Author Topic: Update: decided on severance  (Read 1522 times)

newone

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Update: decided on severance
« on: October 04, 2018, 11:50:11 PM »
I'm posting under a new account to maintain anonymity. I would like to get some input from this smart group of people since I'm definitely not a math wiz and need some outsider perspective.

Iím in my early 40ís, single, live in SF Bay Area, and I have a big decision to make in the coming weeks.  I have a well-paid, cushy position at megacorp, but my department is going through a re-org and Iíve persuaded my interim manager to lay me off since Iím not overly keen on new leadership, change in scope for my role and generally tired of the corporate BS.  Iíve been with the company over 15 years so my severance package will be a generous ~200k to 215k before tax.   

While this chunk of money gets me closer to my FIRE goal, the reality of a layoff is scary. Iíve not had to look for a job in a long time and while Iím valued within my department, Iím not well networked and not good at interviews.  As an alternative, I have an option to stay with the company working for a former manager in a different department who wants to hire me into a similar role. 

Financial Summary:
401k: 696k
Taxable: 265k
Roth IRA: 39k
Home Equity: ~450k (Mortgage balance 409k, annual expense 39,600, rate 2.875%, maturity date 7/2031)
Planned FIRE expenses: 40-45k annually and paid off mortgage

Questions:

1. Take severance or not?
Option A Ė take severance and find a new job or consulting gig for a couple of years until FIRE.  Risks Ė it may take me a long time to find a job/gig eating up my severance money; the grass is not greener (ie similar corporate crap with less pay, benefits and/or a lot less cushy)
Option B Ė take position with former manager.  Downside Ė forfeit severance so longer time before FIRE; same corporate BS

2. I have estimated that with my current stache, current annual savings (86k) and a return of 5%, Iíd have enough to pay off my mortgage and FIRE in ~March 2021.  Does this sound right?  Any suggestions on how to calculate the impact of the severance on time to FIRE given the unknown time to find a new job and salary amount?

3. I think social security will still be around in the future, but haven't factored it into my FIRE calculations.  Should I factor it in, and if so how much?  Using the ss calculator I came up with a rough estimate of ~18,700 annually if I take it at age 62, or ~25k annually if I delay until age 67.

4. My FIRE expenses of 40-45k includes a placeholder of 9,600 for medical, but this is a shot in the dark due to political uncertainty.  How are others estimating this future cost?

5. Payoff mortgage at time of FIRE or not?  If I donít pay off mortgage early how do I calculate the amount I need in stache to cover it since this additional annual expense would only occur until 2031 vs the entirety of retirement?

Thank you!
« Last Edit: December 04, 2018, 09:09:21 PM by newone »

MDM

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Re: Math help & opinions needed: take severance or not
« Reply #1 on: October 05, 2018, 06:05:18 AM »
1. Option B, primarily due to your uncertainty about finding another job.
2. Might be closer to 3 years than 2.5, but it's in the ballpark (assuming all the assumptions).  With unknowns, time to FIRE is also unknown.
3. SS benefit estimates are plausible if you have been earning the SS maximum for ~20 years.  Hard to imagine SS not being around, but the exact dollar amount...?
4. Can't help here.
5. Stache needed = (non-mortgage expenses) * 25 + mortgage balance.  Note that property tax and insurance are non-mortgage expenses.

jlcnuke

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Re: Math help & opinions needed: take severance or not
« Reply #2 on: October 05, 2018, 07:05:27 AM »
Option C, look for a job while you have this offer on the table, get a position = take severance. Don't find anything, go with option B to keep the income coming in.

newone

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Re: Math help & opinions needed: take severance or not
« Reply #3 on: October 07, 2018, 04:13:09 PM »
Thanks for the replies.

Unfortunately, jlcnuke's option C isn't feasible due to timing.  The other job will be filled quickly this year and the severance date isn't until March 2019, so finding an external job this year would also forfeit severance.

A clarifying question for MDM's response to #5. I'm probably not thinking about this correctly, but if I FIRE in March 2021 with a stache of 1 million + 336 (mortgage balance at that time), then withdrawing 80k would be closer to 6% until loan maturity 10 years later.  Would this higher withdrawal rate jeopardize retirement in the long run?

My underlying dilemma is that I want to FIRE now, but the finances aren't there yet, so I'm looking for the shortest time possible without too much risk.

Thanks.

MaybeBabyMustache

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Re: Math help & opinions needed: take severance or not
« Reply #4 on: October 07, 2018, 04:31:33 PM »
Can you give more details on this part:  "Iíve not had to look for a job in a long time and while Iím valued within my department, Iím not well networked and not good at interviews."

How bad are we talking? Do you get cold calls from recruiters, or reach outs vs LinkedIn? How competitive is the field you are in? How desirable is the company you are currently working for? How good will it look on a resume?

It would be hard for me to turn down the severance in your position, but I'd want to understand more details on the above to better understand how long it will realistically take you to find a new role at or around the same pay rate.

Can you also clarify whether your severance will include any medical coverage for you and your family?

MDM

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Re: Math help & opinions needed: take severance or not
« Reply #5 on: October 07, 2018, 04:32:56 PM »
A clarifying question for MDM's response to #5. I'm probably not thinking about this correctly, but if I FIRE in March 2021 with a stache of 1 million + 336 (mortgage balance at that time), then withdrawing 80k would be closer to 6% until loan maturity 10 years later.  Would this higher withdrawal rate jeopardize retirement in the long run?
But then only 3% after that (not counting SS).  Mortgage payments are not "expenses" by the Bengen/Trinity Study definition because
- they stop
- they don't increase with inflation.

No guarantees with any of this, but separating "ongoing, rising with inflation" expenses from the mortgage is not unreasonable.

rws

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Re: Math help & opinions needed: take severance or not
« Reply #6 on: October 10, 2018, 02:53:35 PM »
Are you willing to move out of the SF Bay area?

If so, could you use the severance and proceeds from sale of your current property to buy a less expensive home in a lower col area and have no (or very little) mortgage, then have the freedom to to take a job with lower pay and still FIRE on time? Or perhaps find a different type of work you might enjoy?

I don't think you mentioned what type of work you do. If it's in tech, how hard would it be to find another job with a smaller company / less corporate bs in another city?

SKL-HOU

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Re: Math help & opinions needed: take severance or not
« Reply #7 on: October 10, 2018, 07:31:41 PM »
The equity you have in your home is enough to buy a great house with cash in a lot of places. If you are not specifically tied to your current area, take the severence, move and FIRE!

civil4life

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Re: Math help & opinions needed: take severance or not
« Reply #8 on: October 12, 2018, 04:02:55 PM »
Let me make sure I understand your current situation.

You have $1.0M in Assets besides the home.
You are currently saving $86k a year.

In March of 2019 you will receive a severance of $200k plus have saved another $40k in regular savings.  Then you are at $1.2M.

With $1.2M you have a 4% withdraw rate of $48k/year.  Your current $40 to $45k includes $9.6k + you still have the mortgage expense.

If you wait until March 2021 and take the other job, I am assuming you are making the same amount without raise involved, you would have your current $1M + $40k + $86k + $86k = $1.2M saved of course not counting the interest you would have earned.

In a very simplistic look you will have the same worth in 2.5 years, but working those 2 years.

Is really worth staying in the rat race for the 2 years to really not put yourself much farther ahead?

With a 2.875% interest rate it is really not a great idea to throw all the money onto your mortgage just to pay it off.

You are very close if not there with the numbers you have to FIRE with the severance. 

If it were me I would take the severance.  Take some time off to decompress.  Access what its like feels like to relax and be out of the corporate BS.  If you still need to work a few more years jump back in.

letired

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Re: Math help & opinions needed: take severance or not
« Reply #9 on: October 12, 2018, 06:19:05 PM »
Option D: Start networking/letting it be known that you are looking for work starting in Q2 2019? Nearly 6 months seems like plenty of time to warm up a network such that it shouldn't take that long once you're 'officially' looking.

newone

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Re: Math help & opinions needed: take severance or not
« Reply #10 on: December 04, 2018, 09:07:32 PM »
Update:  I decided to take the severance.  My actual severance date turned out to be July 2019.  This means I'll get a full bonus for 2018 (paid in 2019) so can fully fund my backdoor Roth IRA and 401k before I leave.  Thanks for the additional replies and suggestions. In response:

MDM: I've started working with the CashFlow worksheet (thanks for this helpful tool!) and my updated ss estimate at age 62 is $19,692 or 27,972 at age 67, so if policy doesn't change too drastically that gives me an extra safety net.

Civil4life: I came to the same conclusion and decided not to pay off the mortgage immediately, instead will let the stache grow. I'm not quite at the final FIRE number yet, but getting closer (see current summary below).

SKL-HOU and RWS: I've considered moving to a LCOL to speed up FIRE, but for several reasons have decided I want to stay at this point. 

MaybeBabyMustache & letired: My company is well known and desirable in the industry. I've just joined LinkedIn/starting to build my profile, so haven't had recruiters calling me yet. My employer is providing job placement support so that should help me improve my job hunting skills.  I'll also leave with some good references from management/colleagues, and I do have a nice lead-in time to start building my network.  And yes re healthcare, 4 additional months of Cobra is covered (just me, I have no dependents on my healthplan).

I've rationalized that even if I don't find a job with the same high salary, I'm willing to take the gamble that I will find enough income to shore up the extra needed to get me past the goal line.  My stretch goal is to Fire March 2020 (or sooner!).  This also depends on the market, as investments are down from my original post.
Current Financial Summary:
401k: 696k 650k
Taxable: 265k 250k
Roth IRA: 39k 37k
Home Equity: ~450k (Mortgage balance 409k, annual expense 39,600, rate 2.875%, maturity date 7/2031) July 2019 Balance will be ~388k
Planned FIRE expenses: 40-45k annually and paid off mortgage plus mortgage until maturity
2019 (Jan - Jun) Savings: 70k (19k 401k + 6k backdoor roth + ~22k employer match/contribution + 23k taxable)
Severance: 194k (after tax ~116k) (a bit lower than original estimate because it's prorated for half a year, also tax withheld will be ~40%(?) because it is paid as lump sum)
« Last Edit: December 04, 2018, 09:27:19 PM by newone »

MDM

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Re: Math help & opinions needed: take severance or not
« Reply #11 on: December 04, 2018, 11:16:35 PM »
Severance: 194k (after tax ~116k) (a bit lower than original estimate because it's prorated for half a year, also tax withheld will be ~40%(?) because it is paid as lump sum)
Note that "tax withheld" is not necessarily the same as "tax due".  One has to add all income sources for the year and run that sum through a tax calculation to find total tax due.

BicycleB

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Re: Update: decided on severance
« Reply #12 on: December 05, 2018, 08:48:40 AM »
Congratulations on deciding. I concur strongly with keeping the mortgage. Good luck on finding your next position!

affordablehousing

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Re: Update: decided on severance
« Reply #13 on: December 05, 2018, 11:41:07 AM »
I think you don't even see the issue coming at you. In this market you're going to be hired in a week and you'll realize you spent no time relaxing, going on vacation, or soul searching about what you want to do. Perhaps I have too much confidence in you but I've seen a lot of introverts get laid off and hired before they even deposited the severance checks.

letired

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Re: Update: decided on severance
« Reply #14 on: December 05, 2018, 11:54:57 AM »
That seems like a very sensible plan! The nice part about being that close to your 'number' is it gives you a ton of flexibility about what you want to prioritize in your next job!

robartsd

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Re: Update: decided on severance
« Reply #15 on: December 05, 2018, 12:03:46 PM »
Based on the numbers from your original post, you could just leave to FIRE if willing to move to a 325k home (not bad in LCOL area). It looks like in July you should have all the investments you need for your mortgage free spending level, but still need to pay off 388k mortgage. At that point you could move to any home that you could purchase with the equity you currently have (about 480k at that point) and FIRE.

Car Jack

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Re: Update: decided on severance
« Reply #16 on: December 05, 2018, 12:44:15 PM »
A month in Aruba sounds like a good idea to me.  There's an inexpensive place my parents used to stay at when flights were cheap 3 or 4 days before their time share week opened.  I think it was something like Econo Lodge.  You can go anywhere in Aruba with the bus system.  Heck...rent a quad for a day, a jeep for a day.

newone

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Re: Update: decided on severance
« Reply #17 on: December 05, 2018, 12:56:40 PM »
Thanks for the encouragement.   Luckily I will have some time off.  I'm in the "pre-notice" period now.  Official notice starts in May, and I won't have to work between May and July (my official termination date).  I'll get a chance to decompress for a couple months and can use that time to figure out what I want to do next & start the job hunt.