Ramping up savings at 40

[telbij]

I'm about to turn 40, and I consider myself very fortunate: have a stable marriage with a 9-year-old daughter, live in Silicon Valley making very respectable money—enough that my wife does not have to work.  Over the course of my life I've been okay with money, but not great.  We have no debt, but have less than $100k in retirement accounts, and still renting, with nowhere near enough savings for a down payment on a house in the Bay Area.

Looking around this forum I am envious of those who have managed to achieve FI at such a young age.  I'm 40 and nowhere near getting off the treadmill.  In the middle part of my career I spent a long time underpaid at startups.  The hard work has paid off in terms of career progression, but I feel like an idiot for not saving more.  Over the past five years we've been able to ramp up retirement savings where I am now maxing my 401k and Roth (although I will probably be ineligible for Roth starting this year).  However beyond that there always seems to be some justifiable expense soaking up the extra income.

My strategy so far in life has always been to make more money rather than be frugal.  In some regards I feel this has served me well, but being beholden to a high-paying job is increasingly a source of anxiety.  Also, even if I am able to scrape together enough for a down payment in the Bay Area, it makes me nervous to be that leveraged in the current market given how long the bull run has gone and how housing prices around here seem unsustainable.

Any advice for someone entering middle age to get spending reined in and on the Mustachian path?

[inline five]

No one is ineligible for a Roth. You contribute to a Traditonal IRA and convert to Roth. Super simple and zero income exclusions.

[mozar]

You don't have to buy a house. It's OK to rent.

[wenchsenior]

As a high earner at 40, you can still retire early, if not super early. 

We did  not get serious about saving until we were in our late 30s/late 40s, respectively.  That was also the point we cracked triple digit gross income. We had never tended to run credit card debt, we had a modest house, and we didn't buy a new car every couple years.  But still, we had car loans, student loans, frittered a lot of money away.  We had always saved about 10-15% of our income.  But by the time we paid off the student loans and the car loans and started having a lot of extra cash, we had taken on financial responsibility for a parent who had no resources. 

All of a sudden we were in debt on a second mortgage, with a second set of utilities/housing expenses to pay, and we had another car loan (so as to give the parent our old car). We had a home equity loan, too.  Ugh, I hate thinking about that period, which coincided exactly with the Great Recession.  I'll never forget my frothing frustration at having absolutely no extra cash available to invest in 2008/09 as the market tanked.  I SWORE I would never lose another opportunity like that again, and it was a wake-up call to start REALLY cracking down on our spending, pay off the new debt, and ramp up retirement savings. 

The most crucial step we took was to start tracking every penny that went in and out of the house, by category.  We just saved every receipt and once a week I entered them in a spreadsheet (some other people use budget software).  That was all it took. We never set, nor needed to set, a budget, but just seeing exactly what we spent in each category month after month did two important new things for us:

1) it showed us how much we REALLY spent, on average, over the course of a year. Any tracking is helpful, but to truly grasp our cash flow, we needed about 3-4 years of tracking to account for variable home repairs, trips, medical, etc.

2) it showed us that we spent too much money in some categories that we didn't even value that much, and perhaps not enough in other categories that really gave us pleasure.  It helped us determine value of $ vs. $ spent.

After that, we picked some categories and cracked down on spending, and focused like lasers on paying off our new debt and increasing savings.  It was a stressful period, but a valuable one. In just under 3 years we paid off ~45K in debt and accumulated a 20K emergency fund while simultaneously increasing our retirement savings by >10K/year and paying an extra 6-10K/year toward the dependent parent's upkeep. 

Once we knew we COULD do it, it became easier to continue to funnel extra income or money freed from debt payments into savings without feeling frustrated and deprived.  We are nowhere near as hardcore as many on this board, nor as hardcore as we could hypothetically be. But we now habitually save ~40% of gross income every year, and increased our cash assets 8-fold in the past decade (and as the saying goes, the first million is the hard one).  We are on track for DH to retire at 60-62 if he wants to (I doubt very much he will want to b/c he would just continue to do the same work for free LOL).

So you can certainly make a ton of progress!  First step for us was tracking ALL our money, so that's what I recommend starting with.  Good luck!

[cats]

I agree with wenchsenior, step one is to start tracking your expenses if you don't already. You say there seem to be "justifiable" expenses soaking up your extra income...tracking can help you get the full picture of what those expenses are and see if there are patterns that can allow you to plan better and ultimately spend less.

That said, you live in a crazy HCOL part of the country.  I live there too, and the housing situation in particular is nuts at the moment.  Given that your wife is not also tied to a job, have you considered looking into working elsewhere or simply planning to retire elsewhere?

[Laura33]

You need to change your thinking.  First, start with this:  https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

I hope this helps illustrate that earning more money to cover an inflated lifestyle is the least effective way to achieve financial success, because the more you need to live, the more you need to save up to be able to sustain that lifestyle forever, and so the longer you need to work to save that figure.  Say you live on $100k.  If you want to live on that forever, Social Security will cover maybe $30k of that, but you still need a ‘stache to cover the remainder, so that means you need almost $2M saved to throw off that income forever.  And of course you’re paying high taxes at that income level, so you probably have to earn $250k to live on $100k net and still have enough left over to save at a high enough rate to retire before you’re 70.  If you live on $200k, it’s even worse - because SS still covers only about $30k, so now you need to cover $170k/yr, which means you need over $4M saved (and since your taxes are even higher, that means you have to make probably close to $500k).

In other words, your current path is unsustainable.  If you are 40 and saving 10%, that means you’ll be set to retire in your current lifestyle around 90.  Of course, you won’t be able to maintain your current workload and salary until you’re 90, which means you’ll end up working as long as you can, and then taking a huge hit to your lifestyle when you are no longer able to maintain that pace.  OTOH, if you could live on $ 50k, with SS still covering around $30k, now you need to generate only $20k/yr, which means you only need about $500k saved.  And you can easily do that at your current salary.

So I would encourage you to figure out an off-ramp now, while you are still young enough to change your trajectory significantly.  Start by viewing a maxed-out 401(k) and a Backdoor Roth as the starting line, not the finish line.  If your wife doesn’t work, do a spousal IRA for her.  And then start focusing less on what more you can “afford” and more on what you actually need - what makes you happy, and what is just mindless spending or keeping up with Joneses or ego.  Because the reality is there is always “more” out there - no matter how much you make, there will always be something else for you to want, and always some reason you can justify wanting it. 

If you want a simple test just multiply by 25, because for every dollar you spend now, you need $25 saved to live that lifestyle forever.  Happy with a $10k car every 10 years ($1k/yr)?  You need $25k saved to cover that.  Want a $50k car every 5 years ($10k/yr)?  You need $250k saved to cover that.  Is the nicer car worth an extra $225k?  That is your fundamental decision.

The path to real success is mastering your own desires and putting Future You’s needs ahead of Current You’s wants.  That’s how all those successful people here did it: they understood that extra spending is always justifiable, but they realized that giving in to that short-term desire would have very long-term impacts that weren’t worth it.

You can do this.  You just need to make the mental shift away from our constant focus on more, and start figuring out what is enough.

[BTDretire]

Laura did a good job of saying what I was going to post.
 Your spending level will be forced drop, either now or when you retire,
because you won't have the money, unless you make changes.
 Looks like you expect around $200k income this year,
and as Laura pointed out, $30k from SS in retirement.
That's a huge drop.
If you shoot for $90k of retirement income, $30k SS and $60k
from retirement savings, you need to save and grow until you have $1.5M.
Starting with $100K and saving $50,000 a year growing at 7%
will get you $1.6M in 15 years. 4% of $1.6M = $64k
 $90k is a lot to most MMMers, but you are in a HCOL area.
  Here's a coumpound interest calculator to play with the numbers.
http://www.moneychimp.com/calculator/compound_interest_calculator.htm
 

[Noodle]

Well, the good thing about having a high income and low savings rate is that there's usually plenty of room to make improvements.

In the short term, if you start tracking your financials you will probably find lots of places you can make changes. If you have a thick hide you can post a case study, but honestly you can probably learn almost as much from reading over the ones that have already been posted.

In the long term, you and your wife may need to sit down and talk about what's most important to you--you're probably not going to be able to manage a stay-at-home parent AND living in an HCOL area AND early retirement (and maybe college tuition for your daughter? or a house?), especially in combination with starting at 40.

[telbij]

Thanks for the thoughtful replies y'all.  Yeah, to be clear, I don't have any illusions about early retirement, but I do want a stable retirement.  We definitely want to move to a lower CoL area before retirement.  I totally get what Laura is saying about changing our thinking.  I guess my hangup is that I believe SV should be giving me better marginal returns even despite the high CoL.  For instance I spend $36k a year on rent, but I probably make $60k more than I could anywhere else, so with the correct financial discipline I ought to be able to save more here than anywhere else in the country.  Of course I may be wrong about that, there are high paying jobs elsewhere too, just not as many, and not with as much equity upside.

[cats]

Remember though, when comparing your increased earnings vs. your increased expenses, you need to account for the higher tax bill that a high salary comes with.  E.g. if you earn $50k more in SV than elsewhere, but that $50k is all getting taxed at a higher marginal rate....you may not actually be seeing that much more going into your pocket.

That said, if you are keeping your housing expenses to $36k and earning $200k+ (which I assume you are as you mention potential Roth ineligibility), there's no reason for you not to be saving a LOT more than the $30k/yr you are doing with an IRA+401k max.  It sounds like you have some other lifestyle inflation that is not unique to the Bay Area.