Author Topic: Can I turn a "gap year" into FIRE?  (Read 1585 times)

Laura1332

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Can I turn a "gap year" into FIRE?
« on: January 30, 2019, 09:30:15 AM »
I am at a crossroads and seek your opinions/insights/ideas.  48, single and quit my job late last year.  In preparation for my unemployment and my plan to travel with few obligations, I liquidated assets.  Currently considering options for the future.  Loving where I am now and would love my very belated “gap year” to continue.  I really do not want to return to a full time job, but am concerned about financials. Having only money outgoing and none incoming is a bit scarier than I thought it would be.  I have always been frugal so saving has not been a problem.  However, making my money work for me is not my strength. My risk threshold is low.

Assets: $1.6m, no debt
  • Cash (savings, checking, MM, CDs): $1.2m  ($1.1m earning 2%+)
  • IRA: $400k (50% MM)
  • HSA: $9k
  • Vehicle: $16k
Monthly Expenses: $2200-$2500
  • Housing (include utilities, wifi, water, etc): Variable but has not exceeded $1k
  • Storage unit: $80
  • Mail forwarding: $20
  • Health insurance: $380 (Will investigate other options this year if my situation stays the same.  No current health issues, but it is not something I wanted to skimp on.)
  • Cell/data plan: $43
  • Car insurance/registration: 60
  • Travel transportation costs (incl. gas, vehicle maintenance, flights, trains, buses, etc.): Variable $200-500  (thank goodness for points!)
  • Food/entertainment: $325
  • Personal (pharmacy, toiletries, clothes, etc): $100
A few thoughts on my possible future options: 

Option 1: Continue traveling.  Keep expenses below $2500/mo.  Interest from my savings should offset the majority of expenses. Consider temporary/seasonal employment (only applicable if travelling in US unless I am able to get work permit).

Option 2:  Purchase a house in a low cost of living area. 
  • Based on what I am reading/seeing in the RE market, I will likely not seriously consider making this move until the late 2019-2020 timeframe.
  • Ideally the house will have rental/airbnb potential (duplex, in-law suite, apt over garage, etc.)
  • Purchase home with cash (all in $300k max, including renovations, slush fund etc) 
  • Keep expenses low.  Live on savings interest, rental monies and possible part time job.
Option 3: Go back to corporate work, likely in high cost of living area, and save, save, save.  (If I am going to work full time, I want maximize income and this likely means going to where the good jobs are located.). Continue renting. (I never want to be a slave to a mortgage). FIRE when there is a shorter gap to bridge to SS (if it is still around) and Medicare.
 
Thanks in advance for your feedback! 

pbkmaine

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Can I turn a "gap year" into FIRE?
« Reply #1 on: January 30, 2019, 09:52:24 AM »
1) What’s the storage unit for?
2) Why so much in cash?

Laura1332

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Re: Can I turn a "gap year" into FIRE?
« Reply #2 on: January 30, 2019, 10:04:41 AM »
Storage unit:  I am traveling. The storage unit is for furniture, household items, clothes, etc.  I minimized, but did not totally liquidate personal items
Cash: Part liquidation and part I am a risk adverse GenXer -- been through the snl, dot.com, housing bubble...and current 2%+ interest in cash is pretty good considering the current stock market.

dandarc

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Re: Can I turn a "gap year" into FIRE?
« Reply #3 on: January 30, 2019, 10:07:11 AM »
Normally a ~2% withdrawal rate is an iron-clad, plenty of money for early retirement. But you're not investing "normally" in stocks/bonds or real estate - you're close to 100% in cash. Still, if your money market / CD's can keep up with inflation, then you've got about 50 years of expenses covered, before taking into account social security and things like that. That's a big if - "keep up with inflation" doesn't always happen for these types of accounts.

Long winded way of saying "consider some higher-yielding investments and you'll be even safer for a long retirement". But in any case, you've got enough money that you'll probably be OK regardless.

ysette9

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Re: Can I turn a "gap year" into FIRE?
« Reply #4 on: January 30, 2019, 11:14:49 AM »
If you can educate yourself on investing enough to transfer all of that cash into something even very conservative like a 50/50 portfolio, then you have plenty of money to never go back to work. The only thing that will make you fail and not have enough money in the long term is that “conservative” asset allocation. That is very, very risky in the long term because inflation will eat away at your nest egg until it is worth substantially less than it is now.

Apparently my grandparents retired with a million back in the 70s. That was a ton of knee back then. As she grew older my grandmother got more and more risk averse, to the point she had all of her money in CDs. She didn’t die broke, but she came pretty close. If she had kept a 50% stock allocation she would have died a multimillionaire. That has been a pretty stark lesson for me about the importance of having an appropriate asset allocation and how risky a “conservative” allocation is when you are telling about decades.

RWD

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Re: Can I turn a "gap year" into FIRE?
« Reply #5 on: January 30, 2019, 12:31:19 PM »
You have more than enough money. You just need to invest it and you're set.
https://jlcollinsnh.com/stock-series/

Laura33

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Re: Can I turn a "gap year" into FIRE?
« Reply #6 on: January 30, 2019, 12:38:10 PM »
So, first, you are not "risk-averse."  You are visible-risk-averse.  You are scared of watching your investments drop in front of your eyes.  There is, in fact, a much bigger risk that you are incurring every day:  inflation risk.  If you decide to live on the 2% interest your account generates, by the time you are in your 60s you'll probably have half your current buying power, so you'll be effectively living on $12-15K in today's money.  But you're not scared of that, because you don't see it happening right before your eyes -- it is an invisible risk, not an in-your-face one.  You are the quintessential frog in the pot, not noticing that the water temperature is rising slowly.  And unfortunately, you won't notice it until you're probably too old/infirm to do much about it.

That said:  You have $1.6M.  I am going to assume that you continue to earn interest at exactly the same rate as inflation -- meaning that every year, you are spending down the equivalent of $25K in today's money.  If that is the case, and you can keep your expenses to the equivalent of $25K in 2019 dollars, my calculator says that you can support yourself for 64 more years before you run out of money -- assuming you never work another day.

So, yeah, I'd say you're in a position to FIRE, even at your ridiculously conservative asset allocation, unless inflation really spikes (and interest rates don't keep up).  At the very least, you have the wherewithal to stay where you are for as long as you are happy there.  So congrats! 

But do spend some of your free time figuring out how to put some money in the market without panicking at the first drop.  Really, if you kept $500K in money markets/CDs, you'd have enough cash to cover 20 years!  That's long enough to ride out any historical stock market drops -- but you'd also be earning a lot more than inflation with the rest of your money, which gives you much better long-term protection for what comes after those first 20 years.

[Also GenXer who lived through All The Economic Drama, including layoffs and homes that didn't sell, but who stayed invested and is FI, because despite it all, the stock market has rocked over the past @30 years]

pawnjohn

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Re: Can I turn a "gap year" into FIRE?
« Reply #7 on: January 30, 2019, 12:45:39 PM »
Congrats! Based on your portfolio and minimal expenses, you are most definitely FI.

Even being risk adverse, you have tons of options available to you. As said previously, your 2% is going to get eaten up by inflation over time and not really grow your stash any larger.

Taking the high range of your expenses (2500/month) is only 30,000 per year.

Still being very conservative, you could easily:

Take 1m out of your 1.2 million and invest it. Look into vanguard total stock/bond market index funds and pick a balance between stocks/bonds that you feel comfortable with. A 70/30, 60/40, or 50/50 split would all be very conservative portfolios to minimize your risk.

Living off the interest from your 1m in index funds is only 3%, even safer that the coveted 4% MMM talks about achieving.

You could also use the extra 100-200K you have left in cash in the event that there is a stock market crash. That would leave you with 3-6 years of living expenses in easily accessible funds in that event.

That's all without even talking about your 400K in your IRA that you can draw off in the future.


If you are loving traveling, and can continue to do so without majorly increasing your spending, you should have no worries of potentially running out of money.

BicycleB

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Re: Can I turn a "gap year" into FIRE?
« Reply #8 on: January 30, 2019, 12:53:17 PM »
Yes, turn your gap year into FIRE.

Fellow Gen X here. Totally supporting the comments above. You need more stock, at least 25% to 50%, not the 12% or so you have.

Your current allocation is high risk with respect to inflation, and essentially implies a zero return after inflation and tax. You're not investing, you're spending down what you have. Your spend rate is low and reasonable and fine, so you may survive until death with what you have, but your odds would improve immensely if you reduced your real risk by investing in a higher % of stock. Since you are afraid of it, I suggest shooting for 40% instead of the safer 50% stock.  Because your stash is large, even 40% would make you super safe. It would make you as safe in reality as the current allocation makes you in your mind.

As a side note, I applaud you for getting some interest via money market account instead of pure savings, but suggest increasing your % of actual intermediate term bonds or long term bonds or bond funds instead of short term cash; it's worth having some long term bonds to hold value during recessions. Maybe consider buying your allowed amount of i-bonds, too (Series I bonds from the US Treasury...interest plus federally guaranteed inflation protection, a very nice deal).

You don't need to work again. For perspective on asset allocation, spend some time on portfoliocharts.com and cfiresim.

I last substantively worked about 5 years ago; left that Last Good Job at age 48. Coasting quite comfortably on a stash of less than half the size of yours, a roughly 70% stock/30% bonds-n-cash allocation of financial assets. To be fair, about half my stash is real estate, but it doesn't change the income projections, just increases the stability a little. Offering details only to illustrate that you too can do this. Keep us posted!
« Last Edit: January 30, 2019, 01:00:44 PM by BicycleB »

Car Jack

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Re: Can I turn a "gap year" into FIRE?
« Reply #9 on: January 30, 2019, 12:56:12 PM »
You have plenty of money to not go back to work.  I think I'd plan to get to that storage unit and take lots of pictures for craigslist and empty it.  Then close it down and go on your way.

Boofinator

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Re: Can I turn a "gap year" into FIRE?
« Reply #10 on: January 30, 2019, 01:16:02 PM »
Only thing I'd add to the other good advice given here already would be to get familiar with the risk of running out of money using http://cfiresim.com/ or some other retirement portfolio tool. Using that tool and a few assumptions for your case, my conclusion is you'd probably want to be at least 50/50 equities-to-fixed income, if not higher.

lhamo

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Re: Can I turn a "gap year" into FIRE?
« Reply #11 on: January 30, 2019, 01:18:53 PM »
Agree that you are FI.  I think the options you have laid out are too stark/limited, though.  Some issues to consider:

1)  $300k is a lot for a house in a LCOL area.  You can still get a small/simple condo for that in the outlying suburbs of high-cost Seattle.  Granted, that wouldn't be suitable for subletting.   But you could probably still get a nice little 2-3 br house within an hours drive of this very expensive city for that.  If you are willing to locate in truly low-cost areas you can get a nice house with rental income potential for around 100k.

2)  Your choice is not necessarily between all-out FIRE and more years of corporate hell.  You do not necessarily need to have a work permit to work while traveling outside the US.  You probably have skills that you can apply to fully-remote, on-line work.  You can also be a warm body caring for people's houses/pets/kids in areas you are interested in living in for a few weeks or months at a time (given how  much hassle forum friends have lining up reliable childcare I'm personally considering offering my services as an "instant Mary Poppins" to fill in while they search for a longer-term solution).  Or you can go the "cool jobs" route and earn a bit of extra cash while working a temp/seasonal job at any number of cool national parks.  Your expenses are so low you could earn half your needed income in a half-year, minimum wage job if you needed or wanted to.

3)  Agree that you need to rethink risk and your cash allocation.  Hey, I get it -- I have a huge Inner Bag Lady I am carrying around who wants a BIIIIG cash cushion.  But reasonably speaking, that is max 3-5 years of minimum expenses.  Everything else can and should be invested.  If the economy totally tanks you still have a long runway.  Some kind of temporary labor will always be needed.  And all you need to do is keep yourself afloat until things rebound.  And if they don't you are still in a better position than 95% of the rest of the population, because they don't have your stash.


MrThatsDifferent

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Re: Can I turn a "gap year" into FIRE?
« Reply #12 on: January 30, 2019, 02:43:35 PM »
Congrats, you’re living one of my dreams. You’re all set. Like everyone else, I think you’re being too risk adverse and you’re leaving money on the table. However, you have a lot and you’re 401k will keep growing and your expenses are low. You’re fine. I’ve been thinking about this a lot and you can have a life where you alternate between LCOL places and HCOL places. For example, say your budget is $25k in the US.  Well, you could probable live in South/Central America or SE Asia for $15k for 6 months of the year and Europe for $35k for 3 months and then back in the US. You can be creative with your freedom. I’d hold off buying until you find your perfect base of operations, and it’d be great if it was in a LCOL place but in a major city so you can fly easily to other places.

Laura1332

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Re: Can I turn a "gap year" into FIRE?
« Reply #13 on: January 31, 2019, 02:46:16 AM »
Thank you all for your responses.  I have been a long-time lurker on this site, but this was my first post.   
You did not disappoint with your insights, support, and candor.  I needed to hear, from as many people as possible, what I already suspected --  my fear of the stock market is making me stupid.   Thank you! Your feedback is a kick in the a**.  I love your accurate and surprisingly polite comments: “visible-risk-averse”, “You are the quintessential frog in the pot”, “ridiculously conservative asset allocation”, “She didn’t die broke, but she came pretty close”, “huge Inner Bag Lady”, …

Quitting my soul-sucking corporate job was under consideration for many years.  Golden handcuffs and fluctuations in the stock market kept me working.  When the market would drop, I would think “gotta keep working”.  This led to my slow withdrawal from the market.  I needed to have the FU money “in hand” to quit.

Thank you too for confirming that my stash has the potential to support FIRE.  I will check out the links you provided and review investment ratios/options you suggested.  Your suggestions on travel, employment options, and real estate are appreciated.  I am living my dream as I currently travel both domestically and abroad, but look forward to eventually finding a home base.  I am grateful for the flexibility and the simple things in life.

Any suggestions on the process of getting back into the market?  It is said that one can’t time the stock market.  However, it seems that staggering my investment over a period of time (months?, years?) could be beneficial in my situation.   

90%+ of my cash is in online banks earning 2-3%.   So am not sure that I need to rush my stock market entry to reach the suggested investment ratios.

Cheers!

MrThatsDifferent

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Re: Can I turn a "gap year" into FIRE?
« Reply #14 on: January 31, 2019, 04:17:20 AM »
Your goal is lowest fees and that’s generally Vanguard. I’d call them and look at one of their Lifestrategy options, go with the most conservative and it’ll still be the HISA. Then just work out a plan on how you want to withdraw from your buckets. I wish I had been as smart as you as early as you.

Laura1332

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Re: Can I turn a "gap year" into FIRE?
« Reply #15 on: January 31, 2019, 05:01:41 AM »
Thanks MrThatsDifferent.

I will check out Vanguard.  I currently have accounts with Fidelity and Charles Schwab.  I have used Fidelity Freedom Funds - Target Date Mutual Funds in the past...albeit choosing a retirement date decades closer than my real date.  Opinions on Fidelity/CS are appreciated.

It has more to do with luck than smarts. :)

Boofinator

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Re: Can I turn a "gap year" into FIRE?
« Reply #16 on: January 31, 2019, 08:14:19 AM »
Your goal is lowest fees and that’s generally Vanguard. I’d call them and look at one of their Lifestrategy options, go with the most conservative and it’ll still be the HISA. Then just work out a plan on how you want to withdraw from your buckets. I wish I had been as smart as you as early as you.

I mostly agree with this advice. A couple things to add:

First, go to Vanguard's website and take a look at their list of balanced funds (scroll about a third of the way down): https://investor.vanguard.com/mutual-funds/list#/mutual-funds/asset-class/month-end-returns. Balanced funds are probably the ideal investment for someone who wants to be generally hands off (which I think will serve you well with your aversion to losses). There are a number of Target Retirement funds which you want to avoid: these are meant for traditional retirements, not Mustachian ones. There are four LifeStrategy funds: avoid the most conservative (LifeStrategy Income) because there's too few stocks (~20%); for the others, they list their stock and bond allocations, and any of them should serve you well depending on your tolerance for dips. The other fund I might recommend is the Balanced Index Fund (VBIAX), which is 60/40 stocks-to-bonds and has a lower expense ratio (cost) than the LifeStrategy funds. After you get an idea of the different offerings, then I would call Vanguard.

Second, I know you think the money in the bank accounts is in a good spot, but I'd recommend moving most of it out of banks and into your investment fund. Money in banks should be for very short term spending plans (spending with a year); bond funds are much better at yielding a decent return while minimizing risk over any longer time periods. For example, if your banks are yielding 2.5% and short term bond funds 3.0%, you're pretty much guaranteed to be making 20% more on your money in those bonds per year (which adds up exponentially). Keep in mind banks make money off of your money by reinvesting those funds in areas that can make more money and are relatively safe.

ysette9

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Re: Can I turn a "gap year" into FIRE?
« Reply #17 on: January 31, 2019, 10:49:01 AM »
On thé question of whether to put all of your cash into investments right away (lump sum investing, or LSI) or dollar cost average your way in (DCA), Vanguard has a white paper where they researched that question.

https://personal.vanguard.com/pdf/s315.pdf

The tag line is: “ Dollar-cost averaging just means taking risk later”

“On average, we
find that an LSI approach has outperformed a DCA approach approximately two-thirds of the time, even when results are adjusted for the higher volatility of a stock/bond portfolio versus cash investments. This finding
is consistent with the fact that the returns of stocks and bonds exceeded that of cash over our study period in each of these markets.”

Some people will choose to dollar cost average anyway for emotional reasons. That is fine if that is what it takes to get you out of cash and into a more appropriate investment plan, as DCA is still better than cash.

BicycleB

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Re: Can I turn a "gap year" into FIRE?
« Reply #18 on: January 31, 2019, 06:04:51 PM »

Any suggestions on the process of getting back into the market?   


Suggestion 1: Buy $450,000 of VTSAX in one bold stroke. (Better yet, $750,000 of VSMGX...it's a balanced fund similar to @Boofinator's suggestion, but includes an international component that will probably make your results even safer and more stable. Since it's 60% stock, the risk level is about the same as 450k in an all-stock fund like VTSAX, but it builds in more automatic balancing between sectors to keep your portfolio even more stable).

Suggestion 2: If you Just Can't Do It Aaaalll At Once, set up an automatic monthly purchase of 37,500 VTSAX (or 62,500 VSGMX) and let it run for a year.
« Last Edit: January 31, 2019, 07:39:23 PM by BicycleB »

Laura1332

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Re: Can I turn a "gap year" into FIRE?
« Reply #19 on: February 02, 2019, 02:28:02 AM »
Boofinator, ysette9, BicycleB -- Thank you for the suggestions and links. 

I really need to dive in and read/research. You have given me a place to start.  I have put off formulating a longer range plan which includes the stock market way too long....

Cheers!


itchyfeet

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Re: Can I turn a "gap year" into FIRE?
« Reply #20 on: February 02, 2019, 04:39:15 AM »
Congrats on getting to $1.6M without investing. Now it’s time to invest.

As you only spend $30K per year you could put $300K in CDs or bonds or other low risk investments to live off for the next 10 years with the sleep at night knowledge that this pot of money is not fluctuating at all, and will last you 10 years.

With the other $1.3M invest it in stock index funds and just forget about it for 10 years. You would have a high probability of coming back 10 years from now and finding your $1.3M had doubled to $2.6M. And the great news is that if it didn’t double in the next 10 years the probability of it doubling in the subsequent 10 years would be very high

Set and forget!

Once you start investing you will learn more and will start to think about tax optimisation etc. this can all come later.

ysette9

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Re: Can I turn a "gap year" into FIRE?
« Reply #21 on: February 02, 2019, 07:14:47 AM »
Boofinator, ysette9, BicycleB -- Thank you for the suggestions and links. 

I really need to dive in and read/research. You have given me a place to start.  I have put off formulating a longer range plan which includes the stock market way too long....

Cheers!
Good luck! Be sure to come back and post an update when you figure out what you want to do. Congrats on being FI. :)

kei te pai

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Re: Can I turn a "gap year" into FIRE?
« Reply #22 on: February 05, 2019, 11:18:09 AM »
Take ' go back to work ' off your options list! Be happy, have fun, the path ahead will show itself.
Lots of good advice here re investing.
Congratulations

MrThatsDifferent

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Re: Can I turn a "gap year" into FIRE?
« Reply #23 on: February 05, 2019, 12:41:17 PM »
Congrats on getting to $1.6M without investing. Now it’s time to invest.

As you only spend $30K per year you could put $300K in CDs or bonds or other low risk investments to live off for the next 10 years with the sleep at night knowledge that this pot of money is not fluctuating at all, and will last you 10 years.

With the other $1.3M invest it in stock index funds and just forget about it for 10 years. You would have a high probability of coming back 10 years from now and finding your $1.3M had doubled to $2.6M. And the great news is that if it didn’t double in the next 10 years the probability of it doubling in the subsequent 10 years would be very high

Set and forget!

Once you start investing you will learn more and will start to think about tax optimisation etc. this can all come later.

+1

I’d do this in a heart beat. You’re 48 and that would take you to 58. You’re money will have grown so much that you can then withdraw whatever you want really. You’re not going to run out of money, you won’t need rental income and you’ll only need to work for fun, but of course, you wouldn’t have to if you didn’t want to. Read the rather recent MMM article on what to do with your invested money. My philosophy is simplicity as much as possible. Live your best life!

peeps_be_peeping

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Re: Can I turn a "gap year" into FIRE?
« Reply #24 on: February 05, 2019, 01:18:40 PM »
You are in such a great place with so many options. If I were you I would set aside $200-$300k in a money market or bond fund for a home purchase in 2-3 years. I would then set aside another ~$100k for 3 years of expenses while traveling. Then I would take the rest and invest in in a 3-fund Vanguard portfolio of VTSAX/VTIAX/VBTLX. I would travel until I got homesick then pick a place to settle down. No need to work (for pay) ever again! You are set. I'll be there someday too (that's my plan anyways). Congratulations!!!