Mid 30s (married with young kids) w $5m NW Target

[aroundtheblock]

My wife and I have been truly blessed. We have our health, 4 wonderful children and a very comfortable (if not hectic) life. I like my work and am striving for financial independence (however I can't see myself not working even then - might consider doing some entreprenurial at that point). First time posting here. Just wanted to say 'hello'

Here are the basic facts:

- Mid 30s, married with 4 children under 7
- Income of $500k (only in last few years)
- Savings of ~$700k ($350k in tax-free / $350k in taxable)
- No pension / DB plan through employer
- Home equity of ~$500k (just bought this year)
- Fully insured - health (employer), life ($5mm+), disability, umbrella
- Both my parents and wife's parents well to-do but not rich (ie won't require financial support)

Here is our plan / approach. Your input welcome!

1. I'd consider myself financially independent at the $5m NW mark (I consider true financial independence as not having to dip into principal - ie living off interest alone); I view folks who retire 'early' and immediately begin dipping into savings (even at a modest rate) to be taking a substantial risk. Not to say it's not a rational decision, just that there is more risk attached to it than many seem to believe.

2. We invest only in CDs and MM funds - much more focused on adding to our pile via substantial year-over-year savings than putting it all at risk trying to chase returns. Since we have the luxury of a high savings rate it doesn't make sense to me to risk losing $ when high returns are not required to grow capital. My main concern is maintaining purchasing power over time - and towards this end might consider a broadly diversified equity index and commodity fund for 25% of our savings.

3. We hope to hit our NW target by my mid 40s. Of the $5m NW $3m will be liquid, allowing for a before-tax return of ~$100k, which would barely cover our living expenses

4. At this stage I'd probably down-shift career-wise and work an easier job (still paying ~$250k) in order to 1) spend more time with the family - ie less hours and travel 2) pay for the kids college (which will cost $1mm in today's dollars) 3) add modestly to our pile, perhaps indulge in a few 'extras' like a nicer cars / vacas and 4) keep health insurance.

5. Our belief is that folks were made to be productive - and are happiest when so. Moreover, we believe it's important to set a good example for our children - so they'll never know our NW (potentially demotivating) and they'll see that 'daddy works hard' to afford them their lifestyle / opportunities

6. We hope to retire in our current home (close to large city) where we'll be able to spend time with our kids (and grandkids one day!) assuming they stay reasonably close and do the snowbird thing to/from FL. One issue with this is that RE taxes very high here (>$35k/year) which may dissuade us from staying or force us into smaller home (which we'd like to avoid if possible given that we want extra room for family and kids much more likely to visit the home they grew up in)

[FinanceDude]

A great start, but without equities of some consequence in your portoflio, your real money purchasing power will erode your nest egg. I would at least dip your toe in the water on the equities, maybe using some ETFs.............

[walkinwood]

Welcome to the forum!

Your plan sounds very conservative, but what happens if inflation spikes or interest rates remain as low as they are today? You can check these scenarios out using a tool like Firecalc - see link at bottom of the page. Studying financial history would also help and I recommend William Bernstein's The Four Pillars of Investment.

All the very best.

[cardude]

Echo......

Off to a great start, but you gotta have some equities. Just make sure you buy them while they are cheap (like now).

[Texas Proud]

+1 on what the two 'dudes say...


Even with the big drop that occured 3 years ago.... I am almost back to where I was on earnings... I am ahead of the game on the 5 and 10 year time horizons...


You will make your goal easily if your expenses $100K and your income $500K.. As for your kids... yours is not the 'norm'... there is a very small percent of people who make the scratch you make... trying to show your kids that it is the 'norm' will hurt them in the long run (IMO)... they can figure it out when they are a bit older...

[Rambler]

+1

Welcome! But you need some equities and some bonds (wait till the bond bubble shrinks...). You may also want to consider that medical on top of your RE taxes will bring just those two items to nearly 50k, then RE insurance (at 35k for RE tax, it's gotta be a McMansion...not that there's anything wrong with that...I'm sure the RE insurance is also high), add fed and state income tax, and there won't be much left.

You've done well, given relative youth, but you may want to think a bit about the need for growth as well as income....that's why you need the equities. You don't want to dip into your principle, but with CDs and MMs paying the paltry yields they are now paying, you will find that you won't be able to keep from dipping into principal in just a few short years, if you want the 100k, after inflation.

Good luck, stick around. Lots of info, and fun, around here!

R

[BTravlin]

Nothing to add as I agree with just about everything posted here. Would like to know what line of work you're in though?

[obgyn65]

Like you I am very conservative. CDs are my preferred type of investment. Have you thought of investing in municipal bonds also ?

Quote:

Originally Posted by aroundtheblock 2. We invest only in CDs

[aroundtheblock]

Wow. Can't believe it's been 5 years since my last post. Time really does fly.

So here's the update:
- Life continues to be good to us - we have our health and no major issues
- Income still strong (although I work in a volatile sector)
- Savings ~$1m (50/50 taxable / non-taxable)
- Home equity ~$1.5m (mortgage will be paid off this year)

Given our conservative stance we missed the massive market rally post the financial crisis (although we feel good about the $s we plowed against the mortgage - we'll be debt free save for one car loan this year).

Next steps are to begin to diversify / equify our savings so incremental $s will likely get put into Vangaurd index funds of some sort. Also key for us is maintaining LBYM lifestyle in an area where it's easy to get caught up in 'keeping up' We've had many friends upsize / upgrade their lifestyle (bigger houses, crazy vacas, etc.) and we have no interest in going that route.

My original goal of $5m NW I realize is too low for our desired financial security - what we really need is $5m liquid (apart from home, kids' college fund, etc.). While it's still technically feasible we get there by 45 it's a long shot.

It's been a few years since I've cruised these forums. I have to say I find them interesting and enjoyable. Am very impressed with some of the savings rates I've seen. While we've been able to save we (fortunately) haven't had to cut back to do so.

I haven't built a budget or run FIRE calcs yet - more focused on saving as much as we can - but perhaps we'll get around to that someday.

If the next 5 years are as good as the last 5 years we'll be in good shape (at least financially). But life has a way of throwing curveballs - and $s aren't everything - so we'll just have to see. Bye y'all!

[rodi]

Good update. I think you're smart to start "equifying" (your term) your stash. You can still keep it conservative, but tap into the bigger gain potential. Since you are uncomfortable with risk, I'd suggest a 40/60 ratio... 40% equities, 60% fixed income (bonds, MM, CDs).

You can do that in a few ways but the simplest is to go to one of the low cost brokerages like Vanguard, Fidelity, or Schwab and choose a total stock index fund. Examples are: VTSAX at Vanguard, FSTMX (Spartan) at Fidelity, and SWTSX at Schwab. Invest 40% of your stash in one of these, and leave the rest of your money conservative. If you wanted to add some bond exposure to your fixed income side - choose a total bond fund for a percentage of your fixed income.

You can keep it really simple and keep your conservative asset allocation while still hedging inflation.

[MBAustin]

Good work! Another option for a conservative "one-stop" investment is Vanguard Wellesley (⅓ stocks, ⅔ bonds).

[nash031]

I'd encourage you to run some of the calculators and see if that changes your opinion on dipping into principal. Everyone's entitled to their opinion, and how aggressive or conservative they want to be. I just think you'd find by running calculators you'd find you don't need as much as you think you do, which directly translates to years of work.

Good luck!

[StuckinCT]

First off, you are off to a great start, not many people are where you are in your mid 30s. I am 44 and have the ability to retire, but I am scared to do so here in CT due to the high cost of living, my real estate taxes are similar to yours- 32k. I think you could certainly retire on 5 million, and 100k is realistic on 3mm, but there are two caveats. First, because you are young, you are going to definitely need to be more than 25% risk assets to maintain your purchasing power for potentially a half a century. We are 80% stocks, and I would say 50% is the minimum you would need in something with an expected return over 7%. Only risk assets have this type of return expectation. If you are not comfortable with this much in risk assets, you are likely going to need more capital invested, perhaps $4mm to maintain your lifestyle. Second, I think you should strongly consider relocating somewhere less expensive or at least moving to a home with lower real estate taxes. Our net worth is roughly 8.9mm, and the taxes are too big a bite for us, but we also have a country club and like to travel. You are in a good position to dollar cost average for ten years to take advantage of volatility, don't worry too much about the markets ups and downs, over time stocks will deliver something close to their historical returns of 8 to 9% especially if you have a longer than a ten year horizon and certainly a twenty year horizon which you do. Dividend Growth stocks also increase their income on average 4-6% per year which will help grow your income with inflation over time, especially if you have a lot in fixed income. The biggest mistake people make is not having enough invested in stocks.

[DawgMan]

Quote:

Originally Posted by aroundtheblock My wife and I have been truly blessed. We have our health, 4 wonderful children and a very comfortable (if not hectic) life. I like my work and am striving for financial independence (however I can't see myself not working even then - might consider doing some entreprenurial at that point). First time posting here. Just wanted to say 'hello' Here are the basic facts: - Mid 30s, married with 4 children under 7 - Income of $500k (only in last few years) - Savings of ~$700k ($350k in tax-free / $350k in taxable) - No pension / DB plan through employer - Home equity of ~$500k (just bought this year) - Fully insured - health (employer), life ($5mm+), disability, umbrella - Both my parents and wife's parents well to-do but not rich (ie won't require financial support) Here is our plan / approach. Your input welcome! 1. I'd consider myself financially independent at the $5m NW mark (I consider true financial independence as not having to dip into principal - ie living off interest alone); I view folks who retire 'early' and immediately begin dipping into savings (even at a modest rate) to be taking a substantial risk. Not to say it's not a rational decision, just that there is more risk attached to it than many seem to believe. 2. We invest only in CDs and MM funds - much more focused on adding to our pile via substantial year-over-year savings than putting it all at risk trying to chase returns. Since we have the luxury of a high savings rate it doesn't make sense to me to risk losing $ when high returns are not required to grow capital. My main concern is maintaining purchasing power over time - and towards this end might consider a broadly diversified equity index and commodity fund for 25% of our savings. 3. We hope to hit our NW target by my mid 40s. Of the $5m NW $3m will be liquid, allowing for a before-tax return of ~$100k, which would barely cover our living expenses 4. At this stage I'd probably down-shift career-wise and work an easier job (still paying ~$250k) in order to 1) spend more time with the family - ie less hours and travel 2) pay for the kids college (which will cost $1mm in today's dollars) 3) add modestly to our pile, perhaps indulge in a few 'extras' like a nicer cars / vacas and 4) keep health insurance. 5. Our belief is that folks were made to be productive - and are happiest when so. Moreover, we believe it's important to set a good example for our children - so they'll never know our NW (potentially demotivating) and they'll see that 'daddy works hard' to afford them their lifestyle / opportunities 6. We hope to retire in our current home (close to large city) where we'll be able to spend time with our kids (and grandkids one day!) assuming they stay reasonably close and do the snowbird thing to/from FL. One issue with this is that RE taxes very high here (>$35k/year) which may dissuade us from staying or force us into smaller home (which we'd like to avoid if possible given that we want extra room for family and kids much more likely to visit the home they grew up in)

As others have said, you are doing great. I sound like you, but fast forward to age 51. I have 4 kids (3 girls = cha-Ching!!!) and they are 19 - 25. I am guessing you live a comfortable life style now and have this plan on how it's going to play out as the kids age. Take it from me, particularly from 16 + until they grow real wings, you are pulling allot of $$ out of the register (i.e. Cars, insurance, car accidents, clothes, college, sororities, fraternities, spring break, lawyers, weddings, .... Need I go on?). This **** costs allot of money and you think you are going to be the one parent that says no, but you have the resources and kids that look daddy in the eye and say "please daddy". I hope you are stronger than I was. I said I would NEVER have 6 cars in my driveway and guess what?? Sure, I compromised and spent $6k or so on used cars when my kids friends had new BMWs, but my kids lived/living a much more privileged life than I ever had (I bought my first car for $150... covered in bondo with a burnt out clutch!).
I would say this, as well as you have done so far, unless you have a very frugal flexible wife (I don't... At least not frugal) and you KNOW you are prepared to give up certain life style habits, I would not quit until you have at least gotten 2 kids to college and you have experience part of the gauntlet. My personal launch time is in roughly 4 yrs when my baby graduates college. I have been in somewhat of a semi RE state for last 5 yrs, but I want most of my heavy lifting behind me for the peace of mind.
None the less, you are doing great.

[pb4uski]

Quote:

Originally Posted by aroundtheblock ....Here are the basic facts: - Mid 30s, married with 4 children under 7 - Income of $500k (only in last few years) - Savings of ~$700k ($350k in tax-free / $350k in taxable) .....

Quote:

Originally Posted by aroundtheblock Wow. Can't believe it's been 5 years since my last post. Time really does fly. So here's the update: - Life continues to be good to us - we have our health and no major issues - Income still strong (although I work in a volatile sector) - Savings ~$1m (50/50 taxable / non-taxable)..... My original goal of $5m NW I realize is too low for our desired financial security - what we really need is $5m liquid (apart from home, kids' college fund, etc.). While it's still technically feasible we get there by 45 it's a long shot....

So your income is $500k a year so in five years you've earned I'm guessing you've earned over $2 million and your savings have increased only $300k (from $700k to $1 million)? What am I missing?

At that rate, you'll never hit your goal of $5 million, especially if you limit your investments to CDs.

[hnzw_rui]

Quote:

Originally Posted by pb4uski So your income is $500k a year so in five years you've earned I'm guessing you've earned over $2 million and your savings have increased only $300k (from $700k to $1 million)? What am I missing?

Home equity of $1.5M versus $500K. Guessing accelerated mortgage payoff so less money going to investments for the past 5 years. OP said house will be fully paid off this year so I expect they'll be ramping up investments then.

[pb4uski]

Got it. Missed that.

OP's reluctance to invest in a diversified balanced portfolio is a big mistake IMO.

$5m is still an uphill climb if OP needs another $4m and saves $1.3m every 5 years then it'll take 15 years (OP is ~55?) to get there assuming low interest on CDs and MM.

[aroundtheblock]

Thanks for the feedback. I completely agree with the consensus - more equities and be mindful of COL issues as well as spending ramp as kids get to HS/college.

To answer some Qs - yes, we've been pre-paying mortgage down aggressively - it's a guaranteed return (albeit modest) - but will be done this year (if we choose) and then will face issue of where to put the excess savings. Cash isn't going to cut in this era of financial repression.

Very helpful sanity check on our current situation & plan. Tx all.


Sent from my iPhone using Early Retirement Forum

[eta2020]

That home by the time you retire will be worth maybe 2.3 million. This is one huge huge liability with upkeep, taxes, heating/cooling bills etc etc.

You shoot for NW of 5 million. That means investable assets maybe 3 million? Even with 5 million in investable assets it will be extremely difficult to maintain 2.3 million dollar house.

I will not repeat equities versus CDs comments (but I certainly agree with them).

[Symbiotic]

Quote:

Originally Posted by eta2020 Even with 5 million in investable assets it will be extremely difficult to maintain 2.3 million dollar house.

Not necessarily, if the taxes are fixed (e.g., California) and the lion's share of the value is in the land...