Case Study - Ready for FIRE or OMY?

[mk80]

Hello, Team Mustache!  I am a very long time reader but this is the first time I’ve worked up the courage to post (on this or any other internet forum message board, in fact).  I have been a devoted reader of MMM blog since discovering it in mid-2012 while pregnant with my second child and brainstorming ideas for how to spend less time at work and more time at home with my family.  At the time, my hubby and I hoped to retire before age 50.  As we learned more with the help of MMM and some other blogs we’ve found as a result of this one, we have gradually moved our date up..  age 45! ..40!  ..39!  ..38! 

Unfortunately, due to a number of circumstances at work (leadership direction, disorganized major system launch, poor morale throughout the department, etc.), I feel like I may need to move the date up a bit more and potentially leave in the next 1-2 months.  I am hoping to get some feedback from all of the experienced and knowledgeable minds on the forum as to how ready we are financially.  I know we’re fairly conservative compared to some others because I’d prefer not to HAVE to go back to work in the future (though I’m willing to do so if I need to) but any and all feedback is very appreciated! 

Here is some more information about my family – me (37), DH (37), DS (7), DD (4).  I work full time for a large corporation today, my hubby is a stay at home dad who has a part time side gig that he absolutely loves and plans to continue for the next 10-20 years with fairly stable and consistent income to today’s.

Income
Me ~$155k
Hubby ~$15k

Savings
Cash $80k
HSA $21k
Stock Options ~$20k will cash these out just before quitting
Roth IRA $218k
401k $366k
Taxable mutual funds $215k
529 $12k

Expenses
~40k/year after we pay off our mortgage ($97k principal balance outstanding currently), which we plan to do when I quit working
No debt other than our mortgage

Other Relevant Info
-I will have a future pension of $30k that I can begin collecting when I turn 60.  (fairly well-funded so high likelihood it’ll be around)
-I am of the personal opinion that SS will exist in some way, shape, or form, though we expect, for planning purposes, that it will likely be less than our current estimated payout at age 70 of ~$35k combined.
-We both have parents in their mid-60s who are in very solid financial shape.  Though we are not looking forward to that day, we will receive $0.5MM+ from each set when they’re gone (and likely quite a bit more than that).

The $40k in expenses is a bit conservative – I currently have $11k budgeted for health insurance premiums, whereas current ’17 Obamacare estimate for a future annual income of ~$40k (hubby income + investment income  + ROTH conversion) looks more like $4k today (all of the uncertainty around healthcare is what’s leading me to be conservative here – if we got no subsidy, full cost of insurance would be about $12k/year).  We have other non-critical spending in the $40k that we prefer to have the flexibility to do but could reduce for a few years in the case of a major recession early after my FIRE.  This is essentially the level of expenses that we’ve been spending for the past 3 years so no major behavioral adjustment required post-FIRE.

Summary/Questions
1.   Based on fairly conservative withdrawal rates, I think we’re in pretty good shape to forego my income whenever I’m ready.  Do you agree?
2.   I plan to initially hold 1 year of expenses in cash and another 1-2 years of expenses in a money market to insulate us against short term drops in the market at the start of FIRE.  I know we’re forgoing some earnings by keeping that money out of the market but I think it’ll help us feel more confident.  I plan to slowly bleed out the money market funds over the first ~5 years until we’re just holding 1 year of expenses in cash.  Are we being too conservative and risking our longer term portfolio sustainability?
3.   Our $215k in taxable as well as about $120k of the ROTH are currently with Edward Jones and I know we’re paying pretty high fees.  I plan to move these to Vanguard where we have the rest of our ROTHs (will use 80% VTSAX/20% VBTLX split).  Bearing in mind that we’d like to pay off our mortgage within a year of FIRE, should I…
a.   Transfer funds now and sell funds to pay off the mortgage in a few months?  I’m concerned that this will result in us paying taxes for buying and selling funds in a short time period..
b.   Wait and transfer the funds from EJ to Vanguard at the same time we pay off the mortgage (when I quit, investing only the portion of the taxable account not used to pay off the mortgage) so we won’t have to sell shortly after buying Vanguard funds?
c.   Go ahead and begin paying down the mortgage with a lump sum when I cash out my stock options at FIRE but wait to transfer funds from EJ and pay off the remaining mortgage until the following year to minimize the taxes required on transferring from EJ to Vanguard (so that I won’t have my wages pushing up our taxable income and tax brackets)?
d.   Other better option I’m not thinking of?  I’d like to minimize taxes while being wary of income in future years when we plan to use ACA (or whatever comes next).
4.   If I convert $120k of ROTH IRA to Vanguard, the annual contribution history transfers too, right?  This is important as we’re planning to use these contributions after our taxable accounts and in conjunction with a ROTH ladder to access some of our retirement savings without penalty over the coming years.

Thanks so much for taking the time to read and provide feedback!  This would not be possible without MMM and the folks who are willing to spend their time offering advice and I’m really appreciative!

[MDM]

1.   Based on fairly conservative withdrawal rates, I think we’re in pretty good shape to forego my income whenever I’m ready.  Do you agree?
Maybe.  I've seen people in better shape and worse shape.  At a quick glance, much depends on the pension - correct?  Is that $30K in today's or future dollars?  What do various Retirement Calculators say?

2.   I plan to initially hold 1 year of expenses in cash and another 1-2 years of expenses in a money market to insulate us against short term drops in the market at the start of FIRE.  I know we’re forgoing some earnings by keeping that money out of the market but I think it’ll help us feel more confident.  I plan to slowly bleed out the money market funds over the first ~5 years until we’re just holding 1 year of expenses in cash.  Are we being too conservative and risking our longer term portfolio sustainability?
Answering that requires market forecasting knowledge I don't have.  You seem to understand the possible pros and cons.

3.   Our $215k in taxable as well as about $120k of the ROTH are currently with Edward Jones and I know we’re paying pretty high fees.  I plan to move these to Vanguard where we have the rest of our ROTHs (will use 80% VTSAX/20% VBTLX split).  Bearing in mind that we’d like to pay off our mortgage within a year of FIRE, should I…
a.   Transfer funds now and sell funds to pay off the mortgage in a few months?  I’m concerned that this will result in us paying taxes for buying and selling funds in a short time period..
b.   Wait and transfer the funds from EJ to Vanguard at the same time we pay off the mortgage (when I quit, investing only the portion of the taxable account not used to pay off the mortgage) so we won’t have to sell shortly after buying Vanguard funds?
c.   Go ahead and begin paying down the mortgage with a lump sum when I cash out my stock options at FIRE but wait to transfer funds from EJ and pay off the remaining mortgage until the following year to minimize the taxes required on transferring from EJ to Vanguard (so that I won’t have my wages pushing up our taxable income and tax brackets)?
d.   Other better option I’m not thinking of?  I’d like to minimize taxes while being wary of income in future years when we plan to use ACA (or whatever comes next).
Before you transfer (and transferring is a good idea), determine whether it will be less expensive to
- sell all the funds at EJ, then transfer cash and buy at Vanguard, or
- transfer the funds "in kind" to Vanguard then sell and buy new ones there.  By "determine" I mean ask Vanguard and EJ what they'll charge to sell the funds you hold now.

The "pay mortgage or invest" is another question, perhaps better addressed (if desired) in a separate thread.... ;)


4.   If I convert $120k of ROTH IRA to Vanguard, the annual contribution history transfers too, right? 
Yes.

mk80, welcome to the forum.  See some thoughts above.

[Davids]

I am going to take an opinion that I am sure many will disagree and say go OMY. At $40K/yr of expenses you are estimating you should then aim to have $1M in savings which you do not have yet. I understand you will still earn through your husband's side gig and interest/dividends on investments but going OMY I think will provide a good safety buffer for you. And knowing you are OMY might actually make work more enjoyable since you do have a great FU stache (amazing savings you have accumulated at age 37) but I would stick it out for OMY just to build the buffer and get to $1M savings.

[mxt0133]

You definitely have enough money and if your husband keeps up his side gig and you pick one up as well and get your combined income up to around $25-30K you are golden.  Throw in pensions and social security that's icing. If you maintain that income then you don't have to have so much in cash to cover the shortfall in expenses for 2-3 years.

However this assumes that you can keep you expenses at those levels. I have three kids and lifestyle creep is real.  I'm not talking about toys and gifts, but food, activities, travel, and education.  We try not to go over board with extra curricular activities but they are not free.  We also send them to supplemental enrichment activities, like reading, science, and art programs.  I'm trying to hold firm on focusing on retirement first vs college savings but now that retirement is pretty much covered and we are just working on FI, it's hard not to start funding college at some level.  We will empower them to minimize college expenses if they do decide to go, dual-enrollment, CLEP, scholarships, workstudy, ect., but know that they have some help might ease some of the stress.

The good thing about having a big stash is that you don't really need to get back to making six figures if your expenses go up, you can just go back to work for a few years if you want to fund an expense that you didn't anticipate.  I personally don't buy the argument that it would be impossible or too hard to go back to work after a few years off.  I am a first generation immigrant and my parents started over from scratch when we came over to the US.  Started at the bottom, gas attendant and cashier, then worked their way up to a middle class income.  After the kids were launched, they started over again because they didn't have to work to support me and my brother anymore. Dad went from retail manager to dog groomer, he hates people and prefers dealing with animals.  Mom went back to school to be a nurse because she was in a lab and was bored to death.

All you really have to think about is what you will be doing with your time without a full-time work schedule.

EDIT: typos

[mk80]

Thanks so much for the replies!  While it’s discouraging to face the prospect of another year of work, it will absolutely give us a firmer cushion in our savings and more flexibility for the future.  I think I’ll go ahead and move the funds from EJ to Vanguard now so we’re set up and ready to go when I leave in a year and can pay off the mortgage then.  Thanks again for the advice and feel free to let me know if anything else jumps out at you as worth consideration - you've definitely given me some things to think about.  Have a great weekend!

[ScottsdaleSaver]

Hi there - have you considered consulting or other part-time work? That would allow you to walk away from your current job and you could easily cover current expenses by only working a tiny fraction of each year given your going rate. In the meantime, your investments could continue to grow and you could ease your way into the non-working world. At this point, it probably just depends on your level of burnout at the current job.

It's a tough choice! I have the same savings needs as you and am a few years behind where you currently are, but I think about this option a lot. Once our mortgage is taken care of, I could work just a couple months a year to cover expenses while letting investments grow until they hit the $1M mark...but that delays complete FI. Also, I work in Accounting and seasonal/temp/consulting work is relatively easy to find - how is it in your field?

[SwordGuy]

Once my wife quits her full time job, it's 99.9999999% likely that she could never again find a full time job.    Part time jobs in her field pay squat, when she could get them.

On the other hand, as long as I'm willing to wait 0-9 months, I can find a good paying full time job in my local area without even bothering to keep my skills up to date.   I might have some awkwardness if I was filmed fornicating with a sheep  but as long as it wasn't a Russian, Chinese or Iranian sheep it probably wouldn't matter all that much.   If I was willing to relocate I could find work even faster.

I mention this because it does make a difference in your safety margins.

You already have one spouse doing a low paying job, so that's 1/2 of your "get a low paying job to make ends meet" option already used up.  That leaves you.   Can you easily find full or part time work that would make ends meet if the market has a several year meltdown early on in your retirement?

Or can you cut your spending back instead?

Those are your primary defenses in case things go bad early on.   How robust is your safety margin?

As for paying off your mortgage early, that's an interesting question.  What is your interest rate?  Can you get it lower?
I can assure you that I really get the desire to pay off your mortgage early.  But it's not necessarily the best choice, particularly if you have a really low fixed rate mortgage for the full term of the mortgage debt.

For example, I have a 2.75% fixed rate 15 year loan.   We'll have 13 1/2 years to go when we retire.   I had planned to pay off our mortgage before we retired because, well, you already know that.

But now I'm not so sure.   Average US stock market returns after subtracting inflation are about 7%.   Including inflation they are about 10%.   That's a 4.25% gain in today's dollars in my favor to NOT pay off the mortgage early, but instead to pay it off over the full mortgage term.   But since I'll be paying that mortgage off in future dollars, it's not inappropriate to consider that makes it a 7.25% gain in my favor to delay paying off the mortgage.

I did some math in my case and ran the scenarios thru cFireSim.com.   I had about a 98.5% chance of coming out ahead and a 1.5% chance of a really bad result.   I would have done even better with a 30 year mortgage due to (a) lower payments in bad times and (b) an additional 15 years of inflation in my favor.

Personally, if all of you have good health and it would be easy for you to pick up work or cut expenses, it would not be unreasonable to go for it.

I would want a bit more buffer - but then folks on this site make fun of how I over-buffer my retirement plans.
I

[JC Fire]

You are done - congrats! From a SWR perspective I say you are around 3.4% day one - math:

40k annual - 12k net side gig (20% tax high estimate guessing self employment ) = 28k/ ~ 820k portfolio =3.4%

For portfolio I ignored the HSA and 529 since those are dedicated - understand view hsa is some value here since it's an IRA at 59 but easier math...also took 80k cash and paid off mortgage since time retire in next few months  all else equal the 80k will be close to whatever remaining mortgage (~95?)...again simplicity - call it wash w excluding hsa $

Then I used firecalc (http://www.firecalc.com) with following inputs
50 yr cycle (60 similar result)
Spending 28k
Portfolio 820k
SS at 2050 (70yrs) - 20k yr -  conservative sub 60% full amount given current trust fund projections show about 75% benefits can be paid m....you will likely get more but again conservative
Pension at 2040 (60) 30k yr
Portfolio mix - you said 80/20 total stock / bond but want 2-3 yrs cash /MM which is about 10% portfolio so did 10% small stock , 10 small value, 30 SP 500, 10 large value, 30corpbond, 10 1month tbill which about equalvalent rates as MM now sub 1% - so did 60/30:10 stock-bond-cash - so more conservative than what you mentioned

Result.....100% success rate and Ave portfolio balance at end is >$8m

Know timing of cash flows is a question but can do Roth conversions, taxable account withdrawals (cap gain & div 0% tax under ~90k joint income) and 401k sepp option too which is likely below standard deductions and exemptions (28k fam of four ) not counting child tax credit so fed taxes not an issue

Also ignored inheritance given timing question which make this even more bulletproof
EJ vs vanguard ?......what are the holdings? Just transfer holdings then slow sales per year of RE to have cap gains under the 90k mentioned at 0% cap gains tax - don't sell while still working

[mk80]

Thanks again for all of the words of wisdom.  We’re continuing to refine our plans based on the comments.. 

@MDM  I’ve run cFIREsim and it indicates 100% success rate, even if we cut in half our future projected pension and social security income.  I’ll definitely look into the fees related to selling funds via EJ vs. Vanguard.  Thanks for the tip.

@mxt0133  Absolutely agree with you on cost of kids.  We encourage our kids to be involved and find passions they love but also try to balance this with frugal activities that are local to us – biking, hiking, neighborhood pool, parks, library activities, reading, family game or movie nights at home, etc.  However, it’s fairly easy for us to influence those choices at this age and will definitely be more difficult as they get older.

As far as college savings goes, we will definitely help out but have a pretty firm view on the kids having some skin in the game too.  I got set amount for a college/marriage/rest of your life fund from my parents (that definitely did not cover everything) and we plan to do the same for our kids – to be doled out over the course of a few years so we have some control over how it gets allocated.  The kids are both practical and natural savers at this point (like my hubby and I have both been since we were little) but again, they’re super young.

@lhamo  Definitely a valid point on accessible funds and the risk if markets take a major hit.  We may need to consider holding less in cash – maybe 1-2 instead of 2-3 or not paying down the mortgage in total yet.  I don’t know anyone in my field that has done consulting work and the content doesn’t really lend itself to seasonal or project work, so I’m not sure it would be worth the time it would take to get up to speed at a new company… with that in mind, I think your suggestion about toughing it out longer is probably the way to go, so long as things don’t deteriorate too much further.  If things at work go further downhill, may make more sense to have hubby ramp things up at his side gig, which is a possibility too.

@SwordGuy  There is definitely some flexibility in our spending..  We are currently forecasting $11k for healthcare but if ACA survives, that currently looks more like $3-4k.  We also have another $2,500 of hedge in our budget before we start cutting in any way that would make our lifestyle feel more austere.  Our interest rate is 3.125% fixed on a 15 year loan and have debated a bit the mortgage payoff.  Agree that this is an emotional decision to lower our annual expenses and know that we own our home free & clear.  We would likely come out ahead over the long term if we were to continue paying on schedule and leave the payoff amount invested, so that’s something to which we will give a bit more thought.

@JC Fire  The results you see are in line with those that I’ve gotten as well and part of my hopefulness about leaving the working world sooner than originally planned..  As you mentioned, along with some natural buffers from future inheritance as well as flexibility in our budget, potential for hubby to somewhat ramp up his side gig income if needed/desired, and our home equity that was excluded above since we’ll need to live somewhere and I’d prefer not to downsize in the short-term since our house is well sized and priced for a family of four in our location. 

Appreciate everyone’s thoughts and input.  Will need to ruminate a bit more on mortgage pre-payment as well as accessibility of funds early in FIRE.  Here’s hoping I can tough out a few more months and increase our buffer!  Thanks again!