Personal Finance

I was on track to retire early, but I got saddled with debt and now I'm trying to figure out how to get back on track

Joel South

Published: February 14, 2025 10:27 am

Reddit is a funny place, an online forum apparently populated primarily by millionaires seeking free financial advice from strangers on the internet. (Hint: Never rely exclusively on advice from strangers on the internet, myself included. Whenever large dollar figures are at stake, consult a professional).

With that caveat aside, I want to introduce you to our next Reddit millionaire, we’ll call him “Joe,” and the difficult financial straits he’s gotten himself into after deciding to take out a $1.2 million loan to remodel his $5 million house.

Get to know Joe

Joe is a wealthy fellow. As he explains, between salary, rental property proceeds, and dividends on his stock investments, he earns about $500,000 a year. Add an annual bonus from his job averaging $350,000, and Joe can often take in as much as $850,000 per year, or nearly $71,000 a month, pre-tax.

Taxes, of course, are a problem. In Joe’s tax bracket, that kind of income means Joe has to hand over about one-third of his income to the IRS. In years when he earns the bonus, that means he’s taking home about $47,000 a month. In lean years, though, with no bonus, his after-tax income can fall as “low” as $27,000 a month.

And that’s what makes Joe nervous. You see, thanks largely to the $1.2 million loan he took out to remodel his mansion, plus mortgage payments on the mansion itself, and further mortgage payments on a $1.1 million vacation home, Joe is laying out $16,500 a month on debt payments. Add another $16,500 in monthly living expenses to support himself and his family, Joe’s averaging $33,000 going out the door every month.

And $33,000 is more than $27,000.

Joe’s dilemma

And so Joe has come to Reddit seeking advice. He loves his home, and wants to keep it (especially after doing the remodel that got him into this mess). But he realizes that right now, the math isn’t adding up. He’s mining the “wisdom of the crowd” to check his logic, and tell him if things really are as bad as they look, and if he needs to sell the house.

He doesn’t.

Let’s summarize where Joe’s at right now. In relevant part, his assets and liabilities include:

• A $5 million house with a $1.4 million, 2% mortgage loan attached to it (net value: $3.6 million).
• A $1.1 million vacation home that he owes $525,000 on, also costing 2% (net value: $575,000).
• Cash and stock investments (in a taxable account) totaling $1.9 million — but burdened by a $1.2 million loan that’s costing him 6.9% annually. (This is the loan he took out to pay for the remodel).
• Another $110,000 in other debt.
• Versus about $2.7 million worth of various other assets (private investments, retirement funds, 529 plans for the kids, etc.)

Joe’s immediate problem is that he’s hoping every year his bonus will come through, and none of this will be a problem. But he’s also worried that the bonus won’t come through, and he’ll bleed cash at the rate of $6,000 until things improve.

So our first step is to get rid of $6,000 in monthly costs, to return Joe to breakeven. After that, he can reevaluate his position, book a few years of bonuses, and get back on a path to a secure retirement.

What’s the easiest way to do that?

Joe’s solution

Turns out, the simplest solution is to deal with the very same loan that got Joe in this fix in the first place: The $1.2 million loan taken out against his stock portfolio. At 6.9% interest, that’s Joe’s most expensive loan. If it goes away, he’ll save nearly $83,000 a year in interest costs, which is enough to reduce his monthly outflow by $6,900 and solve the problem immediately.

Net-net, he’ll be no worse off than if he didn’t sell, because the net value of his net stock and cash reserves remains the same at about $700,000. And Joe gets to keep both houses in the process.

Granted, any stock advisor worth his salt would ordinarily tell you to hang onto your investments, “because the stock market goes up about 10% a year on average.” After inflation, though, stocks’ real appreciation is closer to 7%, only barely offsetting the interest Joe’s paying.

In this situation, Joe’s better off not investing until he’s first paid down his debt. And that’s a good lesson for all of us.