses still needs to be covered with only $130k so you have maybe 4 months to replace that income before you have to sell assets. At this point the sold assets can last about 3 years, if you get that far along new net worth is only going to be house assets plus retirement accounts – liabilities.
So if you think you are living a sustainable lifestyle based on your income and can retire and meet your savings goals without some rethinking then keep on chugging (once again not making any judgments that is your decision to make based on the math you decide if the risks/outcomes are likely or worth it etc…).
I said earlier I was at Lehman at the end, I know lots of people (some friend) who lost everything because they didn't think it could happen to them. And when I say lost everything sometimes I mean more than their house unfortunately. Then again I know others who got multiyear severance packages landed other jobs and tripled up, so it can go either way.
-Mister FancyPants