Impact of house purchase and having a child on “time-to-FI”

[hnh87]

Life Situation:
IRS filing status: MFJ
Number of current kids: 0 (planning to have 1 child, within 2 years)
Age: Early 30s Spouse 1 / Late 20s Spouse 2
Tax bracket: 33% Federal (2017), 5% State

All incomes and expenses annual

Gross Salary
Total W-2 Salary Pretax:                300k

Pretax Deductions   
H.S.A.   6,800
Health Insurance   1,820
   
Post-tax Retirement Contributions
Roth IRA   11,000
Roth 401k (just changed from traditional this year because of Trump tax cuts)   37,000

Current Expenses   

Rent on 1BR apartment	17,400
Car Payment (0% interest)	4,800
Car Insurance	700
Gas for Car	500
Restaurants+Bars	3,600
Entertainment	1,200
Groceries	2,400
Internet (only 1 choice in my area)	900
Cell phones	1,200
Natural Gas	360
Electric bill	480
Gym Membership	360
Travel and Hobbies (we like traveling)	7200
Others	2400
Total Expenses	43,500

   
Assets   
Taxable Mutual Funds (mostly index funds)   550k
401k (50% roth, 50% traditional index funds)   230k
Roth IRA (mostly index funds)   220k
H.S.A   15k
Car   10k
Cash   50k
   
Liabilities   
Car Loan (0% interest)   3k

Plan for 1 child and buying a home
Currently, our invested assets in mutual funds are about 1M, my spouse and I spend about 45k (rounded up from 43.5k) per year. Using the “mustachian time-to-FI calculator http://mustachecalc.com/#/calcs/time-to-fi”,  if we say a SWR of 3%, investment return of 7%, inflation of 3%, then our time to FI would be about 2 years.

We are spending relatively little compared to our income now. But, my spouse and I are planning have 1 child within the next 2 years, thus causing our expenses to rise and our income to fall. We also live in a HCOL area, and are considering buying a townhouse, which would really make the housing costs go up.

So, let’s say this is what happens: We cut back on one of our careers for at least several years with 1 child. Our new pretax income would fall from 300k to 175k.

To estimate the increase in spending from 1 child, I used this calculator (https://www.cnpp.usda.gov/tools/CRC_Calculator/) for Northeast region, 100k+ income, but subtracted housing cost (because we will calculate that separately), the annual cost is for a 1st child excluding housing cost is: 19k. This cost includes the child’s cost in the areas of food, transportation, clothing, healthcare, education, and other.

We are also considering buying a house in this HCOL area. In this area, a 2BR townhouse would cost around 600k. This is a mid-range townhome, perhaps ~1200-1400 sq.ft. Assuming a downpayment of 200k, this would result in a mortgage of 400k. On this home, the annual costs (assuming about 4.4% mortgage rate over 30 years) would be:

Property tax: 9600
Insurance: 840
HOA: 1800
P&I: 24000

If we buy such a townhouse, the downpayment would also decrease of our mutual fund investments from 1M to 800k. It would increase our current spending from 43.5k to 43.5k+9k+0.84k+1.8k+24k=79k. With our reduced income of 175k (assuming effective total tax rate of about 25%), our annual savings amount would be 175k-79k-44k tax=52k.

Edit: made an mistake with the initial post and forgot to both add the child cost of 19k and subtract the current rent cost of 17.4k. With these two corrected, it would be 43.5k (current spending)+9k (property tax)+0.84k (home insurance)+1.8k(HOA)+24k (principle+interest)-17.4k(current apartment rent)+19k (annual spend for 1 child)=80.7k current spending instead of the 79k

Now estimating FI time again, we are looking at an expenditure of 79k, SWR of 3%, current networth 800k, yearly savings 52k, interest 7%, inflation 3%, resulting in a new time to FI of 16 years.

Some questions I have

-   Am I estimating the housing cost and having a child cost correctly? Is the budget of 19k per year for our child excluding housing costs reasonable? I feel it’s a bit high starting out, but then again this includes future college cost, which could be very high in the future. It's also hard to know what unexpected expenses will happen for a hypothetical child, so perhaps I'm estimating. If I'm estimating too high, what would be more reasonable given we would want public school education but fully fund college costs.

-   The new time to FI of 16 years also feels wrong because I’m not including the equity we would be building as we pay the mortage every year. How do we quantitatively estimate the effect home equity would have on time to FI?

[Morning Glory]

Wow, you make a crapton of money. That being said, why do you need a 3%WR? 4% is successful as long as you take on part time work or reduce spending when there is a serious downturn. At 4% your time to FI would only be a few months.

I am thinking the house is a bad idea. Do you want to stay in the area after you are FI? If not then just have your baby in a crib in your room for the first 2-3 years.

How much is daycare in your area? It might be close to that$19k number but nowhere close to$125k. The kid won't affect your FI timeline that much if you keep your jobs and apartment.

I would maybe not Roth the 401ks, you are paying a much higher marginal tax rate now than you will be during FI, even if the tax cut is only temporary.  If you are only withdrawing 45k per year then you will be in the 12% bracket (15% if rates revert to what they were).  Mad Fientist has a good post on this topic.

[Hirondelle]

First off all, excellent job on the overall finances and holy crap that's a great income! I also wonder why you're aiming for a 3% withdrawal rate. 3% is quite a bit lower compared to 4%. How about using 3.5%? Still gives you the safety cushion but saves you from saving up an additional 5x yearly expenses.

I think you're overestimating the cost of a child, unless you'll be using lots of daycare. If you cut back on your work, how much daycare would you need? Those calculators mostly assume you're a "consumer sucker" so the Mustachian style of raising a child may be way cheaper. I don't have children but there will be plenty of others on this forum that will be able to chime in on that (or look for one of MMMs blogs regarding the cost of a child).

Regarding buying a house, you use your current expenses + added expected expenses for the house. But to me it looks like you forgot to subtract your current rent? This would reduce cost again with 17,400 to 61,600. I agree with MrsWolfeRN that it'd be fine to keep renting for another few years until you want to give the baby a room of its own. Also consider if you want to stay in the area or move to a lower cost of living area in a few years. This might especially be tempting if you plan on quitting your jobs once reaching FI.

Even though your budget is very reasonable, I'd still like to point out a few things. You spend about 50% more on restaurants than on groceries. How about reducing restaurant spending a bit? Also your cell phone bill seems high. And what is covered by entertainment as restaurants, traveling and hobbies are apparently not part of entertainment? No facepunches here, just a critical look at your budget to see if there's any fat to trim that would help you to offset the extra costs of the baby and/or the house.

[hnh87]

Thank you hirondelle and MrsWolfeRN for your thoughts.

First, I did make a mistake where I forgot to subtract my current rent when calculating annual spending with a hypothetical townhouse, but I also forgot to add the child cost too :). So, fixing these 2 issues, the new annual spending based on initial numbers are:
43.5k (current spending)+9k (property tax)+0.84k (home insurance)+1.8k(HOA)+24k (principle+interest)-17.4k(current apartment rent)+19k (annual spend for 1 child)=80.7k

Now that's corrected. Responses to specific questions:

• Yes, the 19k per year for a child might be a bit high because its a spendy pants estimate. I'd estimate 10k as a lower bound.
• The entertainment cost is because I bought 2 relatively high end computers last year and some sports equipment. We don't buy these every year, but amortized it comes to be about 1k per year.
• The restaurant bill is a bit high. It can probably come down some, maybe by 1/3.

So, if we bought the house and had the child but were more frugal with child expenses, we're probably looking at 70k per year in spending, maybe a bit less. Also we'd probably travel a bit less with a young child, so that cost may reduce some too.

Thinking about this more, the major points appear to be:

• Buying a home is a big expense. Although no one can predict home prices in the future, from 2000-2017 local real estate CAGR was about 4.5% nominal, which is much less than S&P 500. That means buying a house is really an expense. The insurance+tax+HOA alone (not even counting mortage and maintenance) annually on the hypothetical townhouse is 12k per year, compared to my current rent of 17.4k per year, although we currently rent a much smaller place. Still, if we buy, the transaction costs encourages us to buy a bigger place than we need. 
• Not know where we want to live long term makes buying a house uncertain. If we stay in the area for a very long time, buying makes sense (8 years according to the nytimes buy vs rent calculator). We're not sure if we want to quit our jobs after FI. Both my spouse and I have jobs that can force us to move every few years. My employer for example has about a dozen offices in the broader metro area we are in, and it is somewhat common to be required to join a different project 45 minutes additional commute further away with little chance of working from home. So, if we bought a house in the area, it may be a problem for commute too. This kind of uncertainty makes it difficult to make long term housing plans, or raising a child, for that matter. Of course, we could get lower paying jobs that are more certain (working in government, for example).

[MustacheAnxiety]

Withdrawal Rate: Sadly, I am right there with you on the 3% withdrawal rate.  With a CAPE over 30 and little historical data for retirements lasting 50-60 years, I view 3% as the right number.  That said if you are planning for FI years in the future you can reevaluate this based on current market conditions.

House:  I think you missed several additional costs, but you did not subtract out your current rent so overall a big win.  I don't see a line item for maintenance.  With HOA dues of only 1800 annually, I doubt the HOA covers much of this.  Not sure how handy you are but even if you are willing to replace a furnace yourself, the budget needs a few thousand for maintenance annually.  Your utilities will also go up when you have to heat and cool twice the space and pay for water and sewer.  Also if you greatly expand your living space you may feel a need to greatly expand your stuff, so be careful. 
You shouldn't include equity in your networth for calculating FI.  The only exception is if you plan to sell your house and move to a low cost of living area in retirement.  Then you could include the difference between your current equity and the cost of a place at the new location.
On the plus side, eventually the payment and interest goes away, so that might brighten your time to FI a bit.  Also no rent so an extra 17400, woot!

Kid: I think you should estimate this yourself, it can vary so widely based on your values.  MMM claimed $300 a month (but that assumed no change in house size and limited plan to help with college along with general frugality).  Just take your budget and scale categories as needed to account for an extra person.  Given the frugal lifestyle you elect it may be way lower than 19K, but making a snap judgment on the amount you are looking to inflate housing to cover one kid it could be way higher.  Maybe MMM can help more than I can: https://www.mrmoneymustache.com/2011/05/26/what-is-the-real-cost-of-raising-children/  If you think his ideas are reasonable maybe do the 3600*1.5 (because mostly we are not as badass as MMM) + 4000 for college savings annually for 22 years.  And again, you get to take out this line item after 22 years.  It might not make a big difference if you were trying to FIRE today, but after 10 years it would significantly affect your simulation.  But it looks like kid costs were not added into your spending.

So overall, I would think the picture is a little rosier.  You can take 10K back per year on the kid side (but still have to add the 9.4K to your budget) and 12.4K on the house side (17.4K rent - 5K in extra housing costs).  Plus you can use CFIREsim to give a better picture of success rates if your spending on both kid and house drop considerably after a couple decades.  Overall spending is now: 43.5k+9k+0.84k+1.8k+24k-17.4 (rent) + 5k (utilities and maintenance) + 9.4K (kiddo) = 76.14K  You + 22 years (assuming less than a 30 year mortgage or a few extra payments) 76.14-24-9.4=42.74

Other stuff that you didn't ask about but may be missing from your simulation.
Social Security: At your ages you can factor in your expected benefits at 67 with a 25% reduction
Healthcare: this will change a lot if you retire, likely a considerable increase.  If you figure out how to estimate this, let me know. 
Taxes: With all your Roths this will be quite low, but will add a few percent in state taxes to your budget after retirement.

Making the above adjustments (with guesses) CFIREsim says you have 100% success retiring in just under 12 years w/ Capital preservation after 51 years if you immediately by a house, make a baby, and drop your salary.

No comments on the budget as you seem to be happy with it and you are doing well and prioritizing happiness.  Good luck!

[Hirondelle]

• Not know where we want to live long term makes buying a house uncertain. If we stay in the area for a very long time, buying makes sense (8 years according to the nytimes buy vs rent calculator). We're not sure if we want to quit our jobs after FI. Both my spouse and I have jobs that can force us to move every few years. My employer for example has about a dozen offices in the broader metro area we are in, and it is somewhat common to be required to join a different project 45 minutes additional commute further away with little chance of working from home. So, if we bought a house in the area, it may be a problem for commute too. This kind of uncertainty makes it difficult to make long term housing plans, or raising a child, for that matter. Of course, we could get lower paying jobs that are more certain (working in government, for example).

Thanks for your clarifications on the budget and expected child + house costs.

This part of your answer resonated most with me and really makes me lean against buying a house. You literally say that your job will FORCE you to move every few years. That sounds like buying and selling houses each time could turn out to become a huge drain on your budget. Do you have any estimate on the expected number of years and whether your jobs would be moving into the same direction? Unless you could buy a house now and turn it into a good rental while renting another place in your new location it wouldn't make sense to buy a house if you'd have to move let's say every 5 years.