Author Topic: need your advice  (Read 1672 times)

marcus_aurelius

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need your advice
« on: July 22, 2019, 11:57:58 PM »
Hi, what an incredible forum! I just found this a few weeks ago and itís been great to learn.

I need some advice. Hereís the situation: my wife and I earn about 375k per year, and we live in the high-cost San Francisco Bay Area. Our bonuses can bring in another ~75k, but it depends on company performance, so I donít want to include it in my plan. I am 45, my wife is 43.

Our house is worth 1.8M, on which we owe 397k. We bought it for 990k and will pay it off in 9 more years but the interest is low, 2.5%.
Combined 401k balances: 990k
Cash: 270k in CDs and liquid cash, earning about 2.7% interest.
Stocks outside of retirement accounts: 448k
Fundrise + Realtyshares: 53k

We have no car loans, credit card balances etc.

I donít have a monthly budget, but weíre pretty good in our spending habits, although not frugal. We both come from India, so to be honest, I canít think of anything missing that I have to buy. It may be a cultural thing. We have a nice home that works for us. We manage to save $100K per year even after putting money into 401K, stocks etc.

Outside of the mortgage, our other spending is on travel, where we spend $6-8k per year. We have been to some incredible countries so far, and it has enriched us.

Now hereís the main point: we have two kids, ages 14 and 11. I donít have any 529 accounts, but need to save some money for college. Ideally, they both get into the UC system, where I graduated from, where the costs are generally lower than private schools.

Open to any and all advice on when FIRE can work for us, and how we can take care of undergrad tuition for the kids.

marty998

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Re: need your advice
« Reply #1 on: July 23, 2019, 02:34:17 AM »
You have $270k cash but you need to "save for college" for the kids? What is the $270k cash earmarked for?

You earn over $400k a year but you haven't said how much your expenses are (travel for 4 people totalling $8000 for the year seems way understated).

When would you like to stop working? The answer to that, and your expenses, will dictate when you can FIRE.

SwordGuy

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Re: need your advice
« Reply #2 on: July 23, 2019, 06:43:07 AM »
Sounds to me like you could set aside $50K for each kid in just one year.   That's about $45k more than most kids get.  Let them earn the rest if they aren't wise enough to live at home and go to a college where that $50k would cover all costs.

Damn, but I would sweat owing that much money on my house.   You've got a great income but still, that's a lot of debt.

How many years until you are FI and can retire?


A Fella from Stella

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Re: need your advice
« Reply #3 on: July 23, 2019, 08:22:01 AM »
Sir, you are doing very well. Congratulations to you and your wife. I hope you'll be responding to give some advice around here if you have the time.

The $270,000 in just cash looks like it would satisfy tuition, would it not?

Could you set aside $25,000 a year for your oldest until he/she is 18?

Both are sensible.

jeroly

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Re: need your advice
« Reply #4 on: July 23, 2019, 08:47:25 AM »

Open to any and all advice on when FIRE can work for us, and how we can take care of undergrad tuition for the kids.

In order to get a sense, in fairly broad and conservative terms, of when you can FIRE, while you don't need to have a budget, you do need to have a general sense of what you are spending now, and to be able to project it to what you would spend in retirement under various scenarios. Then multiply by 25 to 33 to get a number for what investible net worth can support each scenario.

Based on the limited information you've provided, saying you're saving 100k on top of (presumably maxing out) your 401(k)s, I'm guessing you're netting $250k on that $375 gross and saving $150k from it, spending $100k. So you need $2.5-3.33 million to sustain that spending level. If you were to sell your house and move to a LCOL area, looks like you are already there! If you wait until you pay off your mortgage and retire in place, you wouldn't have mortgage payments so you'd probably need only about $75k/yr (you'd still have insurance and property tax), so that requires $1.5-2.5 million at that point.  If you take social security into account, plus if there's any pension coming your way, that reduces the required amount even further.  The VPW calculator on the Bogleheads website is pretty slick for some of these calculations... I'd recommend that you play with it!
« Last Edit: July 23, 2019, 09:56:24 AM by jeroly »

Tuskalusa

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Re: need your advice
« Reply #5 on: July 23, 2019, 09:06:55 AM »
Hi There!  Fellow CA resident here. We are starting to look at UC college costs, as well. One thing Iíve noticed is that costs have skyrocketed since DH and I went to school. Itís looking like about $40k per year for tuition + room & board, by my calculations. (I was looking at UCSB, for reference.). It looks like your cash reserves will cover UCs for both kids. Just thought youíd like a reference point.

Weíre in a similar position. A few years older. Our plan is to pay off the house and get our cash reserves up for college. We have a 529, as well.

Thanks for starting this thread. Appreciate any insights on college planning and Silicon Valley life!

erutio

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Re: need your advice
« Reply #6 on: July 23, 2019, 09:19:01 AM »
529 doesn't really help you in CA as there is no tax deduction. 

Since you are saving 100k per year after tax currently, you can just redirect those savings towards college once your oldest starts in ~4 years.  100k should even cover college for both kids once the 2nd one gets there.

With your numbers, I'd siphon some of your cash reserves into index funds at your brokerage, unless those reserves are earmarked for something.

Great job on the 401k balances.  As far as your mortgage, 2.5% is great, and I wouldn't put in any extra payments on that.

marcus_aurelius

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Re: need your advice
« Reply #7 on: July 23, 2019, 12:40:36 PM »
Thanks for the thoughtful replies. BTW, I fully realize how fortunate I am.

At this point, more stuff doesnít interest me. In a few years (hopefully five), I would like to do something else. Maybe do a part-time job, leaving more time for reading, travel, playing guitar, etc.

Let me respond to your comments:

Of the $270k cash, I want to set aside $120K as a 2-year buffer in case both of us lose our jobs. (For a few months in 2008, we were in that situation.)

Thereís no pension for either of us. Outside of the 401K, social security is ~$6K per month for both combined (looking at our last statements.)

TBH, I donít like having close to $400k on mortgage debt, but the interest rate is pretty low at 2.5%, so Iíve learnt to make peace with it. I get more % interest in CDs.

Thanks for the note that 529 doesn't get a tax deduction in CA; I didnít know that. Also thanks for the VPW Bogleheads note.

Marty998, youíre right, travel is actually $12k per year if you combine a couple of ski trips, local trips etc. I donít think this is something we want to compromise on.

Since weíve family and friends here, the most likely scenario is that we will pay off the mortgage and retire in place. We wonít have mortgage payments or college payments in 9-10 years, and that point, I think we will be comfortable on about $60k/yr.

Any ideas on where to invest ~$150-200k in a reasonably safe place with a time horizon of 4-8 years, when I will need it for the kidsí college? It would be good to get more interest than a CD, but without the volatility of the stock market. (I think Iím already exposed enough to the stock market.)

erutio

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Re: need your advice
« Reply #8 on: July 23, 2019, 12:50:18 PM »
Any ideas on where to invest ~$150-200k in a reasonably safe place with a time horizon of 4-8 years, when I will need it for the kidsí college? It would be good to get more interest than a CD, but without the volatility of the stock market. (I think Iím already exposed enough to the stock market.)

Depends on how comfortable you are with it, but I'd put it all in the stock market.  I don't think you're over exposed to the stock market.  If anything, you're overexposed to real estate. 
1,438k in stocks (45%)
1,453k real estate (46%)
270k cash (9%)

Like I said earlier, keep your 120k EF, invest the 150k.  Then, when your oldest reaches college, since you are saving 100k per year after tax anyways, you can just redirect those savings towards college.  100k should even cover college for both kids once the 2nd one gets there.  You don't need to save for college.  You have a big enough shovel, you can just pay for college costs as they come up.  That way, you keep your other cash working for you in the market.

Buffaloski Boris

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Re: need your advice
« Reply #9 on: July 23, 2019, 06:36:32 PM »
If youíve already maxxed out the other tax preferred options, then 529 plans or ESAs might still make some sense. Earnings are tax free if used for education.

In candor, I think the big issue for your family is the geographical premium youíre paying to live in SF. Add together the extremely high COL plus high state income taxes and thatís the biggest thing that I see that is potentially changeable. I get that you might be stuck in the area due to jobs and canít geo-arbitrage, or really love it and couldnít bear moving. But youíre paying a lot of money for it.


BicycleB

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Re: need your advice
« Reply #10 on: July 23, 2019, 06:58:26 PM »
@marcus_aurelius, I love your screen name! Congrats on building such an excellent stash. I once lived in the Bay Area, glad you enjoy it. Anyway:

In a few years (hopefully five), I would like to do something else. Maybe do a part-time job, leaving more time for reading, travel, playing guitar, etc.

In that case, I suggest measuring your actual spending and doing a fuller case study, at least to the point where you can calculate a FIRE timeline based on standard MMM assumptions.

Then use that data to explore FIRE calculators, like cFIREsim, under the various assumptions representing different scenarios such as "quit now", "work 3 more years", "will I qualify for ACA under such and such a retirement scenario using current law and what's my spend rate then", etc. You can calculate precisely instead of just guessing. Sure, all of these methods and calculators still have some guesses built into them, but your field of uncertainly shrinks greatly as your calculations grow more precise. Clearer understanding of your options will bring you peace of mind. Maybe you'll even conclude you can legitimately quit now.

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Regarding portfolio allocation, intelligent and well-grounded analysts can come to widely varying solutions, even when using the same objectives. One way to explore portfolios with less stock and possibly more cash (or at least more bonds) is to explore portfoliocharts.com.  Thought-provoking examples there include the Permanent Portfolio, the Larry Portfolio, 7Twelve portfolio, Pinwheel Portfolio. I do recommend that some reading in order to understand tradeoffs is very worthwhile before implementing any such portfolio. Maybe consider exposing the proposal to review in its own thread, or exploring a similar thread on the Bogleheads forum... which by the way is a great place to get advice on investing details, though the default spending expectation there is higher than here (a matter of lifestyle choices, not portfolio allocation).

https://portfoliocharts.com/
https://portfoliocharts.com/portfolio/my-portfolio/
Note that you can put your own current portfolio allocation into the My Portfolio calculator above and determine how that allocation would have performed historically, using data from I think 1970 to today. That is not the same as predicting future results, of course!

https://portfoliocharts.com/portfolio/permanent-portfolio/
https://portfoliocharts.com/portfolio/7twelve-portfolio/
https://portfoliocharts.com/portfolio/larry-portfolio/
https://portfoliocharts.com/portfolio/pinwheel-portfolio/

I think you'll find that:
-most examples have less cash than you (because historically cash is terrible compared to stocks, bonds, real estate, and several other things);
-most portfolios include stock;
-anything with low stock includes something else that seems "crazy";
-every portfolio has investments that will suck at some point. In fact, most portfolios include something that will suck at EVERY point!

Here are the Bogleheads, by the way. A community of John Bogle fans.
https://www.bogleheads.org/
And a sample thread, this one discussing the Larry Portfolio.
https://www.bogleheads.org/forum/viewtopic.php?t=210208

So you'll have to figure out some course of action that you can stand to follow. The best portfolio for you isn't the one that some calculator says is best; it's the one that you can stick to under pressure, that's better than the other options you're able to stick to under pressure. Learn some more and discuss, probably. There's no perfect answer unless you're willing to just follow a confident reasonable suggestion... which if you were, you wouldn't be asking, because MMM already gave an answer. (It was basically "All stock, you'll be fine. Especially if you have Social Security as a backup, and your stock was at the 4% rule to start with.")

http://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/

PS. If I should have skipped the portfolio section and just posted the MMM link, let me know...I gave all the other details, many of them nonstandard on this forum, because I assumed you had read and dismissed MMM's own thoughts. Which is fine, he's just a person - one of many who give reasonable but non-infallible advice. He's fallible just like me!  :)
« Last Edit: July 23, 2019, 07:21:55 PM by BicycleB »

jeroly

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Re: need your advice
« Reply #11 on: July 23, 2019, 07:28:25 PM »
Thanks for the thoughtful replies. BTW, I fully realize how fortunate I am.

Of the $270k cash, I want to set aside $120K as a 2-year buffer in case both of us lose our jobs. (For a few months in 2008, we were in that situation.)
This makes perfect sense.
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TBH, I donít like having close to $400k on mortgage debt, but the interest rate is pretty low at 2.5%, so Iíve learnt to make peace with it. I get more % interest in CDs.
I know many folks here are super debt averse, but IMO having  a mortgage roughly equal to your annual income is pretty moderate. Moreover, you have the assets to pay it off if for some reason you needed to.
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[...] Also thanks for the VPW Bogleheads note.
You're welcome!
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Marty998, youíre right, travel is actually $12k per year if you combine a couple of ski trips, local trips etc. I donít think this is something we want to compromise on.
With your income and savings levels, no reason to! In fact, if you can find the vacation time, take more and keep exposing the kids to the world!!!
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Since weíve family and friends here, the most likely scenario is that we will pay off the mortgage and retire in place. We wonít have mortgage payments or college payments in 9-10 years, and that point, I think we will be comfortable on about $60k/yr.
So then you're really already FI for all intents and purposes.
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Any ideas on where to invest ~$150-200k in a reasonably safe place with a time horizon of 4-8 years, when I will need it for the kidsí college? It would be good to get more interest than a CD, but without the volatility of the stock market. (I think Iím already exposed enough to the stock market.)
Putting $1 in the market when you're looking at a six year timeframe has returned more than a dollar more than 90% of the time, so I'd just put it in stock index funds.