Case Study - Please show me the path to FIRE

[kathl88]

Hi

We are new to FIRE and have done a terrible job managing our investments and $$ over the past 10 years.  We should be up alot more in this time if we invested rather than flat.  I come from a family where cash is king mentality so that probably doesnt help too

Both my husband and I are 38 with 2 kids (1 year and 4 year)

My husband is employed with a salary of 180K per year
I am self-employed with wildly fluctuating income (sometimes 200K sometimes 300K per year)

We live in a high cost area (NYC) bought a home 2 years ago with a 950K mortgage.  We aren't in a position to move due to family and work.

Here's our situation -

401K - My husband has 250K in 401K max out contribution
IRA - I have 180K (only 50% invested) with no new contributions
Cash - 500k (uninvested)
Stock play money $55K in random stocks that I should have probably been out of a long time ago.

Our expenses are high.  5K per month in mortgage + maintenance, 2K per month in school fees, 1K per month in groceries, eating out. We also like to travel a few times a year (and pay for my mom and grandparents to come with us) which averages to about 2K per month.

We have whole life insurance policies for both of our sons with 300 monthly payments each

We dont have any debt aside from our home.

I'm thinking about using betterment because i have no time to invest and do a terrible job. I also  want a service that pulls $$ from my account automatically and forces investment  but i know many here don't advise the service.

We want to finally get our finances in order and start thinking about a course for retirement or best case scenario - FI.

1. How should we be invested?
2. How should we save for our children's education
3. What type of IRAs should we setup?
4. General advice on how to  FIRE

Thanks1

[Watchmaker]

There's a lot to talk about here, but the good news is you have really, really high incomes right now, so you can very quickly get back on track.

1. You should invest in passive index funds, probably a version of the "three fund" portfolio advised by many over at Bogleheads.orgs. You can easily set this up at Vanguard or Fidelity or Schwab (or many others). No reason to use Betterment.

At Vanguard, simply buy Vanguard Total Stock Market Index Fund (VTSAX), Vanguard Total International Stock Index Fund (VTIAX), and Vanguard Total Bond Market Fund (VBTLX). A reasonable mix might be:

40% US
20% World
40% Bond
 
Simple as that. And you can automate purchases with any of these companies like you want. And get your cash invested soon. Invest a portion each month for the next 18 months if you are worried about a drop.

And never think of any investment as play money.

2. Don't worry about that until you get your own financial ship in order.

3. You incomes seem to be too high for the tax break of a traditional IRA, and too high for a normal roth IRA. Look up "back door Roth IRA" for an option. But you can probably set up a solo 401k for your self employed income, which will let you defer significant taxes, so look into that first.

4. You need to know your exact expenses so you know how much you need to save and where you can improve. Track every dollar spent for the next 2 months. But if you want to FIRE, you are probably going to have to make some choices about what you value in your life--it's fine for you to spend 2k a month traveling, or live in a HCOL area, or spend 2k a month in schools fees (or any of the other things you are probably doing) but it's not fine for you to all those things if you want to FIRE. You'll need to cut back on everything, or focus your spending on the things you really value.

That all being said, you are still ahead of the median savings for someone your age, I believe. And with those incomes, if you control your spending you could be FIRE in a few years. 

[marty998]

You're not in as bad a position as you make it out to be.

Presumably you also own a property worth more than the $950k mortgage? So your asset column is at $2+ million? And your net worth is almost $1 million if not more? Pretty good starting point for most people.

Do you see yourself living in this NY home for the next 20 years? If so, there may be an argument to take $400k cash and pay down the mortgage, and then wipe it out over the next 3-4 years, giving you a home owned free and clear (leave $100k a san emergency fund if you will). Then in 3 years time either you start investing heavily or sell up and downsize your place if you want to FIRE quicker.

Being cognisant of your risk tolerance is important. No point investing everything if it causes you to lose sleep at night and you're not ready to have that amount of exposure to the markets. Baby steps, while not mathematically optimal, could help ease you into it.

[ericrugiero]

You said that you aren't in a position to move due to work and family.  Only you know the family situation but you could quickly reach the point where you could FIRE if you are willing to move to a lower cost area.  Once you reach that point, work isn't a reason you CAN'T move and only family is.  In your current location you make a lot more than you (probably) will make somewhere else.  The quickest path will be to stay put until you retire and then move to a lower cost of living location.  Only you can make that decision. 

1.  Most people here believe index fund investing is the safest way with the best returns.  JL Collins has a very good series on this.  https://jlcollinsnh.com/stock-series/  Right now you have $500K that isn't doing anything for you.  Either use it to pay down your mortgage (saving interest) or invest it so you are making money with it.  Historically, the stock market returns more than mortgage interest but there is safety in a paid for house.   
2.  529 college savings plans are probably the most tax efficient way to save for college.  I'd recommend them if you are pretty sure your kids will go to college and you want to help pay.
3.  See the JL Collins series above and the investment order thread.  https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153
4.  You are off to a great start and have lots of options.  (yes you could have saved more but you really have saved a lot)  You and your husband need to decide on your goals and priorities.  With your savings and salaries you could retire now if you move and really cut your expenses.  If travel is a priority and you don't like pinching pennies as much you can work longer.  It all depends on how much you want to retire, what your spending plans are and what your risk tolerance is.  Read about the 4% rule to see how much you need to retire.  Keep in mind that your risk tolerance plays a big part and if you plan to make any money after retirement that helps a ton.  https://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

Typical whole life plans are absolutely TERRIBLE.  You would be better off to take that money and put it in a 529 plan for college or just about any type of investment.  Your first two steps should be to get that $500K (except maybe an emergency fund) working for you and then to look at a better place to put your $600/month. 

[Watchmaker]

Typical whole life plans are absolutely TERRIBLE.  You would be better off to take that money and put it in a 529 plan for college or just about any type of investment.  Your first two steps should be to get that $500K (except maybe an emergency fund) working for you and then to look at a better place to put your $600/month.

Yes, I forgot to mention that. Get out of those whole life plans immediately.

[Chrissy]

Everything ericrugiero said.

Investments
Your IRA is only 50% invested?  Start there, with that $60k.  Get it 100% invested right away.  Then, the stock play money:  don't think of it as selling/buying, think of it as changing or moving investments.  Read JL Collins--stat!  Keep it simple.  For instance, I chose ONE total market index fund, and that's what I invest in in my SEP, ROTH, and taxable.  My 403b is only in VTSAX.  Or, as was said, put it toward the mortgage.  But don't let it just sit in cash where it's getting eaten away by INFLATION.

Education
You could get a lot of mileage by maxing some 529s for a few years with the shit-tonne of cash you're sitting on.  My kids are 1 & 3.  We figure all-in costs at an in-state school could be as high as $240k, so we're aiming for half ($120k) in 529s.  We put in $20k at age 0, and another $20k at age 1.  Compounding over 18 years, $40k should turn into ~$120k.  You might have to do an extra year or two of contributions since you're starting a little later.  As mentioned, cancel the whole life policies.

IRAs
See the Investment Order.

General Tips
You've got $985k in assets, but also $950k in liabilities, so you're essentially worth $0 even though your household brings in $280-$380k/yr in earned income.  By being in cash, you're missing out on $60k every year in investment income.  Every year, the world is like, "Hey, take this $60,000 for free," and you're all, "Nah, I'm busy."  You need to fix this urgently!

Look again at your spending.  I would bet it's ~$15k/mo, not $10k/mo.  Not that this is a problem at your income level!  However, if you want to speed up FIRE, you've only got two ways to do it:  income and expenses.  You've got earned income licked, and will shortly have investment income licked, so, the only other place to optimize will be expenses. If you can cut from $15k/mo to the $10k/mo you think you spend, that's another $60,000 in your pocket PER YEAR. 

[SwordGuy]

You are making the income of 6 to 8 median families per year.    That's 6 to 8 homes.  6 to 8 sets of insurance.   12 to 20 cars.
6 to 8 family's worth of food, clothing, utilities and schooling.

The only thing stopping you from being FI soon, given your income, is your choices on what you spend money on.

How badly do you want to be FI?    How quickly do you want it?

Because you sure as heck have the financial resources to do it quickly; the only question is whether you have the will to do so.