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How much should you spend on your house?

Don’t feel pressured to buy the biggest house possible

How much should you spend on your house?

How much should you spend on your house?

Those who know me know I’m a big believer in real estate. I’ve bought and sold tons of real estate over the years, including single family houses, rental property and I even wound up doing a sort of flip once (wasn’t planned that way, but that’s what it turned into).

At this point, I’ve pretty much seen everything from sewer backups, lunatic renters, mold, leaky pipes, you name it. So I feel qualified to spray my opinion all over the internet about most real estate topics.

The latest thing that’s gotten under my craw is the nonstop drive by the real estate and lending institutions to push buyers into purchasing as much house as they can possibly afford. The most visible way we see this is in online calculators helpfully offering advice on how much home the user can afford.

These calculators all have one thing in common: the first thing they ask you for is your yearly salary. They then typically will use a simple computation to determine your debt-to-income ratio. That’s usually somewhere around 35%. In their defense, that is largely how the lending industry will look at things. And unless you have something weird on your credit report or a relatively high amount of consumer debt, you’ll probably get that loan.

But look at the calculator on CNN Money, for example. I put in a fairly typical upper income salary of $100,000 each for a couple with 20% down with no consumer debt (if you have ANY consumer debt, you should be getting rid of that right now instead of reading this). Using that input, it tells me I can buy a house of over a million dollars!

Mmmm, milliiiiiooooon doooolllllaaaaaaaaaaaaaar hoooouuuusssssseeeee… (Drool, drool, drool.) My head is filled with visions of waterfront homes, decks with hot tubs, space far from my neighbors, condos with sweeping views of harbors, kitchens with islands and built-in wine coolers, separate rooms for every possible human activity. It’s almost irresistible!


My problem with this way of looking at house shopping, is that it’s asking the wrong question. The question isn’t “How much house can I AFFORD?’ The right question is “How much house do I NEED?”. And, really, no one “needs” a million-dollar house. It's a Trap!

It’s easy to get starry-eyed about real estate. I’ve done it myself. I did buy too much house when I moved into my current home. (Not because I was buying as much as I could, however. According to these calculators, I could have afforded much, much more. I was just confused about what I really needed, a good topic for a later post.) Beautiful real estate is one of the most engaging forms of art. I could spend ALL DAY just looking at pictures on Houzz. And like any consumerist temptation, I feel the pull to make my house look like those lovely models.

That’s when I have to work hard to slap myself back to reality. Because there is no bigger hole to flush your pretirement money down than the real estate hole. I could have shaved several working years off my career had I not bought so aggressively. That’s true for so many people. Let’s say you purchased a $600,000 home when a $400,000 home would have sufficed (which is what I did). That would be an extra $100,000 each toward your pretirement funds. That could be a third of what you each needed! In addition, there is more house to maintain. A larger house will have a larger roof, more bathrooms, more windows, more expensive furnace, etc. Plus higher insurance and property taxes. More yard to mow, bigger electric bills, the list goes on.

But we haven’t even talked about the biggest problem: your gigantic mortgage. If you really bought that $1,000,000 home that CNN Money was saying you could buy, you’d be paying a mortgage of nearly $4,000/month before tax and insurance! Now if you’re both making $100,000/year, that may not sound too bad, really. It’s, by definition, around 35% of your monthly income. You have plenty of money leftover each month. You could even afford a car payment if you wanted. What’s the big deal?

Here’s the big deal: Unless you have a way to talk to Future You 25 years from now, you don’t know how much you’re going to hate your job by then. And if you really love your job at that point, but haven’t purchased an unnecessarily expensive home, you’ll be able to buy that million dollar home then with cash! You’ll be much better off buying the cheapest house that will work for you instead of the most house you can get.

Pretirement is about gaining your own freedom. As quickly as possible, you want to build up your investment fund so your monthly bills are covered. This doesn’t happen overnight, but it WILL happen if you can resist the urge to bury yourself in debt.

With all that in mind, here are my rules for buying personal real estate. This only applies to the home you’ll live in, I’ll have different rules for investment property.

  • Buy quality, not a project
    We’ve all heard the old saying about buying the worst house in the best neighborhood. And, that saying is actually true! However, don’t let that convince you to buy any project houses. First time homeowners have no idea how much these projects will cost and once you’ve begun there is no turning back. The best way to make money in real estate is to not spend any money on property AT ALL and let the market appreciate for you. And, first time homeowners ALWAYS over-improve their first homes. I did it, you’ll do it. We all do it. By buying something that’s already in good shape, you’ll usually come out way ahead.
  • If something bothers you about the house, don’t overlook it
    My wife and I once bought a house that had more than 20 steps from the street to the front door. It was an old tudor with tons of charm and we lost our heads (it was a major project house). We overlooked the steps as long as we could and finally realized it was such an unchangeable feature that we knew we had to get out. We barely escaped the real estate collapse, closing the deal right before all hell broke loose. Had we not been able to sell, we would have been stuck living with those horrible stairs. Do yourself a favor: If something bugs you, keep looking, you’ll thank yourself later.
  • Buy what you need — don’t believe the “more is more” crowd
    With real estate, it’s very easy to move up the cost ladder by inching your way a little at a time. “Well, this one is only $5,000 more, I guess we could come up a little.” If you do that more than a few times, you’re soon in expensive home territory. It’s OK to adjust your budget to match reality, but make sure you’re clear about what you really need. If you’ve decided a three-bedroom is right for you, why are you being tempted by a four-bedroom for $10,000 more?
  • If you can’t afford the 10-year loan payment, you’re buying too much house
    The best way (right now — this could change with an increase in interest rates) to determine how much house to buy is to use a 10-year loan as a guideline. Take a look at your expected monthly bills. Add in a bit extra for breathing room. Now, can you afford the payment if you do a 10-year loan? Congrats, you’ve just found your budget! It may not make sense for everyone to structure their loan as a 10-year loan, but as a guideline to figure out your maximum budget it makes a lot of sense.
  • Buy it because you love it, not as an investment
    Real estate can be a great investment and a very lucrative one. But it can also be a harsh mistress. Make sure it’s the right home for you before pulling the trigger. Focusing too much on the investment side can leave you stuck somewhere you don’t want to be.
  • Make sure it fits your practical needs, not just emotional needs
    Now that you love it, also make sure it fits all your objective criteria. Layout, number of bedrooms and bathrooms, privacy, proximity to work and school. These are all critical and must not be overlooked just because the home has loads of style.
  • Don’t “drive until you buy”
    These days the highest priced real estate is largely found in city centers. Moving in concentric circles outward the prices drop as distance from work increases. Home buyers often will simply explore outward from the city center until they find what they can afford. This is often called the “drive until you buy” strategy. They then live miserable lives in their cars, driving to work, errands and soccer games, frantically five minutes late to everything. Instead, either buy less house (hey, earlier generations had even more kids than families today so it’s possible, right?) or rent right in town.
  • Always put at least 20% down
    Fortunately it’s harder to get a loan without a decent down payment these days. That keeps a lot of people who aren’t ready to buy off the market. But there are still a lot of purchases happening with 10% or less down. If you don’t have the 20% yet, just hang in there. It’ll be worth it in lower payments, built-in equity and no mortgage insurance.
  • Don’t rush it
    Don’t be tricked into buying, thinking you have to get in before it’s too late. It’s never too late. Stick to your strategy and don’t be rushed by anyone. There’s always another house and another great time to buy.
  • There is no shame in renting
    Renting has its annoyances but it has a lot of upsides, too. You can keep maximum dollars flowing to your pretirement fund, you don’t have to fix anything and you can move whenever you want. If anyone gives you crap for renting, just chuckle to yourself, knowing you’ll be completely pretired while they’re still schlepping to work every day.

I’ll add in any others that occur to me, but following those guidelines should keep you on a healthy path to pretirement. Once you’re well under way, you can check out my tips for paying off your mortgage early and really speed the process along.

What are your best tips for keeping real estate costs under control as you pursue pretirement?

Should you pay off your mortgage?

It’s your biggest bill — is there any reason to keep it?

If you’re reading this from the U.S. or Canada and own a home, chances are you have a mortgage. And if you have a mortgage, you’ve no doubt wondered from time-to-time if it is possible to pay it off early. As I previously showed in How to get rid of your mortgage, it is.

But today I’d like to discuss whether you SHOULD pay off your mortgage.  

There are two distinct camps in this discussion.

One one side, there’s the “peace of mind” camp. These guys advocate for getting rid of this debt as soon as possible to remove stress from their family. These folks tend to be naturally opposed to debt in the first place and taking on a mortgage in the first place was only an act of necessity. You can read more about this point of view here.

In the other camp are the investors. The investors can’t bear to have even a single dollar making less than its maximum potential. These guys look at today’s low interest rates, realize they can do better in the market and feel they are losing money by putting their money where the interest rate is so low. You can read a good writeup on this perspective here.

And, like any good disagreement, there are those that fall in-between, which is where I land, although I definitely lean toward the “peace of mind” peeps.

But let’s take a deeper look.

The investors often mention a 5% yield on investments as being a reasonable goal in today’s market. You might want to shoot for more if you’re particularly aggressive or young but you might want to aim for 3-4% if you’re older and/or need to be more conservative. But for purposes of discussion, we’ll use 5% as a good target.

So if you can earn 5%, does it make sense to target your funds at a rate of less than 4%? As of this morning, you can get a loan (theoretically) for 3.5%. Nice, right? An extra margin of 1.5% going to YOU!

Let’s pause, though, to recall what an interest rate represents. If you remember your basic economics, an interest rate is just the market representation of risk. If you’re a less risky borrower, you’ll get a cheaper rate when you buy your house. Same on the investing side, you can find investments that earn 10% or more, but your money is increasingly at risk the higher up you go.

So when thought of in that way, we should look at paying off our mortgage as “earning” the rate of our home’s interest rate. Or, in other words, we can earn a relatively safe 3.5%. I also like thinking of the principal of your home as “savings” and the interest you pay as the “cost”.

Good reasons to consider NOT paying off a mortgage

  • Your employment is secure for the long-term
    It’s easy to forget how massive the bloodbath of 2008 was. Many (many!) people who never even considered they’d be out of work were suddenly faced with bills they couldn’t pay. But if you believe you’re completely safe from job risk  or have other “safe” income sources, you could stay leveraged.
  • You have adequate safety measures in place
    Because no one knows what will happen, you have to be ready for anything. A year of your monthly expenses kept in relatively safe, accessible investments should be adequate to keep you out of trouble.
  • You are relatively young
    I’m not a fan of people in their 40s and 50s staying highly leveraged just to squeeze a bit more out of their investments. For younger people, they are  in a better position to withstand a downturn.
  • Family situation
    If you have kids, you might be more focused on increasing your security more than in building up your investment fund.
  • You have a high risk tolerance
    Being willing to lose large sums of money comes with the territory if you’re choosing investing over removing debt.
  • You are highly disciplined
    Most people who say they’re staying leveraged for investment reasons inadvertently end up loosening up their cashflow and spending rises, leaking their funds out to the consumerist world.
  • Inflation
    Should we run into a hyperinflationary period as many believe we will, your “locked-in” payment amount will be trivial compared to your newly “inflated” income.

Good reasons to consider paying off a mortgage

  • You’re in your 40s or 50s
    If you’re working toward pretirement and can see traditional retirement looming on the horizon already, you should be grateful we’re in a low interest rate environment. In times past you’d be stuck swallowing massive amounts of interest as you worked to tame your mortgage. (It’d be even more important to do so in a higher interest world, however.) With low interest rates, though, you can much more rapidly work this debt down and thus lower your needed investment number to reach pretirement.
  • You can’t stand having debt
    We often overlook emotional needs when talking finances. But we’re living our lives here. If it stresses you out to carry debt, by all means get rid of it!
  • You couldn’t handle large investment losses
    Beyond emotional reasons, a massive investment loss could devastate some people. You can build a safety wall against big losses by removing debt instead of playing the market.
  • Your balance is small
    If you have a relatively small amount left to pay on your mortgage, it might be worth getting rid of that annoyance as soon as possible.
  • Your job is shaky
    If you think your job could be at risk, living mortgage-free will greatly increase your safety margin.
  • A paid-off mortgage can act as a safety fund
    When a mortgage is paid off, it’s trivial to get a line of credit for emergencies. Hopefully you’ll never need it, but it’s great to have a large fund available. This allows you to keep the rest of your money invested as aggressively as possible.

Now I don’t advocate paying small additional amounts to principle over the years. This strategy is actually designed for people that don’t know how to manage their money, locking it away from them so they don’t piss it away. I recommend saving and investing outside of your mortgage for eventual pay-off or refinance. That means keeping this money semi-liquid and trying to earn more with that money over the years.

One could also consider a hybrid strategy: Pay off the majority of your loan and invest a smaller, controlled amount, say, $50,000 or $100,000. It lowers your risk but also lets you gain additional earning from a decent chunk of money. That may be just enough peace of mind to make it worth your while.

When we talk pretirement, however, the goal is to bring financial freedom within reach as quickly as possible. This is why I lean toward the Pay Off camp. By lowering your overhead, you have a clear target for monthly income and can even rely on part-time work to cover those bills. It’s typically one’s mortgage that keeps one working full-time. Look at your own bills and let me know in the comments if that is not true for you.

Reader story: A neglected pretirement

Fantastic retirement savings, virtually no pretirement savings

Prison.   Photo by  jmrodri 

Prison.Photo by  jmrodri 

I received a request from a man named Jim recently to take a look at his financial situation. We had a brief exchange on another personal finance blog and I offered to share some deeper thoughts here. Here is Jim’s story: 

He and his wife are both in their mid-50s and are beginning to see retirement creeping up quickly on them. It’s probably fair to say Jim already has one foot out the door from his job, but his wife is afraid of “not even being close to being able to retire.” At this point, they’re still planning to work about 10 more years, but I get the feeling they’d both rather not if they could find a way to avoid it.

Let’s take a look at the numbers:

They have a joint $675,000 in 401(k) accounts and have just started IRAs. They owe around $115,000 on a $408,000 home and are planning to have that paid off in three more years. They refinanced last year into a 15-year loan at 3.25%. This very generous couple has been living a comfortable, American lifestyle and showering their family with a great deal of support. I’ll spare you all the details, but among the list, they paid for their own schooling, and paid for two kids to attend school with no debt. They paid cash for a daughter’s expensive wedding and pilot training for a son as well as a study/travel abroad program. Jim also mentions a sports car “driven only for fun in the summer” and a motorcycle. Additionally they are committed to helping their son through law school, at least the first year at $1,000/month so he can utilize scholarships (it’s a requirement that he not work the first year).

Monthly expenses look something like this:

  • Mortgage payment: $1,300
  • Groceries: $600
  • Charity: $600
  • Cars/gas: $500 (Jim mentions a “long commute”)
  • Car insurance: $170
  • Utilities: $250
  • Water: $100
  • HOA: $60
  • Cable: $80
  • Internet: $40
  • Miscellaneous: $160
  • Total monthly expenses: $3,900

On top of that, Jim and his wife have begun paying extra on their mortgage to pay it off in the three years mentioned above so they’ve actually been paying $4,000/month on the mortgage. Jim didn’t mention any credit card or other debt, so it sounds like they’ve been responsible with their money management.

On the income side, they make decent money, bringing in a joint $6,600 per month. When they take Social Security at age 65, they expect that to bring in about $50,000/year.

So can Jim and his wife pretire yet?

I really appreciate Jim sharing his story because it illustrates the exact reason I felt the need to start writing this blog. The financial services industry does a great job (in some ways) of gearing people up for a traditional retirement. But the concept of PREtirement is completely ignored. Many folks don’t even understand there IS such an era to life until they’re in it, often unfortunately due to an unexpected job loss. Jim and his wife, fortunately, are still employed and have done a great job saving for their retirement. So let’s take a look at their situation and see if we can get them into a comfortable pretirement as soon as possible. And IF they choose to keep working to build an even cushier retirement, they’ll be doing it by CHOICE, not because some expert tells them they have to save up some arbitrary amount of money.

First of all, it’s important to understand what pretirement is and is not. On the simplest level, pretirement is building up an investment fund that is large enough to pay for your monthly expenses. Now when most people hear that, they look at their monthly expenses multiply by 12 and then 20, realize it’s hopeless and then buy a new car to make themselves feel better. But in fact, it’s much easier to reach this level by controlling expenses than by building up the fund (although you do have to do both).

Let’s, then, take a look at Jim’s expenses.

Right now expenses are $3,900 a month. With $1,300 of that going to mortgage, they are at a very tolerable $2,600 with $600 of that going to “charity”. That brings the core bills excluding mortgage to about $2,000 per month, which I think is about the maximum one should have. Car/gas expenses are super high at $500/month, which as he mentions is due to “long commutes” — plus that figure doesn’t even include the sports car and motorcycle. It’s a little unclear if the $500 is for two or for three people, but really it doesn’t matter because Jim shouldn’t be buying gas for his adult child anyway.

Now before I continue,  I need to deliver a firm spanking to Jim for being so indulgent with his kids. Paying for college? That’s something we can debate and I even debate with myself from time-to-time. But paying for a kid’s extravagant wedding? Work/study abroad? These are adults! You have GOT to be kidding me! My eyes aren’t that good, is that Bill Gates over there? What’s more, that a kid would WANT a fancy wedding shows that there is a long pattern of receiving hand-outs and that the child has developed a consumerist value system. I’m sure Jim’s daughter is a lovely person, and this may not apply to her, but I bet even Jim would agree that the overlap of kids who get their parents to pay for their weddings and the kids who later beg to be bailed out of their credit card debt is enormous. Perhaps the only thing dumber than a parent paying for a fancy wedding is a kid putting that same wedding on a credit card. Couples should be investing in their marriage, not their wedding! (Like these guys.) My wife and I spent just a few hundred dollars on our wedding (eloped to Vegas) and spent barely $60 each on rings. Is something wrong with us? Well, I’m 45 and work just four hours a week and my wife will be done working when she reaches her 40s as well. So who is crazier?

While I’m ranting, can we talk about long commutes? Many of us have done it (including me), but it’s time we Americans stop putting up with this daily torture. That starts with facing down this lie about the “American Dream.” The American Dream is to own a home? Please. Stop. Owning a home is great in many ways, but let’s stop pretending it’s what life is about. The American Dream should be about freedom to do what you want to do. Just because you fell in love with a lovely house in a “nice” neighborhood is no reason to throw away a decade of your life. What’s more we tend to ignore the costs of these homes, whether it be lawn equipment, time, repairs, remodels, commuting costs and time away from our families. It’s even sadder watching empty-nesters try to keep up the large house in which they raised their kids only to have those same kids dump it for cash right after the estate sale. But that’s a rant for another day.

OK, now that we have Jim begging for mercy, let’s build him back up with some good news!

On the mortgage, he’s on the right track. Although it’s too bad he chose a 15-year loan instead of a 10-year. The payment difference would only be around $300 or so and would have greatly increased the pay-down time. He could even afford to do a five-year loan in his situation! But that doesn’t matter that much because he can keep going with his current loan.

When it comes to a traditional REtirement, Jim and his wife are basically done. With only moderate growth, they should have close to $1 million in retirement funds available in 10 more years when they are 65. That million bucks should generate enough to cover their basic monthly bills even without counting their social security income, which they could actually live on by itself. Despite what professional investment advisers would say, they ALREADY have plenty of money for retirement.

Our challenge is to bridge the gap from now until age 65. The upcoming years are the classic “pretirement” phase that almost NO ONE talks about. I do find my GenX peers a lot more focused on it than my Boomer elders, but still in general, it’s just not an accepted “phase” of life. Anyhoo…

Jim, here is how you and your wife can reach the freedom of pretirement as soon as possible. Hang on, we’re going to thread the needle here…

  • Tell your son you’ll help with support for school for year 1, but after that he’s on his own. If he has to take on debt, he has to take on debt. But, oh no, school loans suck!
    Here’s the deal: Aside from the emotional desire to ensure a debt-free law school graduate, it’s really quite mathematical. You have limited years to save up for retirement, he has many more years to pay back debt. And don’t kid yourself that there is no debt involved when you pay to support him. Unless you’re debt-free, you’re effectively borrowing to pay for his education anyway. Basically you’re using your home loan to support him instead of paying off your mortgage and building your own pretirement fund. In addition, I think he’ll learn more about money, pretirement and what it’s like to be carrying debt in his 50s from how you handle this situation more than anything he’ll learn in school. (By the way, if he has scholarships, the loan he’d get for living costs would be quite small. I’d reconsider your approach there. He can take 10 years to pay back his loan, but you are going to try to pay off your house much more quickly making your cashflow that much tighter.)
  • Let’s talk about your expenses. Overall, you live a relatively frugal lifestyle, which is great. There are a few areas you should think about cutting back because there is some low-hanging fruit there.
    Your food budget is EXTREMELY high. You should be able to easily trim $200 off that to bring it down to $400. I suspect that number includes some restaurant spending and probably some waste. Time to bring that under control. Say goodbye to Whole Foods!
    Your internet and cable total to $120/month. For high-speed internet plus TV I pay just over $60 for full HD, so I think you’re getting ripped off there. As a former Dish Network customer, I suspect you may have a satellite system. That needs to be canceled To-Day.
    I’m not seeing a cell phone cost line, but I assume you have one. If you’re a normal American, you can probably save on that, too. And it’s time to get rid of the landline. That’s just a needless expense that you’re wasting money keeping. If you want to keep your phone number, you can convert it to Google Voice and have that number ring through to your cell phone. That’s what I did and it works awesome!
    It’s nice you donate to charity, but it’s also not appropriate when you’re trying to hit aggressive goals. I don’t know what kind of cars you drive, but I suspect they’re perhaps not the most economical. If you’re driving an SUV to work every day, you should be hanging your head in shame as you head over to Craigslist to put that beast up for sale NOW. But since you didn’t mention this, we’ll just assume there is moderate room for improvement and drop this to $400/month. It’s hard for me to imagine anyone paying more than $100 per driver just for the honor of getting to work every day. While you’re on Craigslist, you’re going to put two more ads up: one for your sports car and one for your motorcycle. Keeping a depreciating asset sitting there not earning you money is painful to see in your situation. I don’t know what those are worth, but I’ll just throw in a round $15,000 coming your way once you dispose of those toys.
  • It’s also painful to see you have an HOA. For what? The joy of living “there”? Frustrating! But since I’m sure have deep roots there now, I’ll give you a pass and we’ll leave that in place. (Although see below for more fun!)
  • So with barely even touching your extravagant lifestyle, we’ve dropped your monthly pretirement number from $2,000 to $1,600 a month.
  • Next, just to undertake a little financial discipline, you should immediately open a home equity line of credit on your house, if you don’t already have one. Don’t freak out, you’re going to keep this balance at ZERO at all times. You can get as large of a credit as you want, but no less than $24,000 (one year of your current core expense amount.) This HELOC is your new emergency fund! Now you don’t need to keep cash sitting around in your savings accounts earning nothing. Not having loads of cash sitting in the bank might help you learn to say no to your kids, too!
  • For everyone reading this, it doesn’t typically help you to pay extra principle on your mortgage. I mean it does but it doesn’t. Let me explain. It does help you in two ways.
    One it lowers your principle so you owe less and your payoff target does come closer. You could even consider those payments as “earning” the amount of interest on your loan — in your case 3.5%.
    The other way it helps you is by putting your money somewhere you can’t get to it.
    On the other side of the same coin is your money is somewhere you can’t get to it. And even as you pay the mortgage company gobs of money, your PAYMENT doesn’t budge at all. So in general I suggest considering investing those funds elsewhere instead, but keeping them semi-liquid for eventual loan payoff. For Jim, though, it may make sense to go ahead and throw this money at the principle as we’ll see.
  • Now that we’ve lowered your expenses down to a more sane $1,600/month, you have $5,000 remaining, not including your mortgage. With mortgage, you’re left with around $3,700 each month. Here’s how you’re going to get rid of your mortgage in two years, not three! ALL of your $3,700/month will go toward your mortgage fund. That, plus your motorcycle and sports car money should be enough to get that monkey off your back. ($3,700 * 12 * 2 + $15,000) If you’ll check your handy amortization table, I think you’ll see that just about gets you there*. (For other folks interested in paying off a mortgage quickly, see my post on How to get rid of your mortgage.)
  • That was two painful years, but are we at pretirement yet? Unfortunately, not yet. Now that you have paid off his mortgage, it’s time to build up a pretirement fund. The good news is that without a mortgage, you can now save around $5,000/month. That $60,000/year should build up quickly. The bad news is it’ll STILL take about five or six more years to reach a break-even point. That’s frustrating, but we can’t argue with the math. You’ll need nearly $400,000 invested in order to cover monthly expenses and by the time you get there, you’ll basically have just retired. Hey, worse things have happened! Nothing to cry about!
  • But what if there was another option? If we say you’re about 55 today, you would need to do some careful planning, but you could simply work for the two years to pay off the mortgage (until you’re 57). Then work three more years to age 60. If you save aggressively during those last three years, you should have somewhere in the neighborhood of $190,000 saved. Now that you’re 60, you could simply live off the principle, giving you way more than you’d need every month. Then, at age 65, you can dive in and tap your social security and other retirement funds. You could even consider taking retirement at 59 1/2, but you probably know that already.
  • You could also consider semi-pretirement. That would mean working part-time to make ends meet and to have a little extra spending money. Since you are so close to obliterating your mortgage, I’d recommend you stick it out until that’s paid off. Then, if you desire, you could quit your jobs and find something part-time closer to home. You’d only need $1,600/month coming in, which would be a trivial amount to make for two people. Without your expensive commuting costs, you would need even less each month as well!
  • Let’s assume for a moment that you guys hate your jobs as much as I hated my last job. Can you do anything sooner than the two years it’ll take to pay off the house? It’s time to talk downsizing. Because you have good equity in your home, that is a source of funds you can tap. Also, by downsizing you may be able to lower your living costs as well, including commuting costs, utilities, your ridiculous HOA and, of course, your mortgage payment. Of course this depends on where you want to live and how much room you really need. But if you could sell your house for the Zillow price of $408,000, you should be able to net somewhere around $260,000 in cash. That may not sound like much, but remember, now you don’t need to pay your mortgage for two more years. We’ll assume you can buy a comfortable, well-built small home for $200,000. This isn’t possible where I live nor is it possible in many areas of the country. But, remember, they can move anywhere they want! Once that house is purchased, they’ll again open a big HELOC and not use it. Now with no mortgage, no commuting costs and much smaller living costs, I believe you can get your monthly bills under $1,000/month, maybe a little higher with homeowner’s insurance and taxes. You could certainly save up the $250,000 it would take to generate that expense or you could simply work part-time to make up the difference. I used to joke that if I ever got into a cashflow crunch, I could always water the plants at Home Depot and be happier than I was at my soul-sucking job. And I could!

Now let’s talk about health care for a moment. It’s probably the biggest wild card hanging out there to worry about. First, let’s talk about health. People who spend $600/month on groceries, $500/month commuting and $80/month on cable TV are, almost by definition, not healthy. This could have a direct impact on your health care costs over the next decade. Again, by moving to a more walkable and bikeable community, by not sitting on your butt either in front of the TV or in a car every day will have a lasting impact on your health and your happiness. Secondly, I haven’t listed health-care costs in the above because there is such a wide variance in the potential costs. How I wish this country would pull its head out of its collective ass and implement a sane Canadian-style health care system. It is truly the ONLY thing that makes a lick of sense.

But that doesn’t mean there are no options. If you choose to work part-time, finding a gig that covers health insurance is definitely an option. Thanks to Obamacare, you WILL actually be able to buy coverage, that is something that was not a guarantee even a couple years ago. You are VERY lucky that this legislation was passed before you needed it. The bad news is that health insurance companies are still evil, blood sucking scumbags that exploit the desperate for profit. It’s time to start looking around for an affordable plan with a high deductible (you have that HELOC if you really need it, remember?) I have heard of plans for folks your age that were a ridiculous $1,000/month and I’ve heard of some that are $300/month. A lot depends on where you live and your health, etc., so shop around. This could be a reason to choose another state over another where you live today. Shop around. What you find may help you determine what is possible.

So let’s summarize!

Jim and his wife did a great job of saving for retirement but basically didn’t save at all for Pretirement — outside of paying down their house. This leaves them potentially commuting to jobs they’d rather not be going to for 10 MORE YEARS — and that’s after an already long career. This happened because they forked over a ton of money to their kids, have lived an expensive, if typical, lifestyle and, frankly, never planned seriously for this era of their lives.

With some relatively minor lifestyle adjustments and learning to say no to their adult children, or more significant lifestyle adjustments if they want to speed things along, they can leave their jobs and gain a great deal of freedom quite quickly! EVEN IF they decide to keep working out of fear or simply a desire to live a decadent retirement, I would STILL recommend reaching pretirement stage (investments cover expenses) as soon as possible. You’ll won’t need to take as much bullshit at work, you’ll be safe in case of a major life event (such as a job loss) and you’ll live every day in the sweet, sweet mindset of complete freedom that comes with PRETIREMENT!


*There will be some looseness in these numbers due to taxes, insurance, inflation and various surprises and unknowns that may occur along the way. It’s the concept that’s important, not the exact numbers.

What’s the best way to raise successful kids?

Is private school and expensive college the right move?

“You give your children enough money to do something but not enough to do nothing.”

-Matt King in The Descendants, as played by George Clooney

Now that I have a new baby, I’ve been doing a lot thinking about what it means to be a good parent and how best to set my son up for success.

Pretired Nick having fun on the beach instead of learning another language or music.

Pretired Nick having fun on the beach instead of learning another language or music.

Parents feel a lot of pressure and guilt to produce perfect adults and, of course, in the process inevitably screw up their own kids in their unique way. In America, where schools have been gutted by right-wing politics, desperate parents are spending gobs of money on private schools to protect their munchkins from the scourge of public school. And who is to say they shouldn’t? Schools in America are (largely) a joke, particularly in middle school and high school. Unfortunately this latest version of “white flight” is setting up a self-selecting cycle of failing schools as those who can afford to flee do so and leave the struggling masses behind.

I am a product of public grade schools and a private high school that I later realized offered a completely inadequate education such that I found when I reached college that I had to work much harder than everyone else just to catch up. I paid my own way through college using just one small loan at the very end so I could quit my job and take a few extra credits to graduate sooner.

So given all of that, what’s the best way to set my own child up for the greatest success?

To answer that I had to do a lot of thinking about what success means. What I realized was that it wasn’t about money. To me, success is the ability to pursue whatever interest you might have to your fullest ability to pursue it. It’s impossible to talk about this concept without mentioning Maslow’s famous hierarchy of needs. But this Maslow quote best sums it up for me:

“A musician must make music, an artist must paint, a poet must write, if he is to be ultimately at peace with himself.”

-Abraham Maslow

The word “happiness” is thrown around quite often, but it is actually very difficult to define. Obviously the word connotes images of someone blissed-out and smiling. But it’s actually easier to understand by thinking about its opposite. We can tell when someone is clearly not happy, but not always when they are happy.

However I did have something of an epiphany some years ago. When working on a big remodeling project I realized that when I really got into a groove, my mind went blank, my hands operated without mental intervention and hours disappeared. Later I read about how Tibetan monks often report being happier than the rest of the population and even are proven to be so under brain scans. As I paid more attention, I realized this feeling of intense concentration did actually put me in a state of what you could call happiness.

This could happen when deeply focused on a spreadsheet at work, when writing, creating music, gardening or any other thing that seized my full concentration. Letting our brains become absorbed with deep concentration on something we enjoy may just be the secret to a happy life. This is why the quote from Maslow above is so important. A creative person pushed by his parents into a uncreative career may be chronically depressed without knowing why and despite huge wealth. Meditation may be a way to recover some balance, but finding the right activity for your own personality and doing that may be equally effective.

Again, a way to understand this may be to look at the opposite. When we’re depressed or stressed, we are often multitasking or have many things on our mind at once: This report is due by Friday, I’ve got to pick up the kids after work, we don’t have anything for dinner, what if I lose my job, etc. Contrast that to a day at work when you were really in the zone with what you do. You are at peace, settled and balanced. The hours fly by. I want to live that way every day.

So how does this relate to parenting? Setting an example of living as much as possible in a self-actualized state is probably the best thing you can do for your kids. Show them what contentment looks like. If you’re constantly chasing dollars and are captured by consumerism, your kids will only understand those values.

With that understanding, here is how I hope to approach raising my own kid. I’m not so arrogant to think I won’t be screwing him up in my own wonderful way, but hopefully with this approach, he’ll be able to find his own way to whatever happiness he chooses.

  1. Be there. Kids need support and attention. The idea of “quality time” is total bullshit. Kids need “time”. I refuse to spend weekend time watching TV or running errands. Our time together is about learning and exploration.
  2. Display nonconsumerist values. Teaching a young one that “stuff” is a drag on our lives, not a benefit will do more to set him up for success than any other factor.
  3. Teach him smart money management. His freedom depends on an ability to avoid being trapped by debt. No one taught me how to manage money and I think it would have helped a lot having someone guide me through this confusing aspect of life.
  4. Making him responsible for himself. Earning money and paying for his own toys and activities will help him learn to take care of himself. Hopefully he doesn’t turn out to be a “bad kid” that needs tough love, but only time will tell.
  5. Ensure he learns another language while still young. It pains me greatly that my parents didn’t give me access to another language. Can I learn another language now? Sure, and I am learning and that will continue. But it is in NO WAY the same to learn a language as an adult vs. as a child. Entering adulthood as a monolingual person is a huge disadvantage.
  6. Ensure he learns music while still young. Similar to learning another language, learning music while a child makes a massive difference. It helps with brain development but more importantly gives the child access to an important skill.
  7. Let him access the world. Seeing the world will, of course, give him a greater perspective and appreciation for his fellow humans, but if I can engineer a way to grant him dual-citizenship to another country the menu of options he’ll have for his life will be even greater. But at minimum, we need to travel quite a bit so he can see what else is out there.
  8. Teach him respect for nature. Learning to appreciate, understand and respect nature, not only makes you a better person, it could even aid your survival in extreme situations.
  9. Teach him self-sufficiency. No one knows that the future holds. Skills like gardening, construction, canning and fire-making could end being critical skills in the future. But even if they don’t become necessary for survival, they are important for building confidence. He shouldn’t have to worry what will happen to him no matter what occurs.
  10. Teach him about physical health. Learning how to stay healthy is becoming increasingly important in a fatter America. Enjoying and understanding physical activity is so important and so is learning to eat healthy food, in particular avoiding processed crap. I hope we’re able to prevent him from even knowing some of this “food” exists until he’s much older.

Much of this perspective, naturally, comes from what my parents either did or didn’t do for me. We all react against the way we were raised, right? If I could pick just a few things I wish my parents had done for me, they’d be learning another language, learning music and dual-citizenship. Those are things that it’s just very hard to replace as an adult. We’ll see how I do with my kid.

So, I could sacrifice my pretirement, work 20 more years to pay for his private school and college, but that is not only unpleasant for me, I don’t even think it’s the best thing to do for him.

What do you think? Is it just selfish rationalization that it’s best for him that I don’t go back to full-time work to finance his education? Or is it his best chance at happiness?

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