Case Study: Family of five

[Asdfg]

Hey all!

We're a couple with three kindergarten aged kids and we are both working at the moment. She is enterpreuner so she doesn't want to retire, at least not in the next 10-20 years. I on the other hand wouldn't mind retiring tomorrow :) Some figures:

Combined yearly income after tax: 70k€ (+15k€ from rentals) = 85k€
Savings: 110k€

Expenses per year:

Groceries: 3600 €
Electricity: 1000 €
Internet: 170 €
Gas: 3000 €
Childcare: 6500 €
Others (insurance, medical, maintenance, gifts, etc.): 9600 €
Total: 24 000 €

Debt:
295k€ (mortgage and rentals) -> interest rate is about 0,5%.

I have been keeping track of our expenses for almost two years now and these are rather accurate, but the figures don't include any "unexpected" costs such as freezer breaking etc.

We own three rental apartments that each yield 8100 € and cost 3100 € per year, so the income from these are about 3x5000 €/year.

I estimate each of the rentals to be valued about 125k so the simplify the calculation let's say I would sell them for 375k€ and pay the debt which would leave us with 80k€ in cash. So we would have 190k€ to be invested.

Summary:

Income: 70k€
Savings: 190k€
Expenses: 24k€

So the 25x rule states that we would need 600k€, or 310k€ more, to retire both of us. To save 310k we will need 310/(70-24) = 7 years to reach FI.

Am I missing something? Do you think we should keep the rentals or sell them? The idea of having so much savings in cash is to buy two more rentals when we find good ones.

[zolotiyeruki]

One thing I don't see in your calculations is taxes.  I don't know what taxes are like where you live, but that's an important consideration.

[ac]

I also have a family of 5 (with 3 kids ages baby to 4). 

Consider the impact of the kids' aging on your expenses.  I am saving for their college although I don't plan on trying to cover every dollar.  And then when they're done with college, I assume I won't pay for them any more! 

So you may have a massive drop in expenses in 13-17 years depending on your views of supporting the kiddos post 18 (and building up to 18 regarding college savings).

[Gimesalot]

First, I am not sure that the 25x rule applies to Europeans with European investments.  The reason for this is that the 25x rule is based on a 4% withdrawal rate.  This is a figure that was published in a report from several economists based on an extremely extensive study of the US stock market and its' returns over its' history.  As a result, the 25x rule simplifies the returns and inflation of the US stock market.

Second, you may not need as much money given the more generous pension schemes in most European countries.  The 25x rule sort of ignores and additional income you may get as you age.  For most Americans, Social Security is a small amount that may not afford a decent lifestyle.  From my understanding of the European system, the benefits are better.

Also, you need 600k -190k that is, 410k, not 310k.  Given your calculation, it will take you 9 years to save up the 410k.  You can speed this up by making investments that return an income.     

 

[FrugalFan]

You are FI when the money coming in can cover your expenses. Your expenses are 24k and you have 15k coming in from rentals. That means you need to cover an extra 9k of spending, which is 225k at 4 SWR. You already have 110k so you need to save 115k more, which you can accomplish in just over 2 years. If your estimate of net income from your rentals is correct (and you have accounted for vacancies, repairs, etc), they are returning 18.75% on the 80k tied up in the equity (and likely more so in terms of cash on cash return based on your original investment, and even more if you count the equity being paid down each year), so much, much better than the stock market. I would keep those rentals!

[former player]

You may need more than $24k per annum, because 1) you haven't accounted for capital costs (that replacement freezer, for instance) and 2) you haven't accounted for increased (decreased?) child costs as they grow. 

How are you accounting for mortgage costs on your primary residence?

On the other hand you can include the value of any pensions and social security rights you have accrued.  If you stop working during normal working age you might also look at making voluntary social security contributions in order to maintain the value of your entitlement.

There is a post somewhere in the Investing thread that sets out the safe withdrawal rate for countries other than the USA.  I'll try to find it, but don't promise I'll succeed.  I seem to remember that the rate for the UK was 3% and it was even lower for some continental European countries.

Your main concern will be to find out whether your spouse will be happy to be the sole breadwinner until you can both retire.

[Asdfg]

Thanks for the comments everyone!

Income tax in Finland is heavy, about 35% at our level and going up to 55%. For investment incomes the tax is a flat 30%, so it makes sense to focus on this instead of regular income.

Regarding increasing expenses as the kids age, I know I didn't include it in the calculation. But I somehow hope that if/when I FIRE, I will start creating new income that will at least partly offset the increased expenses. Also what I didn't mention is that 80% of our gas costs are from commuting, so that would go down if we would stop working.

For the 25x rule, I am investing in ETF's, which means quite big portion of my money is on the US stock market. Inflation is EU based, however. The pension I'm looking forward will not start running until I'm 65 years old. So it is something that I am not really counting on at all...

I like your math Travelling Biologist! :) So I think I will stick with the plan and buy more instead of selling.

Mortgage cost on my house is in the "others" category.

All in all we both enjoy our jobs at the moment, so there is no real rush to FIRE. But I think we are in an ok spot, so I don't need to put up with much negativity from my boss should there be any.

[FLBiker]

All in all we both enjoy our jobs at the moment, so there is no real rush to FIRE. But I think we are in an ok spot, so I don't need to put up with much negativity from my boss should there be any.

I like this!  This is how I feel.  I don't have enough to FIRE right now, but I certainly have enough not to put up with crap unnecessarily.  It's a nice feeling. :)

[myhotrs]

One question - what's your wife make? As Travelling Biologist mentions, with the rentals you only need 9k in additional income to cover expenses. If your wife makes more than this, you could retire today and continue to growing the stash not even counting the reduced job-related costs (which would be a nice buffer for unexpected costs and additional child-related costs.)

[Asdfg]

FLBiker yeah! And lately I have seen that it has made me more productive at my work. I can ignore some of the the stupid work and focus on the interesting things that have an impact. This is resulting to me being more happy (and productive) at my job. Who would have guessed?

myhotrs she makes roughly the same as me. So actually I think you are right. But I will still work a bit longer just to be on the safe side and since there is little downside of this decision.