Guidance requested

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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Topic Author
smitty1515
Posts: 122
Joined: Fri May 13, 2016 6:34 pm
Location: United States

Guidance requested

Post by smitty1515 » Sat Jan 12, 2019 12:02 pm

I make this post for guidance and appreciate anyone who takes time to read/provide feedback. I've done more reading than posting over the years and value these opinions because most are pursuing or have obtained financial independence.

Our situation:
Monthly expenses: $5,700/mo
Monthly income: (after tax): $9,600/mo (2 stable W2 incomes - both been with current employer ~ 10/11 yr)
Age: 36/37 (1 child- 7 yo)
Savings (Roth IRA, 401k, 403b, 529, car fund, cash savings, HSA): $4600/mo (includes employer matches where applicable)
Debt: mortgage with 305k left, 4.125%, origination date Feb 2015 (home worth ~400k) - PMI = $150/mo
Cash:$32,000
HSA: $5,800
Long-term investments: $310,000
529: $18,000

Job satisfaction:
- I work in healthcare and feel I'm living my calling to help patients. Although it's exhausting it's for a worthy cause!
- My wife works in accounting. She doesn't despise her job but doesn't love it either.

The goal:
Financial independence which I define as:
1.) 25 times annual expenses
2.) when passive income equals expenses

To this point our investing has been in low cost index funds. We DCA every month through the different vehicles listed above. I would like to hit FI in the next 10 years and believe with our savings rate, expected modest annual raises, and continuing to live below our means it is within reach. Once we hit FI, I would love to give my wife options which include volunteering, reducing her FTE, finding a different career not predicated on income, benefits, etc, or staying in her current role. The freedom having options provides is what I'm shooting for here.

The last year, I have been researching real estate as a component of our portfolio. I have read books by Papasan, Keller, and various authors, blogs, and forums through Bigger Pockets. I have met with real estate syndicators, talked with friends who are buying single family homes using a long term buy and hold strategy, and tax lien investors to understand their plan and determine if RE within our portfolio would speed up our FI journey.

For the sake of simplicity I ask Bogleheads their input on the following options. I know there are hybrid approaches and gray areas but these have been running through my head and I need opinions from people with more experience and knowledge than myself.

Option A: Don't dabble with real estate. Continue what you have done the last ~ 10 years with the following goal in mind: Max Roth, Max 401k, and increase contribution to HSA. Continue to take what the market bears and do so in index funds. On paper, this path appears to be the simplest and provides great opportunity to meet our goal.

Option B: Set aside a certain amount per month (currently $1,250/mo) into a REI fund. With each annual increase, increase contributions to this fund. Continue to get matches in work sponsored plans and max Roth IRA. The intention would be building two buckets (traditional investing and passive income). This would slow down the growth of our traditional investment accounts but diversify what we are investing in and provide potential for growth/tax benefits. Options include syndication, investing in tax liens, or buying a new primary residence and utilizing the previous one(s) as a rental. If you lean towards option B which of the options would you take?

I'd be happy to share more information if it's needed. As mentioned, thank you for reading my post and bestowing valuable opinion.

Have a great weekend BHs,

smitty
Be fearful when others are greedy and greedy when others are fearful. -Warren Buffett

mhalley
Posts: 6617
Joined: Tue Nov 20, 2007 6:02 am

Re: Guidance requested

Post by mhalley » Sat Jan 12, 2019 1:28 pm

Real estate is a viable path to fi, but it involves work. You might check out passuveincome md.
https://passiveincomemd.com/

Topic Author
smitty1515
Posts: 122
Joined: Fri May 13, 2016 6:34 pm
Location: United States

Re: Guidance requested

Post by smitty1515 » Sun Jan 13, 2019 7:30 am

Thank you for the link. That’s not a site I’d heard of and there appears to be excellent content.
Be fearful when others are greedy and greedy when others are fearful. -Warren Buffett

Silverado
Posts: 208
Joined: Fri Oct 18, 2013 6:07 pm

Re: Guidance requested

Post by Silverado » Sun Jan 13, 2019 8:17 am

It doesn't seem like you have maintained your current savings rate very long given the combined 21 years working and somewhat low portfolio for your target. Likely spent most of those early years either not making as much as now or not saving much. I would focus on maxing out everything in tax advantaged and a taxable with normal three fund portfolio type accounts for a few years. Look at ways to improve the amount saved.

I would stay away from RE myself. As mentioned, it takes work. We have maybe 10% of our portfolio in some REIT funds. Not totally on purpose, it is part of the target date funds we have from Blackrock in our 401k. That's enough for us.

Topic Author
smitty1515
Posts: 122
Joined: Fri May 13, 2016 6:34 pm
Location: United States

Re: Guidance requested

Post by smitty1515 » Mon Jan 14, 2019 6:55 am

Thank you for the input Silverado. We’ve experienced 3-5% annual raises during this time. We made some questionable decisions in our mid 20s but have a solid foundation to build upon now.

Again, thanks for the input.
Be fearful when others are greedy and greedy when others are fearful. -Warren Buffett

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Guidance requested

Post by livesoft » Mon Jan 14, 2019 7:17 am

Although I have never invested in any real estate myself, I would encourage you to try it because of the entire tone of your post. I think one can become financially independent without real estate investments, but it seems you are willing to try it out, so I recommend that you do so.
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
smitty1515
Posts: 122
Joined: Fri May 13, 2016 6:34 pm
Location: United States

Re: Guidance requested

Post by smitty1515 » Tue Jan 15, 2019 9:52 am

livesoft wrote:
Mon Jan 14, 2019 7:17 am
Although I have never invested in any real estate myself, I would encourage you to try it because of the entire tone of your post. I think one can become financially independent without real estate investments, but it seems you are willing to try it out, so I recommend that you do so.
You’re one of my favorite reads around here so I appreciate you’re input! 8-)
Be fearful when others are greedy and greedy when others are fearful. -Warren Buffett

sjt
Posts: 133
Joined: Fri May 26, 2017 3:03 pm

Re: Guidance requested

Post by sjt » Tue Jan 15, 2019 10:23 am

Silverado wrote:
Sun Jan 13, 2019 8:17 am

I would stay away from RE myself. As mentioned, it takes work.
As someone who also wants to get into real estate someday, I think maybe this isn't the right time for you. You mentioned your job being exhausting, and also having a 7 year old - this is not the time to be getting into real estate. I vote option A with the following goals:

-Continue to take advantage of tax advantaged accounts
-Put extra cash toward home loan to eliminate PMI
-Aim to dabble in real estate once you are empty nesters and have more time
-Learn to repair / improve your own home so you have the knowledge to do your own repairs on your rental when you have the time


What is your savings rate when you remove 529 and car fund? These accounts will not generate passive income in the future...



Something else to think about - you'd like to be FI in 10 years, that means having 25x expenses. Assuming your current expense of $5700/month; $68400 annually, you need a portfolio of $1.71M.

However, assuming a modest 6% annual return, a starting portfolio of $310,000, and annual contributions of $4600/month ($55200 per year), after a period of 10 years, you will have $1.2M. You will either need to lower your expenses, increase savings, or find a better growth than 6% to become FI within that time. And the 6% growth does not account for inflation, if you ran it with 3-5% growth numbers, your stash will be even less than $1.2M. Maybe I missed something or am reading it incorrectly. This is not a criticism, I think you're doing a good job but I challenge you to run the calculations for yourself and try different variables to see if your goals are realistic and achievable.
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

Topic Author
smitty1515
Posts: 122
Joined: Fri May 13, 2016 6:34 pm
Location: United States

Re: Guidance requested

Post by smitty1515 » Wed Jan 16, 2019 8:06 am

Sjt,

Thank you for the well constructed response. You’ve given me some things to think about in how I analyze our plan and future. Again, thank you.
Be fearful when others are greedy and greedy when others are fearful. -Warren Buffett

Colorado13
Posts: 829
Joined: Thu Apr 07, 2011 4:58 pm
Location: Colorado

Re: Guidance requested

Post by Colorado13 » Wed Jan 16, 2019 9:29 am

Step 1: Get rid of the PMI. With your assets and income, it's just not necessary/prudent.

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