Author Topic: Mountain Man Case Study - Can I Quit?  (Read 5866 times)

Dascmo

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Mountain Man Case Study - Can I Quit?
« on: August 05, 2014, 03:39:30 PM »
Hello Mustachians,
I am a 46 year old male living in a University town in the Rockies. I have an advanced degree and have worked all my life at environmental education and field science jobs. Knowing that I have low earning power (or at least a very low tolerance for corporate-style high-wage jobs), I have always lived like a grad student, and have a wide reputation among friends as the cheapest bastard around who still gets out and has a lot of fun in the hills.

I bought a house in 2004; benefiting from the incredibly available credit at the time, a chunk of money I had saved, and some additional down-payment loans from family (now paid off). I have always had housemates living with me, now including my partner, and that has mostly paid the mortgage. Recently I have been doing more office-based NGO work that pays better and I now have more substantial savings. I was recently able to refinance the house to a 3.5% 15-year deal.

In January my mother passed away suddenly, leaving me philosophical about life's impermanence and more deeply convinced of the need to live NOW - not putting off any more of life's adventures until some pie-sky retirement day. Mom also left me with part ownership of a couple condominiums and some substantial Vanguard accounts. My brother and I will be creating a charitable donation fund in her name that will pay out $10,000 per year.

I want to be able to leave the chained-to-the-desk lifestyle I've taken up, and be able to do the kind of beneficial field work I love - when and where I want to. I also want to be able to do "work" projects that may not pay off financially, but are enriching for my community and myself, such as writing and photography.

Can I do it now? That is my question!

Here's the numbers:

Savings in bank: $35,000 and climbing
House equity: $120,000
Total value of inheritance: $430,000
(Total assets: $585,000)

Rental income annually: $10,800
Current job income AFTER taxes: $26,000

Balance of mortgage: $120,000
        (Monthly payment: $1,200)
My share of annual donations to be made in Mom's name: $5,000

Biggest annual budget for personal expenses I can imagine: $17,000.

I'd like to use my assets to pay off the mortgage, buy a rental property, and do some energy efficiency remodels to my house. I think this would result in the annual income scenario below:

Investment (at 4% return after taxes): $9,000
Rent on primary house (proven over 10 years): $10,800
Rental property (very conservative): $9,600
-50% for rental vacancy, taxes and expenses: -$10,200
Work income (after taxes): $7,800

Total of $27,000 income vs. max of $22,000 expenses. That seems to leave me a healthy margin of $5000 annually even given conservative assumptions. I'd expect to add to my savings, and eventually add rental properties (I like fixing stuff!) by borrowing against equity as time goes on to make additional rental income when I don't want to do any sort of paid work.

What am I missing or mis-calculating? Finance is not my bag, and I am slightly terrified about leaving my hard-won job for this exciting but unknown mustachian world. Thanks for any advice and ideas!

Trudie

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Re: Mountain Man Case Study - Can I Quit?
« Reply #1 on: August 05, 2014, 07:05:33 PM »
What do you plan to do about health insurance until you are Medicare-eligible?  Is this in your budget?

wtjbatman

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Re: Mountain Man Case Study - Can I Quit?
« Reply #2 on: August 06, 2014, 07:19:10 AM »
Pay out the charitable donation to yourself so you can further your philanthropic ventures.

Dascmo

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Re: Mountain Man Case Study - Can I Quit?
« Reply #3 on: August 06, 2014, 10:14:54 AM »
Trudie and wtjbatman,
Thanks for the question and advice!

I do have health insurance figured into my budget, currently at $250 per month. Hard to know how that will change given Obamacare uncertainties. If I am not working I expect that there would be some subsidies with a lower income...

My Mom's will indicated that she wanted to donate a substantial portion of her estate to charity, so I am going to do that. The funds invested toward that purpose do serve as a margin of safety for me.

Trudie

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Re: Mountain Man Case Study - Can I Quit?
« Reply #4 on: August 07, 2014, 02:09:57 PM »
I'd check on the health insurance question, since this is a big unknown.  You say you live in the Rockies... not sure if you mean Colorado,  but I'd start shopping the health insurance exchange and finding out what your options are.  You likely would qualify for subsidies.

minimustache1985

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Re: Mountain Man Case Study - Can I Quit?
« Reply #5 on: August 07, 2014, 02:26:03 PM »
Quote
Investment (at 4% return after taxes): $9,000
Rent on primary house (proven over 10 years): $10,800
Rental property (very conservative): $9,600
-50% for rental vacancy, taxes and expenses: -$10,200
Work income (after taxes): $7,800

These numbers aren't adding up for me, 4% earning 9k annually is a 225k principal balance, and I see 465k of liquid or saleable assets from the inheritance.  Once you pay off your remaining mortgage balance that leaves 345, so your rental property and improvements will only be 120k but will bring in almost as much income as your 240k (mortgage + equity) valued house?  That doesn't seem right to me, plus health insurance as others have mentioned.

I'd put some of your plan into action first (getting the now-theoretical rental, paying off the mortgage) and make a decision based on firmer numbers.  You may very well be there, but I wouldn't leap until you have those passive income streams coming in for real.

Prepube

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Re: Mountain Man Case Study - Can I Quit?
« Reply #6 on: August 07, 2014, 05:18:45 PM »
One confusing piece of this is the inheritance.  How much of it needs to be set aside ie out of your budget planning, for mom's philanthropic intentions?  How much is 'yours', and how much is, effectively still hers?

Dascmo

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Re: Mountain Man Case Study - Can I Quit?
« Reply #7 on: August 09, 2014, 06:39:21 PM »
Minimustache and Prepube,

You are right! I was keeping the house equity in the investment pool - not right. The MMM calculations including equity in worth have always confused me. Reworking this, I have about $6500 coming in as investment income, and a margin of $1,900. Still seems pretty reasonable to me. I am attaching a spreadsheet that will make clear how I have calculated things.

The amount that is "reserved for the charitable trust is $130K, and that is how I calculated the $5K annual donation for myself. The money is technically mine, but I won't use it except in emergency and will replenish it ASAP if I do use it.

Health insurance question - I live in Montana. Rates for decent plans with my current income are about $300. With lower income I figure I'll get a break. Any advice in that realm would be very welcome. (I am very healthy overall, have friends and family who are in heathcare, and work hard to stay in shape.)

Looking at my budget, I'd be shocked if I could not keep it to $14K. I don't live as large as MMM, and he's only spending $18K for three!

Thanks for all the help!

Dascmo

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Re: Mountain Man Case Study - Can I Quit?
« Reply #8 on: August 09, 2014, 06:43:08 PM »
I also wonder if it makes sense to pay off a mortgage that is such a good deal at 15 years and 3.5%. I was so excited to get that locked in!

I could invest that capital in another rental and pay the mortgage with combined rental income. Would that be a better idea? I prefer to keep things as simple as possible, but don't want to be missing big opportunities...

furrychickens

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Re: Mountain Man Case Study - Can I Quit?
« Reply #9 on: August 09, 2014, 08:28:33 PM »
I wouldn't prepay the mortgage.

Fuzz

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Re: Mountain Man Case Study - Can I Quit?
« Reply #10 on: August 10, 2014, 01:57:59 PM »
I love MT - you've got my curious as to which of the many fine college towns you call home. I always thought Dillon would be an interesting play.

Question: how interested are you in seasonal/short-term work as part of your retired life? Could you teach skiing a few days a week? Manage a property or two on the side? Teach 1-2 NOLS like summer trips? It seems like even an extra 6K in income every year would be a huge cushion for you. Also, depends on your SO. You mentioned one, but didn't say how s/he fit in.

I think your $26K after tax income per year is low enough that you could replace 1/3 that with a very, very light schedule. 

Dascmo

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Re: Mountain Man Case Study - Can I Quit?
« Reply #11 on: August 11, 2014, 12:15:25 PM »
Fuzz - I am in Western MT, near Missoula. I will definitely be teaching courses and doing other work for $6-8K of income per year.
Dillon is a fine community, I have a friend who lives there and loves it. Great mountains and very few people outside town.

GoblinChief - What would you do with that money instead?

bo_knows

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Re: Mountain Man Case Study - Can I Quit?
« Reply #12 on: August 11, 2014, 12:48:15 PM »
Complete back-of-the-napkin calculations say that if you have all of your investments properly invested and making a return that is in line with the historical stock market returns, that you'd probably be in fine shape.  ESPECIALLY if you're going to occasionally be making a few thousand dollars here and there in income, which can represent a large chunk of your required expenses.

Dascmo

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Re: Mountain Man Case Study - Can I Quit?
« Reply #13 on: August 13, 2014, 08:51:50 AM »
Thanks Bo - Does your napkin look like the csfiresim.com website in your signature line? Hope so. I checked that out and the results seem very positive, but a little challenging to interpret for the uninitiated!

bo_knows

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Re: Mountain Man Case Study - Can I Quit?
« Reply #14 on: August 13, 2014, 09:17:48 AM »
Thanks Bo - Does your napkin look like the csfiresim.com website in your signature line? Hope so. I checked that out and the results seem very positive, but a little challenging to interpret for the uninitiated!

My napkin IS cfiresim.com (that's my site). If you have any questions about how to use/interpret it, feel free to PM me.  I always like to talk about it.