I've made EVERY financial mistake, here's my new plan....

[cardifftodd]

I'm brand new to this forum and have only started really trying to figure out my financial future in the past couple years.  I'm a married, soon-to-be 50 year old physical with 2 children, one in college and the other still in high school.  I ignored and broke just about every financial rule that I could have along the way (mostly in the form of endless cars, boats, vacation homes, and NOT SAVING enough).  I have been inspired by reading this and other financial blogs and I'm trying to implement some large changes over the next year or so to get us on track.

Present situation in simplified version:
Wife and I with combined 450-500k/year incomes
Live in VHCOL area
Primary residence present value around 2.9M with mortgage balance 1.15 @ 3% fixed
Vacation lake home present value around 900k with mortgage balance 250k @ 2.75% fixed
Education debt 39k at 2%
We have about 1.1M in various 401k/IRA/bond/savings/checking
Several toys that are paid for (5 cars, boat, tiny home trailer) that are conservatively worth 275k

I put about $50k/year into a Solo 401k, max out HSA, and save another $2k/month in taxable accounts

When I plug conservative numbers into a calculator I am shocked to see a net worth of around 3.7M but, as you can see, most of it is real estate equity. 

We have had a lot of fun and created a lot of memories over the years but I'm finally coming around to the idea that we need to be saving A LOT more because I don't want to work forever.  However, we love where we live and would like to be able to stay here in retirement.

So here's my plan...
By selling the lake cabin, boat, and tiny home I think we will net about $600k (after selling costs, taxes).  I should have approved plans for a 2bed/2bath ADU on our current primary home property that will cost about that much to build.  We live in a very high rent area so I'm confident we could live in the ADU and rent out the larger side of our home allowing us to net about $2000-2500/month in the process.   Eliminating all the lake cabin expenses and essentially living mortgage free at that point with a small amount of passive income would reduce our monthly expenses by at least $10k, likely more.  So the plan is then to quickly pay off the remaining education debt and begin saving aggressively - I think we could save an additional $12-15k/month at that point in addition to 401k.

On paper I think this makes perfect sense.  Emotionally, we have a hard time letting go of the lake cabin and I had hoped to be able to spend more time there in the future, but with so much of our net worth tied up in real estate, at some point something was going to have to be sold. 





 

[Midwest_Handlebar]

Why not sell the primary as well? You could likely avoid paying taxes on gains of up to $500k since it's your primary residence. You have $1.75M in equity in your primary. Combine that with $600k from the lake house/toys could be $2.35M of liquid cash. I don't know what you typically spend in the average month, but you could afford a very nice life with the funds you have now.

In summary, I don't think doubling down on your primary is the best use of the $2.35M that you would have tied up in the property. You would live rent free and net $2k-$2.5k a month for the $2.35M investment. What do rentals in your area typically go for?

[cardifftodd]

Well, we need a place to live so that wouldn't really work.  Believe it or not, homes in our area sell for as much as $2000 per sqft.  And rents are insane.  Our current mortgage/tax/insurance payment is about $6500/mo but getting $9-9.5k/month is probably a conservative estimate on what it would bring in rent with a long-term tenant.  Substantially more if short-term.  We are in a really nice beach community with great schools, etc and we have nice ocean views/can walk to the beach from our house. 

$600k for a 2b/2b will sound crazy to a lot of people, I know.  But right now a 5000 sf lot in our area is $2M so being able to build rentable/livable space on the lot we already have, at least to me, seems like a good move.  In the short term it would dramatically reduce our living expenses and in the long-term it will add quite a bit of value to our property.  That's my thinking, anyway. 

And even if we didn't build the ADU, selling isn't an option right now because our youngest just started high school and we want to at least be here that long.

[Midwest_Handlebar]

Hey, no worries, it's your life. Just trying to explore all the options. $600k for a 2b/2b doesn't sound ridiculous to me, new construction is crazy expensive. What sounds ridiculous though is having 2/3 of your net worth tied up in your primary house.

I get it, you love where you live. That's great, but the comparison you should be making is how much do 2/2's rent for in your area vs how much you can make having the $2.3M liquid in diversified investments.

Your area could keep appreciating like crazy and you could be making the right call doubling down on your house, but I think it's a risky move. This is coming from someone who loves real estate, has 9 rentals, etc, but our primary equity is <10% of our net worth.

[MaybeBabyMustache]

I'll chime in as someone who has a lot of net worth tied up in an expensive house (bay area, HCOL, approx 1/2 of net worth). We have paid off our primary residence, so our decision making matrix on what to do with our real estate is a bit different than yours.

I agree with the concern on adding additional value into your most heavily weighted net worth element (your house). When our kids are out of the house (we're 2 years out), we plan to revisit whether we need a $4m house, and most likely, move somewhere less expensive. I want our money to be more flexible in retirement. You may have a different approach, which is totally fine. I don't personally love the idea of moving into the ADU on your own property, when you are previously occupying the entire thing. Will you feel that's a big downgrade? Are you comfortable with dealing with renters & watching them impact/damage your house? What will happen when you have a gap in renters? Are you going to enjoy the process of construction on your property? It feels like a bunch of unpleasant work, to eventually not have your current fancy house, but instead have a 2B ADU on the existing property. I'd really heavily favor a clean slate, with a house that makes sense for the phase of life you're in.

We sold a vacation house in 2021, and have minimal regrets. We do spend a lot more on travel now (because we're no longer staying "for free" in our house), so important to thing if that's something for you to consider.

[Midwest_Handlebar]

Maybe it's my mid-western background, but I can't wrap my head around how getting $9-$9.5k a month on a $2.9M house is a good return. I think you're making your decision on emotion and not what's best financially.

If you had $3M in other investments outside of your house I think you could afford to take the concentration risk in your portfolio, but not what you currently have, and certainly not for someone who is trying to get ahead.

[sonofsven]

Make sure your partner is on board first before you make drastic lifestyle changes, or you'll have a new category of expenses (lawyer).

[cardifftodd]

I appreciate the thoughts and hope that they will keep on coming. 

I think the one safe assumption is that we will not be selling our primary residence anytime soon.    1) My work is still in this area and I am happy there.  2) My daughter just started high school and we would like to keep her with her cohort through graduation.  3) Even if we wanted to sell, there's really nothing more affordable to buy in our area even if we move to less desirable parts of our city.  And the large contribution to our net wealth of this and the vacation property were never really even anticipated at this juncture, it just happened.

That said, there is also nothing forcing us to sell our lake cabin or, if we do, there is nothing that says we can't do something with that money other than the ADU.  The ADU, if we elected to rent that instead of the primary home, would probably bring in 5500/mo and we tend to get younger professionals in our area.  I was just trying to figure out a way to get our fixed expenses way down so that I could increase our savings rate and grow our non-real estate wealth.  Also, the ADU would probably end up being a nicer space than the primary home, just a little smaller.  But we already live in a small house and don't even use one of the bedrooms and bathrooms.

I also understand why this is so hard for you mid-westerners to wrap your heads around... I do!  My wife is from back there and I have spent a good deal of time back there over the years, but neither of us think we could live there happily.   This is where I grew up and this is where we have family and friends.  We like it here at this point in our lives and we'll always have the option of cashing out if the desire or need arise.


But please keep the alternative thoughs/ideas coming!  Thanks!

[Freedomin5]

If you absolutely love your primary residence, I’d leave it alone for now, especially because it seems like it may be the most economical way to get the lifestyle you want. But sell all or most of your other big ticket items, like the vacation home, the tiny house, a few of your five cars, the boat, etc. not only do you recoup some of the costs, you also save on the upkeep.

 For each of those items, a useful exercise might be to calculate a per-use cost. If you can rent or borrow a similar item for less, then it may make sense to not own the item.

By the way, why do you have five cars? Do you drive a different one every day of the week?

[Midwest_Handlebar]

 
I think the one safe assumption is that we will not be selling our primary residence anytime soon. 

Cool, not sure if you want any additional commentary from me, but the 2nd best option in my eyes is to sell all the toys/vacation house and put that money into an after tax diversified portfolio. You would have a roughly 50/50 split between your primary and other assets, and would be much better positioned if your local market slows down with 7% interest rates. You'll have $4 million + in equities by traditional retirement age, with appreciation and additional contributions, and will have liquidity and diversification if something happens to your local real estate market.

[cardifftodd]

Maybe one of my primary goals was/is to improve my cash flow.  So, again, I think that where the ADU comes in... basically paying cash for a place to live and having someone else pay the mortgage on our primary.  But I get the idea of a more balanced portfolio, that makes some sense.  But I'd have to just keep grinding away with my current savings rate (minus the costs associated with the vacation home).  Incidentally, the vacation home does generate a small amount of income as we "rent" it to some friends who live about 50 minutes away from it and they pay us to have access to it when we aren't there. 

We'd probably save about $2k/month average over the course of the year to not have the vacation home and associated toys.  It might be more if you really dig into it. 

5 cars... well, I've always been a bit of a car guy but, in fairness to me, on the whole I have made quite a bit of money with my buying and selling over the years.  Not that there hasn't been an opportunity cost to having money tied up in them. 
Right now I have:
1988 911 Carrera - my dad bought it new, I bought it off him for $15k about 15 years ago and it's probably worth $80-90k right now.  Rarely drive it but it has a lot of sentimental value and I'd be happy to be buried in it some day.
2010 Porsche GT3 - I have had a bunch of these and I have always made money on them.  Have an offer for $20k over what I paid 3 months ago, thinking about it.  I don't drive them much but they haven't been bad places to park money over the years.
VW Touareg TDI x 2- the his and hers daily drivers
2002 Ford e-350 7.3 diesel van - for hauling people/dog/gear and sometimes towing the boat 1200 miles to the lake cabin.  So that would go immediately.
They are all paid off but they have to be insured, registered, maintained, etc. 

Like I said in my original post, I have made a lot of bad, cringeworthy financial decisions and I'm trying to right the ship.

[Midwest_Handlebar]

I'm done. You have to be trolling us.

You start the post stating you've made every financial mistake imaginable, and given the fact that you have 2 Porches, 2 TDI's and a vehicle that gets <10 miles to the gallon that you drive 1,200 miles to your nearly $1M lake cabin, I would have to agree.

You make an absolute shit ton of money, but spend like a Kardashian and have been bailed out by an enviable real estate market. It's a mistake to over concentrate on one asset, especially at 50 years of age and diversification is the only free lunch in investing, but you do you.

[Kris]

 
I think the one safe assumption is that we will not be selling our primary residence anytime soon. 

Cool, not sure if you want any additional commentary from me, but the 2nd best option in my eyes is to sell all the toys/vacation house and put that money into an after tax diversified portfolio. You would have a roughly 50/50 split between your primary and other assets, and would be much better positioned if your local market slows down with 7% interest rates. You'll have $4 million + in equities by traditional retirement age, with appreciation and additional contributions, and will have liquidity and diversification if something happens to your local real estate market.

I sign on to this.

[Kris]

I'm done. You have to be trolling us.

You start the post stating you've made every financial mistake imaginable, and given the fact that you have 2 Porches, 2 TDI's and a vehicle that gets <10 miles to the gallon that you drive 1,200 miles to your nearly $1M lake cabin, I would have to agree.

You make an absolute shit ton of money, but spend like a Kardashian and have been bailed out by an enviable real estate market. It's a mistake to over concentrate on one asset, especially at 50 years of age and diversification is the only free lunch in investing, but you do you.

Yeah…

Not sure he is trolling, but if he is not, there is no way he is going to be taking any of our advice. I’m out, too.

[bacchi]

Eh, I don't think the OP is trolling. He/she is just facing 20 more years of work and struggling to see a path through it.

We built an ADU and rented out the front. The ADU is nicer, albeit smaller, than the main house, as the OP suggests it would be. If we lived on an alley, we'd subdivide the lot and sell off the front. However, the entire property is only 1/3 of our wealth instead of 2/3, which is the problem with the OP's numbers.

Can the ADU plan work? Yeah. Is it ideal? Hell no.

In any case, sell off the vacation home, the tiny home, the boat, and 3 of the cars. When the 14 year old gets old enough to drive, buy a solid beater for her.

I think you should also record what you spend for a few months. I suspect there are plenty of other ways to reduce costs.

[reeshau]

Read more MMM.  You could be done working immediately, if you wanted to.  If you don't, so be it.  But you won't find the answers you want, here.  Here, zero cars is the goal, for example.  (though we do have car guys here, they are recognized as hobbies)

Also, as a place to start: net worth is only useful for retirement planning, for assets you are willing to sell.  So, you have about 4x income saved, where even for a traditional retirement age, you should have 6x saved by 50.

In Dave Ramsey's terms, you do have a big shovel.  It's a good first step that you aren't content with where you are.  That's the first step to change.  But your lifestyle also has several large, unnecessary simks in it, and you are just coming into college years.

It is a good time to take stock, and get serious with yourself and your family what your priorities are.

Another way to frame things is to think about their costs vs. savings.  Take the lake house: given that you owe $250k on it, but you save ~ $75k / year.  You could pay it off in 3 years, if it were a priority.  Is it worth working 3 more years than absolutely necessary to keep the lake house?  For many, the answer would be no.  (This is a mental exercise, not a financially prudent way to actually do things)  If your answer is yes, then you can dig deeper into the costs to maintain it, and add some representation of the lifetime accumulation of those.  I think many people find there are few things they own which pass this kind of test.

[Dicey]

When threads like this pop up, there tends to be a fair amount of vitriol aimed at folks who live in HCOLAS. We live in the Bay Area. Sure, we could sell everything and move to flyover country and live like gazillionaires, but that's not where our roots are. About half of our NW is in RE, but that's primarily due to appreciation. The other half of our stache is still a crap-ton of money.

I'm guessing you're coastal SoCal, which is an amazing place to be. In your shoes, I wouldn't give it up without careful consideration. Once you cash out, you can't go back, especially at those interest rates.

I wouldn't even be in a hurry to sell the second home either. Can you rent it out for a couple of years?

[Midwest_Handlebar]

When does calling out the extreme mental gymnastics someone is using to prop up an over inflated lifestyle.... vitriol? I love how people dismiss the Midwest as "flyover" country and living in Cali is some sort of paradise. You can get the same lifestyle (or better) for 1/10 the price in many latin american countries that are a short plane ride away. Within walking distance to the beach sounds nice, and I will do it in a financially efficient manor one of these days. In the mean time I'm enjoying retirement at age 39.

The poster asked for advice on their plan, and I thought it sucked for purely financial reasons, but if they want to work until they're 70 that's cool too.

[MrSpendy]

How many days/year are you able to get to lake house that’s 1200 miles away?

[Dicey]

When does calling out the extreme mental gymnastics someone is using to prop up an over inflated lifestyle.... vitriol? I love how people dismiss the Midwest as "flyover" country and living in Cali[fornia] is some sort of paradise. You can get the same lifestyle (or better) for 1/10 the price in many latin american countries that are a short plane ride away. Within walking distance to the beach sounds nice, and I will do it in a financially efficient manor one of these days. In the mean time I'm enjoying retirement at age 39.

The poster asked for advice on their plan, and I thought it sucked for purely financial reasons, but if they want to work until they're 70 that's cool too.

[Freedomin5]

Baby steps.

If you're selling the truck, will you also sell the boat since you won't be able to tow it anymore?

With regard to the cabin, does the income from renting it out to friends cover the cost of maintaining the cottage? And is it worth keeping 900K tied up in the cabin?

We went through a similar thought exercise before purchasing our lakeside cottage, which is a 12-hour flight away from where we live. We realized that we can basically recoup the operating costs of the cottage if we rented it out to our friends for a portion of the summer. We also realized that it was much cheaper to own the cottage than to rent one for the same amount of time every summer. Another way to share costs is that we bought it with other family members. So owning a cottage, for now, is an economical way to have the lifestyle we want.

Mustachianism and frugality is not about cutting all the pleasures out of your life. It's about identifying the things that truly bring you joy, and then optimizing the way you achieve that joy.

[Midwest_Handlebar]

When does calling out the extreme mental gymnastics someone is using to prop up an over inflated lifestyle.... vitriol? I love how people dismiss the Midwest as "flyover" country and living in Cali[fornia] is some sort of paradise. You can get the same lifestyle (or better) for 1/10 the price in many latin american countries that are a short plane ride away. Within walking distance to the beach sounds nice, and I will do it in a financially efficient manor one of these days. In the mean time I'm enjoying retirement at age 39.

The poster asked for advice on their plan, and I thought it sucked for purely financial reasons, but if they want to work until they're 70 that's cool too.

Also this: https://www.city-journal.org/article/san-francisco-hostage-to-the-homeless

[bacchi]

Without going into the detailed numbers (an exercise for the OP, maybe), living life as-is will not work out at all.

They make $450k/year and have only saved $1M by age 50.
After taxes and savings, that's $250k?*
They save ~$72/year. <-- Can this be maintained with (more) college costs coming up?
At age 60, they'll have ~$3M invested. That's not enough to fund their current lifestyle.
At age 65, they might have ~$4.3M invested. Still not enough.

Simply put, the OP's lifestyle is unsustainable without showing up at the office every day. Something's gotta give if they want to stop working before 70.



* These are all not quite but almost WAGs.

[former player]

You've had a lot of fun in your life, and that is worth something.  So is being retired, and I'm glad you're looking at the numbers that could make that possible.

Lake House
I've got to say, if your main house is where you can walk to the beach owning a lake vacation home as well does seem a bit like overkill.  But: you say you are emotionally attached to it.  You should think hard about whether you are going to regret selling it, but if you keep it then you have to start treating it as a financial as well as emotional asset and rent it out on a commercial basis when you are not there.  Mortgage interest at 2.75% is just less than inflation, so not too much of an issue.

Boat
Is ownership of this tied to the main house or the lake house or do you use it at both?  How much do you use it, and is selling and occasionally renting an option?

Cars and tiny home trailer
Dear dog.  Personally I'd sell everything and start again with two small runabouts.  And that's coming from someone who once had a car hand built to her own specification and kept it for 30 years.  The internal combustion engine has had its day and there is no long term value in a "special" car other than a piece of art locked away in a garage.

Main House
Yeah, keep it.  Maybe think about the ADU for yourself later on when you are too old or disabled to get up the stairs in the main house.  But if you really want rental income then start renting out the lake house: it's there and ready to go now rather than being a whole lot of new expenditure that's at least a year off bringing in money.

Education debt
At 2% interest this is costing less than inflation and getting cheaper by the day.  Pay it off on schedule and no earlier.  Don't use paying it off as an excuse to put off investing.

Living expenses
You've been pretty silent on these, but you are saving about $75k a year out of an after-tax income that's going to be around $300k a year (I used a California tax calculator for that).  That puts your monthly expenses at close to $18k.  I'm betting that there's a whole lot of fluff and wastage in that sum apart from the cars and houses you've told us about.

Prescription
I think you are looking at this wrong.  1) I think there's a whole lot of "one big sacrifice/sale" plus "one big building project" is your salvation and you don't need to think about anything else to do with saving money ever again.  Here's the thing: it's not. And 2) you are all about putting things off: putting off investing until you've paid off the education loan, putting off getting rental income until you've built an ADU.  This procrastination is not your friend.

My suggestion is:

1.  Itemise all your expenses.  Cut out the waste: the unused or poor value subscriptions, the reflexive purchase of expensive options when cheaper is just as good, the waste of utilities, the over-purchase of items that are never used, the throwing away of uneaten food, the unnecessary car journeys.  Make sure you get value out of that money you earn.  You are currently saving about $6.5k a month: how much can you add to that monthly figure by cutting out the waste in your life?  If you are serious about sorting out your finances this is an essential step: there is no point selling stuff and dumping the money into the investments bathtub if you've left the plug out of the bottom.

2.  Sell the unnecessary toys. That's most of the cars, the tiny house trailer, perhaps the boat.  I bet there's stuff in your house that can be sold too without being missed.  Put the money you earn from selling into a nice cheap, safe, index fund.  From what you say that should be an instant boost to your investments of about $200k.  That's an instant 20% boost to your current investments: not too shabby.

3.  Rent out the lake house.  This is an instant means of bringing in additional income using an existing asset.  Renting it out will also test your emotional attachment to the place: you may well find it easier to sell after its been rented out for a while.  If not, it's still there for you in the future.

4.  Stay in the main house.  You are all happy there and a kid just starting high school doesn't need the disruption of a move.  Don't build an ADU: renting out the lake house is the quicker option with fewer downsides.

5.  Don't do anything until you've talked it all through with your spouse.  You absolutely have to have them on board before you decide anything or do anything, and nothing is going to work without their enthusiastic buy-in.  This thread has ideas on how to do that -

https://forum.mrmoneymustache.com/ask-a-mustachian/how-to-convert-your-so-to-mmm-in-50-awesome-steps/

Good luck.

[MaybeBabyMustache]

Can we leave behind the California vs other states debate? The picture that all of California is SF & all of SF is a wasteland of homelessness is.... not useful or particularly accurate. As I'm sure the implications that there's nothing to see/no reason to live in the middle of the country is as well. Living in a HCOL or LCOL can all work great for individual circumstance. As long as a poster has thought about why they've chosen a location, it aligns with their goals & values, great. Let's instead discuss the other options to help the poster optimize their life.

[Dicey]

When does calling out the extreme mental gymnastics someone is using to prop up an over inflated lifestyle.... vitriol? I love how people dismiss the Midwest as "flyover" country and living in Cali[fornia] is some sort of paradise. You can get the same lifestyle (or better) for 1/10 the price in many latin american countries that are a short plane ride away. Within walking distance to the beach sounds nice, and I will do it in a financially efficient manor one of these days. In the mean time I'm enjoying retirement at age 39.

The poster asked for advice on their plan, and I thought it sucked for purely financial reasons, but if they want to work until they're 70 that's cool too.

Also this: https://www.city-journal.org/article/san-francisco-hostage-to-the-homeless

Sorry, what is your point, please? OP is not in SF, nor am I, and that's not where the photo above was recently taken. California is a huge, incredibly diverse state.

[Cassie]

Figure out your monthly expenses and see what you actually spend. I bet you have a lot of excess that you could cut and save more money every month.

[Midwest_Handlebar]

When does calling out the extreme mental gymnastics someone is using to prop up an over inflated lifestyle.... vitriol? I love how people dismiss the Midwest as "flyover" country and living in Cali[fornia] is some sort of paradise. You can get the same lifestyle (or better) for 1/10 the price in many latin american countries that are a short plane ride away. Within walking distance to the beach sounds nice, and I will do it in a financially efficient manor one of these days. In the mean time I'm enjoying retirement at age 39.

The poster asked for advice on their plan, and I thought it sucked for purely financial reasons, but if they want to work until they're 70 that's cool too.

Also this: https://www.city-journal.org/article/san-francisco-hostage-to-the-homeless

Sorry, what is your point, please? OP is not in SF, nor am I, and that's not where the photo above was recently taken. California is a huge, incredibly diverse state.

I'm not taking the bait. I don't have anything additional to add to this post, so I'm out.

[Louise]

What are your actual goals? Do you want to retire by X age? What are your monthly expenses?

Honestly, I don't think your real estate purchases are that bad. They are assets at least. If you want to keep your lake house, that's fine. I don't think I would give it up either. Like suggested, maybe you can rent it out occasionally to generate some income. I personally would not build an ADU. What's wrong with just keeping and living in your primary house? I wouldn't give up that location.

You make a lot of money. I get you have a lot of taxes and payments, but you should be saving a lot more than you do. Where is it all going?

[cardifftodd]

I appreciate the constructive comments and I will keep them in mind moving forward. Perhaps this thread has run its course.  I tried to acknowledge the mistakes I have made and I'm fortunate to have some options with regards to how to address them.  My goals are pretty straight forward - cut expenses, increase savings, and continue to live/work in the community I love.  I don't plan to retire anytime soon- I enjoy caring for my patients and I like the people I work with- I'd just like to be able to sometime in the next 10 or so years.  I work 24 hour shifts so I have a lot of free time anyway which is how I have been able to spend about a month of the summer up at the lake in WA for the past several years.  Anyway, nothing is going to happen overnight and I have a lot to consider.

Dicey - thanks for the note and the pic looks like Moonlight Beach where I had a nice swim on Tuesday evening:-)

[neo von retorch]

I appreciate the constructive comments and I will keep them in mind moving forward. Perhaps this thread has run its course.  I tried to acknowledge the mistakes I have made and I'm fortunate to have some options with regards to how to address them.  My goals are pretty straight forward - cut expenses, increase savings, and continue to live/work in the community I love.  I don't plan to retire anytime soon- I enjoy caring for my patients and I like the people I work with- I'd just like to be able to sometime in the next 10 or so years.  I work 24 hour shifts so I have a lot of free time anyway which is how I have been able to spend about a month of the summer up at the lake in WA for the past several years.  Anyway, nothing is going to happen overnight and I have a lot to consider.

Dicey - thanks for the note and the pic looks like Moonlight Beach where I had a nice swim on Tuesday evening:-)

The thread doesn't have to die if it can help you reach your goals.

You proposed some big moves, but what you need is a change in mindset, and ongoing changes that you can sustain - within the harmonious partnership of your marriage, and in line with the life you hope to transition to.

Why don't you take a closer look at the Cast Study Template and populate the details that are going to affect your month to month expenses and savings? Make those changes as soon as is feasible (basically once you've discussed them with your partner and agree on why they are necessary, how they help you reach your goals, and how you'll incorporate them into your lives.) Start to see how those ongoing changes actually improve your life now and going forward, and then revisit some of your grand gestures and have a better way to evaluate them.

[ChpBstrd]

What are your actual goals? Do you want to retire by X age?

^This.
@cardifftodd you have tons of options if you'd like to change your life but the question is do you want to change your life?

Obviously at some point, change becomes non-voluntary. Retirement must occur someday, and on your current trajectory your standard of living will be much lower than it was when you were working. Prior to any estimate of that time, you could find yourself with a health issue, disability, legal trouble, etc. which could cut off your high income.

You don't state your annual spending rate, but I suspect it is a high enough amount that you couldn't sustain a three-to-five year absence from work. That means you're one misfortune away from a very steep downward spiral.

"Paradise" is always full of very rich people and beggars because it is inherently precarious. Whether living in a mansion or under a bridge, living in paradise requires a "rat race or die!" mentality, and isn't that nice as the mid-westerners say?

So are you planning for a retirement someday, looking to become more resilient to accidents, or looking for ways to keep a negative cash flow situation afloat?

In your shoes, I would immediately convert the excess premium real estate and motor toys into a portfolio of liquid investments and wave goodbye to the 24 hour shifts (can't be healthy, even if the pay is outstanding). Then, even if staying in your home in paradise, I would retire and actually take the time to get out and enjoy it. More likely I would move to a lower-cost place and live like an emperor on the surplus. I don't actually like beaches anyway. You get sand all over the place, there's no shade, you get sunburned, jellyfish, generally poor snorkeling due to wave action... etc. I would actually be embarrassed to own a Porsche. Similarly, I would never buy a vacation home because that would deprive me of the chance to see new places on every trip, while staying in fancier AirBnBs, while spending a fraction of the money, and while tying up no money.

Not judging - I'm merely illustrating the difference in mentality with someone who wants different things. Someone else would do something different. There are people on this Earth who like going to Disney world just to stand in line and I can't comprehend them. But hey, if they're happy - or even if they think they're happy - that's good for them. They don't get my joys either.

It's quite possible you've "been there and done that" with a lot of the lifestyle decisions that led you to where you are now, and things like the lake house, the personal bus, the boat, and the sports cars just aren't delivering the dopamine like they used to. That's fine too. If you're like me, changing the scenery and activities is necessary to keep the excitement going. If so, maybe it's time to branch out and try new ways of living and having fun.   

[BlueHouse]

Maybe one of my primary goals was/is to improve my cash flow.  So, again, I think that where the ADU comes in... basically paying cash for a place to live and having someone else pay the mortgage on our primary.  But I get the idea of a more balanced portfolio, that makes some sense.  But I'd have to just keep grinding away with my current savings rate (minus the costs associated with the vacation home).  Incidentally, the vacation home does generate a small amount of income as we "rent" it to some friends who live about 50 minutes away from it and they pay us to have access to it when we aren't there. 

I think you're looking at things a little bit backwards, but this might be a bit biased based on my desires.  So bear with me and see if any of this thinking makes sense to you:

Instead of trying to increase your monthly income, think about reducing monthly expenses.  Being a landlord is hard and not everyone is cut out for it.  I was terrible and ended up losing money because I was more concerned about keeping a quality tenant than making money.  On your own property would be horrific if there are any issues. 
I'd keep the house and either the vacation home or the tiny house.  Everything else, I'd start unloading.  Think about how much joy you will get from these things in the future...and unload them.  If cars are a hobby, maybe you can afford to keep one extra while you're working on it/reselling it, but otherwise...get rid of what you don't need. 

Don't do an ADU (it's just another toy) until you clean up other areas of your free-spending. 

Focus on how you will save more money each month.  Instead of an idea of "I want to save more money each month", make a plan for how to get there.   This thread (for the years I was saving) was incredibly helpful to me.
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/savings-goals-for-2023!/msg2543948/#new

make a goal and update it every month.  I was able to save 100-200k/year for the years I followed this model and I didn't make as much as you do...and I also live in a HCOL area.  When I looked at my finances, I spent a LOT of money on things that really didn't matter to me.  Once I cut those things out, I was able to get ahead. 

[cardifftodd]

The whole reason I am selling the lake house/toys and cabin is because I AM trying to make those changes and enjoy the benefits that come along with them but I am starting to feel a little judged:-) That's fine, I can handle it.  And I would keep the cabin if it could generate sufficient income but it's really a Memorial Day to Labor Day kind of place.  I have about half of the costs covered by renting now but I don't see that getting much better and that's why I think that equity would be better utilized elsewhere.

I don't think I need to be embarrassed for owning a 35 year old Porsche that I bought from my father (who bought it new and with whom I share a lot of fond memories from growing up) when it cost me $15k to buy and an oil change every year to keep it around.  I drive it about 200 miles per year.  The other Porsches I am a bit embarrassed about which is why I don't really drive them. But it's just a hobby where I like to hunt, buy, and sell niche cars.  I have made quite a bit of money doing it and I don't think it's that different from getting in and out of stocks if you know what you are doing.  I'd be more embarrassed to own Bitcoin.   The boat I own is a little ski boat, not some ridiculous yacht  And I've made money on those, too.  I'm an avid water skier and the whole lake experience has been something that the whole family has enjoyed doing together over the years.  But I am willing to let it a lot of this stuff go to improve our financial situation so that, yes, one day hopefully I can do this stuff and more without the constraints of having to work as much or at all. 

My initial question was really pretty simple: Does it make sense to sell the lake cabin and associated toys in order to build the ADU?  And if not the ADU, what would you do with it to improve our situation given the priorities we have (mainly, staying put in our house, community, jobs, and school)?

Several people have asked about about our monthly expenses and, yes, they are quite high.  That's what I'm uncomfortable with.  My logic, even if flawed, was to build the ADU because there is virtually a guaranteed 10% return every year by doing it (and higher returns over time) and would allow several things that appeal to me 1) we would live mortgage free in the ADU and end up with a small amount of rental income 2) net monthly expenses would decrease by at least 2/3  even allowing for some "fluff" and 3) because of those two things, we probably be able to save 50% of our gross incomes going forward.  Also, even with building costs near $500-600 ft, we would probably get twice that or more in increased property value almost immediately with only a small increase in property taxes.

Some have argued that the proceeds from the lake cabin would be better used to create a balanced portfolio.  I see the point in that and it's something to consider.  My only counterpoint is that I don't really decrease my expenses much by going that route and I'm not entirely convinced that investing that money in the stock market is going to outperform coastal real estate in San Diego.  If I really can put $200k/year into retirement savings for the next 8-10 years, and our monthly expenses are down to $5k (college is funded, for those who have asked), won't we still be coming out pretty good on the other end?  I guess a lot of you disagree with that logic and that is why I am here to learn.

For now, our plan is to move forward with selling the lake cabin, boat, and tiny home which is at the cabin along with the van and probably the GT3.  That should free up about $700-750k that we can contemplate how best to deploy. 

Again, thank you to those who have provided insightful and constructive thoguhts/advice. 

[Dicey]

Dicey - thanks for the note and the pic looks like Moonlight Beach where I had a nice swim on Tuesday evening:-)

Ha! Not a pier in sight. My folks were up by Beacon's Beach. They bought in the '70's and sold about ten years ago. Anyone else want to hazard a guess?

[cardifftodd]

Oh, I didn't look closely.... San Clemente

[neo von retorch]

Several people have asked about about our monthly expenses and, yes, they are quite high.  That's what I'm uncomfortable with.

But as @BlueHouse pointed out... why aren't you addressing your monthly expenses by cutting expenses? Why is redeploying assets (to increase income) your only plan of attack?

To quote someone famous

The reason is that every permanent drop in your spending has a double effect:

    it increases the amount of money you have left over to save each month
    and it permanently decreases the amount you’ll need every month for the rest of your life

[MrSpendy]

I’m hardly the guy to help you cut expenses, but what’s your asset allocation, expense ratios on investments, and how long have you been maxing your solo 401k? There’s a mismatch b/w your current contribution and total in those. I assume it’s because you started late, but just checking if there’s not some other (immediatelyfixable and addressable) issue.

[cardifftodd]

I think that's just it... it doesn't feel like there is much else to cut.  Some things, for sure, but beyond all the stuff (or perhaps because of all the stuff), we live pretty simply otherwise.  We don't take fancy trips, eat at expensive restaurants, we still have iPhone 10s, YouTube TV and Netflix, we make our work meals at home, etc. 

I guess I need an even more drastic change in mindset.  Working on it.

[Kris]

I think that's just it... it doesn't feel like there is much else to cut.  Some things, for sure, but beyond all the stuff (or perhaps because of all the stuff), we live pretty simply otherwise.  We don't take fancy trips, eat at expensive restaurants, we still have iPhone 10s, YouTube TV and Netflix, we make our work meals at home, etc. 

I guess I need an even more drastic change in mindset.  Working on it.

My friend, I think someone up above estimated that you are spending 18,000 a month.

Yes. You absolutely need a more drastic change in mindset.

Post a case study.

https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/

[ChpBstrd]

I think if you get rid of the surplus motor toys and real estate, you'll see your expenses plummet. Insurance, taxes, registration, maintenance, storage if applicable, and the hidden fee of depreciation will all disappear. Maybe do an in-depth analysis of how much all this stuff is costing you?

...to improve our situation given the priorities we have (mainly, staying put in our house, community, jobs, and school)?

OK, this is a very positively framed goal statement. Another way of saying the same thing is "to not be forced to move out of our VHCOL area when our expenses get too out of hand." but that phrasing suggests things are more dire than they actually are. Actually you have tons of budget fat you could cut, tons of assets you could reallocate productively, and then your high income could build a massive nest egg in just a few years. It's a choice to live the way you do, which is not really on a path to be able to retire or cut back anytime soon.

Correct me if I'm wrong, but the desired change is to re-allocate resources in a way that improves your ability to stay financially afloat long term, and to ensure you'll be able to retire in your current location.

My logic, even if flawed, was to build the ADU because there is virtually a guaranteed 10% return every year by doing it (and higher returns over time) and would allow several things that appeal to me 1) we would live mortgage free in the ADU and end up with a small amount of rental income 2) net monthly expenses would decrease by at least 2/3  even allowing for some "fluff" and 3) because of those two things, we probably be able to save 50% of our gross incomes going forward.

There's so co-mingling of terminology in this thread around reducing expenses and generating income. The ADU investment and becoming a landlord should be seen as an opportunity to run a small business from home and increase income at the expense of time and opportunity cost. This idea should be evaluated against the next best alternative, such as leaving the money in a diversified portfolio, or investing it risk-free at today's 5.7% rates and not having to spend any time on it.

Landlording is absolutely a business. It requires time, stress, research, and risk. It's honestly a strange fit for someone earning the amount of income you earn. Most LL's do it because their main skills are working on houses and being a hardass when tenants give excuses or break rules. In other words, it's not $100/hour work. It's more like $20/hour work. A competitive market keeps it that way.

Go to the Real Estate folder in this forum and look at the sticky post at the top about how to evaluate a rental property. Plug in the numbers for your ADU and see if the ROI looks good enough. It is worth the time to get insurance and property tax estimates before making a decision.

I'm not entirely convinced that investing that money in the stock market is going to outperform coastal real estate in San Diego.

I'm not either, but you've already bet most of your net worth on RE. Your bigger problem is that you cannot extract cash from your multi-million dollar home unless you do a HELOC or reverse mortgage. Thus you are house poor and entirely dependent upon an uninterrupted stream of income from work. You need paper assets so you can sell one share at a time or earn dividends and interest.

But there's also plenty of reason to think there's a property bubble. Nationwide home affordability is at levels last seen in 2007, just prior to a major real estate price collapse. In San Diego, people have gone from spending about 45% of their median income on housing in the 2014-2021 timeframe to spending 69% of their median income today. And... that's before a lot of leases or mortgages have adjusted to higher interest rates and prices. How long can this situation continue? To 80%? 100? What does a bubble look like, if not this?

I'd look at your over-concentration in RE as a vulnerability, not an investment plan.

On the flipside, you could sell just the lake house, invest the $900k in SGOV or FDIC-insured bank CDs, and earn about $48-50k per year WHILE no longer paying the five figure annual expenses of the lake house.

I'd be more embarrassed to own Bitcoin.

Now that we can agree on! Cringeworthy! :)

[cardifftodd]

MrSpendy - I lost a lot of years of post-2008 market gains by trusting an advisor that had us stuck in a horrible annuity full of endless fees.  I had no idea what I was doing then, I was just trying to build a practice.  I fired them a few years ago and hired another advisor who has done very well for a friend of mine.  I don't manage the money but I watch it (Schwab accounts) and they have actually done pretty well with a mix of equities, funds/ETFs, etc. But I do pay a 1% fee.

I didn't want to complicate this thread further but I work as an IC for a hospital and have an S-Corp (for the past 6 years) but they are transitioning us from 1099 to W-2 in the next few months.  The money part of it won't change too much and there are some nice perks like better health insurance with much less out of pocket, paid malpractice insurance, 1:1 401k match, etc.  My plan is to take over the new 401k funds at that point but I will have to see what investment options are given to me.  I'd like to do something like a 3 fund portfolio.  So the current advisor won't have any more money coming under their management and I'll have to see how they do vs. how the new 401k does going forward.

[Villanelle]

I think that's just it... it doesn't feel like there is much else to cut.  Some things, for sure, but beyond all the stuff (or perhaps because of all the stuff), we live pretty simply otherwise.  We don't take fancy trips, eat at expensive restaurants, we still have iPhone 10s, YouTube TV and Netflix, we make our work meals at home, etc. 

I guess I need an even more drastic change in mindset.  Working on it.

What is your total annual spending, not include the real estate costs?  Because you make a boatload (pun intended) of money, and have very little (relatively) saved, so it strains belief that you live a simple, frugal life other than the listed homes and toys.  Where is ~$200k going?  (That's a very rough guess, so correct me if I'm wrong, but I'm estimating taxes off of $450k, $50k invested, and then a chunk for the the mortgage and toy insurance.  If $200k isn't close, what is?  And whatever that number is, where is ti going?  It's a lot of money so if you are sitting at home cooking and watching Youtube TV, where is all your money?)

[Dicey]

Oh, I didn't look closely.... San Clemente

Winner!

Also, I'd like to ask you not to close this thread so quickly. Your situation is interesting and you have a really good chance of making your goals with a few adjusments. Moreover, you seem willing to make changes, which we love, love, love. I have seen some great responses in this thread by people I really respect. So read them again, print out the highlights if that's helpful, and come back for more conversation.

Better still, try doing a Case Study. There are several folks who consistently offer helpful thoughts in case studies and don't post much anywhere else.

You really are perfectly positioned to make massive progress in a relatively short time.

[Midwest_Handlebar]

Oh, I didn't look closely.... San Clemente

Winner!

Also, I'd like to ask you not to close this thread so quickly. Your situation is interesting and you have a really good chance of making your goals with a few adjusments. Moreover, you seem willing to make changes, which we love, love, love. I have seen some great responses in this thread by people I really respect. So read them again, print out the highlights if that's helpful, and come back for more conversation.

Better still, try doing a Case Study. There are several folks who consistently offer helpful thoughts in case studies and don't post much anywhere else.

You really are perfectly positioned to make massive progress in a relatively short time.

I lied, I do have an additional comment:

Agree with Dicey on the above (just not on how great California is :)). You have a unique position to make massive changes in a short amount of time that will set you and your family up for success in the future. Since you're new to the blog I would read MMM post starting from the beginning 2012ish. Pretty much everything that you need to know has been addressed and written about extensively. Given the large dollar amounts involved I would focus on high dollar subjects such as asset allocation, portfolio fees, etc.

You need to first identify what is most important to you in life. It sounds like staying in your current house through retirement is the most important. However, the less flexible you are with making changes to your current lifestyle the less financial progress you will make.

Also, don't take any of the comments as personal criticism. There is/was a concept of figurative "face punches" that was meant to be a counterpoint to our extremely consumerist society. You can read more about it in MMM's early articles. I found this website roughly 10 years ago when I was in a shitty situation and now I'm happily retired because I made financial independence a priority.

I view this community as the David Goggins of personal finance vs Dave Ramsey is closer to Planet Fitness. Or at least it was a few years ago. Just a disclaimer. 

[lutorm]

What is your total annual spending, not include the real estate costs?  Because you make a boatload (pun intended) of money, and have very little (relatively) saved, so it strains belief that you live a simple, frugal life other than the listed homes and toys.  Where is ~$200k going?

This is the core question for me, too. I feel like there must be a disconnect somewhere between "we live a relatively frugal life" and "450k income and 1.1M saved at 50". It smells like a classic case of gradual lifestyle inflation to me, where you end up spending a bunch of money without knowing where it goes.

You sound like you want to increase income, which is a natural reaction. But until you know where your money is going and know that all that spending is actually bringing you the value you want, that shouldn't be the first step. Remember that lowering expenses is much more powerful than increasing income in that you both increase your savings rate and decrease the amount you need saved to maintain your expenses in the future.

Over the past year I did a detailed accounting of all expenses (downloading all credit card and bank statements and putting them into an accounting software) and it was very eye opening. I had a fear that our expenses had been inflating over the past couple of years, but it turns out we were just about where we thought was reasonable. I second the calls for figuring out where your money's going and then posting a real case study.

[deborah]

Why I don’t like the ADU idea.

- it’s going to cost a lot of money,
- it will disrupt your family’s life while it’s being built,
- it hasn’t been designed or costed yet, so it’s a pipe dream. It may not even fit on the land.
- your family will still be living in the same place, but they will be confined to the area defined by the ADU, and every day they’ll be able to see the area they don’t have access to any more.
- the tenants will do things that your family members don’t appreciate, possibly invading their precious memories.
- you haven’t calculated the ROI.

You already have an enormous income. Getting to FIRE involves both having a reasonable income AND low expenses. You already have the first half, you need to concentrate on the second. Your ideas are to increase your income, but you’ve already got more than enough.

You say you’re reasonably frugal. That isn’t possible. There are many of us here who spend less than $3,000 a month, and are very happy doing so. If you concentrated on becoming more frugal, you’d get the cash flow you want. Obviously, part of that could involve selling toys that increase your expenses, like boats and cars and the lake house, but you can become more frugal however you want to. You could go on a diet of beans and rice, and keep the toys - it’s up to you how you are frugal. Frugality is being happy by consciously spending on the things that make life enjoyable while not frittering away money on junk that isn’t worth it. If toys make you happy, and beans and rice taste fantastic to you, that would be a great way to be frugal.

[cardifftodd]

There is some spending to cut and I am going to really get in to finding out where it is all going.

The ADU is actually in final stages or planning and we have invested a decent amount in design/engineering.  A building permit is probably 2-3 months away.  It has been a 2 year process.  I have one bid that came in right around $600k although I could probably trim about $50k from that.  It would actually be on the best part of the lot with the best ocean views with more than adequate space for the 3 of us.  I get the concerns about living next to other people but we have done it before and the design/integration of the ADU creates a lot of separation and if that's what we have to do to stay in the area and retire without a mortgage, well I guess that we had decided it would be worth it. ROI, as mentioned above, would easily be 10% as it would bring at least $5k/month as a long-term rental.  But I still think we would rather rent out the larger side of the home for more money since it would have a larger positive impact on the finances, but that could be figured out when it is complete IF we end up building.

The comments on this thread have us thinking about whether we really should do the ADU, and that is why I posted in the first place.  The one thing I can't see my way past is the fact that, without doing the ADU, we will always have a $6650 mortgage (PIT) if we want to live here. 

Or we don't sell any property right now, stick it out for 4 years, then sell the primary house and retire at the lake in 4 years.  Kidding.

[Villanelle]

There is some spending to cut and I am going to really get in to finding out where it is all going.

The ADU is actually in final stages or planning and we have invested a decent amount in design/engineering.  A building permit is probably 2-3 months away.  It has been a 2 year process.  I have one bid that came in right around $600k although I could probably trim about $50k from that.  It would actually be on the best part of the lot with the best ocean views with more than adequate space for the 3 of us.  I get the concerns about living next to other people but we have done it before and the design/integration of the ADU creates a lot of separation and if that's what we have to do to stay in the area and retire without a mortgage, well I guess that we had decided it would be worth it. ROI, as mentioned above, would easily be 10% as it would bring at least $5k/month as a long-term rental.  But I still think we would rather rent out the larger side of the home for more money since it would have a larger positive impact on the finances, but that could be figured out when it is complete IF we end up building.

The comments on this thread have us thinking about whether we really should do the ADU, and that is why I posted in the first place.  The one thing I can't see my way past is the fact that, without doing the ADU, we will always have a $6650 mortgage (PIT) if we want to live here. 

Or we don't sell any property right now, stick it out for 4 years, then sell the primary house and retire at the lake in 4 years.  Kidding.

Have you searched at all for other homes in the area?  You dismissed that above, but have you even looked or talked to a realtor?  Something much smaller, something that already has an ADU you could live in, or any other option that brings down your costs?  Rather than invest more than half a million dollars in an ADU, can you find something to trade your current house for that lowers costs, either because it is smaller and cheaper, or because it already has a suitable ADU (or one you can make suitable with minor changes)?  And, do you not use ~50% of your current space?  Or if you do use it, have you truly sat and thought about what it's going to be like for everyone to move from your mansion to a modest ADU?  (To be clear, it sounds like the ADU is more than large enough for your family, but given your current lifestyle, I can't help but wonder if you are going to spend $.6m on the ADU, only to find it's another expensive toy that you don't actually like.  Because it's pretty clear you and your family like fancy, and living in a smaller place in someone else's backyard, even if it has a good view, isn't fancy.)
 
Also, do you plan to stay in this home forever, or just until the kids are launched in 4 years?  If you plan to move, will you keep the house and rent our it and the ADU, or sell?  Where do you think you'll live at that time?  (It seems you will still be working for another 10+ years, based on a very rough pass at the numbers.  If you are spending about $200k/year, you need $5m saved to cover those costs and you have about $1m. so you likely have several decades of work ahead of you, at a minimum, unless you make some massive cuts beyond just the vacation home and some toys.)  The plan for the future helps determine whether this ADU makes sense (or how little sense it makes). 

[mistymoney]

ADU sounds like an expensive headache that may or may not pan out financially for you.

Why is retiring to the lake house *kidding*? That seems like a nice plan to me.