Author Topic: Reader Case Study - Countdown to FI & Contingency Planning  (Read 3904 times)

EarlyQuit

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Reader Case Study - Countdown to FI & Contingency Planning
« on: August 07, 2014, 05:39:05 PM »
Hello everyone!

I have been working on my case study for a while, I think it is finally ready to be shared with you all. Really looking forward to your input and insight!
I am 34, unmarried, without children. I have been employed at a Fortune 500 company for almost 9 years. My goal is, first and foremost, to reach FI. I think it is very likely that I will RE at that point, the biggest reason being the fact that I am getting fed up with fighting for my own free time. I want to stop spending most of my waking hours working on someone else's agenda and shift the focus to things that matter more to me.
However, I do not exclude the possibility of post FIRE part-time work, especially if it is something I enjoy.

Here are the numbers:

Income   
 $73,000    - net annual take home pay after taxes, includes a variable bonus

Current Expenses (annual)   
Note: This represents last 12 months of expenses. I have made improvements in a few of these categories, and continue to tackle them one by one, so I expexct the next 12 months figure to be lower, but I am comfortable using these totals in the study to be on the conservative side

 $7,680    - Condo HOA fees. This is a very punch-worthy item, and I punch myself mentally every time I see it. Here are more details on the condo:
I bought this property out of foreclosure a few years ago for a good price. Since then, it has increased in value by more than 30% and I expect that this trend will continue. It allows me to walk to work, library, bank, grocery store, several museums and local event venues, etc. Additionally, by living so close to work I gain more time for sleep (work starts at 8, I wake up at 7), also I walk home for lunch every day, so the lunch break truly becomes MY time as opposed to eating at my desk at work. And of course I do not have to spend money on gas for commuting, and do not need to pay for parking at work.  Owning this place only makes sense while I am employed though, I would not keep it otherwise. The HOA fees are absolutely ridiculous, but I almost treat them  as a cost of having a job. In other words, I would not prefer to have $7,680 more a year at the cost of having a commute typical for the city where I live.

 $2,220    - Condo property tax (this should be going down some, as I recently qualified for a couple of exemptions)
 $524    - Condo property insurance
 $700    - Electricity
 $256    - Cell phone
 $648    - Internet
 $774    - Car Insurance
 $612    - Health Insurance (employer provided)
 $826    - Other car-related expenses (registration, repair & maintenance, gasoline)
 $45    - Subscription - Sam's club
 $960    - Pet
 $3,600    - Groceries (wow, that's a lot of eating!)
 $673    - Other shopping
 $770    - Classes (this was a one-time thing and will not continue)
 $250    - Monetary donations (trying to replace monetary with donating time & items going forward)
 $420    - Eating out & drinks
 $180    - Entertainment (tickets to events)
 $600    - Gifts
 $1,900    - Other items (emergencies, expenses on toiletries, home care / repair items, personal care items)
 $740    - Travel
$24,378    - Total personal expenses
 $13,200    - Fianncial support for parents
$37,578    - Total annual expenses
   
$35,422    - Total annual savings

Expected ER expenses (annual)   

Expenses that will go away:   
 $7,680    - Condo HOA fees. Will sell condo and buy a more reasonable house
 $612    - Health Insurance (employer provided)
 $770    - Classes
$9,062    - Total (There may be more that will discontinue, but I am comfortable stopping here)
   
 New expenses to add:    
 $3,600    - Health insurance ($300 per month estimate) I have no idea if this is reasonable?
 $2,000    - Healthcare expenses. Again, this is a complete shot in the dark. Is this reasonable for a healthy person for physicals, and maybe occasional dental work?
 $2,000    - Cushion just in case my parents will need more than what I currently provide
$7,600    - Total

$36,116    - Expected ER expenses including fin support for parents


Assets   
$183,000    - 401k
$2,500    - Roth IRA
$180,000    - Taxable investment accounts
$200,000    - Condo
$14,000    - Car (2008 Nissan Altima Coupe), value is a guesstimate
$5,000    - HSA   
$3,650    - Cash
$34,000    - Current value of company pension. I am fully vested and can take it whenever I leave. Value increases the longer I stay. For example, if I leave after I turn 40 (a little over 5 years from now), the value is $65K. (This is a conservative number, as I did not plug in any raises into the model). Edit: the value of the pension is a one time lump sum payment that I will be able to roll over to an IRA.
$622,150    - Total assets
   
Liabilities
None

Specific Questions
1. By your estimate, when will I be FI? (I have ran the numbers myself, but would like to see how similar or different the views of others are). Please assume that fin support for my parents will continue for 30 years. (It probably won't because my parents are working toward changing their circumstances, as they do not want to depend on anyone, but I prefer to plan that the support continues throughout their life time as I do not want to be in the position where I am not able to help them if needed).

2. As I mentioned, I am not married and do not have kids. I am not opposed to either, but I do not know whether either will happen. When I think about the implications of such life changes, the financial aspects send me into freaking out mode because I have no clue how to intelligently budget or make assumptions for these things. Can you offer any advice of how to approach contingency planning in this situation? I am especially concerned about planning for the possibility of having kids. I think marriage is more of a question of getting on the same page with your spouse, whereas children are truly an additional expense that needs to be factored in.

3. Any other input regarding my numbers and assumptions will be appreciated as well.


« Last Edit: August 08, 2014, 06:44:18 AM by EarlyQuit »

mozar

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Re: Reader Case Study - Countdown to FI & Contingency Planning
« Reply #1 on: August 07, 2014, 08:41:19 PM »
Back of the envelope math:
36,116 x 25=902,900
Savings: 183k+180k= 363k
Compounding calculator:
5%
35,422 a year saved
Time to fire: 8.5 years

I didn't understand the pension bit so I left it out. Does 65k mean you get that amount each year when you leave or is that total?
For contingency planning for when you want to have kids it depends on if you are working or not. Day care for first four years is about 10k to 20k a year. If you are not working, with your expected expenses, this ER date does not include kid expenses.

EarlyQuit

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Re: Reader Case Study - Countdown to FI & Contingency Planning
« Reply #2 on: August 08, 2014, 06:42:16 AM »
Back of the envelope math:
36,116 x 25=902,900
Savings: 183k+180k= 363k
Compounding calculator:
5%
35,422 a year saved
Time to fire: 8.5 years

Looks like your calculations assume that my parents will live forever, whereas in my calculations I only included 30 years of support for them, and then the expenses decrease to $20,916 annually. If I could ensure their immortality with a few extra years of work, I would! Too bad, that's not how it works...

I didn't understand the pension bit so I left it out. Does 65k mean you get that amount each year when you leave or is that total?

Haha, I wish I would get it every year, I'd be gone already! The pension amount is the value of a one time lump sum payment that I will be able to roll over to an IRA. I will edit my original post to include this detail.


lhamo

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Re: Reader Case Study - Countdown to FI & Contingency Planning
« Reply #3 on: August 08, 2014, 11:47:54 AM »
Looks like you are in a pretty good position overall.  A few points to consider:

1) Do you really need a car at this point in your life?  You are spending roughly $1600/year on it.  If your city has a car sharing service you might look into that as a cheaper alternative.

2)  If you use A/C your electric bill will likely go up considerably once you are not going to the office all day (since you are in Florida).

3)  Grocery bill can definitely be brought down considerably, especially as you already have a warehouse membership (though personally I think Costco is vastly superior to Sam's Club)

4)  You need to add something in for property taxes on the house you will move into. And what do you think you can purchase a house for -- i.e. will you be able to take some cash out of the condo sale to bump up your available cash?

5)  You should probably be maxing out your Roth before putting money into other taxable accounts.  Your contributions will be accessible to you at any time, and can serve as an emergency fund.  Not sure about putting more money into 401k -- that would get you some significant tax benefits currently, and you could always roll it over into an IRA and use 72t withdrawals to access it before standard retirement age, but many people find that troublesome.  The "backdoor roth" option that is often discussed here and on other retirement-oriented forums might also be a good option for you. 

6)  The $1900 "other" category is pretty big in relation to the rest of your budget, and too amorphous for my tastes.  I'd drill down a bit closer on that area and see if there are places you can reduce spending.

7)  Does Florida have a health care exchange?  You should be able to find out what individual health insurance costs would be based on that.  Remember that if you are living off of savings/investments (other than dividend payments), your actual income will be quite low, so your health insurance costs may also be comparably low.  I personally think your budget for health care is a bit on the high side for a young, single, healthy person, but probably better to be conservative here.  Get your dental work taken care of while you are working/insured.

Re:  The kids issue, are you at all contemplating single-parenthood?  Because if that is not something you are interested in then I don't think you really need to worry too much about a contingency plan at this point.  Presumably the relationship would come first, and discussions about kids and how to pay for them would be a part of the development of that relationship.  Your partner may well be working/wishing to continue to do so, or you could both find some kind of part time work to boost income when needed.  Kids really aren't that expensive, especially if you are living a MMM style life already.  Small paid off house in a decent (but not necessarily "top" school district), healthy diet and a good range of free activities (libraries, parks, lots of free outdoor activities). Want to pay for their college?  Go back to work for awhile.  No biggie.  You have 18 years to plan/figure out the finances. 


EarlyQuit

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Re: Reader Case Study - Countdown to FI & Contingency Planning
« Reply #4 on: August 08, 2014, 04:26:06 PM »
lhamo, thanks so much for your comments and advice. It really helps to have another person take a look at your life from another perspective. I am just going to quote your post and add my comments in a different color font:

Looks like you are in a pretty good position overall.  A few points to consider:

1) Do you really need a car at this point in your life?  You are spending roughly $1600/year on it.  If your city has a car sharing service you might look into that as a cheaper alternative.

Can I get by without a car? Probably, yes. Do I WANT to own one? Also, yes. Although I am in a unique position of living close to a lot of things, I also live in the largest (by area) city in the continental U.S., and a lot of other places are quite far. My SO lives 20 miles away. Most friends - at least 15 miles away. Also, although my office is within walking distance, the company has other buildings in the city, and sometimes (thankfully, not too often) I have to go there for meetings or special projects.
However, the car question is perfectly valid. Maybe I should look into different cars (cheaper, more efficient). And also, revisit my insurance coverage.


2)  If you use A/C your electric bill will likely go up considerably once you are not going to the office all day (since you are in Florida).
I actually do use my AC in the summer and do not turn it off when I am gone because I have a furry friend at home. My ridiculously huge condo is almost 1,500 sq ft, and my last month's electric bill was $52.

3)  Grocery bill can definitely be brought down considerably, especially as you already have a warehouse membership (though personally I think Costco is vastly superior to Sam's Club)
Agree on all points! I use Sam's because it is closer than Costco.

4)  You need to add something in for property taxes on the house you will move into. And what do you think you can purchase a house for -- i.e. will you be able to take some cash out of the condo sale to bump up your available cash?
I currently have $2,200 budgeted for property taxes, so I am assuming the same amount will cover taxes for future house. I also assume that the future house will cost approximately the same as the condo sale price. So, basically, in my assumptions I am just swapping one property and its taxes for the other, and losing the HOA fees. I do not have a mortgage on the condo.

5)  You should probably be maxing out your Roth before putting money into other taxable accounts.  Your contributions will be accessible to you at any time, and can serve as an emergency fund.  Not sure about putting more money into 401k -- that would get you some significant tax benefits currently, and you could always roll it over into an IRA and use 72t withdrawals to access it before standard retirement age, but many people find that troublesome.  The "backdoor roth" option that is often discussed here and on other retirement-oriented forums might also be a good option for you. 
I agree, and what you described is pretty much the plan. I just started contibuting to Roth last month (thanks to another thread on this forum), which is why the balance is low. But it is the 1st priority to max out before putting more into taxable accounts.

6)  The $1900 "other" category is pretty big in relation to the rest of your budget, and too amorphous for my tastes.  I'd drill down a bit closer on that area and see if there are places you can reduce spending.
Unfortunately I used to keep track of spending on too high of a level until a couple of months ago. The only things I know for sure is a little over $400 was paid for an emergency room visit for my pet and around $100 for a shower repair. I am keeping track on a much more granular level now, so I will be able to make better decisions going forward.

7)  Does Florida have a health care exchange?  You should be able to find out what individual health insurance costs would be based on that.  Remember that if you are living off of savings/investments (other than dividend payments), your actual income will be quite low, so your health insurance costs may also be comparably low.  I personally think your budget for health care is a bit on the high side for a young, single, healthy person, but probably better to be conservative here.  Get your dental work taken care of while you are working/insured.
I will look into the health care exchange.

Re:  The kids issue, are you at all contemplating single-parenthood?  Not really... or at least not on purpose! My biological clock is kind of broken, and I do not get the "must have children" feeling like many others do. My SO wants kids, although we are not at that stage in the relationship right now to be seriously planning for something like this.
Because if that is not something you are interested in then I don't think you really need to worry too much about a contingency plan at this point.  Presumably the relationship would come first, and discussions about kids and how to pay for them would be a part of the development of that relationship.  Your partner may well be working/wishing to continue to do so, or you could both find some kind of part time work to boost income when needed.  Kids really aren't that expensive, especially if you are living a MMM style life already.  Small paid off house in a decent (but not necessarily "top" school district), healthy diet and a good range of free activities (libraries, parks, lots of free outdoor activities). Want to pay for their college?  Go back to work for awhile.  No biggie.  You have 18 years to plan/figure out the finances. Thanks, this perspective is very helpful.

mozar

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Re: Reader Case Study - Countdown to FI & Contingency Planning
« Reply #5 on: August 08, 2014, 06:06:57 PM »
I would save up the 900k, and once they die you could have a significant buffer. If you are paying 13k for your parents now their costs are probably going to go up. In home care was 20k for my grandmother.

My bare bones expenses are 19k. I am guessing if I were to have a kid as a single parent I would budget 5k a year with a 3k tax deduction, so 2k out of pocket at the end of the year. That's 24k upfront. So my target amount is 600k. I plan to work while that kid is in child care which means about 20k a year by itself. This lengthens my time to FI by about 2 years. 24k is expenses after FIRE.

I'm only raising my kid for 18 years. My mortgage for 30 yrs. So yes expenses will go down eventually, but once you subtract this and add that and start calculating a bunch of variables that I can't control I figure it all comes out the same. I'd rather overshoot anyway.

Also if you are only having kids if your SO wants them then expenses will be split with them. Would they move in with you? Can you get a roommate in the mean time? I am assuming your SO is younger than you and wants to carry? Otherwise you might be dealing with very expensive fertility treatments or adoption fees in your future.

EarlyQuit

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Re: Reader Case Study - Countdown to FI & Contingency Planning
« Reply #6 on: August 08, 2014, 07:44:30 PM »

I would save up the 900k, and once they die you could have a significant buffer. If you are paying 13k for your parents now their costs are probably going to go up. In home care was 20k for my grandmother.


Also if you are only having kids if your SO wants them then expenses will be split with them. Would they move in with you? Can you get a roommate in the mean time? I am assuming your SO is younger than you and wants to carry? Otherwise you might be dealing with very expensive fertility treatments or adoption fees in your future.

My parents live outside of the U.S., so the costs are completely different than here. But the buffer idea is good either way.

As far as children, I am a woman, actually :)
Both SO and I come from families that had kids in their 30s without fertility treatments or any other issues. My take on it is if it happens naturally, great, if not, then I would probably not go for any treatments or adoption.
Since the children discussion is purely theoretical at the moment, I am inclined to stop worrying about it right now as another poster above suggested and concentrate on issues that are more tangible at the moment.

Cheddar Stacker

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Re: Reader Case Study - Countdown to FI & Contingency Planning
« Reply #7 on: August 08, 2014, 08:15:12 PM »
You mentioned being open to working after FIRE. I see that as your way out.

Your current net worth, if fully invested, supports about $24k swr. That's roughly your current and fire expense load. The only reason you still need to work at all is to support your parents. Work another year for safety margin, then checkout and find some part time work you enjoy to support your parents.

mozar

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Re: Reader Case Study - Countdown to FI & Contingency Planning
« Reply #8 on: August 09, 2014, 11:23:23 AM »
Yes, I know you are a woman, but you didn't say if your SO is a woman or a man, and I didn't want to assume. If your SO definitly wants kids and expects you to carry, and you are not interested in fertility treatments or adoption, its better to have that conversation sooner than later. If your SO was indifferent too then I wouldn't worry about. But you dont have all the time in the world to carry. My family members had kids in their late thirties and early forties too, but I am not them.

EarlyQuit

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Re: Reader Case Study - Countdown to FI & Contingency Planning
« Reply #9 on: August 10, 2014, 08:08:14 AM »
You mentioned being open to working after FIRE. I see that as your way out.

Your current net worth, if fully invested, supports about $24k swr. That's roughly your current and fire expense load. The only reason you still need to work at all is to support your parents. Work another year for safety margin, then checkout and find some part time work you enjoy to support your parents.

Cheddar, thanks for such an optimistic and courageous outlook! In your scenario, are you assuming that I would invest the money from the sale of the property, and have a mortgage on the next house? Do I understand that correctly?

Also, off topic, but I've read some of your posts in other threads, and every time I see your avatar I have to fight the urge to go and get a snack! Love cheese... can eat it by the pound! :)

Cheddar Stacker

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Re: Reader Case Study - Countdown to FI & Contingency Planning
« Reply #10 on: August 10, 2014, 10:54:41 AM »
You mentioned being open to working after FIRE. I see that as your way out.

Your current net worth, if fully invested, supports about $24k swr. That's roughly your current and fire expense load. The only reason you still need to work at all is to support your parents. Work another year for safety margin, then checkout and find some part time work you enjoy to support your parents.

Cheddar, thanks for such an optimistic and courageous outlook! In your scenario, are you assuming that I would invest the money from the sale of the property, and have a mortgage on the next house? Do I understand that correctly?

Also, off topic, but I've read some of your posts in other threads, and every time I see your avatar I have to fight the urge to go and get a snack! Love cheese... can eat it by the pound! :)

Its up to you on how to implement, but that could work. Mortgage rates are super low still. I rounded down to $600k so you have some wiggle room. Plus after 1 more year of work you would have another $30k or more depending on savings rates/market returns. That should give you a nice down payment.

On the cheese front, my journal has accidently become a place to discuss your favorite cheeses so feel free to chime in.

feelingroovy

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Re: Reader Case Study - Countdown to FI & Contingency Planning
« Reply #11 on: August 12, 2014, 03:44:47 PM »
The only problem with counting the $200k equity in the house as an income-producing asset is that if you do invest it, you'll need to now pay a mortgage, which will increase expenses.

So based on the assumption that the only income producing assets are the 401k, the roth, the taxable, and the pension (at its current value), I put your total income producing assets at just shy of $400k.

This is still good news, because 4% of that is $16k, which is nearly there to your own expenses (not including parents).  So if you still went with Cheddar's strategy of a part-time job to cover those, you're very close.

Close enough that if you could change that $200k to an income-producing asset, by say, buying a duplex instead of a single family house when you sell the condo or rent out a room in your new house, you're already FI.

My assumptions:

4% withdrawal produces $16000
Rental profits $7200

Expenses without parental support based on what you said: $20,916

If you didn't want to use either of those strategies, I'm also coming out with 9 years. :)