Hi readers, it’s been a while since we’ve done a reader case, so here goes! This one is a doozy, and I knew it as soon as I saw the headline in my inbox “FIRE with 7 kids”. If you have a big family, is it going to be impossible to get to FI? Let’s find out by MATHING THAT SHIT UP! (also, stay tuned for an awesome announcement at the end of this post)
Hello,
We are big fans of Quit Like a Millionaire (and we pre-ordered PLAM), and we also read your blog regularly. But ever since my wife and I got married, and we combined our kids and finances, things have quickly become too complicated for us to Math Shit Up. I don’t know how to factor in the gradually decreasing child support we owe for the next 12 years and the alimony we owe for the next 17. I’m also not sure how to factor in the income we get from various retirement accounts, especially since part of it comes from a pension and from my wife’s company stock, and some estimates have different values based on early retirement versus later retirement. Can you help?
A bit of background on my custody situation: My wife’s ex has majority custody of the 6 children (we only get them for holidays and summers), so we would only be world schooling the 1 child that we have together.
We also have a nice amount of cash in a HYSA right now that we were planning on using to build a house on the land we own. But we know you’d probably tell us to sell the land and rent instead. The problem is, the land is what makes us happy and allows us to live by values: 1) it is a great place for outdoor recreation with our kids, 2) we really value eating organic food, which is pricey to buy, 3) we happen to love the hobby of homesteading, because it gets us outdoors in the sunshine and keeps our bodies in shape, and 4) we can grow our own food and be certain that it doesn’t come into contact with pesticides and plastic containers.
After homesteading for 8 months out of the year, we would like to leave for the winter months to take advantage of geographic arbitrage to travel abroad while using Home Exchange to give people a lovely winter cabin to stay in where they can do snow activities on our property or go to the ski resorts nearby. We are nervous to do what you do year-round and travel all the time, because we don’t know what kind of access there will be to healthy, organic food that we can trust. But we do plan on switching the kids (that are with us full time) to the world homeschooling program that you talk about so that we have the flexibility to come and go from the homestead as we please.
What do you think – is the homestead plan worth it or would it prevent us from FIRE-ing soon?
- Your gross/net annual family income – $306k gross/ $230k net family income. My wife occasionally gets company dividends, but we thought it best not to factor that in since it could be $0 one year or $30k the next. So any dividends would be a bonus
- Your monthly family spending – $9,743/month – this includes the $5300/month for alimony/child support, which will decrease by $200 every two years for the next 12 years until the youngest kid turns 18. After that, the $4000/month in alimony decreases to $1700/month for the remaining 3 years. Our $7,000/year (average $585/month) travel expenses to visit our family members should also decrease once we retire, because we won’t be forced to only travel on weekends and holidays when airfare is more expensive.
- For any debts you have, please include: 0 debts!
- Any fixed assets you have (house, car, etc.) – We have two cars that are paid off and land that is paid off.
- And investments or savings you have (cash, bonds, stocks, etc.) – We currently have $465,000 in IRAs and 401Ks, and we max out to those every year. My wife also has $470k in company stock, so that’s where we have trouble with doing math to project its growth, because that’s less predictable than the stock market. Additionally, I have a pension through my work that doesn’t allow me to see how much is in there, but the estimator tool says it would pay out $2,281/month if we wait until June 2044 to collect it, $3,549/month if we wait until June 2049. But this estimate continues to go up the longer that I work there and my company contributes to it. We do have $280k in total savings right now, but we are planning on using that to build a house on our land. We’ll need an additional $200K to make that happen, but we hope to pay for as we go with our income and avoid a mortgage. When we move into the home, our monthly expenses would decrease by $1850/month when we no longer pay rent.
Best,
Homestead Girl
Wow, that is a lot going on! I can see why Homestead Girl has trouble mathing that shit up! In this situation, the only way to create order out of chaos is to summarize and organize everything is that it’s less confusing.
Here’s what it looks like when you breakdown all their numbers:
|
Summary |
Amount |
|---|---|
|
Family Income |
$230,000/year |
|
Expenses |
$9,743/month or $116, 916/year |
|
Debts |
$0 |
|
Property |
$0 |
|
Investible Assets |
$465,000 (IRAs and 401Ks) + $470,000 (company stock) + $280,000 (savings) = $1,215,000 |
|
Pension |
$2281/month if retiring @year 2044, or $3549/month if retiring @ year 2049 |
Give that they spend $116,916/year, their FI number is $2,922,900. They currently have $1,215,000 and save 49% of their after-tax income. Put that into the spreadsheet and we get:
|
Year |
Balance |
Contributions |
ROI (6%) |
Total |
|---|---|---|---|---|
|
1 |
$1,215,000 |
$113,084.00 |
$72,900.00 |
$1,400,984.00 |
|
2 |
$1,400,984.00 |
$113,084.00 |
$84,059.04 |
$1,598,127.04 |
|
3 |
$1,598,127.04 |
$113,084.00 |
$95,887.62 |
$1,807,098.66 |
|
4 |
$1,807,098.66 |
$113,084.00 |
$108,425.92 |
$2,028,608.58 |
|
5 |
$2,028,608.58 |
$113,084.00 |
$121,716.51 |
$2,263,409.10 |
|
6 |
$2,263,409.10 |
$113,084.00 |
$135,804.55 |
$2,512,297.64 |
|
7 |
$2,512,297.64 |
$113,084.00 |
$150,737.86 |
$2,776,119.50 |
|
8 |
$2,776,119.50 |
$113,084.00 |
$166,567.17 |
$3,055,770.67 |
Which means they would reach their $2.9M FI number in less than 8 years, assuming their salaries keep up with inflation. Since their pension wouldn’t kick in until 2044, after they reach FI, we’d need to add in the cumulative value of their pension at year 2034, which would give them extra buffer room. HSG would need to find out from work what that value is and sometimes it’s opaque, given that number would likely be calculated using the interest rate, which we don’t know what it would be in 2034, so it would be an estimate.
Assuming the worst-case scenario that we can’t rely on her pension, and just looking at her numbers, even with the expensive alimony/child support cost of $5300/month taking up more than half of their monthly expenses, because they have such a high family income and savings, they’re still only 8 years away from their FI number.
If we were to factor in the child support and alimony drop in cost over the next 12-15 years, we get:
|
Year |
Balance |
Contributions |
ROI (6%) |
Total |
Child Support + Alimony |
|---|---|---|---|---|---|
|
1 |
$1,215,000 |
$113,084.00 |
$72,900.00 |
$1,400,984.00 |
$5300 |
|
2 |
$1,400,984.00 |
$113,084.00 |
$84,059.04 |
$1,598,127.04 |
$5300 |
|
3 |
$1,598,127.04 |
$115,484.00 |
$95,887.62 |
$1,809,498.66 |
$5100 |
|
4 |
$1,809,498.66 |
$115,484.00 |
$108,569.92 |
$2,033,552.58 |
$5100 |
|
5 |
$2,033,552.58 |
$117,884.00 |
$122,013.15 |
$2,273,449.74 |
$4900 |
|
6 |
$2,273,449.74 |
$117,884.00 |
$136,406.98 |
$2,527,740.72 |
$4900 |
|
7 |
$2,527,740.72 |
$120,284.00 |
$151,664.44 |
$2,799,689.16 |
$4700 |
|
8 |
$2,799,689.16 |
$120,284.00 |
$167,981.35 |
$3,087,954.51 |
$4700 |
|
9 |
$3,087,954.51 |
$122,684.00 |
$185,277.27 |
$3,395,915.79 |
$4500 |
|
10 |
$3,395,915.79 |
$122,684.00 |
$203,754.95 |
$3,722,354.73 |
$4500 |
|
11 |
$3,722,354.73 |
$125,084.00 |
$223,341.28 |
$4,070,780.02 |
$4300 |
|
12 |
$4,070,780.02 |
$125,084.00 |
$244,246.80 |
$4,440,110.82 |
$4300 |
|
13 |
$4,440,110.82 |
$156,284.00 |
$266,406.65 |
$4,862,801.47 |
$1700 |
|
14 |
$4,862,801.47 |
$156,284.00 |
$291,768.09 |
$5,310,853.55 |
$1700 |
|
15 |
$5,310,853.55 |
$156,284.00 |
$318,651.21 |
$5,785,788.77 |
$1700 |
By year 8, they’ll already have reached their FI number before the child support + alimony drops off, so it doesn’t change their time to FI.
Now, that being said, they also want to liquidate $480,000 of their net worth to build a homestead in cash for their kids. This would drop their rent by $1850/month, but still incur homeownership costs like maintenance, insurance, and property taxes, which are forever costs even if they buy a place outright with cash. That said, even if this may not make sense from a financial standpoint, it might make sense from a lifestyle standpoint if that’s what they really think is best for their family and would make them happy in the long run. Before they make this big leap though, I want to make sure this decision doesn’t blow up their finances too badly. So, let’s see what that does to their FI number if they were to buy this home:
The rule-of-thumb we like to use when calculating the “forever” homeownership costs, even when you don’t have a mortgage is:1-3% for yearly maintenance, 1% for property taxes, 1% for insurance, lawyer fees, closing costs, etc. So, let’s say 3% to be safe. This means it would cost $14,400/year, on average or $1200/month.
So even though it would save them $1850/month in rent, that savings goes down to $650/month after accounting for home ownership expenses. We’re also not factoring the opportunity cost of the $480,000 that is now trapped in the home rather than being invested and paying interest and dividends. Using the 4% safe withdrawal rate, they’re losing out on $19,200/year or $1600/month on passive income that their money could be earning, rather than trapped as equity. So they’re saving $1850/month but they’ll be spending $2250/month in homeownership costs and lost income from their portfolio.
That being said, they can make this homeownership equation more attractive if they can rent out part of the house and as a result, tap into that $480,000 of equity to earn income in the form of rent. Not everyone wants to be a landlord though (spoiler alert: it’s is NOT fun), so that would add an extra layer of stress to their life that I’m not sure they’d be willing to make.
Assuming they don’t want to become landlords, here’s how much their time to FI gets stretched out if they spend $480,000 on buying a place:
Their spending goes down by $1850/month but ownership costs of $1200/month makes it so that they are only saving $650/month, bringing down their spending to $9093/month or $109,116/year. This gives us a new FI number of $2,727,900. Their starting net worth also goes down from $1.2 Million to $735,000, and their yearly savings goes up to $120,884, which means they will reach FI in:
|
Year |
Balance |
Contributions |
ROI (6%) |
Total |
|---|---|---|---|---|
|
1 |
$735,000 |
$120,884.00 |
$44,100.00 |
$899,984.00 |
|
2 |
$899,984.00 |
$120,884.00 |
$53,999.04 |
$1,074,867.04 |
|
3 |
$1,074,867.04 |
$120,884.00 |
$64,492.02 |
$1,260,243.06 |
|
4 |
$1,260,243.06 |
$120,884.00 |
$75,614.58 |
$1,456,741.65 |
|
5 |
$1,456,741.65 |
$120,884.00 |
$87,404.50 |
$1,665,030.14 |
|
6 |
$1,665,030.14 |
$120,884.00 |
$99,901.81 |
$1,885,815.95 |
|
7 |
$1,885,815.95 |
$120,884.00 |
$113,148.96 |
$2,119,848.91 |
|
8 |
$2,119,848.91 |
$120,884.00 |
$127,190.93 |
$2,367,923.85 |
|
9 |
$2,367,923.85 |
$120,884.00 |
$142,075.43 |
$2,630,883.28 |
|
10 |
$2,630,883.28 |
$120,884.00 |
$157,853.00 |
$2,909,620.27 |
A little over 9 years!
That’s not too bad, given that it only extends their time to FI by about a little over a year.
This family has such high earnings that even with 7 kids, over 6 figures of spending, the desire to buy a home, they’re still less than 10 years from FI, regardless of whether they pick Team Rent or Team Own.
Given that alimony and child support takes up more than 50% of their spending, this family has relatively low spending even though they have incredible earnings.
So, HomeSteadGirl, even though I’m on TeamRent, after mathing that shit up, we can see that this dream of yours to own a homestead isn’t going to break you financially and only adds a little over a year to your time to FIRE. If your job is stable, and you can stay within your home buying budget of $480,000, this lifestyle decision may actually make perfect sense for your family.
What do you think? Should Homestead Girl buy a property? Or keep renting?
Announcement: Just wanted to share that my friend Mr.NomadNumbers, who’s appeared on this blog multiple times before, will be speaking at the first FIRE festival in Braunwald, Switzerland this upcoming Sept (Dates: TBD. Originally planned for May but has been postponed. ) Prices range from 600-1000 CHFs ($768-$1280 USD) for 7 nights depending on which room you pick and whether you want to cook or have board included.
Use my discount code: MREV-KINDLE to get 10% off! Full disclosure: I’m not being compensated at all for mentioning this event. I chose the code that gives you the maximum discount and nothing for me. I just think it’s super cool and my buddy Mr.NomadNumbers is amazing to hang out with!
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