Rent a home vs Buy? The age old question….

There has been a lot of ink spent on trying to answer this most basic of questions. In the FIRE community, there are strong voices advocated each choice, and there are a lot of bloggers, even though their analysis shows that renting for them is optimal who choose to get a house anyway.

It is a decision that is based on numerous variables, each of which has to be determined for a market that is dramatically fractured. In my state of New Jersey, the price for the town next to mine is ½ to 1/3 the price of my own town. This is primarily due to the school system and the perceived value of that town.

Some of the monetary variables that need to be considered include:

  • Home value
  • Mortgage rate
  • Down payment
  • Property taxes
  • Repair costs
  • Condo fees
  • Decorating/remodel costs
  • Increases in home value
  • Increases in rent rates
  • Home insurance costs vs rental insurance costs

In addition, there are numerous non-monetary factors that impact this:

  • Neighborhood/School system – major factor with families
  • Closeness to other family
  • Not selling/owning home vs. continuing to rent into your retirement (i.e. if you purchase a home, its yours after 15/30 years, but if you rent, you are still renting at the age of 65)
  • Flexibility/ease to move (hard to move quickly while having to sell a home)
  • Ease of finding rental (in some markets, like Colorado, it’s almost impossible to find a rental. Home prices have shot up so much that it has forced out rental opportunities)
  • Rental increases in excess of model (you don’t have control of this, unlike a locked in mortgage rate – the owner could jump your rates 10% and you are out of luck)

I would say these intangible factors are what causes a lot of the FIRE bloggers who have done the math to buy a home anyway, even if the numbers say it doesn’t make sense.

In the end, the answer is – it depends. There are too many variables and too much personal preference involved in the decision. Everyone has to do the math for their specific situation, take into account the non-monetary factors, and then decide.

To help, here are some “make vs. buy” tools available for free on the internet.

NerdWallet: 4 years

Realtor.com: 9 years

NY Time: 9 Years

Zillow.com: 2 years

Smartasset.com: Depends on what you put in

I think NerdWallet and Zillow leave out a few things that need to be considered (Zillow has a hidden agenda to get you to buy a home). Realtor and NY times include a lot more items to be considered (maintenance of home, Condo fees, etc.). I like smart asset, because it lets you input a lot more of the data yourself (mortgage rate, repair costs, etc.) so you can match it easier to your current situation.

Other blogs to review:

Rockstar Finance: Pay off mortgage vs. Invest extra

Any thoughts on make vs buy for you?

 

Mr. 39 Months

Quarterly Update – Apr 2018

Well, it’s early April, a quarter of the way through the year, and hopefully a good start for the year’s goals. Again, a lot of folks don’t like to do this sort of thing, but as an engineer and amateur financial junkie, I actually love taking a look at these sort of things. Even when I’ve had a bad quarter (or bad year) I like to look at the numbers and see what my situation is, and the future outlook – and financially the first quarter had both good and bad.

So how am I doing in comparison to my goals for 2018?

My Goals for 2018 (some financial, some not):

Finance:

  • Save $81K in tax-advantaged accounts (saved almost $37K in 2017): Grade B. Saved almost $14K in 1st qtr, and looking to dump $21K from my bonus into it in early April.
  • Save $9K in regular: Grade A. Got this done right out of the gate. The $5K I had to take from my inherited IRA went right into this, and I took $4K from savings and put it in as well. The $333/month I was going to dollar-cost average into it will just go to plus back up my savings.
  • Increase dividend income from all accounts to $24K/year: Grade B. Was at $4,456 for 1st qtr vs. $4,089 in 1st qtr 2017. I usually get a big boost in 4th qtr, so we will see if I hit it.
  • Passive income covers 33% of base living expenses in retirement, i.e. $24K of my $72K expected expenses: Grade B. See above – need to hit $24K of dividends, since I don’t have other forms of passive income right now.
  • Beat net worth growth rate of 7%: Grade D. Market is down, thus hurting my net worth. It hasn’t grown hardly at all, despite the $23K that I dumped into it. If market recovers, I should still be able to hit this.

Business:

  • Begin attending regular meetings of my local real estate investors association. Grade C. Attended four (4) meetings over 3 months. Good info, but nowhere near as much as I should be investing time for. There was a great one last night on estimating repair costs, but it was full and I couldn’t attend.
  • Double the number of blog visitors in 2018. Grade A. I’ve already exceeded last years numbers by 15%. I’m sure part of it is that I have more content. Still, I need to do a better job of providing stuff folks want to read.
  • Write/publish a book on finance.  Grade: Incomplete. Did some initial work on it, but really haven’t put as much work into this as it needs.

Personal:

  • Increase weight lifted by 10% from 2018 (increased by 12.7% in 2017 Grade B: Up 3% from the beginning of the year
  • Average 3 hours of cardio per week (currently averaging about an hour).Grade C: Averaging about 1.7 Hours a week as of March.
  • Take part in at least one long bike ride, like MS bike-a-thon (80 miles) Grade: Incomplete. Bike scheduled for September
  • Backpack over 100 miles on AT (did over 100 in 2017) Grade: Incomplete. Hike’s scheduled for June and October
  • Begin volunteering at Pennsbury Manor at their joiner’s shop (woodworking) Grade C: Volunteer training set for April 15th, and then I will start
  • Reduce weight by 20 lbs. from Jan 2018 (lost 9 lbs. in 2017). Grade D: Only lost 4 lbs. in 1st Qtr. Need to get better at fitness and diet.
  • Read at least one book a month. Grade A. Read five (5) books in 1st qtr, one work of fiction, two self help, and two histories. Really enjoying this personal goal

Travel:

  • Visit a national park (visited Shenandoah NP in 2017). Grade: Incomplete. Scheduled to visit two parks in May (Redwoods NP in California and Crater Lake in Oregon)
  • Visit family in Tennessee, Vermont and New York. Family is very important to me. One of the things I am looking forward to with financial independence is the opportunity to visit family more often. Grade B. Visited family in TN in March, but only for a short time. Looking forward to more visits throughout the year.
  • Visit Portland, OR and northern California. Grade: Incomplete. Scheduled to visit in May 2018.
  • Visit Ellis Island. Wanted to do this in 2017, but didn’t make it. As 50% Czech from immigrant great grandparents from the turn of the century, I believe they went through there, and I want to see it Grade: F. Still haven’t been there and I have had the opportunities.
  • Go on an international trip. Not sure which one (Canada, Caribbean, etc.) but I’d like to get out this year. Grade: Incomplete. Nothing scheduled at this time.
  • Visit the Asheville NC area. It’s one of the areas that we are considering retiring to (close to my old home in Tennessee, interesting crafts, shops & outdoor sports, etc.). Trying to learn more about the area (we’ve been there a couple of times). Grade: Incomplete. Nothing scheduled at this time.

Overall, I’d give myself a B. Got a lot done, but still have more to go.

 

How are you going on your goals for 2018?

 

Mr. 39 Months

Status Update, Apr 1 2018

Well, not much progress was made during the month of March, but I also didn’t lose, which (when you think of February) could be considered a plus. I did get one month closer to FI (27 months to go!). While I am not “going gangbusters” right now, I’m not unhappy. As I said in my previous post, I believe I am going to be able to get some investments on sale in early April. Still haven’t gotten back to $1M in invest-able assets (thank you February) – but I will soon.

Retirement Accounts: Remember, my allocation for these is:

  • 30% Bond Index Fund
  • 17.5% S&P500 Index Fund
  • 17.5% International Index Fund
  • 17.5% Small Cap Index Fund
  • 17.5% REIT Index Fund

I ended up being about 0.4% up here, after all the craziness. While the S&P 500 Index and International Equity lost significantly, the bonds and small cap did alright. The surprise was the REITs! After getting pummeled in 2017 and the beginning of 2018, they hopped up over 4% in March, and enabled me to stay in the black. Another reason for asset allocation. Note that these returns include reinvesting dividends.

My 401K/Deferred account at work was down 1.1% for March – but this one doesn’t have a REIT option in its choices, so I didn’t get the benefit of the REITs for March (but didn’t suffer from this in this account for 2017).

Dividend Income Account: Allocation:

  • 25% Dividend Stocks
  • 25% REITs
  • 50% Bond Index Funds

Did well, considering – 1.7% up for March. Again, don’t forget that it is ¼ REITs, and they really helped it out. The bonds didn’t really go up much, but I did get the advantage of all the dividends. Overall, dividends were about 3% annual yield – and I will reinvest those in the assets that went down in 1st quarter.

Value Investing Account: Allocation (remember I refocused this at the beginning of February):

  • 60% in individual value stocks I picked myself (3 each, 20% for each)
  • 40% in Vanguard Value Index fund

Another bad performance for the stocks that I picked myself. Down 4.7% for the month of March. Everything in this account is down. I believe I am going to give it to the end of the year, and if it’s no better, then its going to Low-cost index funds!. Again, this is more of a “fun money” account where I experiment. It keeps showing me that I’m not a good stock picker.

The allocations are not too much “out of whack” so I don’t intend to re-balance until July (unless something major happens).

How did you do in March?

 

Mr. 39 Months

One of the benefits of a major stock market correction…

A lot of folks have been bemoaning the drop in the market, talking about the billions of $ that have been lost, and how the market seems to been in danger of a major correction. The doom-and-gloom people have been out in force. Still, most folks in the FIRE community have taken in all in with a “grain of salt” because of our long-term outlook and our financial knowledge. We all remember that it’s all paper losses, until you sell.

One of the major benefits of a market drop is the potential to buy things “on sale.” If we truly believe that the long-term trend of the market is up, then this sudden drop gives us the chance to purchase something we wanted. I know most folks in the US flock to sales like crazy (especially around Christmas), but seem to shy away from “sales” on stocks. Seems odd, doesn’t it.

This has an added benefit when you find yourself with some excess funds, for some reason. Mr. 39 Months company paid out their bonus for 2017, and since the company did well, I got a decent amount of money. With the timing the way it is, I can drop that into the market and buy some items on sale at the equivalent of a 4.1% discount (based on Jan 31 prices). Also, since I put 100% of it into my deferred account, I am able to put that money into the market without paying taxes on it (I did have to pay Social Security and Medicare taxes).

The result was a nice bump in the money that I can access when I retire early, as part of my draw down strategy.

Find any bargains out there?

 

Mr. 39 Months

Woodworking with a legend

Roy Underhill has been showing traditional woodworking on PBS for 37 years. He was a master carpenter and Woodwright for Colonial Williamsburg in Virginia before he started. He has concentrated on traditional 18th/19th century tools and woodcraft, and has been a prime mover for the rebirth of hand-tool woodworking in America. Roy has a definite, almost manic style of presentation, both on TV and in person. Always a joker, He keeps it light while helping to explain the intricacies of using a 19th century tool to come up with accurate results.

About ten years ago, he opened up a school for woodworking, where folks can come and attend classes, see and use the tools (he has a host of them available if folks don’t have their own) and purchase tools to take home if they’d like (there is a separate store, owned by Ed Lebetkin, upstairs). The schools is in a store front in the quaint town of Pittsboro, NC.

I’ve taken classes there on hand tool use, and a special one on wooden molding planes. Last week I took a class with Will Myers and Roy at his school, where we built a great “portable” workbench. This one is based on a bench that Will found in the Moravian museum in North Carolina, which they believe is a design built around 1800. As most woodworkers know, a good bench is strong, sturdy and heavy, so it can withstand the pounding without moving or breaking. This one breaks down into six major parts, the heaviest of which is the 4” think workbench top (around 100 lbs.). It’s fairly portable, but sturdy when you set it up.

There is something really enjoyable about doing all the work by hand. Every cut is hand-sawn, every hole is hand-drilled, and every joint is cut out and fitted. By the end of five days, we were able to take home a workbench that was 85%-90% complete, including a great front vise. The remaining work that needed to be done is relatively easy (I’ve already gotten about half of it done over the last 2-3 days, in the evenings).

I would greatly recommend to anyone that if they have hobbies, don’t wait till you retire early. Take the opportunity to explore them now, if only to confirm it is something that you’d like to do for a long time.

 

What new skill would you like to try out?

 

Mr. 39 Months

Update to draw down strategy – Mar 2018

After going through the health care analysis earlier, I (like so many others) have had to adjust my retirement plans and drawdown strategy to account for Obamacare and changes to it. Like so many others, as well, I will have to continually monitor the situation and make changes. In addition, Mrs. 39 Months looks like she wants to continue to work after we hit FI, but her job probably wouldn’t provide benefits.

The key issue is the provision for subsidies for individuals that do not make more than 4X the poverty level (the poverty level was around $16,000 for 2017). Thus, if your income, before deductions, is $64K or less, you can be eligible for subsidies. This may mean the difference between paying $1,400 a month and $600 a month for the same level of healthcare. Needless to say, if the situation remains the same, I’ll either need to make $64K, or $74K (the $10K necessary to pay the additional medical). I know many folks in the FIRE community knew this, but I thought it was $64K after deductions, not before.

Our initial budget post-retirement, was going to be about $72K, in order to pay for everything, including medical. This would provide for all bills, some travel, and $1K a month each for Mrs. 39 Months and myself in “fun money”/personal expenses. That would push us over the $64K figure. In addition, if Mrs. 39 Months works (earning around $24K), it adds a level of complexity. So how do I “square this circle?”

When we hit FI (27 months from now), we should have the following amounts.

  • Savings: $132K (can spend without having to pay taxes)
  • Deferred Income from work: $179K (when paid out, have to pay taxes on it)
  • Brokerage Account: $94K (can spend about $60K of it without paying taxes. The rest, will be taxable.
  • Inherited IRA from my father: $137K (taxable when we take it out)
  • 401K/IRAs: $546K (taxable + penalty)
  • Roth IRAs: $257K (non-taxable)
  • Total: $1,345K liquid assets
  • House: $298K (not depending on it unless absolutely necessary, i.e. no reverse mortgage)

Complications

  • Mrs. 39 Months making $24K/year. Have to start from there
  • Inherited IRA will force us to take around $6K a year
  • When I leave company, I have to start taking my deferred amount. I believe I get to stretch it over 5 years, but that still winds up as a minimum of $36K a year

As you can see, I’m already up to $60K, without the ability to alter it. How do I get to $72K of income, without going over the $64K of taxable income?

Options

  1. Use the money in my brokerage account by selling some of the stocks there. I would only have to pay for any capital gains on it. Since it looks like about 2/3 of money in it will be basis money, I could take out $12K, and it would only show as $4K of income.
  2. Use some of my Roth IRA money, which is not taxable, to make up for the shortage. Even though I would only be 56 when I hit FIRE, I can still withdraw the money I put in, tax free. However, I am loathe to do this.
  3. Get myself a side gig/part time job to keep myself from going crazy from retirement boredom and pay for the additional medical costs. We will have to see about that.

What is my current plan? I’m going to plan for option 1, and if I get really bored in retirement, I’ll probably shoot for #3, with the understanding that I will be working half of my time just to pay for medical. Like so many others in the US, medical is driving the train!

Of course, all this could change over the next 27 months as we move forward.

So, any changes to your drawdown plans, folks?

 

 

Mr 39 Months
 

Great chart at “Four Pillars” on how long it will take to reach FI at certain income and spending levels   

I think the chart below is excellent. Its from FourPillarFreedom.com (a blog I’ve got to start reading now) that was linked to by The Simple Dollar. It shows, at certain income and spending levels, how many years it will take you to reach FI (assuming the 4% rule and a 5% interest after inflation). I believe it also takes into account taxes, etc. in the annual spending (i.e. your annual spend should include your taxes)

Many folks find it difficult to explain to people why they should save so much, and how it takes effort and sacrifice to reach our financial goals. This chart makes it a little easier to explain to people how long they would have to work in order to retire/reach FI.

Four Pillars has a lot of other tools (listed under his “Visuals” area) that help to show many of the FI concepts.

Check him out.

 

Mr. 39 Months

Interesting philosophical question on Root of Good…

What do you do if you have reached FI, but are scared to “pull the trigger.”

What do you do when you’ve been diagnosed with a terminal disease that might mean your death in the next 5 – 10 years – but you are still scared of leaving the workforce?

Should you retire early if you only have five years to live?

I think this is close to many FIRE folks big nightmare. They work and scrimp and save, only to have something come up right as they are heading out to their new life.

I hope your thoughts and lives are doing better than this!

Mr. 39 Months

Dealing with depressive thoughts as you close in on FIRE

Sorry the posting has been a little late. I’ve been on the road traveling (11 hours in the car on Wed, 7 hours yesterday) so it was a little difficult to get posting up.

I’m traveling down to North Carolina to take a woodworking class (You’ve got to have hobbies!) and took the opportunity to stop off and see family in Knoxville TN on the way (Mom, Brother, other folks). It’s always great to have the opportunity to see family, especially when you are living 11 hours away by car.

Family has always been important to me, or at least I think so – but you couldn’t tell by my life choices. Mrs. 39 Months had a mother who wasn’t in the best of health, so we ended up moving to a place a little closer to her (3 hours) than my family. Even then, we would see her side maybe twice a year. Mine I would see, if I was lucky, about once a year. We always complained that nobody came to visit us, that we always had to be the ones traveling – but we also didn’t have any children to draw the grandparents to us.

Visiting my old homestead, where I lived for 18 years and was formed (and which I still feel is my home state) brings up a lot of memories. I see the choices I made growing up, and think about what could have been, had I made a different decision. I see places I enjoyed as a youth, and it brings back memories of old friends, lots of fun, and sadness at the passing of time. I have a tendency to be morbid about the past at times (something that Mrs. 39 Months chastises me about), but its part of my character. It doesn’t last very long, and typically I return to my usual upbeat self after only a short time.

That is why I have embraced stoicism with some vigor. The teaching help me deal with these feelings, as they show that what is past is gone, never to return. The decisions made then have gotten you to where you are now, but all you can control are your decisions now. It is useless to spend time and emotion on something you can no longer control. I know the logic behind it, but still have moments.

I also have been reflecting on what I’m going to do once I hit FI. I believe this is a topic that many folks explore vaguely, or in their first couple of years. They do all the things they have wanted to do all their lives (travel, hobbies, etc.). Then they look in the mirror, after a decade of pushing like crazy to reach FI, and see that they no longer need to push. They have to alter their personality, and it’s tough. That is probably why some of my favorite blogs to follow are those folks who have reached FI, and what they are doing now – years afterward.

I am still working that out.

Additional Reading on subject

Mr. 39 Months

Frugal Tip – Bad Movie Night with Friends

A lot of folks are looking for things to do for fun that aren’t going to cost them an arm and a leg.  The amount typical Americans currently spend on dining out and entertainment  is something much talked about in the FIRE community, and many folks discuss ways to reduce their entertainment/dining out costs dramatically.

For Mrs. 39 Months and I, we just had a pot luck dinner at our friends house (we brought desert, others brought sides, and the host had the main course). Total cost for us was less than $10, the most was probably $15 for the hosts for the ingredients for the main course.

For entertainment, we all gathered round the TV and watched a pair of really bad movies. For many folks who are old enough, they remember a TV show called “Mystery Science Theater 3000” where a group of characters would play a bad movie, and snipe at it from the side. It was incredibly funny, and stayed on the air for many years (I think they may be trying to recreate it now).

The original team has re-united and has started a series called “Riff Tracs” where they pretty much do the same thing, on special nights. You’ve got to go to a movie theater to see it, but its very funny. You can also see it online a little later (Netflix I believe).

For last night’s viewing, we watched the Rifftrax take off on “Plan 9 from Outer Space” – one of Tim Wood’s movies and often considered the worst movie ever made (It makes Sharknado look like high cinema). After that, we watched “Amazon Women on the Moon” a movie similar to “Kentucky Fried Movie” and “the Goove Tube” – takeoffs on early 80s television shows & commercials, rater R with some nudity and adult situations.

In the end, it was a lot of fun, and a pretty cheap night out. I’d recommend it.

 

Mr 39 Months