She Has $1M at 36, But Did Buying a House Ruin Her FI Plan?

Cheryl's Financial Snapshot [0:28]

• Total Assets: $2.2 million
• Total Debt: $1.1 million (mostly mortgages)
• Net Worth: $1.07 million
• Net Liquid Financial Portfolio: $500,000 (including $386,000 in traditional retirement accounts, $56,000 in Roth, and $51,000 in HSAs)
• Illiquid Financial Portfolio: Rental property valued at $552,000 with a $300,000 mortgage, yielding $250,000 in equity and $1,000/year cash flow.
• Primary Home Mortgage: $880,000 at 7% interest.

  "So a total net worth of $1.07 million. That's awesome."

Personal Circumstances [1:28]

• Age: 36 (husband is 39)
• Location: Los Angeles, high cost of living area.
• Children: Two young boys, ages 3 and 5.
• Occupation: Product manager in a medical device company.

  "We live in Los Angeles, very high cost of living area. We've got two young boys, three and five."

Cheryl's Core Questions [1:59]

• What to do with the rental property?
• Did buying the primary residence jeopardize early retirement?
• What is required to reach Coast FI and work part-time?

  "Did I blow up everything. I introduced so much financial anxiety back into our lives with this mortgage."

Household Income and Expenses [3:08]

• Gross Annual Income: $228,000
• Retirement Deferrals (HSA/401k): $20,000
• Projected Taxes: $55,000
• After-Tax Cash Generation: ~$152,000/year (~$12,500/month)
• Total Monthly Spending: $9,400
• Housing Expenses (P&I, utilities, taxes, insurance, maintenance): $7,700/month

  "So that brings us to $7,700 a month just in your housing expense."

Explanation of Low Expenses [4:35]

• Cheryl and her husband prioritize low-cost activities and vacations.
• Childcare expenses are $0 due to free childcare provided by Cheryl's parents.
• Grocery bills are reduced by frequent meals at her parents' home.

  "We don't eat out at fancy restaurants or go on expensive vacations."

Impact of Housing on FI [5:36]

• Annual housing cost: $92,000 ($7,700/month x 12)
• To support this housing cost alone under the 4% rule, an additional $2.3 million FI portfolio would be needed.
• This purchase significantly increased the required FI portfolio size from previous estimates.

  "So the 4% rule is a 30 year time horizon that requires a $2.3 million incremental financial portfolio."

Coast FI Calculation [6:47]

• Target retirement age: 59.5
• Assumed annual expenses (excluding P&I): ~$45,000
• Assumed inflation-adjusted growth rate: 6%
• Coast FI number (without rental income): $286,000

  "According to this set of calculations here, you only need $286,000 to be Coast Fi with the rest of your assumptions in this particular scenario, right?"

Rental Property Cash Flow Projection [7:36]

• Removing the $2,500 mortgage payment and adding $800 for insurance/taxes.
• Projected annual cash flow from rental property (inflation-adjusted): ~$21,000/year (after mortgage is paid off in 21 years).
• This projected income would significantly reduce the Coast FI number.

  "So that'll cover half of my expenses already just from the rental."

Coast FI Status Re-evaluation [8:16]

• With the projected rental income, the Coast FI number drops to $152,000 per year.
• The analysis suggests Cheryl is already Coast FI, contrary to her fears of derailing her plans.
• However, skepticism remains regarding the long-term sustainability of her current low non-housing expenses in Los Angeles.

  "The analysis here says you're on great track to have plenty in traditional retirement."

Disagreement on Expense Accuracy [9:36]

• Mindy Jensen expresses caution about Cheryl's reported low monthly spending outside of housing, especially in Los Angeles.
• She highlights that children's expenses will likely increase significantly as they grow.
• The $3 million net worth goal would require $632,000 invested today, and Cheryl is currently below that threshold.

  "I'm really cautious to say, yes, you're Coast Fi right now, because LA is a very expensive place to live."

Rental Property Concerns [11:10]

• The rental property currently generates only $1,000/year ($90/month).
• Mindy warns about potential special assessments common with condos, which could negate or exceed the current cash flow.
• She suggests using the $250,000 equity to replenish emergency funds, pay off the 401k loan, and build the after-tax brokerage account.

  "I see you making $90 a month off of this rental property knowing that it's a condo."

Rental Property Valuation and Decision [13:30]

• Cheryl and her husband were discouraged from selling the rental due to its low 3.25% mortgage rate.
• Current estimated market value: $500,000-$510,000.
• Selling would incur capital gains tax, depreciation recapture, and transaction costs (estimated 7%).
• The decision to keep or sell depends on the net proceeds after taxes and fees, and whether the property's return on equity justifies keeping it.

  "I think there's a harder decision here. I think that all of a sudden that lower price point, because if I were to say that this property is worth 400 grand, right?"

Part-Time Work Feasibility [17:50]

• The $1.1 million house with an $880,000 mortgage at 7% makes transitioning to part-time work unrealistic in the near term.
• Achieving Coast FI at 59.5 is possible, but going part-time now would likely jeopardize that goal.
• Shifting to part-time work would require selling the house, moving, or a significant reduction in lifestyle expectations.

  "No, I don't think that's a realistic possibility based, based on your situation."

Rebuilding Financial Stability [19:30]

• Prioritize rebuilding cash reserves and paying off the 401k loan.
• Focus on maintaining current full-time employment for the next 5-10 years.
• Accurate expense tracking is crucial to ensure the spending numbers are realistic.
• Cheryl's situation is not a disaster but requires diligent work and discipline.

  "You need to be a little frugal for the next two or three, I think to shore up your cash position."

Next Steps and Recommendations [23:00]

• Track Spending: Use software like Monarch to get a precise understanding of expenses.
• Shore Up Liquidity: Repay the 401k loan and build an emergency fund of at least three months' worth of spending (~$30,000).
• Rental Property Decision: Analyze net after-tax proceeds from a potential sale. If selling, use funds to bolster liquid assets. If keeping, factor its future income into Coast FI calculations.
• Revisit Condo Value: Consult a real estate agent for current comparable sales data.
• 401k Loan Repayment: Inquire with HR about accelerating repayment after building a cash buffer.

  "I think that that would be important in this situation."