The Doctor’s Bill: I Want To Keep My Home!
For an audio version of this post, please click on the speaker icon (top left).
Welcome to this episode of The Doctor’s Bill (Can You Afford It?).
Wonder if you should buy that big ticket item or not?
Well here’s your chance to have a wealth management expert, Johanna Fox Turner, of Fox & Company Wealth Management analyze your overall finances and make a final verdict on whether or not you can indeed swing for the fences and splurge on yourself or whether you should just walk away.
[Johanna and I have no current financial relationship]
Disclaimer: This is not meant to be a substitute for paid professional advice but only meant to serve as a suggestion/guideline.
The following are the details from our submission form:
Item/Experience Desired:
Keep Current home
Approximate Cost:
$945000
On A Happiness Scale of 1-10 (10 Being Happiest), rate what this item/experience will do for you A) Short Term and B) Long Term:
A) 9 B) 8
Age:
38
How Many Years Till Planned Retirement?
10 to 12
What is your total household income?
$405000
What is your % Annual Savings Rate? (savings/gross income)
50%. Savings rate includes the employer matches.
Primary Home Equity (Market Value-Debt) [For Renter =$ 0]
$186755
Additional Real Estate Holdings Equity (Market Value-Debt):
$0
Current Liquid Asset Value (Savings, Checking, Etc.):
$54000
Retirement/HSA Combined Value:
$324209
Miscellaneous Asset Value:
$0
Mortgage Balance:
$863000
Student Loan Balance:
$0
Additional Liabilities:
$0
Future College Plan Funding Needed (Today’s Dollars):
Unknown – expecting child in March. Don’t know that we’d pay for its full college.
Future Parental Support Funding Needed (Today’s Dollars):
Don’t know. Four living parents.
Additional Future Obligation Support (Today’s Dollars):
$0
How do you plan on paying for this item/experience?
Our salaries. But I don’t want to be 68 when we finish paying for it. That scares me. So we have been looking to downsize but can’t find the same value.
Any other pertinent information not addressed?
My wife is 29. She is fully vested in her pension. It is currently worth $34,165.
I would like to transition to another line of work where I don’t have pressure to bring in six figures as soon as possible. Or know that I only have ten years of this type of work left.
In ten years, I would like my income not to matter. So I would like to have the option to stay at home full time or take on a new career where it doesn’t matter if I make $20,000 or $200,000.
My wife makes $150k with about 20% bonus. I make $115k at a W-2. I also currently make $120k at a 1099 consulting gig. That will end sometime within the next two years. I expect my income at the W2 would rise as high as $140k when I tell them I no longer have the consulting gig.
Expecting child in March. Not planned.
Johanna had some follow up questions (this submitter left an email):
1. Does your wife contribute to the pension or is it all employer-contributed?
The employer only contributes to the pension. It is a European company.
2. Are the pension contributions included in the 50% savings?
No. We do not include it in our net worth or savings rate.
3. Does the 50% savings rate include employer contributions to any plans or are you saving a total of $202,500/yr?
Yes, the savings rate includes the employer matches. I don’t think we are saving 50% of gross compensation. That looks like after tax savings.
4. When your income goes down in the next 2 years, will you still be able to save 50%/yr?
No, our income would potentially drop by ⅓.
There are two likely scenarios:
- Stay at my current job and go from $115k to $140k. Lose the entire $120k consulting (plus ability to contribute to Solo 401(k)
- Work for the consulting client as a W-2. Make ~$185k with bonus. Lose $115k W2 job and access to Solo 401(k).
I worry about #2 because it takes me off a career path and is not work I am interested in or would be busy doing.
My current W2 job is in cancer advocacy and I like doing it for the most part.
5. How long does she have to work at her job to receive pension?
If she left today, she’d get ~$34k or an annuitized amount.
The longer she stays, the bigger the pension gets.
6. When does your wife plan to retire?
We don’t know.
Our goal was to get me to stop working and then work on her.
She is so young, only been in the workforce 7 years.
I figure she has at least 15 more.
Based on this submission what do you think? Does he get to keep the house or is he forced to downsize?
Click on the Doctor’s Bill Image and find out the verdict:
Open the Bill And Find Out If Can Afford It or Not
After you see the verdict please come back to this page and comment whether you agree or not with the decision (and no cheating by looking at comments first!)
If you would like to submit your own Doctor’s Bill request please fill out the submission form (and remember email subscribers to XRAYVSN will get priority)
NOTE: The website XRAYVSN contains affiliate links and thus receives compensation whenever a purchase through these links is made (at no further cost to you). Although these proceeds help keep this site going they do not have any bearing on the reviews of any products I endorse which are from my own honest experiences. Thank you- XRAYVSN
Agree with Johanna and Xrayvsn. The situation is house poor. No info on where they are located. In my MCOLA one could easily find a cheaper house that is very nice.
Thanks Hatton1 for your comment. It definitely is a tough situation to be in of liking your house but having too much tied into it to make financial sense.
I completely agree…they will be feeding the beast for years to come with such a high mortgage remaining. In their situation I would definitely downsize.
Thanks ENT MD for the comment. Downsizing is the way to go in this situation. This example can be used to highlight the plight of buying too much home in that once you get accustomed to a certain lifestyle, it makes downsizing that much more painful. If you were able to have chosen an appropriate home right from the start it wouldn’t cause such an emotional transition (it’s always harder to go from something bigger to smaller)
I would downsize IF they want to retire in 10 years. The mortgage is a lot and their largest barrier to FI in the timeframe they hope to achieve it.
With their income and savings rate, they should otherwise be well positioned to live off their income in retirement.
Thanks Financial Verdict, appreciate the comment and great point made. Their income and savings rate (even though it was later shown to be after tax and not gross) does set them up for future success if they get rid of the large financial anchor this home mortgage represents OR they forgo the desire to retire as early as originally indicated.
This was a no-brained, they do not earn enough to live in a house that (financially) large, let alone have early retirements layered on. No way. I think they need to downsize AND plan to work longer.
Thanks VagabondMD. When I was first going through the submission I thought it had some legs to stand on with the high savings rate and great combined salary early on but it started following apart as I read what he wanted to happen (leave workforce, etc). Appreciate the comment.
I believe they have about twice the house cost they can afford. Their finances are not stable IMHO. What’s described is a $300K income with a $100K side gig that expires in 2 years. The cost of raising a kid is about 300K inflation adjusted and is ongoing for 22 years well into their proposed retirement. So at this point he has to fund a 900K mortgage, a 300K kid, and a 4M retirement portfolio on 300K/yr BESIDE pay for food taxes etc. (I don’t see the side gig entering in at all it only generates 200K in the next… Read more »
Great analysis Gasem (that is beginning to sound repetitive, isn’t it? 🙂 ). It would definitely be a scary situation to try and stay in that home with the parameters they stipulated. Good point that one unexpected cost would definitely tip them over financially.
This is a tough one – if you buy the big house and subsequently try to justify keeping it, the challenge of ditching it is much more difficult psychologically. All roads point to selling, and there might be a compelling case to be made for renting and investing the difference to jack up the savings, depending on whether this represents a HCOL or LCOL area. The last person to see the albatross around their neck is the person wearing it – very common with young docs who start out charging and then quickly realize they can’t sustain the workhorse pace… Read more »
Thanks CD for that great insight. Scaling back is indeed psychologically tougher than starting out with the right size home in the first place.
Renting is a brilliant solution. It builds in flexibility and reduces down market risk.
My wife and I are tied to our region due to family, but we live in the NY metro area. The COL here is nuts, and we could live much better on less. While it’s not time to move yet, but we are edging closer.
Yikes. NY metro definitely is HCOL. I live in the southeast and credit geographic arbitrage as a major factor of why I got ahead financially despite my numerous missteps financially (which was the series that started this blog off in April)
The SE is beautiful, and so many folks from up here are moving there. It’s a real possibility for us, although so is a lot of other parts of of the country aside from the other equivalent COL areas. Our modest home would be a mansion on cost alone in most of the country.
Yeah, I lucked into this place without even knowing what geoarbitrage was about. Have a really cool post I created about the story how I ended up here, I think it is set to come out in December. But I pretty much everything backwards of how a normal person goes about things (by now most people are not shocked by that statement). The value of homes around here is amazing, coming from Ohio to here was a huge difference in what I could get (as well as what I could keep since no state income tax).