Latest posts by Wanderer (see all)
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It’s Friday, so you know what means: Reader Case time!
Today’s reader case is from a long-time reader at a bit of a crossroads (hence the title). She’s been living and working in Alberta, has been reasonably responsible with her money but she’s coming to the point where she’s asking “Is this it?” Her and her family wants to make a run for Financial Independence and want us to analyze their situation and figure out whether it’s even possible.
So without further ado, let’s dive right in, shall we?
Dear Millennial Revolution,
My husband and I are 37 and 39 years old. I work in communications at an oil and gas company; my husband works in digital marketing for a national retail chain. We have been married for 12 years and have two kids, 7 and 9. We live in and have recently paid off a two-bedroom condo in Alberta where our kids share a room, and are wondering what our next steps should be. We are mortgage and debt-free in our thirties and feel we are at an important crossroads.
On the one hand, I would prefer never to have a large housing expense again and would like to reach FIRE (mostly FI) in my mid-to-late 40s with the option to leave the corporate world. To me, that means $1 million in investments, excluding our home. My husband is supportive and plans to keep working. However, we are contemplating moving. We both agree that our place, at 899 sq ft, feels smaller every year as our kids grow, and we’re both tired of dealing with a variety of inconsiderate, immature and entirely un-self-aware renters around us. Honestly, it’s more of the latter than the former. If not for (some of) the people who live around us, I think we could actually make it work to stay where we are. Alas, few families choose to raise kids in condos in our part of the world. The building was mostly owners when we first moved in, but now it’s mostly renters.
What does the math say about our options moving forward and how they might impact this FI(RE) dream – do we stay put, rent out the condo and go rent a house, or attempt to sell the condo (in a soft market) and buy a house? I love the freedom that being mortgage and rent-free provides, but I don’t want my husband and kids to suffer just because I want to leave behind the corporate rat race and either retire early or choose different (maybe part-time?) work. I am very grateful for my job, and am considered a high performer, but I don’t know that I fit into the ladder-climbing and consumer spending lifestyle that a golden handcuffs workplace typically encourages. It can also be very stressful. I want a quieter life.
Here are my numbers:
Gross/Net Famiy Income:
Mrs. Crossroads (37): $104,000 gross (base salary only. There is also an annual bonus).
NET every two weeks: $2,161 (but keep in mind this is because I save 19% in our company savings plan or it would be higher)
Mr. Crossroads (39): $73,000 gross base salary
NET every two weeks: $1,904
Your monthly family spending:
|Groceries and household items||$800|
|Childcare (ends in 2021)||$800|
|Car insurance (two cars)||$159|
|Car maintenance and registration (My FIL is a mechanic and he and Mr. C do repair work and tire changes together)||$115|
|Eating out + craft beer||$100|
|Bus pass (Mrs. Crossroads only)||$103|
|Cell phones (both)||$230|
|Life insurance (both)||$98|
|Disability insurance (Mr. Crossroads only)||$229|
|Allowance (kids – $20 each)||$40|
|Allowance (both of us – $100 each)||$280|
|Kids season clothing and school supplies||$120|
|Kids summer camps||$166|
AS OF JUNE 26, 2018, WE ARE COMPLETELY DEBT-FREE, INCLUDING MORTGAGE!
Any fixed assets you have (house, car, etc.):
- A two-bedroom condo in Alberta bought for $267,000 during the 2006 boom, now worth optimistically $189,000 (and it keeps falling. Real estate doesn’t always go up – take heed Vancouverites and Torontonians).
- We own outright a 2007 Chevy Cobalt and 2009 Nissan Sentra, neither of which we consider assets, so we don’t include them in our net worth calculation.
And investments or savings you have (cash, bonds, stocks, etc.)
|Mrs. C RRSP (personal)||$193,000|
|Mr. C RRSP (personal)||$191,000|
|Mr. C RRSP (work)||$9,000|
|Mrs. C DC pension plan (work)||$31,579|
|Mrs. C TFSA||$1,500|
|Mr. C TFSA||$1,500|
|Mrs. C Company Savings Plan||$12,848|
|Miscellaneous savings accounts (for vacations, car maintenance, etc.)||$1,500|
Thanks for any guidance you can provide!
– At a crossroads in Oil country
OK to summarize, here is where they stand.
|Expenses||$4,451 monthly, $53,412 annually|
|Fixed Assets||House: Paid $267,000, now worth $189,000|
Note that Mrs. Crossroads lists her bi-weekly take home pay, but mentions that she contributes 19% into her company’s savings plan. We counted these contributions as part of her income since, similar to RRSPs/401(k)’s, they can later be used to pay for retirement expenses if we withdraw it tax-free.
OK so at first glance, how has Mr. and Mrs. Crossroads done? The incomes are great, so good job there. Their expenses aren’t too unreasonable given that they have two kids, but there’s some low-hanging fruit we can get rid of, which we’ll get to in a bit. They’ve also played the housing game and lost, and are now unfortunately sitting on a condo worth less than what they’ve paid. As with most people in their situation, this is causing them some angst and “What do I do with this condo?” is at the forefront of their mind. We’ll get to that in a bit as well. And finally, a respectable $497k in investable assets. So we have lots to work with here.
A note to the curious eagle-eyed reader. Why so little in their TFSA, you might be thinking? In their email, they said that because one of them is a US citizen, there’s no point in putting any money in their TFSA. They are correct. Because the US taxes on a worldwide basis even if you don’t live in the US, and because the US doesn’t recognize the TFSA as a retirement account, the US actually demands taxes be paid on any earnings in a TFSA. The only way to get rid of this is to renounce your US citizenship, but that’s a whole other can of worms we’re not going to get into here.
Path to Financial Independence
So let’s deal with the first question: How do we get Mr. and Mrs. Crossroads to FI?
As always, the answer lies in MATHING SHIT UP!
At their current annual spend level of $53,412, they will need according to the 4% rule, $53,412 x 25 = $1.34M to retire. Now that’s a hefty sum, but not insurmountable given their savings rate. Also, considering they have 2 kids their cost of living is somewhat reasonable, BUT if we dig into that spending just a little, we can still find some easy ways to reduce their spending after retirement.
Just by seperating out their spending into “NOW spending” and “RETIREMENT spending”, we can find some savings.
What I mean about “NOW spending” vs. “RETIREMENT spending” is that some spending just doesn’t apply once they pull the FI rip-cord. For example: disability insurance? Don’t need it. Once you leave your job disability insurance no longer applies since your portfolio is paying for your living expenses, not your job, so no need to insure against being unable to work. Ditto for life insurance. Your kids are taken care of with or without you because you’re FI. Also, child care. By their own estimates, this cost goes away in 2021.
So by eliminating these costs that will naturally drop off in retirement, their retirement expenses go down to $4,451 – $800 (child care) – $98 (life insurance) – $229 (disability insurance) = $3,324 monthly, or $39,888 annually. All without cutting a single lifestyle-related cost out of their budget.
At this lower cost of living, their retirement portfolio needs to be $39,888 x 25 = $997,200. That’s a hefty $337k they no longer need to save. Win!
Now let’s look at their savings rate. At their current net income of $117,320 and expenses of $53,412 (remember, we have to use their NOW spending for this calculation rather than their RETIREMENT spending), they are saving $63,908, or 54% of their income! That’s pretty damned good, and reason to be pretty optimistic about how our projection is going to look.
Also, remember that child care costs end in 2021, so that’s another $800 per month of $9,600 per year that will get saved after the first 4 years of our projection. As always, we assume a modest 6% ROI on a balanced, low-cost, Index ETF-based investment portfolio that we write about in our Investment Workshop.
So what does our projection look like?
Wow! Mr. and Mrs. Crossroads are FI in just 5 years! All without making any spending cuts aside from getting rid of costs that don’t even apply once they retire! But do keep in mind that in this scenario, they have a short runway (5 years instead of 10+), so do watch out for market fluctuations. The plus side is that Mr.Crossroads is planning to keep working after FI, so that will buffer them.
What About the Condo?
But wait, some of you may be grumbling. These guys lost money in their house! How can they be still in good shape?
Simple. Even though they screwed up on the timing of their condo purchase, they kept their housing costs reasonable. Even at the peak buy price of $267k, that constituted a relatively conservative 2.3X of their net income. Plus they paid the mortgage off as soon as they could, and are now left with a relatively small month-to-month carrying cost of $36 (home insurance) + $123 (property taxes) + $347 (condo fees) + $60 (utilities) = $566. So even though they lost $78k or 30% on this condo, the relatively low buy price kept that mistake from swamping the rest of their finances.
If they had bought some monster McMansion costing $1.5 M, and then lost 30% or $450k, this reader case would be taking a decidely more darker tone.
So let’s now answer the second question: What to do about this condo? They could sell it and add the sell price of $189k – 5% real estate commission = $180k to their portfolio, and this would generate an extra $180k x 4% = $7,200 a year, or $600 a month in passive income, but is an extra $600 a month worth it?
They would also save the $566 a month cost of maintaining the condo. So now we’re ahead $1,166 a month. Of course, the Crossroads family now has to live somewhere, so in order for this move to make sense, they’d have to rent for $1,166 a month or less. Maybe on the ground they’d be able to find a suitable place for this price point, but according to Numbeo, the average cost of a 3BR apartment in a big Albertan city like Calgary, as an example, is around $2076, so I’m not liking this idea of selling at all.
What about renting it out? Again, I don’t think this helps. Let’s say they get the average rent of $2076 for their condo. But then they have to rent out an equivalent apartment for the same price, $2076. So how does this help?
It only really makes sense to rent out your principal residence and move into a rental if you can get the same (or similar) digs at a lower price and typically this only happens if you’re moving cities for work or whatever. But if you’re going to live in the same city as your old place, you’re subject to the same rental market conditions as the landlord AND the renter. And remember, rental income is taxed at marginal. So all this would do is just give the government money while saving you nothing. Not good.
So where does this leave us Mr. and Mrs. Crossroads? Staying put, that’s where.
Figure out a way to make peace with your neighbors, because right now you are WINNING and about 5 years away from retirement. Selling & renting puts you no further ahead, and renting your place out actually moves you backwards. And of course, selling and buying a bigger place will DEFINITELY move you backwards since you’ll be shovelling more of your net worth into an asset class that, to be honest, has not treated you terribly well so far.
So I will end this case study with the advice that everyone who writes in wishes they get: Sit Still and Do Nothing. You’re already winning, so for the love of God don’t rock the boat!
What do y’all think? Should Mr. and Mrs. Crossroads stay put or do you have a clever idea that will get them to FI even faster? Let’s hear it in the comments!
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