Signs You’re Saving TOO Much for Retirement

Mindy:
Today’s Finance Friday guest is hoping to retire by the age of 55, but will he be able to, given how much of his current portfolio is tied up in retirement accounts and three rental properties, let’s see what’s possible today. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my blueberry loving co-host, Scott Trench.

Scott:
Thanks, Mindy. Great to be here with a very good intro, BiggerPockets as a goal of creating 1 million millionaires. You’re in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting. Today we’re going to discuss can Ethan retire in six to eight years? How does he know if he has enough saved? And how can Ethan unlock wealth from his current portfolio before he hits traditional retirement age?

Mindy:
This episode is brought to you by Connect, invest real estate investing simplified and within your reach. Now back to the show.

Scott:
Ethan, welcome to the BiggerPockets Money podcast. We are so excited to have you here today.

Ethan:
I’m happy to be here. Thanks for having me.

Scott:
Awesome. Would you mind maybe opening up with a quick overview of your money story to let us know how you got to the current position?

Ethan:
So I’m a 48-year-old tech entrepreneur, husband and father of two teenagers. When I was in college, it was a founder of a tech startup during the end of the dot-com boom. That company that I founded in college ended up getting acquired by the company I work at right now. So the majority of my career has been working in technology and working for a company where I’ve more or less been an executive leader. So that’s been the last 23 years roughly. Along that way I’ve also done some real estate investing. I did house hacking when I was right out of college. My first house, I had extra rooms in the house and so I rented those out to tenants up until the point in time I got married and then my wife didn’t think that that was such a smart idea for me to have random people living in the house when she was there as well. So that ended that piece.
So I also picked up a rental property from my grandparents when they needed to move into retirement housing. So I’ve fixed up that house that they built in 1966 and have been renting it out for the last 24 years roughly. In addition to that, I’ve been doing just sort of normal investments in the stock market every year, probably for about 10 years when I would get my tax refund back, I would invest that in a brokerage account in buying stocks of companies mostly that I knew what their reputations were from working in technology. And then I read a book, I think I may have gotten it off this podcast about creating wealth and I started investing on a monthly basis and sort of V-T-S-A-X following the standard index fund investing rather than trying to pick my stocks. So that sort of brings me to where we are today. We’ve been doing that. My wife and I both work full-time. The majority of our income comes from W2 income and we have three romo properties, two homes and a condo.

Scott:
And what is your, it looks like you have, based on the expenses we saw here, could you give us a preview of your kids and how old they are and what they like to do?

Ethan:
Yeah, so my wife and I, we have two beautiful young girls. Our oldest is a freshman in high school and our youngest is a seventh grader, so she’s in middle school. Both kids are swimmers, so extracurricular activities. I think that if I add up their expenses between childcare and the activities that they do, I think that that’s more than our mortgage.

Scott:
It is. I just added them all up for you. We’ll talk about that in a second here. Yeah. Well fantastic. Mindy, do you want to give a quick rundown of the numbers here and then I have a couple of places I’d love to ask some questions just to get more context around this as we dive into the plan and your goals here.

Mindy:
So I see a very poultry income of 34,354 a month. That’s not a year, that’s a month. So nice job doing well there. No suggestions for increasing that. I see expenses of $20,000 and at first glance I’m like how are you spending $20,000 a month? But then we’ve got a primary mortgage of 2300 again, awesome on that we’ve got in your expenses, I see savings, rental, mortgages, IRAs, rental expenses and investment accounts that I don’t really consider to be expenses. They might be money coming out of your pocket, but those aren’t traditionally expenses. So I take that out and I see a total of $14,000 for monthly expenses.

Ethan:
Ethan, do you do zero

Scott:
Based budgeting

Ethan:
In business? I’m used to just doing inflows and outflows. So my budget or what I use to share the numbers with you was just based off of looking at everything that leaves our checking accounts every month and that is an outflow. And then looking at the deposits that come in from as inflow. So that’s probably why it looks that way. I see all those things pet out, so I consider them part of the budget

Scott:
And I just wanted chime in with this here before Mindy gets to the asset section because there’s two important callouts here. One is $6,500 of that is really going to savings or investments. And another 7,300 which I want to get into is expenses that I do not believe you would have in traditional retirement in six to eight years. And I think that those are two really critical numbers for us to zero in on as the conversation goes through. And those include things like tuition for private school that will maybe get bigger when college comes around, but it is not something you have to plan your retirement around as a monthly outflow. Same thing with college savings accounts, swimming and piano childcare and a couple of two other categories in your car payments potentially for smart. So does that sound right in terms of the buckets of expenses and how I’m thinking about ’em?

Ethan:
It does, and I’m hoping that some of those go away and that’s sort of why the time period, my question about time period is marked there. That should be the point in time where both kids are in college and no longer, at least in high school.

Scott:
So we’ll definitely dive back into those.

Mindy:
We need to take a quick break, but more from Ethan and whether or not he’ll be able to retire and say goodbye to his W2 right after this. Welcome back to the show. So back to the beginning, we’ve got 2300 for primary mortgage, 2000 for savings, a thousand for private school, 2000 for rental mortgage number one, $1,300 for college savings accounts, 1500 for swimming and piano, 1300 for rental mortgage number two, 2000 for childcare, 900 for car 1, 6 50 for car number two, 600 groceries, 600 shopping $541 for IRA 1500 for entertainment and travel. We’re going to talk about that one too. $600 for auto and property insurance, $400 for utilities, 250 for rental expenses, 240 for gas, one fifty five for phone, internet and cable, two 50 for household maintenance, one 50 for church and 500 for an investment account. Some of those, like I said before, I don’t consider to be personal expenses. Those are business expenses, the business of your rental properties or your investments, and maybe we should have a discussion about that sometimes, Scott, about where the investments should go in your mindset because yeah, it is money coming out of your pocket, but it’s not really an expense. It’s like saving for the future. So when we pull out those expenses that I removed, we’ve got $6,500 out. So now instead of $20,000 of expenses, you’ve got $14,000 of expenses against a $34,000 income. I think you’re doing okay there.

Scott:
We still need to get to net worth, but while you’re pulling that up, I’ll just preview where my mind is immediately jumping. This could be wrong as we get into the conversation, but I think that planning for your early retirement revolves around first excluding the amount you invest from your expenses, you don’t need to plan on that. Second planning for all of these major line items, the, what is it? 1, 2, 3, 4, 5, 6, 7, the college savings account, the private school tuition, the swimming and piano lessons, the childcare and both car payments just going away after your kids graduate or begin going to college and pulling those out. And if I pull both of those out, you spend $6,800 a month and if you pull out your p and i on top of that, now you’re at how much.

Ethan:
Right? So on the primary mortgage, lemme make sure I’m looking at the right one. Yeah, the principal payment per month is $717 and the interest payment is $712.

Scott:
Okay, so 14. So now you’re at 5,300. The reason this is important is because I can back into how much you need to retire by pulling out those and saying, okay, your actual monthly expenses, if nothing changes in the next couple of years, inflation adjusted in today’s dollars is about $5,500 a month and the asset base needed to generate $5,500 a month in income is 5,500 times, 12 times 25 or $1.6 million. The asset base needed to sustain the $20,000 headline number for expenses is 4.2. After pulling out the 6,500 of non expenses, 13,000 you spend every month is 4.2 million. So we have a huge difference once we go through that exercise of unloading the pressure on your financial position to generate a position for early retirement. And I think that that leads really nicely into the net worth conversations of Mindy, could you maybe walk through some of the net worth numbers here?

Mindy:
I will, but first I want to say his rental properties bring in $6,021 a month. So what was that $5,500 amount, Scott?

Scott:
That was the total amount of expenses that Ethan would have on a monthly basis per this spreadsheet. If there was no principal and interest on the mortgage, if he just paid off his mortgage, if there was no private school tuition, if there’s no college savings that need to be done, if there’s no swimming or piano lessons that need to be paid, if there’s no childcare that needs to be paid and if there’s no car payments inside of the position and all of those should go away over the next eight years I believe. So hopefully that’s a comforting observation. Ethan, have you thought about that before in doing this exercise?

Ethan:
Yeah, I had not thought about the mortgage payment going away in the next eight years, so I’d like to hear about how that’s going to happen.

Scott:
That’s an asset allocation decision. We may not choose to do that, but that just says, okay, this is super achievable. The numbers support this right now in some ways and now we can be working around what’s the way to fine tune it and add in plenty of padding to make that as comfortable as possible. You do not necessarily need to pay off your 3% mortgage. I’m just saying that that’s an option we have and with the headline number of how do we generate 20 grand a month in expenses to help you retire is really hard. How do we help you generate 5,500 or $6,800 in income? Oh, way easier with where we’re at.

Mindy:
Well with 5,500 we just generate that with the 6,000 that he’s making out of the rental property and then we’ve got 521 leftover, the 6,800 that he might need. That’s a different story, but let’s go in and look at this net worth statement. So I see cash sitting at about $150,000 give or take. Why do you have so much money in cash?

Ethan:
I think that that was one of those books that I had read that said you should have three months worth of expenses or more on hand. So it started there and then it was just a habit. So we just continue to put money there and it grows and lately the interest on the savings accounts are pretty good, so that’s just been growing.

Mindy:
Okay, so 20 times three is 60 and this is 1 42, so you’re at six months plus actually you’re at seven months. How does that feel having seven months of expenses in your cash? What if you dropped it down to 60 or what if you dropped it down to six months? And that’s a thought conversation to have with your partner. But wait, there’s more. Not only do we have 150 in cash, 142 in cash, we have $921,000 in a 401k. Yay. Good job did it. Right? But I look at that and I’m like, oh, is he in the middle class trap where your net worth, the bulk of your net worth is in your primary residence and your retirement accounts? Nope. Again, 137 in a Roth IRA 509,000 in a brokerage account. I see rental property asset value of $913,000 mortgages against those properties of 313,000 to give you approximately 600,000 in equity. Your primary residence is worth $743,000 and your mortgage is 297,000. So I see some pretty good numbers here. My math shows a grand total of 2.7 in net worth, so 2.7 million and you’re making $34,000 a month. What do you want from me? What can I help you with today, Ethan?
Or does Scott kind of spoil everything by saying pull all these expenses out of your expenses and look, you’re already fine.

Scott:
Well, I think that’s the big issue. Well go ahead Ethan. How can we best help you? Am I on the right track or am I jumping to conclusions too quickly?

Ethan:
Well, I mean there’s one thing sort of theorizing that it is possible. There’s another thing getting to the brass tacks of it. So I would not assume that the current budget is exactly what a retirement budget would look like and I’m not even sure that I want to completely retire. My wife and I have used this term called pre retire very loosely, and I think our goal is to just be more free to travel and do other things as soon as our kids are in college and don’t need us on a day-to-day basis, but not necessarily without doing any. I thought about maybe doing some consulting. I’ve thought about maybe buying a business that I can operate on an absentee basis. I’ve thought about lots of different ways to do that because right now we go on a family vacation maybe once a year, but my wife and I have ideals of maybe traveling, I don’t know, a third of the year and that’s not inexpensive, although I think there are ways to do it to sort of minimize costs.
So I think some expenses potentially would increase, but I don’t think that they would increase to offset all of the child related expenses that exist. I’m not sure what college will mean in terms of the amount of money that we need to be able to come up with in order to pay for college. We live in Georgia and they have the Hope Scholarship and the LL Miller scholarship. So good students if they go to in-state schools essentially get free tuition. We’re encouraging our kids to continue to do well in school and potentially go to an in-state school. But my wife and I both went to private schools for college that were very expensive and I don’t think we’re in a position where we would shut that down if they got into a really good school and they really wanted to go there. And then I’ve got the blessing of having two girls and at least at this point in time, I think that they’ll both want to get married at some point and I have no idea how much we should be saving for that. It does concern me to have pretty large expenses that could pop up right around the same time that we were talking about sort of checking out from the nine to five.

Scott:
Well that’s great and yeah, we’ll have to plan around all those. I was jumping to conclusions, I apologize there. I just look at numbers and fine. Okay, great. We’ll reframe a couple of those things around this and go on that track. I did want to ask one other question real quick based on your questions. Are we missing an asset or maybe several things that could at least one important one in private company equity that could come into play and is there anything else like that, like a pension or anything else that we should be considering?

Ethan:
So no pensions, neither my current company nor my wife’s current company have pension plans. The company that acquired the business that I started in college has issued stock options to a number of the executive team members, but it is a private company as far as I know, there are no plans to take it public and there are currently no plans to actuate a sell of any sort, especially not necessarily on the timeframe that we’re talking about. So I don’t know how to think about that. There are options, so I would have to purchase them at the time of a transaction in order to net any sort of proceeds. But given all of that, I’m still struggling with how I should feel about sticking around longer or potentially working out something to where maybe I’m working part-time after that timeframe just so that I can continue to hold onto those options should there be a transaction to be part of. Can you give

Scott:
Us a little bit of a sense for if things continue to go the way they’re going, would this be worth a lot of money or a little, is there a way to get some directional sense of this in terms of a magnitude component? And for the record, I would value them as zero in your net worth, but if they’re likely to be worth something, I would not ignore that potential either and that statements of the obvious, but it’d be helpful to understand.

Ethan:
Yeah, I would say that the transaction value maybe the tens to hundreds of thousand, but not in the, I wouldn’t say it’s going to be 200, 300, 400 or $500,000 transaction value if there was a transaction given the current trajectory of the business. That being said, I guess that’s partially in my control. If we increase the value of the business, then obviously the value of those shares are

Scott:
Higher. So this is a boost, but we’re not talking about more than potentially 10 of your net worth in most likely scenarios for this. So something to consider and factor in have the back of our minds, but not the way you would plan your life around the realization of any of these things.

Mindy:
Stay tuned for one final break to hear what investment vehicles might be a good fit for Ethan’s goals and financial timeline right after this. Let’s jump back in with Ethan. So I want to comment on a couple of things you said. You said, I wouldn’t assume that the current budget will be the same as our retirement budget and I think this is a really smart way to think about it. I think there’s a lot of people who are like, well I spend 40,000 now that’s what I need to retire. I’m not even going to consider anything else and your expenses are going to be lumpy. Some months you are going to come in way under budget, but a lot of months are going to come over budget because your tire blows or it’s time to go to the dentist and oops, you have a cavity because you don’t floss. There’s all sorts of weird things that you can’t really plan for and assuming that your current budget will be the same forever is a mistake that I see a lot of people making. So I love that thought. You said you would potentially buy a small business. Would that be so that you are putting the money into it and then getting money back without having to work there? You’re hiring somebody to run the business for you

Ethan:
Or even as a partial, something that I can do remotely, something that I just need to keep an eye on versus something that I need. I don’t want to buy a job. That would be the last thing I want to do.

Mindy:
Stay in this current one if you’re just buying a job because this current one’s pretty sweet,

Ethan:
But one of the things that I’ve thought about is healthcare expenses. So I thought well maybe if we did have either if I was working part-time or we did have a company that the company could provide the health insurance benefits, especially in the first up until medicare ages or whatever. I don’t remember exactly what, I think it’s 65 that we qualify for that. So yeah, so if we retire or if we pre retire in our fifties, I’ve been doing some bit of research and it looks like healthcare expenses can be quite expensive.

Scott:
What do you think that they’ll be if you were to buy one exchange? For example?

Ethan:
The last bit of research that I looked at for my wife and I, and I don’t even know if I’m assuming I would continue to have to cover my kids as well since they’d be in college. So probably 1200 a month probably.

Scott:
Yeah, I think that’s a good estimate. Yeah, so definitely that would be a putback into my earlier math for sure. That’s going to have to go back in there, but I still think, actually lemme flip this. Do you agree with am I approaching the problem from a right standpoint of saying here are the expenses that are going on today. We have to figure out what you want to spend in this early retirement phase to some degree and the way that I’m trying to back into that number because absolutely essential to everything else that we’re trying to discuss is by cutting out all the things that we I possibly can from the budget and then we can layer back in 1200 bucks a month in healthcare, which that’s only going to be for four or five years, right at most. And that will begin going down as child one presumably gets a job and has their own healthcare and child two eventually phases out of that as well. And then saying, okay, we want more for travel, we want more for entertainment, we want more for all the fun stuff, but we want to basically get to the lowest possible number and then build it back up I think in order in constructing the portfolio here. That sound, do you like that approach?

Ethan:
I do. And there’s probably another spreadsheet I should have shared with you guys or I took a stab at that, but building it back up and including healthcare, if I don’t count the cost of the rental, like the mortgages on the rental properties conservatively, I came up with roughly double what you were talking about, so close to 10,000 a month. But that was assuming that we continued to have, we didn’t pay off our cars and we decided to get new cars and continued sort of that run rate. I’d rather be conservative about it and know that I can trim back things than to be too tight and then all of a sudden I’m asking for my job back.

Scott:
Well either way we’re pretty darn close. You’re at 2.7 million right now and to generate 120 k, reliably 10,000 a month, you need an asset base of about 3 million. So I think it’s about fine tuning it and giving as much margin of safety as we possibly can over the next six to eight years because you could just put it in cash and you’ll be way ahead in terms of the 4% rule for this, but that’s not what we got six years, let’s maximize the opportunity to the maximum possible extent. And then the way my brain works is I always like to put in as much margin of safety there because once you get close to that point in six to eight years, you want the biggest possible asset base. And I like to think about financial independence and I have a heavy bias towards moving away from the math at that point, the maximizing returns and to keeping the expenses as low as possible to reduce the amount of income that you need to realize and pay taxes on to support that lifestyle.
And that’s where the math of paying off the mortgage at the end of that might make sense to some degree. Mindy and I had a big debate about this a while back because you need so much more income or so much more assets to pay that it just gets a lot easier when that number goes from 10,000 to 8,500 in terms of what you need to pull from the portfolio. We’re not going to do that right now. You got eight years left, why would you pay off the mortgage right now when you have eight years of investment potential to earn in other areas. But when you get there, that might be a time where you say, I’m actually going to put this in the stock market and I’m going to reallocate to the mortgage at that point or in the last two years I’m going to put all the extra cash flows toward debt mortgage. That could be good fire math even though it will result in lower long-term net worth. Those are the things that are jumping into my mind. Ethan, what’s your comfort with the rental properties? Do you want to buy more or do you want to buy? What do you want to do from an investment standpoint?

Ethan:
I don’t mind buying more. As long as the properties are relatively low maintenance properties, I understand how to do that. I’m not afraid of having to talk to contractors or even doing some of the repairs myself. So that is certainly a possibility. At one point in time I thought that maybe we should, my wife and I talked about, well, maybe we should have 10 rentals and at that point that should be enough cashflow for a nice retirement. And then I also thought about, okay, well maybe at some point we decide to sell the rentals but we hold the notes instead of selling them outright and then use that as an income, as a retirement income rather than just taking all that as a lump sum and trying to invest it. So I’ve tried to think about multiple different ways and that’s where I get stuck just in the analysis paralysis of it

Scott:
All. How about this one? What feels better to you between these two approaches? One is taking on as much risk, you’re taking on more risk and driving the mathematically optimal approach for the next eight years or saying I’m going to get there by a huge margin no matter what or most likely no matter what with all of these buffers and spending that time de-risking the situation over the next eight years, would you rather go for more or would you rather go for safer?

Ethan:
I think that I’m probably leaning towards de-risking at this juncture tried and true things I’m willing to do, but taking on a bunch of, well, I guess it depends on what you mean by risk. If you’re talking about taking on mortgage loans against rental properties, I don’t consider that a bunch of risk, but I’m not sure about the risk profile of buying a company where there’s actually no assets and it’s all service delivery and then the people that are delivering the service decide that they want to go out and do something else and all of a sudden I’ve got an asset that I, I’ve bought myself a new job if I want to get my money back out of it. So what type of risks are you thinking about?

Scott:
Well, I think I was asking if you’re comfortable levering up on more rental properties or you want to put it all into stocks or if you want to just pay everything off and say I’m done, good and gone. I think you’re much more along the, I would like to take on a little bit more risk than that spectrum. Based on your response there, you’re thinking about buying a business, continuing to invest in not aggressive but levered real estate along these lines to continue building out the portfolio is what I’m hearing.

Ethan:
Yeah, I don’t mind doing those things and in six to eight years I don’t want to be sitting on the beach all the time. I like to have things to keep me busy. I think that’s healthy, but I want the freedom to be able to go places and do things and not say, well, I only get two weeks of vacation or three weeks of vacation because it’s tied to the normal job.

Mindy:
Have you thought about specifics with regards to what types of businesses you’re thinking about buying?

Ethan:
So I did evaluations in the last year or so on two different rental property businesses where people were trying to sell their portfolio of rental property assets that they were managing. Neither one of those penciled for me, like the risk was too high that either there was a lot of concentration with one owner in a bunch of properties versus or properties that seemed problematic and more of a headache than a true business. So I’ve looked at that, listened to a couple of your podcasts where you’ve had people on talking about the fact that there are a lot of boomers retiring and trying to offload their businesses. So I’m interested in that in concept. I’ve been running businesses, I’ve been running a business for the most part for the last 20 something years. So I think I understand how to operate a relatively simple business, but I just don’t want to get stuck actually doing more than operating it. Right.

Scott:
Ethan, what is your proclivity to buy this business while you’re working your current job? I had been upbringing on the assumption this would be after you left your job, but you just said you’ve reviewed two recently. Are you contemplating doing that sooner?

Ethan:
I’d be open to it as long as it was a situation where I thought absentee oversight was all I would need to do outside of transacting the purchase if I felt like I needed to be there air 10, 20 hours a week. That’s sort of a non-starter for me right now.

Scott:
I think what’s making this conversation so hard for me is you’re super rich, super competent and super successful in all these areas. And so you have all of these options in front of you. You provide what is clearly an awesome, you and your partner provide awesome life for your girls. They’re well set up. You’re thinking ahead for all of these things. You will have no trouble retiring. And these are just, it’s kind of around that what do you want question around it because you will get there regardless of which path you take, whether it’s rental property investing, you can buy ’em cash, you could buy, you can get to 10 properties in cash over the next eight years potentially with a number, maybe not 10 properties, but you can get to five properties paid off if you want to do it. You can get to 10 easily.
If you want to take on a couple more mortgages and notes there, you’re clearly skilled at managing these things. They’re producing great cashflow and performing really well. You told us about a home run deal before the show here on this. You can run a business, you could do that today. You’ve got clearly a great job in killing it at the current profession, having run a business for 20 years with some equity and some options there. And I think that’s why I’m struggling here to give direction is because all of those sound good and you should be successful with all of them as long as you remain conservative relative to your overall situation here. And so I guess that’s the question is what sounds more fun? What sounds like more you over the next couple of years? Is it just passively accumulated in assets and stocks? Is it building that rental property portfolio or is it running a business or is it doing all three? Because you can do all three in your situation.

Ethan:
Well, let me ask you this. Maybe you can provide some guidance on this. What are your thoughts on what puts me in a better tax advantaged position? So there’s that 0% interest credit card that I had to come out of pocket to pay more than $10,000 worth of taxes this past year. Every time I do that, it hurts because we’re paying taxes on our W2 income already and then they turn around and have to pay taxes after that. I’m all for paying my fair share, but I feel like I’m given blood when tax time comes around. So I’ve been contemplating positions that put us in a better tax position as part of the calculus.

Scott:
Well, I think that your tax problem is related to the fact that you’re in $412,000 a year. So I mean that’s a great problem to have. And so you just are going to pay tax on that. And that’s where, if we go back to what I was saying earlier, if you can chunk down those expenses that I just listed in a very meaningful way and max out the 401k, all those different types of things now you don’t need to realize, you have to realize $14,000 a month after tax right now to fuel your lifestyle. That is the biggest problem here. And you can do things that are tax efficient, but it’s going to be really hard as a W2 employee with the current portfolio that you set up here. So if you wanted to say, how do I get serious about reducing my tax bill? Well, I think that by the time you retire, if you only need to realize 5,500 in income, you may pay no tax at that point in time for your rental portfolio. We have on recently, Mindy, the guy, I think we titled the episode dude actually with withdrawals from his 401k early

Mindy:
Eric Cooper.

Scott:
Yeah, Eric Cooper. That guy has a couple properties, a handful of rental properties and a little bit of passive income and he generates $97,000 a year in cashflow. But his tax bill is his A GI is 24,000. So that’s something to think about when you’re planning around this is, and that’s why I always begin with the expense side because if you need to realize 10 grand a month to fuel your lifestyle, you’re going to need to think about how to do that efficiently. If you were to go down that route that you described earlier of buying a property management business and managing properties, you’d probably get licensed as a broker in the pursuit of that. And now you’re a real estate professional. Okay, now we’ve got something interesting going on there where there’s probably a world where there’s more rental properties in the picture and there’s maybe even some syndications that provide that passive, those passive losses. And because you’re a full-time business owner doing real estate related activities as a property manager now we’ve got something really fun to begin working with from a tax perspective. But I think that the fundamental problem with building a tax, and we can talk about this more, but I think you’re going to have a hard time realizing the 80 20 of those benefits with the current job set up, which is not really that big of a problem. It pays so well, but how’s that for a reaction? Any ideas that sparks to start thinking through?

Ethan:
Yeah, so maybe that is a good transition idea to actually do the property management business as a try to start building it up while I’m doing this where it doesn’t take a lot of effort and I have thought about becoming a real estate professional in order to change our ability to realize depreciation and other write-offs related to real estate. So I would lean towards that. I think that to me that feels like something that I know how to do and that is not a far departure from what we’re doing already and one of the rental properties is out of region already. I don’t have to be there in order for it to operate. So I feel comfortable with being out of the country for two months and only checking emails and placing phone calls to help manage that kind of stuff. So I think that that is possible.

Scott:
We talked about home equity a little bit. I touched on it. Best way to free it up is to remove the p and i payment. In my opinion, one of the best ways to free it up if you are going to stay put after they’ve gone to college is when it’s paid off. You no longer have to realize the income, so I won’t go back into that point. The other one is to sell it and the last option is to pull out a HELOC or refi it, which could be an option for you if you decide you want to go into the business world, but you’re going to lose your cushy mortgage with a low interest rate right now for something higher rate or at a higher rate, or you’re going to take out a pretty expensive variable rate on the heloc. So you need to have high conviction in that business, but that would allow you to have a lower cash position or not have to diversify away from other assets. Did you have a more specific question on the home equity piece?

Ethan:
Well, the home that we’re in is great right now that we have kids, we’ve got plenty of room and all that kind of stuff. We actually probably have more house than we need because when we first built it, we had family come in and visit all the time. So we wanted to make sure we had a place for everybody. But fortunately a lot of our families moved to this nearby us. So we don’t really have all that many out of town long-term visitors anymore. So we will likely downsize in the size of property once the kids are gone. That probably is not right when they go to college, it might be a little shocking, but in retirement I’d like to sell the current property and hopefully be able to buy the following property outright and not have to take a mortgage out on it.

Scott:
That’s it. I love that. That will make life way easier on a lot of fronts in terms of planning around your retirement expenses. So I think that’s a great plan. That’s the best way to use the home equity in my view.

Mindy:
So one thing to consider with regards to buying another, buying a business, do you think that you can make more money than you’re making now at your current job?

Ethan:
No, and I’m not looking to buy a business before the kids go to college to replace my current income. I would only be looking to buy a business that I could transition into managing on a fractional basis after they get into school, after they start college that is, and the property management, I’m wondering if it doesn’t even make sense to buy one. I’m wondering if it makes more sense to try to just slowly manage my own properties as a property management business and just grow into that and try to expand the portfolio rather than turning it into taking more risk and trying to buy a portfolio of assets that somebody else is managing.

Scott:
I think that the reps, so the question I think comes back to the tax strategy that you want to implement. And I think that when you get to there in practice and you leave your job in a couple of years and the kids are out of college and you have these lower expenses, you’ll find that this portfolio in seven years will double roughly, right? I mean there we put some takes, but that’s a rule of 72, right? It’ll double every 7.2 years. So good chance of that happening certainly could not around that, but that puts you at 5.4 million before we talk about all the additional cash flows that you invest over the next several years from the spread between your income and expenses right now, which will by the way, diminish the expenses will diminish naturally over that time. So you’ll actually be accumulating more and you probably get a raise or two, you might even realize there’s equity.
So I would peg your nominal net worth between six and 7 million by the time you make that decision at that point. And then it’s going to come down to how much do you want to spend on a regular basis and what’s the most tax efficient way to generate that amount of income. And if you want to spend a lot at that point, then I think we’re talking about, okay, how do I make money? How do I make active income from reps and how do I depreciate it with rental properties and play it all of those different types of games? But I think there’s also a good chance where you’ll find you don’t really need to change that much. Your real estate income at that point will naturally be very tax advantaged because it’s rental property income. And if you buy a few more of ’em lately, levered properties like you’ve been doing, you may find that you’re able to just like Eric Cooper generate close to a hundred K with a pretty low nominal a GI without having to do that business side project.
And that’s just a bonus. Then you can just say, okay, well I don’t really have to worry about the tax angle because the rental property income is already fairly passive and I’ve got enough in my 401k to easily type me over when I get to traditional retirement. And by the way, I’ve only got to bridge this for 10 years before we can start collecting social security. So I think that that’s a perspective. I don’t know, the doubling and the compounding nature are so fantastic now that you’re at this level of wealth that I don’t know, is that a fresh angle or a new way to think about it all? Yeah, no,

Ethan:
No, that’s actually very comforting. It means that essentially you stay on the existing path, let the assets grow, and then the part-time job is just managing the rental properties that we currently have and I don’t have to.

Scott:
Yeah, and it certainly could not happen that way. You definitely want to be conservative, but you already are conservative with all this stuff. But if that happens, that would be very historically average from a portfolio design standpoint. We’ll give you great options then. Yeah, you could buy that business, but it’s just because you like running the business and getting some more extra box money. It’s not because it’s really necessary to tide you over that world. I’ll have to figure out what the putback is for inflation adjustments. Yeah, so that’s definitely an angle to pursue on this. One other note, and this is, I’m just jumping around here a little bit here, and what do you think is reasonable for weddings? How do you even think about that? I have a daughter actually some news. We have another one on the way in April. So what is the number you should be thinking about on that front?

Ethan:
Well, congratulations on having another one on the way. And the short answer is I have no idea. I know with inflation it’s got to be more than double what my wife and I spent on our wedding. So my guess is a hundred thousand dollars.

Scott:
Okay, so 200 for two.

Ethan:
I don’t know Mindy’s Gawing there. I don’t know. Mindy, what do you think is a wedding budget?

Mindy:
Well, I dunno if you know this, but I’m a little frugal. My wedding budget was $5,000 and my parents gave me a check for $10,000 and said, however much you choose to spend on your wedding is however much you choose to spend on your wedding. And this is our contribution. So if you want to spend a hundred thousand dollars, you have to come up with the 90 and if you want to spend 5,000, then you get an extra 5,000 and that was their gift.

Ethan:
My wife is more frugal than I am, so that a hundred thousand dollars will likely get,

Mindy:
She’s going to listen to this and say what? Yeah,

Ethan:
But I don’t know. It’s one of those things where when it’s your kids, you want to do what you can. So I’d like to know that we could have, do I think that that’s a wise way to spend money to be out a hundred thousand dollars in a single day? No,

Scott:
I’m with Ethan mind. I think on this one though, I think what are you going to do in this situation? But bumping up against 3 million in net worth. Good job. Kids are almost out of the house. There’s not really a world where he’s going to leave his job in the near term unless he buys a business, in which case he going to keep working on that. Why wouldn’t you plan on $200,000 weddings in terms of the way you’re projecting out the model over the next couple of years? And then it probably won’t actually come to that. And then the way you do that I think, is you just build the net worth pile as large as possible in the context of your overall relatively conservative plan. And it’s there if you need it and you don’t have to spend it if that doesn’t happen. So I think in this situation I’d be doing the same thing. I have a lot of trouble saying no to the next applesauce for my 2-year-old. I don’t know how I would say no to a wedding if that was the dream 20 years from now. But we’ll see. We’ll see. Ethan, has this been helpful?

Ethan:
It has been helpful, I think so. I think you’re sort of talking through it and having somebody to confirm assumptions. I start looking at this and I’m like, okay, well maybe we’re almost there, but then again, maybe we’re not. So this helps to clarify that. And I think that the answer is yes, we’re almost there. Stay on the path. If some opportunities present themselves, so be it. But we don’t have to drastically change anything and we should be able to comfortably step back from at least full-time work in the next 68 years.

Scott:
I think a lot of people are struggling with the same questions you are, and it’s awesome because you have done such a good job here and it’s just about finishing the play over the next couple of years. And I think you’re thinking about all the right things. You got to pick an option, but you have no real bad options on this front. You can be successful with any of the three courses in stocks, real estate or business. And because you’re clearly skilled in all of those areas around them, around personal finance. So congratulations.

Ethan:
Thank you, thank you. And thanks for your time today. Thanks for walking through this with me. This is very good.

Mindy:
Thank you for sharing your story with us. I really appreciate it and I agree with everything Scott said. I think you’re doing fantastically and this is part of that slog that you’re like, well, am I there yet? Am I there yet? You could be if you changed a bunch of your spending, but you also have kids at home so you don’t have to change a bunch of your spending and I have every confidence that you will still get there. Alright, that was Ethan, and that was a really fun series of events. I really liked what Scott said about pulling out some of these expenses that you won’t have in retirement. And I was joking at the beginning. I’m like, oh, you’ve got all this money. What do you need me for? But actually this particular problem pops up a lot. You get in your head that you need X number of dollars for your retirement and it can be very easy to overlook the fact that you’re not going to have babysitters in retirement.
Most likely you’re not going to need to be paying for high school expenses and daycare expenses and all of these other expenses that you currently have. And I really appreciated that Scott pulled some of those other expenses out besides the ones that I had pulled out when I said, these rental property expenses are not your personal expenses, those should go through your business. But I really, really appreciate Ethan sharing his story today because while his outlook is fantastic, kind of changing your mindset and looking at things a little bit differently is absolutely the reason why we do shows like this. So we would love to talk to you as well. If you have a financial situation you would like us to comment on, please email [email protected] [email protected] and we will love to review your finances with you. That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench and I am Mindy Jensen saying goodbye butterfly.