New Baby, New Job, New Home Decision ⋆ XRAYVSN

Johanna’s Take:

Is home where the heart is – or where the grandparents live?

Dr. and Mrs. Home Town are new parents and have realized that having grandparents nearby can add a whole new dimension to parenthood, namely, sanity.

They hope to move back home, take on their first mortgage, and re-establish themselves with old friends in familiar haunts.

Since Dr. HT originally submitted his application, he has decided to forego his current path to partnership and instead take an academic position with a fairly lucrative base salary of $450k.

He has managed to negotiate a great deal working M – F only and has the opportunity to work extra if he decides he’d like to pad his retirement.

Mrs. HT is currently an RN turned SAHM [Stay At Home Mom] who is planning to work just enough to fill out her retirement account after they move.

I based my calculations on his $450k + her $20k total income and did not include any side income.

Dr. HT has also since told me that they currently are looking only at houses of $600k and below.

I wanted a cushion so went with the $700k just in case they stumble across that one house that steals their hearts.

Based on a 20-year mortgage timed to end at Dr. HT’s retirement, I estimated that their savings rate will go from 35% to 25% (I don’t include debt service in savings calculations), even though Mrs. HT’s income will go 100% into retirement (which I did not include in the savings rate for calculation purposes).

Dr. HT has also shared with me that he is saving cash above and beyond the 35% they are currently putting into investments.

That tells me that my calculated living expenses (below) are probably overestimating their real consumption.

He has not yet decided whether to take out a “doctor loan” or use part of the cash savings toward the down payment.

My calculations are based on a 100% doctor loan – I think they’ll need any savings to buy furniture and fix up the inevitable “issues” all new homeowners deal with in the first year.

The positives:

* You’re familiar with the area

* It’s in the good ole’ LCOL Midwest

* Mrs. HT’s nursing education and experience is highly marketable

* Can work beyond age 55, if necessary

* HTs appear to have a fairly frugal lifestyle

* Not buying a vineyard (Couldn’t help myself – see my prior analysis.)

The negatives:

* You’re just now starting a new job. What if it doesn’t work out?

* You’re planning on saving very little for college – what if you change your mind in 18 years?

* Taking a doctor loan will cost a little more.

Assumptions (I will use conservative estimates wherever there is an uncertainty.)

* 6% average long-term returns on savings (Assuming no emotional mistakes in upcoming bear markets and corrections)

* Average inflation of 3%

* You retire in 20 yrs. I also calculated a 20-yr mortgage to be paid off at retirement.

* No more children

* You have plenty of appropriate life and LTDI in place.

* No divorce

* Savings of ~25%/yr after you buy the house and start your new job

* No private school tuition

* No significant financial assistance for other family members

* Reasonably good health

Given the above, it appears that Dr. HT would retire with ~$5.6M in savings in 20 years.

My calculations show current living expenses are ~$138k (before the mortgage), which inflates out to ~$250k in future COL (20 yrs).

Under the 4% rule, the HTs would be able to draw ~$224k/yr from their investments.

This is not a huge concern to me because I consider the above calculations fairly conservative, but I do hope they will take notice.

My main concern is that Dr. HT takes this job and it doesn’t work out.

It’s happened, of course, and I am normally very cautious about this issue (as are our readers).

However, the HTs are moving back to familiar territory; they know the schools, the neighborhoods, the local joints, and will live near family.

I’m going to give them a pass on wanting not to rent when they move, with the understanding that they are willing to be stuck there for a few years near the grandparents if the position turns out not to be optimal.

Other than that, I don’t see any warning signals in these plans to keep me from giving a…

Xrayvsn’s Take:

I am impressed that this physician, just 2.5 years out of training, has completely vanquished all debt and put himself in a great financial position for the future and already has a net worth of nearly a third of a million dollars.

The message of “live like a resident” has apparently started to gain traction.

It is truly wonderful to see all the opportunities that now lay before this physician because of his early “front-loading” sacrifice.

Even going from a quite remarkable 35% savings rate down to the estimated 25% savings rate after home purchase still puts this doctor well on course to retire at the age of 55 with a quite healthy nest egg of $5+ million (from Johanna’s calculations above).

Johanna hits the nail on the head with her main concern (mine too) about buying a home at the beginning of a new job.

It is difficult to know if a medical practice is a good fit or not based on just a few interviews, etc.

Both parties try to be on their best behavior and put their best foot forward.

Like any relationship things may change once the “honeymoon period” is over.

Worst case scenario Dr. HT may feel trapped in a practice that is ill-suited because of home ownership.

That is why Cory Fawcett preaches to hold off buying a home right away to make sure the practice and the doctor truly fit before making the serious commitment of purchasing a home.

But as the scope of this series is geared to whether or not something can be afforded, I will remove the concern for potential medical practice discord from the equation.

The Positives:

The home price even on the high end is still less than a 1.6 multiple of first year income.
There is a large safety net available:
- With no nights or weekend clinical duties, the potential for moonlighting is available if a catastrophic financial event occurs
- Dr. HT’s wife has the potential to increase her employment hours to also aid financially if things become problematic.
LCOL geographic arbitrage at work.
No student loan debt (or any debt for that matter).

The Negatives:

529 contribution plan may be a bit optimistic and may end up requiring funding much higher than anticipated.
Unsure if any additional children will be added to the mix.
Doctor loan with 0% down has negative aspects (higher interest rate and fees (although Private Mortgage Insurance (PMI) requirement typically waived).

In the end this is a reasonable request, especially taking into account that Dr HT has previous knowledge of the area and knows what makes sense for his family in terms of fit.

The only thing that could derail the dream is that the new medical practice is not what it is cracked out to be however this risk can be minimized too by exploring other local practice groups (as long as there is no non-compete clause).

The Decision:

Johanna’s Verdict:

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Xrayvsn’s Verdict:

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