Latest posts by FIRECracker (see all)
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- FIRE Doesn’t Fix Everything - November 25, 2019
As I write this post, I’m hacking my lungs out and building an impressive tissue mountain. I was supposed to wake up at 8am for a hike, but instead spent the night drowning in mucus and getting zero minutes of sleep. This would’ve SUCKED back when we were working, but since we are now slow travelling, I just let myself sleep until noon, putter around our Airbnb, and watch a ton of Netflix. Missing out on all the activities doesn’t matter because I can just postpone them for another day. Zero worries. Zero stress. Long-term travel rocks!
AND, on the plus side of having the plague, I’m now holed up in this cozy house on top of the mountains writing up this reader case for all you fine people.
And this killer view doesn’t hurt either:
So without further ado, here we go! (email has been edited for brevity)
I’m a 37 year old woman. My nickname is KK! I’m almost 3 years married to an amazing woman, KM. We both left our hometowns in the Midwest after graduating from college, and headed for LA to pursue jobs that our hometowns couldn’t provide. Oh, and to also be openly gay.
KM and I both had a similar upbringing where we had SO much love and emotional support from our parents, and they provided everything we needed from the years of 0-18, but once college hit, we were mostly on our own, taking out sizable student loans, covering room and board, and any fun money. So we graduated college with a decent amount of debt. Couple that with insane high cost of living in LA and low paying jobs, well we then accumulated credit card debt just to survive.
Back in 2002, I was pursuing a career in entertainment, and it’s well known that you have to bend over and take it in order to get a coveted job in the chosen entertainment field much longer than it takes to advance anywhere else in the country, world, planet. So I was making roughly $30,000 – $42,000 from the time I was 22 – 30. Shit was brutal. I nearly gave up. I was always spending more than I made, because I now had crazy minimum payments on credit cards. I had about $27,000 in credit card debt (primarily food, gas, minimal entertainment expenses because I had to wine and dine writers, people in the industry) and $10,000 left in student loan debt.
At 31, another company reached out to see if I’d come work for them to develop tv shows and I took that job. I went from making $45,000 to $90,000 plus a $5,000 bonus. I also had an amazing 401k plan where our company matched 133% up to the first 6% we contributed into a Fidelity 401k plan. So I decided to do the full 6% out of the gate.
In 2013, I got an offer from another company to do what I do, but my current company made a play to keep me. So I went from $95,000 a year to $130,000 a year with a $15,000 annual bonus all for being good at my job and someone else recognizing it. My 401k has $26,350 at the end of 2013!
The end of 2015, KM and I completely pay off our credit cards and for the first time in over 12 years I have no credit card debt! KM still has $37,000 in student loans at this point and I have $7,000.
In Sept of 2015, I’m now making $180,000 a year with a $25,000 bonus. We get the student loans down to $25,000 and take it from having to pay these loans for the next 17 years to 4.
Fast forward to 2017, here I am at 37 at the same company, and I’ve doubled my base salary from when I first started at the end of 2011, and am making $186,000 a year with a $35,000 bonus (that gets taxed at 50%) and I have zero debt finally!
KM and I been in the same apartment since we moved in in 2017 and have CHEAP rent for Los Angeles. We pay $2000 a month for a 2BR/1BA in a desirable part of town. I realize that the last 5 years of salary could’ve made a HUGE chunk of change if we had invested it, but it was more important for us to pay things off. But now we want your advice. We’re itching to buy a home and expand our family in LA. My job can’t be done in another city, and KM has a SWEET job with tons of flexibility and bosses who want her to get pregnant. We are going nuts in our small apartment, and we both miss hosting people, having dinner parties, and having grass to put our toes in that’s OURS. Houses that we’ve been looking at are anywhere from $595k-$800k for a 3 or 2 BR that we could live in for the next 5+ years.
We love our jobs and love what we do, so there’s not AS much of the urge to retire immediately. We know we’re catching up for lost time with the damage we did in our twenties and early thirties, so realistically we’d love to retire when I’m 50 and KM is 46.5 or 47. Ideally we’d love two kids and would love to help them with some or most of their college.
So, what the hell do you think we should we do? Be brutally honest, we can take it.
KK + KM
Is it just me or does this reader’s life sound exactly like the plot of La La Land? But with less dancing (I’m guessing).
Now I don’t know much about the film industry in LA, but KM ended up going from $30,000 salary to $221,000 (including bonus) in 15 years! Which just goes to prove if you want it bad enough, you don’t have to be an engineer, doctor or lawyer to earn that kind of moolah. Kudos, La La Landers!
Anyhoo…movie references aside, let’s look at their finances:
Pre-tax combined salary: $186,000 + bonus of $35,000 (KK) + $130,000 (KM) = $351,000/year.
Net Monthly Income (after-tax and maxing out 401K for both): $8625 (KK) + $5946 (KM) = $14,571/month
Dining Out $865.00
Joint Soul Cycle (spin class) $240.00
Dry Cleaning $40.00
Car payment $458
Insurance (car + rental + earthquake) $329
Drybar (hair blowouts) $120
Cell phone $80
Investable Assets: $128,000 (KK’s 401k) + $50,906 (KM’s 401k) + $5000 +$57,000 + $1200 +$1100 + $10,350 (investments) = $253,556
KK and KM are making an astounding $14,571/month after tax and spending $6636.50, which means they have a savings rate of 55%! Amazing, considering that they had a combined $74,000 in student and credit card debt with a starting salary of $30,000/year. WOW. You ladies have come a LONG way and I’m so impressed with how far you’ve come. And not only do you have a 55% savings rate, you also have $253,556 in assets! Even if you buy a house for $595K right now, you’d been able to pay off just 3-4 years. Given your incredibly high salary and the fact that you like your jobs, a house at that price range wouldn’t be a problem for you at all.
But let’s MATH THIS SHIT UP and see what happens to your retirement goals with and without the house:
You mentioned “realistically we’d love to retire when I’m 50 and KM is 46.5 or 47”. Since you are 37 now, that gives you a 13-year runway. Can you make it?
Scenario 1: Retiring while continuing to rent
Given your current yearly expenditure of $6,636.50 * 12= $79,638, you would need $79,638 * 25 = $1,990,950, so around $2M to retire using the 4% rule.
You save ($14,571 – 6,636.50) * 12 = $95,214/year. If you were to invest that plus yearly max contributions of 18,000 each to both your 401ks, that would be $131,214 a year, all compounding at a conservative 6% return, here’s what your numbers would look like:
|Year||Starting balance||Annual contribution||Return (6%)||Total|
Note: rent increases will be offset by salary increase and promotions, which have been omitted from this chart.
This means you’d be able to reach your $2M portfolio and retire in 10 years! So yes, with this scenario, you will beat your targeted retirement age of 50 by 3 years and retire at age 47.
Scenario 2: Retiring with a house
But since you’ve expressed your desire to buy instead of rent, what will happen if you retire with a house?
Let’s say you buy a house for $700,000, the middle of your housing range.
In order to avoid the PMI, you’ll need at least 20% in down payment, or $140,000. You have $74,650 outside your 401k, so you’ll need to save up an additional $65,350, which, based on your current savings rate should only take you only 7 months.
At that point, you would need a mortgage of $560,000. Plugging that into the mortgage calculator, we get:
Your monthly payment would be $2,864, $1707 of which would be interest in the first year.
We would then need to add property taxes, insurance, and maintenance, which adds another $462 (LA property tax) + $100 + $583 (1% of property value) = $1145
So your total monthly payment would be around $4,009 and this is not including closing costs, lawyer fees, home inspection, real-estate agent fees when you sell, etc, etc.
Of the $4,009 monthly cost, $2852 goes towards interest, property taxes, insurance, and maintenance, NONE of which adds to the value of your home. That’s actually HIGHER than your rent. YIKES!
But but but the House Horny Idiots will automatically point out that the taxes you save in mortgage interest deduction will fix everything. Right?
Well, let’s see if that’s true.
Since you max out your 401K, your tax burden before claiming the mortgage interest is $130,511. After you claim it, it is $122,346. So you’re saving $8165 in taxes, or $680/month. Which brings your $4,009 monthly cost down to $3329. Of this monthly cost, $1156.67 is principal, so you are still throwing away $2171.33, which is STILL more than your rent.
In 10 years, at the point where your other “renting” self would be retiring you will have paid 10 years into principal, but guess what? You would STILL have a monthly interest payment of $1251/month. Property taxes, maintenance, insurance, none of that goes away no matter how much of the principal you pay off, so that still adds $1145, which gives you $2396 that you are throwing away in year 10. Because your interest has gone down, your tax savings are also reduced to $480/month at this point, so you are STILL throwing away $1916/month after paying the mortgage for 10 whole years!
Now, let’s see what that does to your retirement date.
Assuming you want to keep the house to live in when you retire, your housing expenses would increase from $1970/month to $4009/month, pushing your yearly expenses to $8675.5 *12 = $104,106. This would require a portfolio of $2,602,650. Taking into account the extra $8165/year she would receive in additional tax refunds, and the extra $24,468/year increase in expenses, she would be able to contribute $78,911/year , instead of $95,214. Assuming you invest what’s currently in your 401k, as well as continue maxing out both your 401K’s each year, that’s a total savings of $114,911/year. Since you had to use money outside your 401Ks for the downpayment, your starting balance would be only the amount in your 401Ks, so $128,000 + $50,906 = $178, 906. With those numbers, your retirement date looks like this:
|Year||Starting Balance||Annual Contribution||Return (6%)||Total|
Taking into account the extra 7 months she would need to save the 20% down payment, her retirement date would be around 14 years instead of 10.
So by buying a 700K house, she pushes back her retirement date by 4 years. She will only be slightly off target and retire at 51.
So are we *gasp* saying that buying a $700k house ISN’T a bone headed idea? For this couple, yes we are. And it’s not because of home appreciation, or the mortgage interest deduction, or leverage mumble something leverage, it’s because they’re making over $300k gross a year. Their house price is just 2.5X their pre-tax salary. So it’s difficult to really blow yourself up too badly with numbers like that.
But is the house worth an extra 4 years of working? Unfortunately, that’s where the power of mathing shit up ends. This La La Land couple will have to answer that question for themselves.
Intrepid readers, what would you do? Sound off in the comments below.
Update: Astute readers have mentioned that this analysis doesn’t take into account kids and college costs. That is correct. Since the costs of kids would be the same regardless of whether they buy or rent, this has been left out. KM and KK can feel free to add these costs and rerun the scenario themselves to see how much it would push out their retirement date.
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