Another Friday, another Reader Case! Yaaaay!
Today’s reader comes from the Bay Area. Home of Silicon Valley, the Golden Gate Bridge, and some of the most unaffordable housing in the country.
Let’s dive in, shall we?
Thanks for your work. My partner (26) and I (29) have been reading for months and appreciate your insight and blunt honesty!
Hoping you can give us your opinion on our situation… thanks in advance!
Your gross/net annual family income
Me: $100K gross / almost 80K net (including 401K and HSA, mine and employer’s contributions). not counting those, it’d be 57K salary net
$10K gross side hustle
Partner: about $100K gross; variable, not a consistent income
Your monthly family spending
Condo mortgage – $2500
Groceries – $500
Utilities – $150
Health insurance (partner) – $400
Car – $125
Dog food – $50
Misc – $400 (budgeted, avg spend around 200)
For any debts you have, please include:
The interest rate
Your minimum monthly payment
The outstanding balance
Any fixed assets you have (house, car, etc.)
Condo – worth about $400K
Car – Prius, worth about $9000, paid cash
And investments or savings you have (cash, bonds, stocks, etc.)
Checking/savings: $90K (will be investing soon)
Roth IRA: 47K
SEP IRA: 20K
Biggest questions we have:
– Should we have/keep this condo? It’s not in a super hot area of the Bay Area, but the ‘hot’ sections seem to be spreading further out from SF/Oakland every year. Comparable rental probably about 2500-3000 depending on proximity to SF/Oakland.
– Other reasons for condo are that my partner (he’s a real estate agent, please don’t shun us!! :)) can claim some of the payment for home office use on top of the other deductions. When we sell, we don’t need to pay listing commission, when we buy, we get either paid or get a deal. By no means are we tied to the idea of keeping this condo, though.
– The real estate gig is part of the reason we’re still in the Bay Area. My job allows for more flexibility and working for home (at least for now), but is a tech role and if I ever needed to switch jobs being in the Bay would be ideal. Additionally, we don’t really know where else we’d move to at this point, and it’ll be a while until we’d take advantage of int’l geoarbitraging (due to our dog). Thoughts on these variables with respect to our FIRE journey?
– What would you two advise in general for us to FIRE? I’ve already told my partner to try and sell as many houses to house-horny idiots as possible, but other than that, what do you suggest?
OK so before we get to the questions, let’s summarize our dear reader’s numbers and see if anything pops out as unusual, shall we?
Note that as usual, I’m not including their condo value or their mortgage balance since residential real estate can’t be used to help you retire. What we’re showing here is investible assets.
|Income||$200,000 gross, $157,520 net + $10,000 side hustle|
|Expenses||$4,125 monthly, $49,500 annually|
So let’s see, what numbers jump out at us? Well, for one, it seems this couple makes a ton of money. Grossing $100k each plus a modest side hustle ain’t too shabby at all. One works in tech, the other in real estate, so that explains that. That being said, this is the Bay Area. High earnings don’t matter if your cost of living is also bonkers.
Which leads me to the next number that jumped out, or rather didn’t jump out at us. Their expenses, including the costs of the condo, is $49,500 a year. That ain’t bad at all, especially considering the fact that they live in the Bay Area. I’m used to reader cases from California spending easily twice this, so this was a pleasant surprise.
So yes, we have a $400k condo. But on the other hand, we have combined earnings of $157,520 net, plus a $10k side hustle, and modest spending of less than $50k a year. Does the high savings rate cancel out the expensive condo? Let’s find out by MATHING SHIT UP!
When Can They Retire?
First of all, there’s something interesting in their earnings numbers: A side hustle already grossing $10k. That’s actually really helpful.
As I’ve mentioned before, post-retirement income is super-duper useful, as it reduces your withdrawal pressure. And since side hustle businesses can continue after retirement, we need to take this into account by subtracting it off their spending. So even though they’re spending $49,500 annually now, the amount they’d have to withdraw from the portfolio would be $49,500 – $10,000 = $39,500.
That gives us an FI target of $39,500 x 25 = $987,500.
Considering that their original FI target would have been $49,500 x 25 = $1,237,500, that $10k side hustle income represents a 20% drop in their FI target!
Now, an additional wrinkle is that we have to be careful to take into account taxes on that $10k differently before retirement and after retirement. After retirement, we can assume that a $10k side hustle income would be tax-free since it would fall within a married couple’s standard deduction. But before retirement, because there’s other income involved it will get taxes much more heavily.
So by plugging in their combined income into SmartAsset.com’s tax calculator, we can see that their total net income, including side hustle income and assuming both make the maximum 401(k) contributions each year, would be $164,245.
Combine that their spending of $49,500 a year, and we get a savings rate of $164,245 – $49,500 = $114,745. That’s everything we need to model their retirement date.
Just 6 years, baby!
In this case, the condo really hasn’t held them back all that much. Their crazy-high income and their relatively normal spending has done most of the work for them. And more importantly, it shows that it’s still possible to live in the Bay Area without spending six-figures a year.
What About The Condo?
Before we deal with the condo, we have to caveat this part of the analysis by saying that I’m deeply suspicious of their housing-related spending numbers. They’ve only listed the mortgage and utilities as monthly expenses, but where’s the property taxes, the home insurance? And a $400k condo with no condo fee? Something’s deeply wrong here.
But fine. I can’t just make up numbers and can only run the math with the inputs I have. So let’s say BayAreaConundrum sells the condo. After a $400k x 5% = $20k real estate commission, they’re looking at $380k net. After paying off the mortgage balance, they are left with $380,000 – $335,750 = $44,250.
Let’s add that to the starting balance of our retirement projection. So instead of $313,000, we start with $313,000 + $44,250 = $357,250.
We will assume she rents an equivalent place for $2500, which is the same as the mortgage so her FI number doesn’t change. What does this do to her FI date?
So that didn’t really do anything. That means that either decision is fine, but since I’m assuming BayAreaConundrum would rather not move than move, keeping the condo seems to make more sense.
Now Onto The Questions
Should we have/keep this condo?
The real estate gig is part of the reason we’re still in the Bay Area. My job allows for more flexibility and working for home (at least for now), but is a tech role and if I ever needed to switch jobs being in the Bay would be ideal. Additionally, we don’t really know where else we’d move to at this point, and it’ll be a while until we’d take advantage of int’l geoarbitraging (due to our dog). Thoughts on these variables with respect to our FIRE journey?
Because of your low living costs, I don’t actually think you need to geoarbitrage at all, but the fact that your job is remote presents some interesting possibilities. A previous Chautauqua attendee realized that her ability to work remotely can really help you lower costs. As long as she stayed in the same time zone, nobody would even notice, so now she travels in Mexico with her husband, allowing them to drop their costs dramatically.
What would you two advise in general for us to FIRE? I’ve already told my partner to try and sell as many houses to house-horny idiots as possible, but other than that, what do you suggest?
Absolutely. Sell as many houses to idiots as possible, pocket their money, and use it to retire. I think that’s a great idea!
Otherwise, though, you seem be doing everything right. You’ve managed to keep your living expenses down, you both make good money, and you didn’t let the condo swamp your finances. Good job!
Aaand We’re Done
Well, that’s it for today. What do you guys/gals think of BayAreaConundrum’s situation? Let’s hear it in comments below!
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