Today I wanted to look at our next several years of expenses. Most people are probably fine with looking at one year of expenses. However, we have two Big Financial Events (BFEs) colliding that will drastically change our financial picture. In 6-7 years, we’ll finish paying off our primary mortgage and two investment property mortgages. Around the same time, the kids will be graduating from their expensive private school. That may translate to ditching $50,000 in investment expenses while adding $25,000 in income.
That’s a great BFE down the line, but we have to get there first. So let’s look at where our money goes until the BFE.
[Note: You might be asking, “Why did you choose 5 years in the title?” Well, choosing 6-7 years just looks weird. I think there’s more value in people looking at 5-year chunks anyway.]
Expense 1: Kids’ School
Currently the kids go to private school. It’s an exceptional school. In one of my kids’ classes, two of the ten kids’ parents are public figures with an estimated net worth of hundreds of millions of dollars. You could call it the best education that money can buy.
We are lucky to get a large military discount. We think it’s a good value even though it is clearly still very expensive at $25,000 a year for the two kids.
I realize it is a great privilege to send your kids to a private school. We’re very frugal in a lot of other areas, so we’re okay with investing in our kids’ education.
School Annual Expense: $25,000
Expense 2: Housing (and Rental Properties)
We have our primary residence and 2 other rental properties on 15-year fixed mortgages. The idea was to front-load the expenses while we were making good money, pay less interest, and not have to worry about mortgages in retirement.
We recently sold one investment property (via a 1031 exchange to limit taxes) and bought another one closer to where we live since it would be easier to manage. The good news is that process reset the mortgage for 20 years so now it is cashflow positive as opposed to the other two slightly negative, cashflow properties. Between maintenance and such, we can probably consider the three investment properties – all in an LLC to be cashflow neutral. In around 6 years, we should be able to bring in around $25,000 in additional income. In the meantime, we don’t have to plan any significant annual expenses due to the income from the tenants. (This could change, so we need to keep an emergency fund for it.)
Our primary house though is a big expense. We have about another 6 years on that mortgage. I’ll round it up to $3000 a month to make it $36,000 a year. In fact, I’ll bump it up a little more to include some maintenance. (I’ll be adding some extra money to pad all the expenses at the end, so let’s not quibble about whether this enough padding for now.)
Housing Annual Expense: $40,000
Expense 3: Transportation
I haven’t looked at our transportation costs in a long, long time. I typically don’t worry about breaking it out, because we do the best we can – there’s no fat to trim. We’ve paid off our cars, but they are 7-8 years old now. We are the type of people to drive our cars into the ground. The timing of paid-off cars is good because we can probably get by without a car payment until the mortgages (noted above are all paid off)
Of course, there’s more to transportation than just the car. I’ll budget another $3,000 for gas, maintenance, insurance, etc.
Transportation Annual Expense: $3,000
Expense 4: Food
Food is like transportation. I don’t typically look at the numbers because I’m frugal with our shopping. Fortunately, we have an American Express card that gives us 6% cashback on groceries. Since we use that card for food religiously, I can look up our annual spending on the card and use that number.
In 2020, we spent $6,253.28 on groceries. In 2019 we spent $5,585.16. So on average, we can expect to spend $6,000 on groceries. However, our 7 and 8-year-old boys will probably eat more, so I better boost this up to $8,000 to be a 6-year average.
Our restaurant spending is a little more difficult. We do have a credit card for that, but for some reason, Chase disables the year-end reports for that one particular card. I added up each month’s statement from 2019 (restaurant spending in 2020 was off due to the pandemic) and found that we spent about $8000 there as well. As we found out in 2020, this is an area we can cut back on if we ever need to.
Food Annual Expense: $16,000
Expense 5: Healthcare
Healthcare is provided by my wife’s work. It comes out of her paycheck, so I don’t notice it. It’s great for now, but my wife will likely retire within the next 6-7 years. It’s a good idea to include this category to plan for that scenario.
We can get Tricare for Life, which is relatively cheap military healthcare. My wife is an expert in healthcare and it’s her main business to know the economics of this stuff. It looks like the deductible is $300 per family with a catastrophic cap of $3000. It seems like most other things are covered in some way.
I have to admit that I don’t understand any of these things. Maybe I should read “Healthcare Plans Explained for Dummies”, but I know this is our best option, it’s cheap, and my wife knows all this.
Healthcare Annual Expense: $1000 (but no more than $3,000 – I think?)
Expense 6: Miscellaneous
I’m adding $15,000 to the final number for things that I’m just too lazy to add up. That can include the kids’ extracurriculars, kids’ camps, house cleaning service, utilities (lowered by our solar power), landscaping, emergencies, entertainment, vacations.
We’re fairly frugal with some of these items. We can stretch our vacation dollar with our Aruba timeshare and stored up airline miles. We can also use numerous military perks in retirement. We can skip some kids’ camps if we have two adults around all day.
Miscellaneous Annual Expense: $15,000
It may seem weird to spend tens of thousands of dollars on a private school for a first grader and save next to nothing for college – yet here we are!
The reality is my wife’s GI bill can effectively cover half of the college expenses for both kids. We have some money already saved for college and a little time for it to double. We’ll ask them to cover some expenses so that they have “skin in the game.” After the BFE in 6-7 years, we’ll have more cash flow for college. Hopefully, they’ll get some grants and scholarships – they better for all we are spending on their education now, right?
In reality, we’ll save more than $0 as we have been doing, but we don’t need to factor this in as a requirement.
College Annual Expense: $0
Here’s what our expenses look like in a table:
I’m certainly making that $15,000 Miscellaneous section do a lot of work, but that nice, even $100,000 number is so damn attractive. I definitely let the tail wag the dog to reach that number.
If we presume a 20% effective tax rate we’ll need a pre-tax income of around $125,000 before taxes. That may be a bad assumption of taxes, so it’s a question that I’ll have to ask our tax preparer.
While that $125,000 sounds like a ton of money, after the 6-7 year BFE, it would effectively be closer to $45,000 – with $25,000 of income from the rental properties. That’s a lot more manageable, especially with our other income sources.
Why These Expenses are Important
You may have caught a hint of why I’m going through this analysis. It was originally intended to be part of a bigger article analyzing a bigger question. Expense analysis is a critical factor in determining if you can retire.
Next week, we’ll revisit these numbers in a larger context.