Hi, I'm new and would welcome some advice!

[laurence]

Hi all! I stumbled upon this great web site quite by accident, and I'm so happy I did! I am 30 years old, my wife is 29. Retiring early is our dream and our goal. We have about 60k saved so far, and just this year upped our 401(k) contributions to the max, so with company matching we'll be putting over 30k a year into our retirement. We have refinanced and are in a 20 year mortgage on a house we love. We feel like we are set if we wanted to retire at 55 ( I get a pension, too), but we dream of retiring ten years earlier than that. Any suggestions? We live in north San Diego county, have one kid and plan on having one more. Thanks again!

 

[John Galt]

I have some thoughts. I suspect your area of the country is
pretty high priced, so you may want to plan on
relocation at some point. Staying put may hold back your
ER plans. At your ages, you are way ahead of where I
was at the same point. I wish I had gotten serious earlier on, but I had a lot of fun just "earning and spending".
With the right motivation (sounds like you have it)
retiring at 45 is quite doable. Finally, my children are the
best thing that ever happened to me, and of course
they were mostly "unplanned". That said, they can be
quite expensive and can keep you stalled for a while
off on the side of the ER highway. Even now
(age 60) I am still dealing with financial issues related to
my kids (3). Glad I got 'em but they can be costly.

JG

 

[Dawg52]

I agree with above, relocating will help. You should make a ton on your house if you do relocate.
All i can say is just save save save. Mutual funds probably the best way to go. I tried to pick and choose stocks but it is just to easy to step on a land mine. For me, it is easier to stick with a fund when the market goes south. Anyway, good luck! I've got 23 more months

 

[Hyperborea]

I have some thoughts.  I suspect your area of the country is
pretty high priced, so you may want to plan on
relocation at some point.  Staying put may hold back your
ER plans.

I'm going to have to disagree with that. The fact that I'm in a pretty high priced area (Silicon Valley) is speeding my trip to early retirement. Sure it's expensive to live here but the difference between what I earn and the cost of living is greater than in a low priced area. However, that generally only applies if you are working in the industry (or industries) that are causing the area to be high priced.

For example, I work in the computer industry and I get paid very well to live in this expensive area. So one might earn X in a low priced area and pay 0.5X for living costs. In the high priced area one might earn 2X and pay X for living. You've doubled your savable income. I've found that the cost of living also doesn't scale up at the same rate as the income does - at least if you avoid some of the more obvious money pits.

If instead though you were a grocery store employee or a teacher or an auto mechanic etc. then you won't be making enough to break above the high cost of living and it would probably make sense to move elsewhere.

 

[Hyperborea]

 Any suggestions?  We live in north San Diego county, have one kid and plan on having one more.

Sure.  It seems that you are already doing well.  Getting it all started is a good part of the fight - and you seem to have done that.  Just keep plugging away at it.  When you get raises put at least half of that money into your investments.  Keep your investing simple - a good diversified portfolio (Vanguard is good).  Read William Bernstein's books, Burton Malkiel's Random Walk Down Wall Street, anything by Peter Bernstein, and perhaps by Bogle though he is a bit dry.  And make sure to spend enough now to do the things that you want to do in life - none of us know if we are going to make it to ER.

 

[dx]

I second Hyperborea's comments regarding living in
a high priced area but being paid accordingly. This is
very much my situation as well, except I am on the east
coast. As long as you can manage to keep the cost
of living low, you'll make out way ahead down the road.

The pitfall to avoid at all cost is the tendency to live
a high life style. Remeber, it's not how much you make
but how much you save.

dx

 

[Nords]

Welcome, Laurence!

Whew, what a cheerful start. Relocate or get a higher-paying job?!

Sounds like you guys are maxing your savings (IRA contribution?) and minimizing your expenses. If you love the house, then live there as long as it doesn't force you to choose between home & retirement.

Track your expenses, keep educating yourselves with the books already mentioned, read the articles & studies at Greaney's Retire Early homepage, keep asking & learning here, and plan a portfolio allocation that lets you sleep at night.

As for kids, you'll immediately know when your family is large enough. That's more of an emotional decision and it's definitely not financial. I'm not sure it's even logical...

 

[Beachbumz]

Hi and welcome to the board. You did not give us a lot of information to go on. How much free cash flow, if any do you have? Will you get that pension when/if you retire at 45? Will it start at 45 or some later date? How much of your current savings are in taxable vs tax-deferred accounts? Will you both keep working when you have your second child (should you?)? What kind of cars are you driving and do you have car payments?

Having asked all that, you appear to be off to a good start. Maxing your retirement accounts and the 20 year mortgage are good moves. Generally speaking, here's my advice:

1. Live below your means. Especially with vehicles, this seems to be the biggest waste of money for most people. Don't worry about what the Jones' are driving. I drove a Toyota Camry for 13 years, which was always a big joke with my clients, who drove much nicer vehicles. (I had a small CPA practice for 12 years, retired now @ 38). Bottom line, pay off the vehicles and avoid car payments. Read some of the LBYM boards for more ideas.

2. Use a credit card with a cash rebate, or other perks for all possible expenses, always pay them off monthly. some good cards are the American Express cash rebate card and the Citibank Dividend rebate card (for gas and groceries).

3. I assume you have daycare costs. Take advantage of Section 125 flex spending accounts, if available for these expenses, as well as out of pocket medical costs. This can be a huge savings.

4. Consider adding enough principle to your monthly mortgage to pay your house off in 15 years (or your desired retirement date. This is a bit of a toss-up depending on your interest rate and expected return for your investments, but having a paid for house at retirement is a big plus.

5. You will probably want to cash out of the house at retirement and move to a cheaper area. Also, should your house appreciate to the point where you have a gain of $500,000, sell it and take the capital gain exclusion, which is the maximum allowed (assuming current tax law is unchanged). Do this, even if you buy the house across the street and start the meter running again.

6. At least consider purchasing rental property. This topic sometimes gets me in trouble on this board, but if it wasn't for rental real estate, I would still be working today. If you take this route, be sure to educate yourself fully. Rental real estate can provide tremendous leverage for your money and rates are low. Find a property, that will at least break even on cash flow, with a management company looking after it and allowing for 1 month vacancy each year. If you put 20% down, you will have 5 times leverage on your money, ie, if the house appreciates at 4% per year, you real return would be 4% x 5=20% real return on your investment (ROI). We purchased vacation rental property, which served the dual purpose of allowing us to use the property while still reaping the benefits of the rental (if you can't tell, we love the beach 8)).

7. This one should have been first, but I'm too lazy to renumber them . Be sure you have an emergency fund of 3 months living expenses in a liquid account. Consider a longer-term CD. You would have an interest penalty if you withdraw the money early, but since you only plan to use it in an emergency, it's worth the risk. Also, have enough available credit for another 6 to 9 months living expenses, the more you have the better.

8. Use FireCalc as you go along to see how you are doing. Also be sure to have a written plan for your retirement at 45 and also set shorter term goals for where you want to be in 3 to 5 years. This is a great morale booster and will help to keep you on track.

9. Ask specific questions on this board as you have them. You will get some great responses and some different perspectives.

10. Read lots of books on the subject. You can find a great list of recommended books on the retireearlyhomepage.com website.

Good luck to you!
The Beachbumz

 

[laurence]

Wow, first of all, you guys rock for all of your input. To answer some of your more detailed questions:

We earn about 125k a year gross, I would agree that the difference between our income and cost of living makes staying in the area advantageous. We don't want to leave the area because our parents, brothers, sisters etc. are all here within ten miles and our ER goal is more time with family (we have simple dreams!). Our debt is soley our house, but that's a large (2600 with impound, taxes etc. a month) payment. With that and maximizing our 401(k)s, day care etc. we don't have a whole lot left over, but anticipate we will in a couple of years as we get raises. Our cars are paid off (VW Passat '00 and Jeep Grand Cherokee '02). I'm handy with cars and have a trusty mechanic for things over my head. I will not be eligible for the pension untill I'm sixty five if I leave before 55, but I will get about 1100 a month at that age (not adjusted, probably peanuts after inflation ravages it). So currently, except for the 30k we keep in an ING money market for "emergencies" everything else is in tax defferred retirement accounts, and that's where future contributions are going. Any advice on Roth IRA? What are the eligibility rules for that if you have a 401(k)? There is a lot of confusion on that front. I'll keep reading, thanks to all for current and future advice!

 

[Martha]

Laurence, eligibility to contribute to a Roth depends on your adjusted gross income. The fact you have a 401(k) doesn't matter. If you are married, file joint returns and your AGI is less than 150,000 you can fully contribute to a Roth. The contribution is phased out for incomes between 150,000 and 159,999. No contribution allowed if your AGI is over 160,000.

In 2004 you can contribute $3000 and it is $4000 for 2005 (less amounts contributed to a traditional IRA). Add $500 to the contribution limits if you are 50 or over.

Rules and limits change from time to time.

 

[sgeeeee]

I'm going to have to disagree with that.  The fact that I'm in a pretty high priced area (Silicon Valley) is speeding my trip to early retirement.  Sure it's expensive to live here but the difference between what I earn and the cost of living is greater than in a low priced area.  .  .

Hi dx and Hyper,

While this may be true for your own situations, it is not true in general.  IEEE salary survey data shows that salary differential (due to region) is a maximum of only about 34% from the lowest paying area (Midwest) to the highest (Silicon Valley).  But cost of living calculators show that it takes more than double the salary to live the same lifestyle in Silicon Valley (actually 130%) that it does to live in the midwest.  Similar comparisons can be made for other areas of the country.  

The biggest reason for the disparity in the cost of living is housing.  A rank-and-file engineer living in Cedar Rapids, Iowa might well be living on more than an acre of land in a large house, etc.  that cost him under $200,000.  The same property in Silicon Valley would be well over $1M.  The mortgage payment difference alone would swamp the salary difference.  

Of course the less house or apartment an individual requires, the less the cost of living difference becomes.  And if a person's individual expertise makes them far more valuable to companies in Silicon Valley than to companies anywhere else, then salary differential can be larger than the averages described by IEEE surveys.

BTW, my signature line, salaryguru, was given to me by my staff after I attacked and embarrased an HR director with engineering salary data in order to get my department a significant raise.

 

[Hyperborea]

But cost of living calculators show that it takes more than double the salary to live the same lifestyle in Silicon Valley (actually 130%) that it does to live in the midwest.  Similar comparisons can be made for other areas of the country.

This is one of the reasons that I find cost of living calculators generally useless. They assume that you maintain a constant lifestyle in completely different environments. Only an idiot would do that. Nobody moves into Manhattan expecting to buy a 4 bedroom 2 bath ranch style house on 1 acre. Similarly nobody expects to live in a 30 story condo building in a small midwest town. Both of these would be outrageously expensive because they are out of the norm.

It's similar to the expats living in Japan for example who want American style apartments, a big American car, and big fat steaks. They will pay a high price for that kind of living. If they instead lived in a Japanese style apartment, took public transit (the norm), and ate more fish they would pay a lot less. The converse also applies.

The biggest reason for the disparity in the cost of living is housing.  A rank-and-file engineer living in Cedar Rapids, Iowa might well be living on more than an acre of land in a large house, etc.  that cost him under $200,000.  The same property in Silicon Valley would be well over $1M.  The mortgage payment difference alone would swamp the salary difference.

Again, don't do it. Adapt to the location you are living in. My home would cost a typical engineer in Silicon Valley about 30% of their income. That's not too far from what the average person spends on their home in the US. It costs even less of a percentage if you make more and/or you have a working spouse. Of course, it's not a 4 bedroom 2 bath ranch on 1 acre though it is large enough to raise the regulation 1 to 2 children if desired.

 

[sgeeeee]

This is one of the reasons that I find cost of living calculators generally useless.  They assume that you maintain a constant lifestyle in completely different environments.  Only an idiot would do that.  Nobody moves into Manhattan expecting to buy a 4 bedroom 2 bath ranch style house on 1 acre.  Similarly nobody expects to live in a 30 story condo building in a small midwest town.  Both of these would be outrageously expensive because they are out of the norm.

It's similar to the expats living in Japan for example who want American style apartments, a big American car, and big fat steaks.  They will pay a high price for that kind of living.  If they instead lived in a Japanese style apartment, took public transit (the norm), and ate more fish they would pay a lot less.  The converse also applies.


Again, don't do it.  Adapt to the location you are living in.  My home would cost a typical engineer in Silicon Valley about 30% of their income.  That's not too far from what the average person spends on their home in the US.  It costs even less of a percentage if you make more and/or you have a working spouse.  Of course, it's not a 4 bedroom 2 bath ranch on 1 acre though it is large enough to raise the regulation 1 to 2 children if desired.

Hi hyper,

I don't think everyone would want to live the same way in Silicon Valley or Manhattan as they would want to live in Iowa.  But, some would prefer the space and opportunity for solitude that the midwest (as an example) could offer.  For these people, the tradeoff of Silicon Valley for 34% more money is not worth it.  And, of course, there is nothing stopping the Iowa engineer from living in a small inexpensive apartment and still coming out ahead financially.  But if you value spending time near the ocean, seeing major league baseball, weekends on the warf, a diverse population, . . . no amount of money in Iowa is likely to make you happy.  My point isn't that one is always better than the other, but that it depends on your lifestyle and other choices. It is not a clear decision that higher paying places will speed you to retirement.  For many people, living the lifestyle they want in those high pay areas will be a negative.

Also you don't have to look at lifestyles as different as Silicon Valley and the midwest to come to similar conclusions.  A comparison of salary to cost of living between Silicon Valley and Phoenix shows even greater disparity than the Silicon Valley to midwest.  Again, if you are comfortable with what Silicon Valley can offer and not with what Phoenix can offer, the right choice can go the other way.

Of course one strategy that a lot of high tech workers have used over the years is to work the first part of their careers in the high pay areas, then switch jobs (usually at the same or higher pay) to a low cost of living area later in their career.  

 

[BUM]

Hi laurencewill

Welcome "a-board". Hard acts to follow above. The advice is solid. Living it is up to you. We are entering ER now in our early 50's. LBYM was and still is the key to our ability to exit the rat race. Living below your means is a life style that will bewilder your friends, neighbors and coworkers.

Secret for success (it must be a secret because so few people get it!)

Save all you can
Invest intelligently and conservatively.

The rest is automatic barring any of life's nasty surprises. Use your power that many of us no longer have... the power of compounding! You have decades ahead of you. Work the system.




BUM

 

[laurence]

Thanks BUM,

I think I've done everything I can this year. As far as LBYM, if I had it my way, I'd be able to retire at 40, but alas, my wife likes some of the finer things in life. If you took her to any store, furniture, jewelry, etc. and removed all the price tags, she could pick out the most expensive piece no problem. She just looks around and sees what she likes best! We've already come miles on this, but I usually have to bribe her with one whopper per year (Hawaii vacation, jacuzzi, etc.). Let's be honest, I don't suffer too much, I get plenty of enjoyment out of it too! I think we've found the right balance. We buy jeans at Costco for $10-$12 bucks so we can have those nice vacations.....