MCOL & MIddle income AE

[mcolae]

We live a craft beer loving area of the midwest. Mcol & middle income.


Despite the pandemic, 2020 was a big year for us. We purchased the home of our dreams & converted our former home into a rental property. Both homes have been updated & we expect very few major repairs in the near future.

Me (40) & DH(42) have stable jobs and have not been financially impacted by the pandemic. We have no debt, other than the mortgages. DH works for the government and is fully vested in a pension plan that pays out 80% of his salary. He will likely retire once kids get closer to college age.


We are pretty basic people. We cook most of our meals, repair most of our stuff & buy used when possible. We've been debating buying a boat, but are still doing research.


What should be be doing with monthly excess? We've been just adding the cash to our savings account recently, but want to do something else. We're not sure if we should add more to college savings or payoff rental home mortgage first. We don't have a huge interest in putting more $$ into the stock market.

We've been debating buying another rental property (duplex or airbnb lake home). Lake homes are BIG in our area and a $400k cabins easily rent for $2k/week in the summer (20 weeks). We know the area and would likely hire a property manager to do the cleaning.

We live in an area with quality public universities. We intend to cover about half our kids' college education. We estimate this will be about $120k and this is a few years off (8+ years).


Assets
$191,000 401k for me
$19,000 Roth IRA for DH
$16,000 college savings for kids
$30,000 liquid savings
$5,000 savings for rental (if needed)
DH pensionfully vested. Can retire in 10 yrs

Monthly Income
my salary $5,330.00  after tax, 6% 401k contrib + 3 % employer 401k match
DH salary $4,000.00   after tax, health ins+ pension
rental prop $2,100.00

total $11,430 monthly income

EXPENSES

Primary residence (mort+ins+ tax) $2,000    Valued at $475k, $ 350k bal. 2.75%. 30 yrs left
Rental home (mort+ins+ tax)     $1,180        Valued at $375k, $150k bal. 3.75%. 29 yrs left

food $600
beer $250
restaurants $200
utils $190                             gas/electric/trash/water
phone $75                            me, DH+ FIL
internet $80
insurance $100                      auto + life
gas for cars $300
auto maintenace $100             2013 SUV & 2007 wagon
college savings $300
target $50
clothes/shoes $50
travel $400                        during normal year
DH hobby $100                 golf membership
me hobby $100                 gym
Kids hobbies $150            ski, baseball
home repair $100
misc budget $50
dates $50
gifts/charity $200

total $6,625 monthly expenses

Excess $4,805.00

**Any suggestions of how to prioritize our future investments?

*****EDIT----  DS(9)+ DS(7)





EDIT-. $152k household income last year

[ohgillian]

Thank you for sharing! I always appreciate the time people put into pulling these numbers together. It can take awhile!

I get that your H is fully vested in a defined benefit plan, but your retirement still seems low to me. Fwiw, H and I are also both in defined benefit plans, so I do understand where you're coming from.

Are you planning to mostly cash flow the half of colleges that you plan to cover? Because if not I don't see how the math is working there.

I would probably drop most of that excess into increasing your retirement savings.

I like that you have separate savings for unexpected issues w/the rental. That's smart. We've just started discussing a rental home, so that stuck out to me.

[fryjack2]

I have no real advice for you about where to allocate your extra monthly money because we have the same question. We also just dump it into general savings but its a lot of money sitting at a very low interest rate. I would probably beef up the liquid savings if you do buy a cottage. 3 homes that could need something at any point, despite being upgraded, would make me nervous.

Love that your beer spending is equal to 40% of your grocery budget. Ha!
$50 at Target? What's your secret?

If you are in GR, or the surrounding area, I have so many questions We talk about buying a beach house to rent there.

[awkwardpenguin]

What is your hesitation about the stock market? I ask because you still have a bunch of room in your tax deferred savings space in your 401k and are likely eligible for a Roth IRA for yourself, and I would prioritize that first. It's hard to say how much you should save for retirement with a defined benefit pension for your DH, but looking at you alone it looks like you are a bit behind on retirement.

After that, I would consider:
1. Upping charitable giving
2. Saving more for college
3. More of your preferred investments, which seems to be real estate

Right now you have $350k of your "portfolio" in residential real estate equity, and $226k in the stock market, assuming the 401k, Roth, and 529s are fully invested. I think you could weight quite a bit more toward the stock market given how much you have in residential real estate.

[ssmjlm]

I agree with PP, your retirement is fairly low for age. Are you maxing each year? I would prioritize that.

You say "throw more money in the market," but only show a savings account. Is there another account?

How many kids and ages?

[sunnydays]

I was thinking your retirement is very low as well. What about an IRA or Roth (back door maybe if ur income is too high). I’d look into various investments in stocks and/or mutual funds. We are contemplating taking advantage of our hot real estate market and dumping our investment properties and putting proceeds into stocks.

[flygirl]

I am very risk adverse when it comes to not have money saved, so take my comments with that in mind. I think you should throw more money at retirement but I also think you need more of an emergency fund for your rental than $5K. I would then save to pay for future cars in cash and if your kids are >6-7, I’d save for for college also.

[mcolae]

Mar 18, 2021 14:08:37 GMT -5 ohgillian said:

Thank you for sharing! I always appreciate the time people put into pulling these numbers together. It can take awhile!

I get that your H is fully vested in a defined benefit plan, but your retirement still seems low to me. Fwiw, H and I are also both in defined benefit plans, so I do understand where you're coming from.

Are you planning to mostly cash flow the half of colleges that you plan to cover? Because if not I don't see how the math is working there.

I would probably drop most of that excess into increasing your retirement savings.

I like that you have separate savings for unexpected issues w/the rental. That's smart. We've just started discussing a rental home, so that stuck out to me.

Thanks for the response! I always reading the budget threads, too.

The pension plans are hard to quantify, but it' a solid amount of money that's guaranteed.  And, since we've tried to work our budget that we mostly use one person's salary, we hope that  DH's pension + my 401k will cover the bulk of our needs.  I'm saving for retirement, but really have a hard time imagining wanting to retire.  I strongly feel that I'll always want to be tinkering with some type of business, but I know that could change in the future...

Tuition+ board at our local state system is  currently about $25k/year.  While we had both kids in daycare, we regularly paid $3k/month for daycare, each month.   Now that kids are out of daycare, that's part of the reason we have the excess funds.  I know college tuition will increase by the time my kids need it, but I find it hard to believe it will double in the 8-10 years until we need it.  So, that's part of the reason we thought we can cash flow it.

Otherwise, we have nearly $200k equity in our current rental property.  We've also debated selling that when/if we needed the $$ to cover college costs.

[mcolae]

Mar 18, 2021 14:10:03 GMT -5 fryjack2 said:

I have no real advice for you about where to allocate your extra monthly money because we have the same question. We also just dump it into general savings but its a lot of money sitting at a very low interest rate. I would probably beef up the liquid savings if you do buy a cottage. 3 homes that could need something at any point, despite being upgraded, would make me nervous.

Love that your beer spending is equal to 40% of your grocery budget. Ha!
$50 at Target? What's your secret?

If you are in GR, or the surrounding area, I have so many questions We talk about buying a beach house to rent there.

The interest rate on our savings account stinks right now.  

We've been very cautious due to COVID, so we're still not dining out or travelling, so all that $$ just goes into savings each month.  COVID's also probably the reason my Target bill is so low...hard to spend the $$ if you're not in the store.

We're in the Twin Cities area of MN and have lots of tasty craft beers within walking distance of our house.  Our ''goal'' each week is to walk to at least one to purchase a growler to help keep the tap rooms open.  COVID's been tough for brewers to keep the doors open.  So, we've been making sure to support them as much as we can.

In MN, beer and wine is sold at separate stores than groceries.  We're mostly vegetarian and shop primarily at Aldi and Costco, with biweekly deliveries from Imperfect.  

We're interested in purchasing a lake home in the Hayward area of WI.  Our families have several cabins there (for personal use), but it's a popular spot for week long rentals.  We're watching to see what happens to the market after things normalize a bit...will people still want to do lake home rentals or will they fly to Mexico for a family trip instead?

[mcolae]

Mar 18, 2021 14:27:34 GMT -5 awkwardpenguin said:

What is your hesitation about the stock market? I ask because you still have a bunch of room in your tax deferred savings space in your 401k and are likely eligible for a Roth IRA for yourself, and I would prioritize that first. It's hard to say how much you should save for retirement with a defined benefit pension for your DH, but looking at you alone it looks like you are a bit behind on retirement.

After that, I would consider:
1. Upping charitable giving
2. Saving more for college
3. More of your preferred investments, which seems to be real estate

Right now you have $350k of your "portfolio" in residential real estate equity, and $226k in the stock market, assuming the 401k, Roth, and 529s are fully invested. I think you could weight quite a bit more toward the stock market given how much you have in residential real estate.

My issue with the stock market is probably ridiculous, but I dislike that I have very little control about the whole issue.  My 401k rises and falls based on people who sit in board rooms and make sales pitches.  I know that, statistically speaking, the stock market always wins.   

We have a financial advisor who helps us decide how to allocate our investments.  However, we only meet with him 2X a year,  and things can change quickly.  He also wants us to invest more $$ with him, which we will probably do.  

Granted, we are new to the real estate game.  But, so far I really enjoy that I can see the direct benefit of my actions.  When I can fix our home and make it more rentable, I'm able to get a premium rental price.  

Yes, I agree we should also increase charitable giving.  A budget surplus is new to us, so that's part of the reason we've been pretty cautious about spending more.

[aspentosh]

I love your beer budget. I am all about craft beers. Yum.

The thing that really stands out, as others have said, is your retirement savings. Even with a pension, I'd want to be much higher at your ages. Not sure what your HHI is, but based off the take home after tax I feel like it should be quite a bit higher.

And like someone else said, I would have more than $5k for rental fixes. That's a great start (and probably more than you'll need until you NEED it), but with the excess money you get from the rental, I'd just funnel that into a separate savings account so you don't even have to think about it.

Great job!

[ohgillian]

Mar 18, 2021 16:17:51 GMT -5 mcolae said:

Mar 18, 2021 14:08:37 GMT -5 ohgillian said:

Thank you for sharing! I always appreciate the time people put into pulling these numbers together. It can take awhile!

I get that your H is fully vested in a defined benefit plan, but your retirement still seems low to me. Fwiw, H and I are also both in defined benefit plans, so I do understand where you're coming from.

Are you planning to mostly cash flow the half of colleges that you plan to cover? Because if not I don't see how the math is working there.

I would probably drop most of that excess into increasing your retirement savings.

I like that you have separate savings for unexpected issues w/the rental. That's smart. We've just started discussing a rental home, so that stuck out to me.

Thanks for the response! I always reading the budget threads, too.

The pension plans are hard to quantify, but it' a solid amount of money that's guaranteed.  And, since we've tried to work our budget that we mostly use one person's salary, we hope that  DH's pension + my 401k will cover the bulk of our needs.  I'm saving for retirement, but really have a hard time imagining wanting to retire.  I strongly feel that I'll always want to be tinkering with some type of business, but I know that could change in the future...

Tuition+ board at our local state system is  currently about $25k/year.  While we had both kids in daycare, we regularly paid $3k/month for daycare, each month.   Now that kids are out of daycare, that's part of the reason we have the excess funds.  I know college tuition will increase by the time my kids need it, but I find it hard to believe it will double in the 8-10 years until we need it.  So, that's part of the reason we thought we can cash flow it.

Otherwise, we have nearly $200k equity in our current rental property.  We've also debated selling that when/if we needed the $$ to cover college costs.

Thanks for responding.

To be clear, I wasn't saying there's anything wrong with cashflowing college. I hope it didn't come out that way. I just couldn't figure out if you were planning to do that, or if you thought you were saving enough to pay half by the time you get there w/o cash flowing. We have saved what I consider to be a lot but realistically will be cashflowing at least part as well.

Re the pension, it IS hard to quantify. With H and I both having pensions, I always felt unsettled about our projections until I started working w/a planner who could take the projected cash flow from those into account.  That said, one thing about the pensions is that you're dependent on an act of the State legislature to get a raise (at least in my state), whereas investments hopefully will continue to increase in value. In other words, as soon as I retire, the value of my pension payment is the highest it will ever be because inflation will continue and unless we get a cola adjustment, I still will get the same payment. Anyway, I don't want to beat a dead horse but even with a pension, your numbers look too low to me. 

Btw, you have great mortgage rates! You must have refi'd like the entire rest of this board and the world did this past year. Was it hard to get a rate that low for the rental home? I have read that for rental properties you can't get a rate as low as for a primary residence, but haven't gotten much further than that yet.

[ellipses84]

Your retirement doesn’t seem that low to me, considering your COL, the pension, and that you own an investment property. Of course keep saving for retirement as much as you can. I’d suggest either more college savings or retirement. I know MM will say retirement, but college will be here in no time and your savings are very low which is a lot to cash flow.

I’d only consider an investment lake property if it’s something you will truly love and get use out of, because I don’t think it will make you much $$ for a long time with costs / maintenance. Consider different size/price points and determine what your best option is. What does the $$ get you? Could half of it get you a smaller lake cabin?

Your savings / rental e-fund seem low, especially if you buy another property. Worst case scenario, the economy tanks, you can’t find renters and have a ton of mortgages to pay. Putting more e-fund savings into a bank account is basically losing money and you can’t pull from retirement/ college savings for no reason, so I think you should invest part of an increased e-fund in the market. You can diversify and be conservative about it if the risk makes you nervous. If your mortgages are 30 year, you’ll be 70+ by the time you pay them off. I’d take the excess rent and try to pay off the income property early. You could sell it eventually and pay off your home or a lake property.

[purplepenguin7]

thank you for sharing, I love seeing budgets! I am far from a financial expert, but personally I'd take some of your monthly excess and put it towards your rental property mortgage. I know that you have renters * now *, but having two 30 year mortgages in your 40s and planning to retire in 10 years would make me a bit nervous. You obviously have the equity and can sell if needed, but since you have such a large excess, even after doing some of other things mentions (beefing up rental fun, college savings, retirement, etc), I would try and knock that down some.

[krystee]

I agree with the comment directly above me. I would not want a 30-year mortgage in my 40s when I plan to retire in 10 years. I would either pay your primary home’s loan as though it was a 10- or 15-year mortgage, or invest in the market and put it toward the house when the balance reached the remainder of my loan.

[lacey]

Thanks for sharing! I would start by increasing your retiredmwnt to 10% plus the 3% company match and funding a Roth IRA for you. I’d also increase the college savings to 500 per kid. You’ll still need to cash flow college, but if you are retired and the kids are gone it seems possible that you’ll want to travel or get into more expensive hobbies and will not want a large college bill. I’d increase the savings fund for the rental to 10-15k.

Depending on how much you want the lake house, I’d either scrap the idea and pay down your primary home (or invest more) or start to save up for a substantial down payment for the lake house.

[keweenawlove]

I'm in a MCOL city that appreciates beer too I've never added up our beer but but I'm sure it's close to yours.

We're around your income and I'd definitely want to add Roths as an investment. They've got the advantage that they can be treated like an extra emergency fund because you can pull out the principal at any time.

[wildrice]

Thanks for sharing!

I just wanted to comment on your comment about not seeing wanting to retire. It sucks to think about, but don't forget that it may not be your choice. I've known plenty of people who were forced to retire due to physical or mental health issues that make it impossible to keep working into old age. It is best to prepare to retire and end up working longer than to not prepare and be caught off guard when it's too late.

That said, I don't think you are in bad shape for retirement or anything!

Do you have any renovations or major repairs you plan to do on the houses? Your cars are both on the older end - what is your plan for replacing them? I think saving for those major expenses would be wise, and anything beyond that I think I'd just put into a general stock market account. That's more or less my plan for when we get to a point where we have extra money like that, at least - investing in non-retirement savings.