Early Retirment for Young Couple

[ambition187]

Hi all,

Thought I would introduce myself (or ourselves).

We are young'uns but are sure FIRE is the lifestyle we want. The thought of moving to NYC and partying for a decade makes both of us shiver. While our colleagues and cohorts think we are quite odd, we know what will make us happy in the end..and thats traveling the world and not being a slave as soon as possible .

I am 23/m engineer she is 19/f u-grad prospective lawyer. Our goal is retirement at me=48 she=45 with a kid, or me=43 her=40 without one. We aren't sure whether we want a kid or would like to dink forever.

We plan on living at 50% of take-home pay from now until retirement (overly ambitious?). I am starting at 70k+bonus so probably around 50k take-home. We live in a reasonable 2-br renting from my parents 700/mo. Her parents contribute 350/mo to rent while in school so as a couple we effectively are paying 350/mo right now.


Short term plan is for her to finish u-grad. Then we would like to move to Phoenix or similar where she can go to law school and then we can live/work there. Due to our early retirement desire, we find the chance at a cheap cost of living + good house well worth the move.

I carry ~ 20k of school debt, she goes for free and parents are paying for L-School.


Questions:

-Given that early retirement is the goal, is it best to avoid 401k etc. that provide benefits but come with an early withdrawal penalty? My guess is to only put in 401k up to what the employer matches?

-What is the best mechanism for savings and investment (Roth vs 401k vs our own brokerage account etc)

-What is the optimal house-buying strategy from a FIRE perspective? IE is a 15 year mortgage > 30 year mortgage?

-What is the optimal down payment strategy? When purchasing a house, should all savings go into the down payment no doubt or what?

-We would like to buy a home at year t=7. What is the best investment strategy in the meantime?


Our preliminary thinking was something like this.

Year 1-3: Live here, me work, she in u-grad. Stay in this (cheap for the area) apartment.
Year 4-6: Her L-school, me work..rent cheap apartment
Year 7: Purchase home
Year 7-25: Pay down mortgage, Save and invest with online brokerage in some ETFs

We anticipate a Year 7 joint income of around 150k (75k engineer + 75k lawyer), after adjusting for Cost of Living.

We will have (roughly) 200k for a down payment at that time and would like to purchase a home for around 600k. We were thinking of a 15 year mortgage but would love to hear some feedback and input on that plan.

Thanks for reading and looking forward to some responses!

 

[Coach]

Ambition, it is simply wonderful to see young'uns thinking and planning about early retirement. Your plan sounds pretty good to me. I believe the secret to accumulating lies more in not spending than in earning, and you sound like you understand that well.

A few thoughts: I would maximize my tax-advantaged saving first -- go over the match amount. You can work on after-tax retirement savings when you get old, say 35 or 40. A good number on here will disagree with that advice.

You need an emergency fund, of course -- a Roth is a great place for that, at least until you can accumulate one in regular savings.

I like 15 year mortgages. It nothing else if helps you avoid spending too much on a house. Speaking of, $600K sounds like a heck of a lot of house. Lots of square footage for a couple or three. I haven't priced in Phoenix in a few years, but at that time prices were pretty darn reasonable. McMansions suck up a lot of cash.

I'd recommend reading The Millionaire Next Door -- great book.

Good luck to you both -- you are clearly on track!

Coach

 

[Nords]

Welcome to the board, Ambition.

We aren't sure whether we want a kid or would like to dink forever.

Yeah, good luck with that. I suspect we already know what happened to about 99% of the "undecided" crowd! But raising a family is (and should be) much more of an emotional decision than a financial one.

We plan on living at 50% of take-home pay from now until retirement (overly ambitious?).

I guess that depends more on your expense budget than on a %. It's always great if a bonus can be banked (after perhaps spending a bit on yourself). And that budget should include a little room for entertainment and some luxuries or else "frugal" will feel more like "deprivation" and you guys won't be able to stick to the plan.

We live in a reasonable 2-br renting from my parents 700/mo. Her parents contribute 350/mo to rent while in school so as a couple we effectively are paying 350/mo right now.
Short term plan is for her to finish u-grad. Then we would like to move to Phoenix or similar where she can go to law school and then we can live/work there. Due to our early retirement desire, we find the chance at a cheap cost of living + good house well worth the move.

What a deal, and what a great way to lay the ER foundation to let it compound for a couple decades. If the folks are willing to subsidize the housing costs as long as your spouse is in school, is there any reason to move before that good deal runs out? Would they subsidize your housing expenses through her law school too?

-Given that early retirement is the goal, is it best to avoid 401k etc. that provide benefits but come with an early withdrawal penalty? My guess is to only put in 401k up to what the employer matches?

401(k)s offer enough rollover flexibility (IRAs & Roth IRAs) to allow for early-withdrawal schemes, and the match sure outweighs any inconvenience. The reason that most people don't exceed the match is that many 401(k)s tend to be restricted in asset choices and loaded with high fees. So you may want to end up putting more than the match into a 401(k) if it offers great choices & low fees. Otherwise you'll go with taxable low-cost accounts.

-What is the best mechanism for savings and investment (Roth vs 401k vs our own brokerage account etc)

Conventional wisdom is to max the 401(k) match and both IRAS, then load up on taxable accounts. If you can consolidate those accounts at one business (e.g. Fidelity) then you may have a high-enough balance to gain other free or reduced-price services. But the amount of the savings probably wouldn't be enough to make it worth jumping through a lot of hoops.

-What is the optimal house-buying strategy from a FIRE perspective? IE is a 15 year mortgage > 30 year mortgage?

Buy the lowest-price home you can fit into (no 5000 sq ft McMansions) and stretch the financing out as long as possible if you can beat the interest rate with your other investments. But if your mortgage rates are variable or if you're not staying in the house long between career/job changes then it's a difficult problem to evaluate and a shorter mortgage is probably better. There are a number of variables in the mortgage debate and you should search the board's threads for the keywords "pay off" and "mortgage"...

-What is the optimal down payment strategy? When purchasing a house, should all savings go into the down payment no doubt or what?

Once you've saved enough for a 20% down payment (or whatever gets the best fixed interest rates and avoids having to pay PMI) and the closing costs then it's time to buy. You'll want to avoid emptying the emergency cash fund and the Roth IRAs if possible, but many have their Roth IRA contributions double as their emergency funds.

-We would like to buy a home at year t=7. What is the best investment strategy in the meantime?

If you know you'll need the cash back in seven years then it's not such a hot idea to depend on the stock market. You might do a lot better with I bonds or long-term CDs. You could sink it all into the stock market's hypothetically higher (long-term) returns if you don't mind the significant risk of having to delay that home purchase by another 5-10 years...

We will have (roughly) 200k for a down payment at that time and would like to purchase a home for around 600k.

That sounds like one heckuva lot of house. Instead of saddling yourself with a huge mortgage payment, to say nothing of maintenance/repair/property tax costs, it might make more sense to find a good 2-3 BR house in a location convenient to work and put as little net worth as possible into your home.

That way you're expense-light if a job is lost and you're not heavily invested if you guys relocate for your careers. Or your kid(s)...

 

[califdreamer]

ambition187

Congrats on starting so early in your financial planning. I wasn't even aware of the ins and outs of personal finance at age 23... much less age 19.

You've gotten some great advice so far. I'll just chime in on the housing issue. I'd opt for the 30 yr mortgage especially at a young age. Let the capital grow. No need to have it tied up in the house. You can always pay it down later when you're filthy rich.

And don't buy too much house. Even if you have a kid you can do just fine in a house with 3 or 4 BR and 1900-2200 sf or so. You can get a house like that in a nice Phx burb for 350k and, I would venture to say, not a whole heck of a lot more than that in 5 yrs.

Really, good for you for thinking ahead and best of luck.

 

[macdaddy]

Why would you want to jump from a dirt cheap apartment to a 600k house - especially in Phoenix where houses are pretty cheap?

You are both young (she's only 19!!!) and clearly headed in the right direction. I would say focus on your career and have her focus on school - max out the roth accounts and do the best you can - then look at a starter home in a few years once the housing market settles.

Living cheaply and happily is a lot harder than picking the right index funds to put the money you save in.

 

[ambition187]

ahh good point on the house. i guess part of the point of FIRE is to avoid the "rat race" anyway, so the smaller home seems like a no brainer . We would probably be quite happy and content in a 2 or 3 BR.

regarding school...the problem is that for law school, other than the top 15-20 schools, the placement is regional (or so say forums, etc!), thus going to school in X means you will have to work in X. That is really the driver behind the possible and probable move (we are currently in a high cost of living area=Boston).

Thanks for the tips on 401k and IRA. We will get those started soon!

We will browse the forums and take a look at all the strategies. Seems to be alot of info here!

Thanks again,
Ambitious

 

[ambition187]

regarding cheap and happy, any tips? how do you all avoid the temptations

 

[LOL!]

We plan on living at 50% of take-home pay from now until retirement (overly ambitious?).
...
Questions:

-Given that early retirement is the goal, is it best to avoid 401k etc. that provide benefits but come with an early withdrawal penalty? My guess is to only put in 401k up to what the employer matches?

-What is the best mechanism for savings and investment (Roth vs 401k vs our own brokerage account etc)

-What is the optimal house-buying strategy from a FIRE perspective? IE is a 15 year mortgage > 30 year mortgage?

-What is the optimal down payment strategy? When purchasing a house, should all savings go into the down payment no doubt or what?

-We would like to buy a home at year t=7. What is the best investment strategy in the meantime?
...

As double income family, it should be easy to live on one salary and invest the other, so you will have no problem saving 50% of your income. That's what we did, so I do not see it as overly ambitious. It should be trivial for you.

You should plan on maxing out 401(k) plans because that will be way less than 50% of your income. We have always maxed out our retirement plans and find now that our assets are split about 50:50 in retirement and taxable accounts.

Best mechanism for investing will be the standard ones of asset allocation, index funds, low expense ratios, avoid annuities, avoid advisors. Invest in a tax-managed way.

Optimal house buying strategy for us was to not buy a house until we were in our late 30s. We rented in some wonderful locations. We only bought a home after moving to a cheap place to live. We got a 3000+ sq ft 4 br, 3.5 ba home for less than $200K close to our jobs so commuting costs are practically zilch. Not sure what will be optimal for you though. We got 30 year fixed mortgage with 20% down though we could have paid cash. Later refinanced to 15 year fixed with a 4.875% interest rate. The mortgage payments are an after thought in our monthly expenses.

While saving for our house, we simply invested as if for retirement. Our kids came in our late 30's as well. We are almost 50 now, but financially independent though still working because we have fun jobs.

You should really have no problem meeting your goals if you start now.

 

[macdaddy]

I'm in Boston too - where is a "reasonable" 2 bedroom 700/month?

 

[Nords]

regarding cheap and happy, any tips? how do you all avoid the temptations

Best way to be frugal is to figure out what makes you feel that you've received good value for the money spent, and to do those things in moderation. Then figure out what doesn't make you feel that you're getting value, and stop doing those things. It's an iterative process and you'll find yourself stepping back & forth over the line between frugality & deprivation. Your goal is to stay on the fun side of frugality and only do deprivation if you've lost a job or had a huge spending emergency.

One thought process (from Your Money or Your Life? I can't remember) is to figure out how many hours you'll have to work for whatever consumer item you're lusting after. When you realize that something will cost six or 13 (or 1523.6) hours then it may not seem so essential.

Another approach is to think about how much time & money it'll cost to be responsible for a possession. Chances are there's cleaning, storage, insurance, maintenance, & repairs, plus maybe food, medical care, & vet bills. Suddenly that puppy or that dirt bike or that sailboat doesn't seem so necesary.

The Dollar Stretcher's e-mail newsletter (http://www.stretcher.com) is a great resource. You get an issue a week plus a tip or two delivered in small doses instead of a huge overwhelming load. For the first couple issues you'll find a lot of interesting ideas that'll take an hour or two to read up on, but as the weeks go by you'll flatten out your learning curve. After a decade I probably only pick up one or two tips a year but I enjoy reading about the process (and finding good ways to teach our kid).

If you have the time you could also read the discussion boards at SimpleLiving.net. There are extensive archives to search for specific subjects, and when these people cross the line there'll be no doubt in your mind!

 

[Peaceful_Warrior]

regarding cheap and happy, any tips? how do you all avoid the temptations

The best way for me to avoid temptation is to ask whether I would rather have this item now or FIRE earlier. Then I look at my job and think, "Well it's not bad... but if I didn't have to work again that'd be even better."

I also talk about it with my wife and ask her thoughts on the matter. Oftentimes we both find that something interests us, but we don't really need it.

We also pay attention to our budget. We love Jamba Juice, so we budgeted to go there twice a week. We like to eat out, so we budgeted once per week. We used to do both of those things a lot more.

We love movies, so we got a 4x Netflix subscription instead of going out and/or renting movies. We also don't have cable because our Netflix subscription gives us more than enough to watch and most TV shows don't interest us.

All in all, we've used our budget to identify things we like very much and want to have in our lives regularly, and then looked for ways to minimize that cost.

When it comes to depreciable assets like cars, we buy whatever meets our functional need and set our egos aside (does it look good? We don't care. Does it drive forever and get us where we want to go effectively? Then we'll buy it). Honestly I think we wash our car once a year, maybe twice, because we intend to drive it into the ground. We do get the oil changed and regular maintenance on schedule, though.

When it comes to appreciable assets, we just run the numbers. Sometimes a bigger house does make sense when you account for leveraging (20% yours, 80% banks money) along with appreciation. However, that really only works in areas with high costs of living where you can leverage a $600k home and watch it appreciate to $800k in a matter of a few years (if you could reliably predict appreciation, which is not always the case).

On mortgages, run the numbers on a spreadsheet and compare the 15 yr vs 30 year. You need to account for the payment difference and how much money you'll earn if you invest the extra amount at a particular percent. Then you want to see how these numbers compare at regular intervals (say 5 years) for probably 30-50 years. There's no sense in accounting for appreciation here since it's the same in both cases (appreciation is independent of the mortgage). In the case of the 15 year mortgage, you'll also need to add how much you can invest from years 16-30, so that you can evenly compare "How much assets will I have in 30 years if I choose XXX mortgage".

What I have found is that for me, it is financially more advantageous to get an interest-only loan and invest the difference (of what a 30 year mortgage would cost). The reason for this is the time-value of money. By allowing your investments/assets to grow sooner (rather than pay down debt), you end up with more assets later on in life. Then, if you don't like the idea of not 'owning' your home, you can always take those investments and pay off the mortgage. The surplus is your 'bonus' for having an interest-only mortgage instead of taking the force-savings route of a traditional interest+principle mortgage.

Of course, with interest rates changing (and the fact that interest only loans are at higher rates than 30 yr mortgages), this strategy may not always be the best. That's where the spreadsheet comes in handy.

 

[haha]

We are young'uns but are sure FIRE is the lifestyle we want. The thought of moving to NYC and partying for a decade makes both of us shiver. While our colleagues and cohorts think we are quite odd, we know what will make us happy in the end..and thats traveling the world and not being a slave as soon as possible .

I am 23/m engineer, she is 19

I do believe we have new record. This aspiring FIREE, though old enough to vote is not yet old enough to have a legal drink.

A toast to Ambition!

Ha

 

[ambition187]

to macdaddy,

we are in everett, which is a pretty cheap area. on top of that, renting from my parents which gives the discount. we got lucky.

 

[SecondCor521]

A couple of points to think about on the mortgage/house situation:

1. The cost of house decision is probably a bigger factor in FIRE than your mortgage decision. I agree with others (and you!) who write to buy a smaller but comfortable home rather than the McMansion you will likely be told you can afford. Personally I set my outside price limit at one where my mortgage payment on a 15 year mortgage with 20% down was equal to 25% of my gross salary. (I then bought a house that was about $10K less than that price.)

2. Ideally, I think you would try to figure out before you bought the house whether or not you were going to carry the mortgage into retirement. That's a pretty complex thing to try to figure out. But if you were going to keep the mortgage in retirement, I'd lean towards a 30 or 40 year fixed. If you were going to pay it off in order to FIRE, I would look at matching your mortgage term to your FIRE date -- so if you're looking at buying when you're 30 and retiring at 50, it would make sense to me to get a 20 year and take the break on the interest rate.

2Cor521