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Facing a housing conundrum and about to ER with young family
Old 02-19-2015, 11:46 AM   #1
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Facing a housing conundrum and about to ER with young family

We live in Southern CA so housing is generally expensive. I'm 42, DW is 36, and we have 3 kids under 4. As I mentioned in my introduction, we are on the verge of ER this year. I wish we could downsize or move out of CA but with our young family we probably won't be able to do that for awhile. Besides, both sides of our family live in Southern CA, we've never lived anywhere else, and most of our friends live here as well.

As you can imagine our home equity as a % of net worth at approximately 20% is probably higher than ideal and probably higher than most people on this board (I've read through some of the prior surveys).

We have scrimped and saved to get to the point where we can ER but given the young family we're trying to get our SWR down as low as possible. In my original introduction I got a lot of good perspective on how hard it is to forecast expenses for young families and how imperfect SWR is as a result. If I try to take the blended average of the next 15-20 years...we're probably right around 3% (obviously home equity is not included in portfolio value for SWR purposes) which includes some discretionary expenses that can be cut (travel, etc).

Housing expenses are about 20% of our budget. We don't have a mortgage so for those familiar with CA probably realize we unfortunately are not a long time owner benefiting from very low Prop 13 taxes. The budget does include direct expenses (property taxes, HOA, home owners insurance + prorata share of umbrella insurance, regular maintenance, etc) and then a contingency for repairs, surprises, etc.

So...

1. I've been thinking hard about the trade-off of downsizing our house (which is admittedly very big at about 4k sqft) which would help lower our housing expenses and free up home equity to increase our portfolio. Thus increasing our SWR. This would obviously be somewhat disruptive...moving with 3 young children...potentially to a new cheaper neighborhood (which if we are going to do, we should do know before the kids start school?) or a significantly smaller house (maybe 2500 sqft) to make a big enough difference. 4k is obviously bigger than we need now but we were anticipating what it would be like with 3 teenagers and we convinced ourselves that it would be better to have a bigger home at the time. Maybe if 10 years into retirement portfolio has performed well and we have kept expenses in line we can upsize again...

2. On the other hand, I know that in 18 years DW and I can downsize housing significantly more than today to a condo or very small house...and also benefit from lower expenses of being empty nesters...who knows maybe one or more of our children may even gravitate somewhere outside expensive Southern CA? At that point even if we have spent a little more than desirable...perhaps somewhere between 3% and 3.5% for 20 years we can then probably drop spending, free up home equity significantly.

DW is probably more in favor of staying put but the conservative FIRE part of me is very tempted to further secure our future by getting SWR to 2.75% or below. In the end she will probably go along with whatever I think is best for our family. I'm obviously grateful to be in position to make this decision but really am struggling with this one and would be grateful for any advice or perspective on any of the above thoughts, information, etc.
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Old 02-19-2015, 12:20 PM   #2
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I suspect your DW will call the shots on this subject.

You could probably save a considerable amount in housing costs by moving away from the commuter suburb you probably live in now. You didn't say but I suspect you are close to where you work which is probably where a lot of other people live and work. The further out properties are probably much less expensive and possibly less congested.

As for house sizes, 4000 sq ft is pretty spacious but I suspect your DW would feel a loss in status with a 2500 sq ft house. I raised 3 kids with a nominal 3000 sq ft house. We weren't overcrowded. I was one of five kids my parents raised in a 1500 sq ft house with full basement and we were definitely crowded.

I'd personally view this (and try to persuade your DW) with the leisure enhancement opportunity that would come from a possible move. I'd also get out of California but that's just me.
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Old 02-19-2015, 12:21 PM   #3
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While moving with 3 kids under 4 is certainly a stressful experience for the parents, it's much less stressful for kids that age than once they are in school. I personally would downsize now to move some of your home equity into your portfolio. Also, most likely your housing expenses (taxes, utilities, etc.) would be significantly lower in a 40% smaller house. I think it's at least worth taking a serious look at towns/neighborhoods where you could find good schools and the amenities that are important to you with a smaller and less expensive house.

Good luck!
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Old 02-19-2015, 12:32 PM   #4
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Thanks 2B...I suspect you are right. DW is saying she will do whatever I think makes sense but I am concerned that she will be unhappy. You are also right that we live in a commuter suburb so there is a premium for location. If we moved even 30-40 min away we could unlock some equity. Not sure about expenses (for same sized home) though as we may end up driving more...our families live near by right now. We would actually get more land moving further out but that would come with higher expenses as well.

I wish we had any good reason to leave CA other than purely financial reasons...probably just about every other reason is in favor of CA. Perhaps once we are empty nesters we will move away but hard to move away from grandparents, uncles/aunts, cousins, etc as well as our long time friends and their families right now with our young family. Yeah, I grew up as a family of four in an 1800 sqft home and thought it was just perfect...it's amazing how home sizes have grown.
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Old 02-19-2015, 12:39 PM   #5
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Thanks MBAustin...I absolutely agree...very, very tempted to pull the trigger. Good school districts in Southern CA sell at big premiums. You are competing with not only high income professionals but even sometimes international money (Asia, Central America, etc) that views US/CA as a great place to park money and raise a family. All of these families want great schools...there are some communities in Southern CA that basically really never experienced much of a price drop in 2008-2009!

It's unfortunately just a very expensive competitive market. So our choice is to move further away to a cheaper location as 2B suggests and then we'll have to think long and hard about private school (which won't make sense financially) or betting that our kids are going be special/lucky enough to get into magnet/high achiever schools/progams outside of the neighborhood. Or the other choice is to move into a much smaller older home and make compromises perhaps on location (busy street, etc) as well.

I do agree with you that right now is a perfect time to move if we are going to do it. Otherwise highly preferable to stay put for awhile once the kids are in school.
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Old 02-19-2015, 12:43 PM   #6
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Needs versus wants. You do not need a 4000 sq foot house in an expensive suburb in California, but you appear to want it. You and DW will have to identify how important are your ER goals and what, if anything, you are willing to sacrifice to attain them.
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Old 02-19-2015, 12:55 PM   #7
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Meadbh, I'm aware that it is a need and not a want. If we end up making the wrong decision on wants then we will need to go back to work or cut out expenditures we may not want to. I am trying to get some perspective/thoughts on my situation given our statistics...I feel like we might be on the border?

For instance if we were at 4% SWR then this would be a no-brainer to move to continue working. However we are at 3% SWR--which also includes margin for error, discretionary spending that can be cut, etc. In addition, our family situation comes into play. If we were empty nesters this would also be a no-brainer as well...we would downsize and probably be better off financially and in terms of satisfaction.

If we were purely optimizing finances then moving is the only choice. I was just hoping for some feedback on whether others would in my situation given the 3%, the 20% of net worth, the 20% of budget, the young family, and the wife who would probably prefer not to move.

I know your recommendation would be to move. However, if you don't mind me asking...at what point financially would you feel comfortable staying if you knew that there were a lot of non financial and hard to quantify benefits to staying?
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Old 02-19-2015, 01:01 PM   #8
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I think proximity to family when you have children is very important. You and your wife should look at more modest homes in neighborhoods with good schools convenient to family members who are important in your lives.
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Old 02-19-2015, 01:04 PM   #9
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2. On the other hand, I know that in 18 years DW and I can downsize housing significantly more than today to a condo or very small house...and also benefit from lower expenses of being empty nesters...who knows maybe one or more of our children may even gravitate somewhere outside expensive Southern CA? At that point even if we have spent a little more than desirable...perhaps somewhere between 3% and 3.5% for 20 years we can then probably drop spending, free up home equity significantly.
We wish we had family in S. California. That would give us a reason to move for some much better weather. Family is the only thing keeping us in the state we're in now.

My experience with my own parents and my in-laws is they've gotten bigger houses as grandkids have come into the picture. I wouldn't be so sure that you'll want to downgrade in the distant future. Think of inviting the kids and a few new grandkids over to a condo for a few big holidays.

Yes, there's a chance that your kids could marry off and leave the area, but they also might go to local schools and enjoy being around family and extended family just as you and your wife have done.

If you've really got a good handle on your expenses and you've factored in all of the upcoming expenses for the kids as they grow and eventually leave the nest, I think I'd stay in your current home in a "better" neighborhood.
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Old 02-19-2015, 01:16 PM   #10
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Meadbh, I'm aware that it is a need and not a want. If we end up making the wrong decision on wants then we will need to go back to work or cut out expenditures we may not want to. I am trying to get some perspective/thoughts on my situation given our statistics...I feel like we might be on the border?

For instance if we were at 4% SWR then this would be a no-brainer to move to continue working. However we are at 3% SWR--which also includes margin for error, discretionary spending that can be cut, etc. In addition, our family situation comes into play. If we were empty nesters this would also be a no-brainer as well...we would downsize and probably be better off financially and in terms of satisfaction.

If we were purely optimizing finances then moving is the only choice. I was just hoping for some feedback on whether others would in my situation given the 3%, the 20% of net worth, the 20% of budget, the young family, and the wife who would probably prefer not to move.

I know your recommendation would be to move. However, if you don't mind me asking...at what point financially would you feel comfortable staying if you knew that there were a lot of non financial and hard to quantify benefits to staying?
You state that "it" is a need, not a want. If "it" refers to your current home, then you must know that most families raise children in much less space than you have. For instance, I lived for 20 years in a 1200 sq ft home in a middle class neighbourhood in a very cold climate, where the original owners successfully raised their 5 children. So I disagree that owning such a large home is a necessity.

I am not recommending anything to you because this is fundamentally a values based decision, and everyone has different values.

I happen to be single and live far away from family members. I have owned two homes, both relatively modest, because my choice is not to be "house poor". I am ER and feel comfortable with a SWR of 3%. You might have difficulty understanding my choices in life, so far be it from me to tell you what to do.

The point of my previous post was simply that you and DW will have to identify what your values and priorities are. If proximity to family is key, as it is for many people, then it makes sense to stay in your area, though you still have the choice of whether to downsize. If living space is your priority, you can choose to stay put, or move to a lower cost area. If staying in your current home is the only option that satisfies your wants, then you will need to choose between working longer and taking a chance with a higher SWR. And so on.
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Old 02-19-2015, 01:19 PM   #11
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I think proximity to family when you have children is very important. You and your wife should look at more modest homes in neighborhoods with good schools convenient to family members who are important in your lives.
I like this. Are there communities close to family with good schools but perhaps less desireable commutes (and therefore lower prices) that you could relocate to? Since you are ER a convenient commute is no longer a factor, but proximity to family and good schools is. If so, perhaps you can meet in the middle on house size and free up some cash to improve that WR a little.
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Old 02-19-2015, 01:20 PM   #12
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Just one comment - you need to take your age into account when considering a SWR. At 42/36, you are very young. I would not consider 3% as a conservative SWR in your situation.
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Old 02-19-2015, 01:49 PM   #13
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If we were purely optimizing finances then moving is the only choice. I was just hoping for some feedback on whether others would in my situation given the 3%, the 20% of net worth, the 20% of budget, the young family, and the wife who would probably prefer not to move.
I believe someone with a wife and 3 toddlers should never be optimizing retirement. The big disaster possibility in your life is not a later retirement, but a divorce, separate maintenance, child support, and becoming a bi-weekly weekend visitor to your children and persona non-grata in your former family home.

It's OK for some old person to pull his train over onto a siding and watch the world go by, but it is dereliction of duty and a terrible loss to all concerned for a young a young father to follow this course.

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Old 02-19-2015, 02:06 PM   #14
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I believe someone with a wife and 3 toddlers should never be optimizing retirement. The big disaster possibility in your life is not a later retirement, but a divorce, separate maintenance, child support, and becoming a bi-weekly weekend visitor to your children and persona non-grata in your former family home.

It's OK for some old person to pull his train over onto a siding and watch the world go by, but it is dereliction of duty and a terrible loss to all concerned for a young a young father to follow this course.

Ha
2015,

It sounds like Ha thinks you need to keep working.
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Old 02-19-2015, 02:09 PM   #15
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I raised 3 children in a 3500 sf home and there were times I wished it was bigger! I did not anticipate how much space "the kids" would take up as they grew! Think about 5 adult size people rather than 2 adults and 3 small children, add in their friends and/or girlfriends in the future and you can see where I'm heading with this. My house is about 10% of my net worth and the yearly cost of insurance and property taxes is 7% of my yearly budget (that's a LBYM budget). My area is not as expensive as yours to live in.

Can you do it in a smaller house? Absolutely. Could I have done it in a smaller house? Certainly but it would not have been fun, relaxing or very calming. I appreciate your thinking about whether or not DW would be happy. You are both used to a lot of space and it is definitely a consideration. I would not have wanted to raise 3 children in a 2500 SF home. In fact, I added on during that time! (Ha!). The decision however is very much a personal one for you and your wife to make.

Have you considered which house would appreciate more? While no way to actually predict this, it might be a consideration. Point being, as you go thru the 18 years, your current house may be more desirable when you get ready to sell and may be worth more. That said, could you consider your current home as if you are diversifying your investments? It is a hard asset. The downside is that the carrying cost as a percentage of your budget seem high…but hey…it is CA.

If you have not already, have you attempted to put some realistic numbers (give or take) to what you might be able to save by going to a smaller house and what percentage of your budget it may be? For me, numbers tell the story. For ex: If you can save $12,000 a year, over 18 years = a savings of $216,000 (think college costs here!) I bet you could possibly save more than that and that is huge (on top of any equity you can pull out and save by selling your current home). You both are very young and I wonder if working a couple or three more years is an option IF you both want to stay in your current home.

It's a lifestyle choice and it depends on what you want to afford and what you want to pay for over the next 18 to 20 years. As you have already said, you already know that if it were purely a financial decision you would move. You are wise to think about the other non quantifiable issues..things money can not buy. The question is "Can you afford to stay?".

Best of luck with your decision.
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Old 02-19-2015, 02:10 PM   #16
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Meadbh, mea culpa...silly me...I just realized I mixed up "need" and "want" in my sentence...so it came across as not only confusing but perhaps somewhat argumentative...of course I meant it is a want and not a need...=). I am grateful for everyone's responses and am always interested in everyone's opinions and perspectives!
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Old 02-19-2015, 02:11 PM   #17
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The only thing I wish to add is you might be 50 to 55 YEARS in retirement. Do you really have enough to pull the rip cord now? In other words, and to beat a dead horse, there is every reason to believe that you will be in retirement longer thN you have lived to date.
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Old 02-19-2015, 02:22 PM   #18
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I agree with a lot of the statements...family is very important to me...at this point in my life, it's probably everything to me.

A little bit more about our situation. The reason I'm about to ER is that I've worked hard to build a small business over the last 20 years and we're in the middle of selling it for a price I would have never dreamed of when we started it that will potentially allow us to ER at the 3% SWR rate staying in our house.

However, I won't have a job after I sell it. Of course, I can go get a job afterwards, and will do so if I need to, but after working for myself for so many years I have some concerns about how happy I will be as an employee. Also, getting a job in my line of business (retail stores) after so many years of being an owner will be tricky...it won't pay anything close to what we've been used to and we would probably have to consider relocating. In addition, I also have some health issues, IMHO partly brought on by the grind of building a business, that are not life threatening but do impact the quality of my life and could get worse if I don't spend some more time taking care of them properly. I'm concerned as I know I'm nearing the age where the toll of working, etc really starts to show in your health if you aren't lucky enough to have the right "genes".

I could try starting another business and that is something I will most likely strongly consider after taking some time off but there are no guarantees there and would likely have to risk some of our portfolio as seed money. That's probably the right thing to do but I'm concerned if we start a business and it fails then we're really screwed up FIRE!
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Old 02-19-2015, 02:26 PM   #19
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Have you given much thought to the costs of maintaining and repairing a 4000 square foot house? For us, this is getting to be burdensome as the house ages.

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Old 02-19-2015, 02:32 PM   #20
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Sorry I posted too soon...

It sounds like the consensus is to probably downsize but I have given some thought to the point that haha was making. I know that at our age with potentially 50 years to go a lot can happen...so much uncertainty. I think DW and I have a strong marriage (I hope she feels the same way!) but we've only been married for 7 years and still going through the early child rearing years that can really test couples.

She came from a wealthy family and never really had to live on a budget until me. We definitely still have fluff in our budget which is partly why I feel comfortable we could ER if we had to. She's learned to be much more careful with money over the years but I can sense that moving from 4k to perhaps 2k or 2500k is something that worries her with the five of us. If we were 3 or 4 I don't think it wouldn't as much of a problem.

Since inventory in Southern CA is very tight right now and b/c prices can vary so much even within a town based on lot size, location, etc as I've looked options we definitely need to go from 4k to 2k-2500k to make this move financially worthwhile...also because of transaction costs, etc e.g. if we go from 20% of net worth to 18% of net worth is it worth it?
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