Author Topic: Be Cautious or FIRE?  (Read 1749 times)

Mrs. Healthywealth

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Be Cautious or FIRE?
« on: January 10, 2021, 09:25:42 PM »
Hi all
Want to know if we are being appropriately cautious or if we should FIRE. We sold our home and are living rent free to help a parent-77 y/o; when I say elderly, she got Covid and seemed to have the most energy in the house, so not fragile. But, one concern for when she dies we will need to pay for housing again. This unknown is what makes me nervous to wit my job.

Hereís what our situation looks like:
We are in our early 40ís w/ 2 kids in elementary school.

Current gross combined income: $195,000
Rental income: current-$32,400. By summer: $82,000 (in process of purchasing several more rentals).

84% of health insurance covered. If I work till Jan 2025, then itís 100% covered.

Checking acct-$310,000 (net proceeds from selling hm and regular savings)-all going towards purchasing additional rentals.

Investments
457b: $261,000
Rollover IRA: $110000
ROTH: $60,000
401k: $27,000
403b: $2000
Total: $460,000 @ SWR of 3.5%= $16,100

Total passive income from rentals and stocks/bonds by end of 2021= $100,000
Spouse income for next 2 yrs (Sheís not ready to RE)= $40,000 to $60,000
Pension w/ COLA  starting at 55 y/o= $25,000
SS income at 67y/o-$14,000

Expenses:
$2700/mos Base expenses
$900/mos to pay all utilities, house cleaning, etc. This non-negotiable, itís our way of helping out since we arenít paying rent.
$700 for health insurance for 12yrs; at 55y/o insurance goes down to $200, but Iíll stick with the higher number in calculations.

Current total expenses minus insurance: $3600. Add in 20% for taxes, 20% buffer and $700 for health insurance =$5900/mos or $70,800

If parent dies, want to have $3500-$4000 for living expenses, itís a HCOL area. If this happens then total expenses- $6700/mos; add in 20% taxes, 20% buffer, and $700 health insurance = $10,250/mos or $123,000/yr

Hereís where we might be overkilling it: If parent dies we will most likely inherit $300,000-$450,000. This will allow for down payment on home, adding to investments, or paying for housing for the years prior to pension kicking in.
The years we have financial excess, we will continue to invest.
Just feeling anxious and want to make sure Iím not overlooking something. So what do you think can we FIRE?



NonprofitER

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Re: Be Cautious or FIRE?
« Reply #1 on: January 11, 2021, 08:47:50 AM »
You've done an awesome job saving and investing - congratulations!

My follow up question is what do you think your FIRE expenses will be (besides what you already stated about needing a home)?  If your kids are in elementary school, have you factored in their costs to your FIRE budget?

My personal opinion is that everyone thinks kids cost little to no money when they have babies and toddlers. It's easy to get hand-me-downs and they need and consume fairly little. I have a middle school aged child, and several nieces and nephews in high school - and it seems kids get more expensive the older they get (until they're fully launched). Think: unexpected health or development issues that require special therapies or interventions, braces, extracurricular activities (even if you aren't intense "Tiger Parents", soccer cleats or band uniforms or misc. education/ field trip fees can still add up), whatever the family decides to help shoulder in terms of driving costs, technology costs, and eventually, college costs... 

So just make sure when you're considering a FIRE budget, you build in room for growing people!

meandmyfamily

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Re: Be Cautious or FIRE?
« Reply #2 on: January 11, 2021, 12:34:17 PM »
100% health insurance for 4 more years of work is tempting but then that is 4 more years and you have 80% now.  That is the only thing that stuck out to me.

Mrs. Healthywealth

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Re: Be Cautious or FIRE?
« Reply #3 on: January 11, 2021, 12:40:28 PM »
You've done an awesome job saving and investing - congratulations!

My follow up question is what do you think your FIRE expenses will be (besides what you already stated about needing a home)?  If your kids are in elementary school, have you factored in their costs to your FIRE budget?

So just make sure when you're considering a FIRE budget, you build in room for growing people!

Appreciate you responding and agree with you whole heartedly!!! The kids are our budget...my spouse and I can live off a lot less, but the kids add costs to how we live (Need more space), where we live (School district), and they eat all day 😊 the expenses also factor in extracurricular activities (My dtr wants to learn to fence and ride a horse) and college. 

Mrs. Healthywealth

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Re: Be Cautious or FIRE?
« Reply #4 on: January 11, 2021, 12:42:21 PM »
100% health insurance for 4 more years of work is tempting but then that is 4 more years and you have 80% now.  That is the only thing that stuck out to me.

Right?! So close but yet waaay waaay too far. At 84% itíll be $200/mos for really good healthcare, working 4 more years seems exhausting. But Iím also recovering from Covid so everything seems exhausting.

chagan

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Re: Be Cautious or FIRE?
« Reply #5 on: January 12, 2021, 01:35:14 PM »
OP - you have drafted the case study very well. Clearly you know what you are doing, congratulations on your success.
When exactly are you looking to FIRE?
Have you been maxing out your (or both) 401Ks?
Is the passive rental income ($32K) Net of expenses?
Would the new place you move into, also be in HCOL area?

Mrs. Healthywealth

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Re: Be Cautious or FIRE?
« Reply #6 on: January 12, 2021, 07:52:06 PM »
OP - you have drafted the case study very well. Clearly you know what you are doing, congratulations on your success.
When exactly are you looking to FIRE?
Have you been maxing out your (or both) 401Ks?
Is the passive rental income ($32K) Net of expenses?
Would the new place you move into, also be in HCOL area?

Appreciate Chagan! Plan is to RE the minute Iím asked to return to an office, which might be around summer. We were maxing our 401k, but then stopped to focus on the rentals. Once we purchase all the rentals we will invest money into stocks/bonds again. The passive income is net of expenses.  The new place is a HCOL, but we only pay utilities to help out. The concern is- will we have enough in the event we have to move b/c parent diesódonít want to buy out siblings to stay in this home because itís just too big. There is clearly some self-doubt...a bit hard to believe we can actually do this after starting this journey 12 years ago. Which is why itís helpful to get input from others on this thread!

BradminOxt19

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Re: Be Cautious or FIRE?
« Reply #7 on: January 13, 2021, 01:55:09 AM »
Help me understand something. Why did you stop contributing to the 401k to focus on rentals?  Especially if you are going to FIRE in the (near?) future?  I'd max my 401k while I could while working, and then focus on rentals later.

Right now is not a great time to be buying rentals, IMO.  There seem to be more risk with the eviction moratorium and renters forbearance.   I'd personally invest far more in stocks than rentals until covid is past us.

In my opinion it seems you have been so focused on rentals that you are putting too much in that basket and not considering the risk enough.

Playing with Fire UK

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Re: Be Cautious or FIRE?
« Reply #8 on: January 13, 2021, 04:35:12 AM »
After you lose access to the free housing and stop work would you be looking to relocate to a lower COL area or are you tied to the current area (is your partner also stopping work? Do you have other family in the immediate area)? If you have geographic flexibility (even moving to a cheaper part of your current area) it would give you more of a safety buffer.

Dicey

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Re: Be Cautious or FIRE?
« Reply #9 on: January 13, 2021, 05:26:18 AM »
Help me understand something. Why did you stop contributing to the 401k to focus on rentals?  Especially if you are going to FIRE in the (near?) future?  I'd max my 401k while I could while working, and then focus on rentals later.

Right now is not a great time to be buying rentals, IMO.  There seem to be more risk with the eviction moratorium and renters forbearance.   I'd personally invest far more in stocks than rentals until covid is past us.

In my opinion it seems you have been so focused on rentals that you are putting too much in that basket and not considering the risk enough.
^^This.^^ The time to buy rentals is at the bottom of the market, not the top. Just ask @arebelspy and @SwordGuy.

Also, 77 isn't that old. What if they live for another two decades? I'm fine with you pulling the trigger to FIRE, but I think you could  go about it a bit differently than you've planned.

SwordGuy

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Re: Be Cautious or FIRE?
« Reply #10 on: January 13, 2021, 09:34:56 AM »
Help me understand something. Why did you stop contributing to the 401k to focus on rentals?  Especially if you are going to FIRE in the (near?) future?  I'd max my 401k while I could while working, and then focus on rentals later.

Right now is not a great time to be buying rentals, IMO.  There seem to be more risk with the eviction moratorium and renters forbearance.   I'd personally invest far more in stocks than rentals until covid is past us.

In my opinion it seems you have been so focused on rentals that you are putting too much in that basket and not considering the risk enough.
^^This.^^ The time to buy rentals is at the bottom of the market, not the top. Just ask @arebelspy and @SwordGuy.

Also, 77 isn't that old. What if they live for another two decades? I'm fine with you pulling the trigger to FIRE, but I think you could  go about it a bit differently than you've planned.

Slightly distressed houses that were in the 30's when we purchased the bulk of our properties are in the 60s now.    That's what happens in boom times, prices go up.   Well into a recession is the best time to buy real estate.  I could make money on the houses in the 60s but I wouldn't get the net worth bump for fixing them up.

Plus a lot of the tradespeople in our area -- as late as RIGHT NOW, Jan 2021 -- don't really believe Covid is a real problem or much of one so they don't take the safety precautions seriously.  We're not renovating properties now because we don't want to get sick and die from one of them.

Mrs. Healthywealth

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Re: Be Cautious or FIRE?
« Reply #11 on: January 13, 2021, 10:01:05 PM »
Help me understand something. Why did you stop contributing to the 401k to focus on rentals?  Especially if you are going to FIRE in the (near?) future?  I'd max my 401k while I could while working, and then focus on rentals later.

Right now is not a great time to be buying rentals, IMO.  There seem to be more risk with the eviction moratorium and renters forbearance.   I'd personally invest far more in stocks than rentals until covid is past us.

In my opinion it seems you have been so focused on rentals that you are putting too much in that basket and not considering the risk enough.
^^This.^^ The time to buy rentals is at the bottom of the market, not the top. Just ask @arebelspy and @SwordGuy.

Also, 77 isn't that old. What if they live for another two decades? I'm fine with you pulling the trigger to FIRE, but I think you could  go about it a bit differently than you've planned.

Agree, she can live for another 20 yrs, in which case we will have a huge stash. We contribute to the match, but stopped maxing the 457 and 401k out in sept, not too long ago.
I handle RE like stock market, I donít market time. Is the market high yes, but no one really knows where it will go from here. Interest rates are crazy low, so why not take advantage of that? The PMs we use have 1 year rent guarantees, which helps us sleep at night, but so far everything is rented. You are right, I donít know the full risk cause I havenít experienced it with these rentals yet. I have with 1 many years ago, that sucked and hurt.

So letís say we max out the 457 and 401k at $39k, that 39k in rentals would have netted $6000/mos vs. 39k In stocks with SWR @ 3.5% = $1365.

But, just like the other time you helped me, Iím open to feedback. So whatís the different strategy you would propose that would still allow me to FIRE?

Options:
I can take our $310k in cash and invest it all in stocks/bonds=$770k in stocks/bonds, withdrawing $27k, and $32,400 from RE is about $60k, we can survive off that, but i like have a large buffer.
Or half of it goes to RE and the other to stocks= $54k income RE and and $21k from stocks bonds. Total $75k.
Or I buy enough RE to cover my base expenses and put the rest towards stocks/bonds.

Mrs. Healthywealth

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Re: Be Cautious or FIRE?
« Reply #12 on: January 13, 2021, 10:14:03 PM »
After you lose access to the free housing and stop work would you be looking to relocate to a lower COL area or are you tied to the current area (is your partner also stopping work? Do you have other family in the immediate area)? If you have geographic flexibility (even moving to a cheaper part of your current area) it would give you more of a safety buffer.

It would depend on when that happens. If the kids are in high school, then we wonít move. But prior to that, then we would be open to it. My family, relatives, and friends all live nearby, so we wouldnít move too far away. The best way for us to cut costs is to rent, which we are very open to do, that would bring our housing costs closer to $3000 hopefully. The homes in the cheaper areas are $750k; I was told this city has the most millionaires per capita in the state, lovely😒.

My spouse is my golden ticket 😊 sheís willing to work part time for 10 more years, so we will see how it goes (purposely didnít add that into our calculations cause we prefer being FIREíd together). For sure she will work another 1-2yrs full time. Chances are I will pick up part-time work too, but I donít want to count on it just yet; Iím too tired right now to want to work, but normally there are tons of part time jobs I know Iíll enjoy when I have energy.

Playing with Fire UK

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Re: Be Cautious or FIRE?
« Reply #13 on: January 14, 2021, 02:04:36 AM »
Given that your spouse is willing to work part-time and you might also work part time, I'd lean more towards FIREing now. She will continue to work for the next couple of years which gives you both security against the markets and rentals tanking soon (or needing to show income to get a mortgage). You'll have the option of a move to an affordable rental if needed before the kids reach high school. Once you are committed to a high school/area your FIRE plan will have succeeded already (or, in the highly unlikely case that everything goes wrong, you'll have addressed that with some part-time work).

Having said that, I don't know the rental market in your area, presumably you do and are confident that the income is reasonably certain. Similarly with the reliance on future part-time work as a back-up plan. If the drop in your income is because of something systemic (like a recession or pandemic), it'll be difficult to find a part-time job at that moment, but you seem to have enough buffer to survive that storn and then find part-time work later to refill the accounts.

Mrs. Healthywealth

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Re: Be Cautious or FIRE?
« Reply #14 on: January 14, 2021, 11:10:13 AM »
Given that your spouse is willing to work part-time and you might also work part time, I'd lean more towards FIREing now. She will continue to work for the next couple of years which gives you both security against the markets and rentals tanking soon (or needing to show income to get a mortgage). You'll have the option of a move to an affordable rental if needed before the kids reach high school. Once you are committed to a high school/area your FIRE plan will have succeeded already (or, in the highly unlikely case that everything goes wrong, you'll have addressed that with some part-time work).

Having said that, I don't know the rental market in your area, presumably you do and are confident that the income is reasonably certain. Similarly with the reliance on future part-time work as a back-up plan. If the drop in your income is because of something systemic (like a recession or pandemic), it'll be difficult to find a part-time job at that moment, but you seem to have enough buffer to survive that storn and then find part-time work later to refill the accounts.

Thanks for this. You know, weíve had so many friends and family die last year, only 1 from COVID, its pushed me to not have OMY syndrome. I have this fear of failing after planning for so long, but I guess worse case scenario is we both work part time to bring in a little extra. Itís true what many have said, itís hard to go from saving to spending. If I stayed in this job we can save a shit ton of money, but my friends recent death has made me rethink the value of that plan. 

Mrs. Healthywealth

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Re: Be Cautious or FIRE?
« Reply #15 on: January 14, 2021, 05:22:27 PM »
Thanks to someone on another thread, I learned that 20% added for taxes is too high. For $100k, most likely we arenít going to pay much in taxes. So with that said, I think $105-$110k will be a safe amount.  With $75k from rental income, we can invest around $12k/mos while RE and living rent free. Then when we canít live rent free, the stock/bonds and rental income should be around $95k, the inheritance will cover the rest otherwise we can find PT work, which isnít something we are opposed to.

Appreciate the help, and grateful someone helped me understand LTCG and ordinary income tax.