Author Topic: Case Study--Close to FI  (Read 5417 times)

Nicodemus

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Case Study--Close to FI
« on: February 14, 2015, 09:07:17 AM »
I would like to pursue interests that do not involve money.  I have done well in my career and now the question is when to change gears.  I think I am close but I'd be interested in reactions.  One key point is that I don't want to have to spend time thinking about money after retiring, except perhaps voluntarily devoting a bit of time to researching stocks, since I find that interesting to a degree and have some training and experience in that area.  Some background--

Context:   I live in a high priced area in the Northeast.  My house is modest but expensive because of the area (2500 sq ft, $800k). I have a 500k mortgage at about 3%.   I own two modest smallish cars (~6 years old, paid ~20k for each used a few years back).  I have two young children and a wife that is not currently working but plans to go back to work in a few years.  She would probably earn 50k-75k per year in her profession.

Spending: We spend 120k or so per year in expenses, which breaks down roughly as follows--house related (40k), day care two days a week for 2 year old plus miscellaneous babysitting (20k), health insurance premiums plus out of pocket (20k), food (15k), car related (10k), other (15k).  House related include prop taxes, mortgage interest, utilities, repairs, lawn service etc but not principal paydown.  Other includes vacation, charity, clothes, blah blah blah.  I think if I wasn't working I could relatively easily lower total costs to 100k per year without moving based on doing my own lawn, less babysitting, smarter food purchasing, etc).  The health plan is a high deductible—it can probably be lowered about 5k with some research etc. but I don't think it can be lowered as much as in some other parts of the country. 

Assets:   I've saved about $3m net worth, including say 300k in house equity, 700k in retirement accounts (includes stocks and bonds), a few hundred k in cash, and the rest in a diversified portfolio of mostly stocks (very diversified by market cap, industry, geography, etc with a focus on dividend payers).  I have a tilt towards international stocks on the basis of valuation.  FX exposure on my total net worth is somewhere between 30 - 40% because of that but I am not levered to any particular currency.  Taxable accounts currently pay dividends of roughly 50k per year in cash.

More context:  I am in my late 30's.  My tentative goal is to retire at 40 or so.  I think I could probably quit today but a few more years seems prudent, especially given my desire not to spend time on money and the seeming near term potential for a market meltdown that could go global.  A repeat of valuation levels from 2008 doesn't seem likely but it is probably worth continuing to earn for a few more years.  I may move to a cheaper area after retiring but that will depend on my wife.  If we lived in a walkable place we could go down to one car.  All of my interests and hobbies are cheap (e.g. reading) although it might be fun to take the family overseas for a month or two in a few years (but probably like 5 years or so when the kids can appreciate it).  Otherwise road trips are good and the occasional cross country flight to visit relatives (say once a year).  My wife is like minded.    After quitting I'll probably need a few months or more to decompress from many years of hard labor but I don't think even when I decompress I'll want to pursue income producing work.  I don't plan to sit around--I just plan to pursue things that are unlikely to generate significant income (e.g, creative endeavors untethered from capitalism).  My current income is high by most standards.  Every year I work adds significantly to my asset base. 

Questions:  I'd love to lower my expenses--it seems embarrassing that my costs are so much higher than MMM's and yet I'm not really buying anything except food, shelter, and the occasional break from one or both kids for my wife.  I have way less in terms of material goods than other folks in the neighborhood because I just don't care about having a fancy car etc.  And I generally feel quite blessed.  But I'd be interested in reactions.  Is my expense situation just a natural outgrowth of living in a high cost area?  Do I have clown like spending habits?  Does my retirement plan seem "about right" based on what I've outlined here?  Am I a crazy person?  This is my first post here--be kind and brutally honest. 

Cheers, -Nicodemus

humblefi

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Re: Case Study--Close to FI
« Reply #1 on: February 14, 2015, 09:49:10 AM »
Congrats on a very sound financial situation! It takes hard work to get here and looks like you have paid your dues. Enjoy the freedom!

I will mention a couple things I did not see in your list of expenses:
+ A college fund for your kids
+ A medical fund for both of you.
+ Life insurance...probably not needed at your level of savings, but if you are healthy and can get a good policy, worth exploring since your kids are still young.
+ Umbrella insurance...since you are high worth.

Spending wise, since I live in a HCOL area as well, the only thing that jumps out at me is the $20K day care+baby sitting expense. When I sent my kid for 5 full days to an expensive day care with 1:4 ratio, food included, etc etc, it cost me close to $20K. So, in your case $20K seems high to me.

Assuming you live until 90, you have a minimum of 50yrs of retirement left. You are getting appx 50K a year in dividends. So assuming that you will need appx $100K a year in retirement for the next 50 years && you get 50K per year via dividends, you are left with generating $50K a year through some other income stream. I would think about ways to generate an additional $50K per year in income without working....it could be withdrawing assets at some rate, rental income, etc.

Since most of your assets are in stocks, a diversification into another type of income stream seems safe.....if that is done, then you retirement is super solid :-)

Hope that helps. Have a wonderful early retirement.

Retired To Win

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Re: Case Study--Close to FI
« Reply #2 on: February 14, 2015, 10:34:41 AM »
... I've saved about $3M net worth, including say 300k in house equity, 700k in retirement accounts (includes stocks and bonds), a few hundred k in cash, and the rest in a diversified portfolio of mostly stocks (very diversified by market cap, industry, geography, etc with a focus on dividend payers)...  Taxable accounts currently pay dividends of roughly 50k per year in cash

Not counting your house equity, you have $2.7M in cash and investments.  At a 4% withdrawal rate, that works out to $108,000 a year "safe withdrawal rate" for a plus-or-minus 30-year time frame.  So, even with that big a stash, you are falling short IF you go on the basis of a $120K annual budget.

Obvious solution is to lower your annual spending below $100,000.  "Obvious" way to do that (to me) is to sell the house, take the $300K equity from the sale and MOVE to a Reasonable Cost of Living Area where the $300K can pretty much get you an equivalent house to what you have now.  And Bam! You have FIRE'd.

Good luck.

P.S. -- Once you have FIRE'd, you will most likely also be able to ditch the day care.  And there's another $20K a year you can keep in your pocket.

2Birds1Stone

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Re: Case Study--Close to FI
« Reply #3 on: February 14, 2015, 10:41:38 AM »
With those assets I would pull the plug soon.

If you can downsize the house a 3.5% draw rate puts you at $100,000 per year, if the wife rejoins the workforce its a no brainer. I bet your expenses will drop further once the kids start school.

You can afford your freedom already, "one more year syndrome" is very real and you can always justify another year spent working.

NathanDrake

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Re: Case Study--Close to FI
« Reply #4 on: February 14, 2015, 11:25:41 AM »
How did you accumulate that much by your late 30s?

Nicodemus

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Re: Case Study--Close to FI
« Reply #5 on: February 14, 2015, 11:43:15 AM »
Thanks for the feedback, folks.  The responses so far generally confirm my sense of where I am at.  When I retire I think I can cut back costs but I also don't want to make cutting costs my new job.  So there's a balance to be had.  It would certainly be wonderful if I am able to move to a lower cost area and really cut back the costs. 

Someone asked how I accumulated the stash.  There's no magic answer--I started working right out of college in the financial services industry and spent many years working a very large number of hours per week for a fairly average wage.  Through a combination of hard work, ability, and luck I grew my income to a rather high, and certainly well above average level by the time I was in my early to mid 30's.  I've always lived off a small percentage of my income and saved a lot.  For instance, I've always tried to keep housing at less than 10% of my gross salary.  When I was younger and made less money I lived in small apartments or parts of apartments in not-the-best parts of town.  Finally, I've invested everything I save in stocks and bonds, including through the 2008 - 2010 crisis period.  So I have large unrealized gains on stocks and bonds.  I will also tell you my career path involved opportunistically moving to several different parts of the country over the course of my career--I didn't stay in one spot. 

I will say that getting married and having kids increased my cost structure dramatically.  But by the time that happened I had already climbed up the corporate ladder so much that my ratio of savings to income was not impacted.  That's the back story.  The hard work is not all bad--I'm just not sure continuing to do it forever would be the most satisfying thing, especially as my kids start to get older etc. 

Retire-Canada

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Re: Case Study--Close to FI
« Reply #6 on: February 14, 2015, 12:17:18 PM »
Thanks for the feedback, folks.  The responses so far generally confirm my sense of where I am at.  When I retire I think I can cut back costs but I also don't want to make cutting costs my new job.  So there's a balance to be had.  It would certainly be wonderful if I am able to move to a lower cost area and really cut back the costs. 

You have to ask yourself..."Would I rather stop working today if I was willing to move and cut some costs or would I rather work more and not change anything about my life?".

If your wife can make $50K-$75K/yr and wants to work there is really no point you working any further unless you love doing it everyday.

As for making cost cutting your job. I went through that process recently and it took me a month to complete [ie. make significant gains] while working full-time. If I was FI I'd expect to spend 1 day/month thinking about it and getting good results. I wouldn't call that a job.

Congrats on getting some impressive savings/investment results!

-- Vik


NathanDrake

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Re: Case Study--Close to FI
« Reply #7 on: February 14, 2015, 12:56:10 PM »
Sounds like Financial Services is the place to go these days....only industry that actually rewards hard work it seems.

Yankuba

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Re: Case Study--Close to FI
« Reply #8 on: February 14, 2015, 01:14:03 PM »
Sounds like Financial Services is the place to go these days....only industry that actually rewards hard work it seems.

It rewards you if you generate revenues for the firm. Hard work and long hours alone won't get you anything and you have to check your ethics and politics at the door.

Nicodemus

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Re: Case Study--Close to FI
« Reply #9 on: February 14, 2015, 02:07:45 PM »
I wasn't aiming to make this a discussion about choice of profession but I'm happy to share my personal experience.  "Financial services" is an umbrella term.  I do not work in investment banking or any kind of sales role.  Nor do I work for a bank.  But yes, many of the folks in my high cost of living area work in finance, law, medicine, or consulting; those terms being broadly defined.  Relative to checking ethics at the door, that has never been my approach.  I have a number of scars to show for that--I always try to do the right thing even when that means going into battle with tough opponents.  The effect of those scars and the long hours may be why I'm aiming to switch gears sometime soon and pursue my other passions. 

I certainly agree this country spends too much money on high finance--my personal investments are in low cost index funds like vanguard.  I'd also mention I sort of fell into what I do--I don't have any graduate degrees or special training.  A job came up in the particular niche I ended up in after I got my undergrad during a hot economy in the 1990's so I squeezed my way in the door at my original employer--they probably wouldn't have taken a guy like me during ordinary times.  It's been a long road from there.  Overall, I feel good about the work I've done--but none of it's been easy and a lot of it has involved long hours, tight deadlines, and situations in which one had to deliver bad news / stick to one's guns.

2Birds1Stone

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Re: Case Study--Close to FI
« Reply #10 on: February 14, 2015, 03:46:13 PM »
It is nice to see when hard work pays off!

rmendpara

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Re: Case Study--Close to FI
« Reply #11 on: February 14, 2015, 08:54:23 PM »
Half of your annual budget goes toward housing and babysitting. Within 3 years, the babysitting will be far lower, perhaps just 1-2k per year assuming you pay someone to watch your kids while you and the wife go out or something. Moving elsewhere would be the easiest way to unlock a fair amount of equity or just lower the amount you have in housing. You could also just sell the house and rent for a few years in a new place to see if you'll like it.

Regardless, a 120k budget at ~4% would require around 3 million invested assets. If you drop down to a planned 3% withdrawal, that could give you a reasonable 80k income, which leaves you to make up the 40k somehow.

Few ideas, and you don't have to only do one:
- Work for another few years and continue to invest
- Have the wife go back to work which would likely easily clear 50k
- Move to a lower cost area and your budget would likely be a lot lower anyway (mostly from savings on housing)

Either one, or a combination of partial ones, should likely get you there.

Ricky

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Re: Case Study--Close to FI
« Reply #12 on: February 14, 2015, 09:35:01 PM »
Put the $200k towards your mortgage, then work until the remaining $300k is paid for, putting everything toward it. Boom, retired. You'd draw $100k @ 4% and only spend $60k a year for the essentials. And I'm betting that $60k will become more like $50k once you have all the time in the world to explore your city more and learn to cook (more efficiently). I haven't even accounted for the likely savings in the car department.

By the way, how exactly are you spending $96 in auto costs per car per week? Super long commute or?
« Last Edit: February 14, 2015, 09:45:24 PM by Ricky »

theonethatgotaway

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Re: Case Study--Close to FI
« Reply #13 on: February 14, 2015, 10:05:26 PM »
Are you in the annuities business?

I know quite a few that break 3-400k a year. It takes a certain skill set, but the rate of climb is fast and high. They are late 20s right now.

If not, another insurance?


Nicodemus

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Re: Case Study--Close to FI
« Reply #14 on: February 15, 2015, 11:28:33 AM »
Thanks, folks.  This has inspired me to go back and sharpen the pencil.  My car cost was probably a bit high in the estimate, but my spending on various other expenses is a bit low--it balances out.  I think the ideas in the replies are spot on.  My math suggests that I could get my expenses down to 80k in my current neighborhood if I devoted the next couple years to paying down the mortgage and cleaning up needless spending.  Even better would be moving to a lower cost area when my wife decides to go back to work--and getting base costs down into the 60k range--but I don't want to bank on that until it happens.  So my basic plan is to work a couple more years and then go where my wife lands a job.  At that point I'll become the crazy stay at home dad.  I'll also work on cutting some costs now to smooth the transition... but first need to survive another few months of two kids in diapers!  Thanks for the great suggestions.

yoga mama

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Re: Case Study--Close to FI
« Reply #15 on: February 16, 2015, 09:31:03 PM »
I am about to have 3 kids in diapers so I feel your pain there.  I recommend you look into other areas of the country to live in, since it sounds like you aren't particularly attached to your current area.  The medical costs seem really high, and along with housing costs, could be greatly reduced if you moved to a lower cost of living area.  In addition, as you mentioned, land in a walkable area and reduce costs even further.  You haven't mentioned your parents or the relationship there, but do they live in an area that meets the above criteria?  Boom, free babysitting, and you're cutting costs even more.  It sounds like you've always been very frugal and I don't believe that cutting costs will be that difficult or time consuming for you.  Unless you love your job, set a quit date and start planning!  I'm jealous!  And congratulations on working so hard and making smart choices!