Author Topic: update! - Case Study - selling house windfall  (Read 4532 times)

diffusate

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update! - Case Study - selling house windfall
« on: February 14, 2018, 01:32:43 PM »
Life Situation: 37, in a committed relationship with partner (27), no kids and don't plan on having them. Both had preexisting frugality, savings, and interest in FIRE.

Income: I'm doing independent non-profit consulting, gross income around $60k with no benefits. This is about 12 hours a week of work, and is sustainable for the next couple years. In some ways it's a semi-FIRE gig, after stepping down from a demanding job a few years ago. I'm maxing out my Roth, but not saving much else.

Partner works in tech, earning $150k. She's maxing out retirement accounts. Is very burnt out. Stock vesting schedule makes another two years in current role advantageous.

Assets:

Mine: Around $60k in Roth IRA, $62k in 401k/403b, and $26k in taxable investment account. $148k invested. Also sitting on $33k cash. The big thing for me is that I'm currently selling my house to move in with partner. Bought it at the bottom of the market, and expect to walk away with about $400k after paying off the mortgage.

Total net worth around $550k

I have to say I'm proud of this at 37! I've worked in the nonprofit sector, and there were only a few years that I earned more than $60k. I got some good luck with the housing market, but saved substantially even when I earned $8/hr. Enough to come up with a $20k downpayment on my first house at 20 years old.

Hers: Roth $77k, 401k $54k, taxable investment, $194k. Total invested: $325k. 10k cash. Owns a condo that I'm moving into worth about $490k with $269k mortgage, so $221k equity. 

Total net worth around $556k

Joint net worth: $1.1m

Current expenses: We are combining households, so we expect our expenses to reduce in certain areas but not clear yet. We've each been spending around $20k a year on all non-housing expenses. Our projected budget looks something like this:

Car insurance, gas, and repairs (2007 Prius): $1,400
Health insurance for me: $3,600
cell phone for both: $960
Utilities: $1k
Groceries: $6k
Restaurants: $2,400
Entertinament: $1,200
Clothing: $600
Misc: $2,400
Donations: $1k
Travel: $8k (This is a major hobby/priority. Last year we spent a month in Thailand for a total cost of around 5k plus some smaller trips. It could also be dramatically cut if needed, with longer camping/climbing trips domestically)

Total non-housing expenses: $28,500
Mortgage, HOA, insurance, taxes (15 year mortgage): $31k

Total expenses with mortgage: +/- $60k

Discussion/questions: It feels like we are getting pretty close to FI, with a number of caveats. A few more bits of information: in the next two years, we're projecting saving around $130k more, putting our total invested assets around $1m ignoring market increases or decreases. Heath care wise, we are both healthy but after quitting her job she will have to buy individual heath care for the first time, potentially adding $5k/year for now.

Plans wise, I am wrapping up a contract in two years, about the same time as her "it's not worth as much to keep working here" date. I would probably bring in around $10k/year even just working for fun after that. She is also open to doing some software engineering as an independent contractor.

Just a quick note that it's pretty cool that our assets are so equal going into combining our household.

Practical questions: Anything I should keep in mind with my large amount of assets ready to invest? I don't want to time the market, but thinking of doing some dollar cost averaging. I'm also considering paying off the mortgage, both for the safe returns (3.75%) and for the cash flow benefit.

Any tax tips? I'm just investing in my Roth, what other possibilities are there to consider this year?

Bigger questions: psychologically, do we both plan on quitting in two years? Or should we wait to see how the market goes? Biggest worries are health care expense, sequence of returns risk with the market downturn, and uncertainly about earning potential and stress level of both of our contract work possibilities.

Any other things we should be thinking about now?
« Last Edit: July 30, 2018, 08:14:27 PM by diffusate »

RWD

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Re: Case Study - selling house windfall
« Reply #1 on: February 14, 2018, 02:13:45 PM »
What portion of the $31k in mortgage payments is interest/HOA/insurance/taxes (i.e. actual expenses)?

Don't dollar cost average.
Don't pay extra on the mortgage.

diffusate

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Re: Case Study - selling house windfall
« Reply #2 on: February 14, 2018, 02:29:55 PM »
About $8k is insurance, HOA, and taxes. of the remaining $23k, $9,500 is interest. So $17,500 expenses. You're saying this is the number I should use to calculate my FI number? This would make our total annual expenses $46k, requiring $1.15m at 4% SWR. Or something else?

RWD

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Re: Case Study - selling house windfall
« Reply #3 on: February 14, 2018, 05:50:38 PM »
About $8k is insurance, HOA, and taxes. of the remaining $23k, $9,500 is interest. So $17,500 expenses. You're saying this is the number I should use to calculate my FI number? This would make our total annual expenses $46k, requiring $1.15m at 4% SWR. Or something else?

Yes, that is what I meant. As you pay down the mortgage the amount you're paying in interest will decrease. The idea is that some of your invested assets will go towards principal and once the mortgage is paid off you'll have annual expenses of $36.5k, which will require $913k invested to sustain at 4% SWR. This is just a rough calculation so you could break it down on a spreadsheet to make sure the numbers work out.

Your projected budget looks a little weird to me. Are these based off of actual tracked expenses or just guesses? Some value seem really high and others seem too low. For example, you only expect to spend ~$83/month on utilities? That's about 60% of our costs. But then you're spending about $700/month on food (groceries + restaurants) which is more than double what my wife and I are spending.

diffusate

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Re: Case Study - selling house windfall
« Reply #4 on: February 15, 2018, 09:40:45 AM »
Makes sense!

Utilities are low because it's a small condo, the only costs not covered by the HOA are internet and electricity. Some months it's as low as $60. I know $700 is a bit high, but we prioritize eating well, and are in an urban HCOL area with lots of great restaurants in walking distance (we always take advantage of happy hour deals). This is a prediction not an actual, as we aren't sure how our grocery budget will be impacted by combining assets. There might be some savings here.

waltworks

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Re: Case Study - selling house windfall
« Reply #5 on: February 16, 2018, 12:19:30 PM »
Just dump the house windfall into the taxable at your usual asset allocation and forget about it. If it helps you sleep at night, feel free to DCA in, but be aware that you are probably losing money by doing that (probably).

You're in a situation where optimizing things perfectly is of minor importance, though, since you only have a little way to go - so maybe DCA is just fine. Keep doing the restaurants and enjoying your life, think about your partner walking away from the stock vesting if he/she is that burnt out (2 years is a long time), and concentrate on making your life awesome and  planning for the future instead of scrapping for every last bit of money.

Good work!

-W

diffusate

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Re: Case Study - selling house windfall
« Reply #6 on: February 19, 2018, 02:29:56 PM »
Thanks for the reply! It's very encouraging. I keep going back and forth between feeling "set" and feeling more anxious than ever with FI so close. Right now I'm spending way too much energy thinking about how much exactly I'm going to get for my house when it sells. Looking forward to getting all the careful planning, asset allocation, and budgeting out of the way so I can just enjoy.

Bicycle_B

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Re: Case Study - selling house windfall
« Reply #7 on: February 19, 2018, 05:31:26 PM »
If the planning / budgeting is an effort, just make sure that your expenses don't exceed the estimates you have.  You're close to the edge, so IMHO the effort is worth it.  I am FI on slightly less $/person (450k, no partner) and value the freedom of not actually needing to work.  Things can change and the easy money disappear.  Just one person's opinion.

diffusate

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Re: Case Study - selling house windfall
« Reply #8 on: March 08, 2018, 05:38:20 PM »
Just wanted to share an update/brag that I just went into contract on my house with an all-cash no contingency offer for almost $100k more than I expected (sold for $865k, bought for $423k six years ago). This puts our joint net worth at close to $1.2m. I'm going to go ahead and declare ourselves FI. Still working a year or two longer to decide where exactly we want to live and test our budget to see how it plays out this year. Hasn't yet sunk in, but feeling pretty good about this.

Lentils4Lunch

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Re: Case Study - selling house windfall
« Reply #9 on: March 08, 2018, 07:27:22 PM »
Well done!

Bicycle_B

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Re: Case Study - selling house windfall
« Reply #10 on: March 08, 2018, 07:58:51 PM »
Congrats, @diffusate.  Keep us posted on your investing, and whether your expenses during your decision time stay at/under 4% of your new stash.  Best of luck.
« Last Edit: March 08, 2018, 08:31:09 PM by Bicycle_B »

better late

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Re: Case Study - selling house windfall
« Reply #11 on: March 08, 2018, 08:33:44 PM »
Fantastic! Congratulations on the real estate win!

jlcnuke

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Re: Case Study - selling house windfall
« Reply #12 on: March 09, 2018, 10:13:44 AM »
Just wanted to share an update/brag that I just went into contract on my house with an all-cash no contingency offer for almost $100k more than I expected (sold for $865k, bought for $423k six years ago). This puts our joint net worth at close to $1.2m. I'm going to go ahead and declare ourselves FI. Still working a year or two longer to decide where exactly we want to live and test our budget to see how it plays out this year. Hasn't yet sunk in, but feeling pretty good about this.

Earlier you posted a $60k/year spending level, and mentioned when she stops working that'll add ~$5k for her health insurance. Totalling that up we get to $65k/year. For a 4% withdrawal rate to sustain $65k/year you'll need a $1,625,000 portfolio. With most of your 30 year loan to go, I wouldn't bother discounting your spending based on paying it off right now. You can run Firecalc with offset spending to account for it though (put the principal+interest amounts in an "off-chart spending" starting now and then put that amount as a negative off-chart spending when it's supposed to be paid off and don't include it in the spending on the start page) and see how things look. I'd imagine you're not looking at much for SS down the road either though, but you could run a calculator to see what you can expect with $0 earnings moving forward (likely quite lower than your annual statement shows).

Also, it seemed that you're counting the equity from the place you'll be living in your net worth and then including that in your withdrawal rate projections, which doesn't work unless you're selling it and getting a free place to live to replace that. For financial independence, your "liquid" portfolio is what matters, not your total net worth. To be FI you need to be able to cover your spending with your assets. You're not covering any spending with the place you live in because it is costing you money, not generating income. As such, here's what I see your portfolio looking like (combined):

You have $148k in investments, $33k in cash, and just got/are getting ~$500k from the sale of your home. Total portfolio of $681k.
She has Roth $77k, 401k $54k, taxable investment, $194k, 10k cash. Total portfolio of $335k.
Total combined portfolio value = $1,016,000. A 4% withdrawal rate from that portfolio would support a spending level of $40,640. That's less than 2/3rd your retirement budget adjusted with her health insurance costs added in.

I plugged your numbers into FireCalc to see if what I was saying made sense, here's the inputs and results:
I assumed both of you get $6k/year in SS starting in 2042.
I put your spending at $51k/year (your estimated $46k plus her $5k/year health insurance).
I put in your current investment portfolio of $1,016,000.
I put off chart spending to cover the PI of your mortgage for $13k/year through 2045 (removing that expense 27 years from now when the mortgage is paid off).

That plan resulted in a 37% success rate, failing over 60% of the time historically.

Having you earn $10k/year for life on top of that still resulted in less than a 58% success rate.

For you to reach a 95% success rate (i.e. FI), you'll need an investment portfolio of $1.55 million according to the numbers I'm seeing.

Not to be a "Debbie downer", but I don't think you're "there' yet.

diffusate

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Re: Case Study - selling house windfall
« Reply #13 on: March 09, 2018, 01:30:35 PM »
Thanks for the detailed response! I do understand your perspective, but there's a few more details that change things a bit:

1. It's a 15 year mortgage. I know this is only a marginal difference, but I think it would shift things a bit

2. The condo would not be where we would live after RE. Similar units are renting out at a few hundred over the total monthly cost, so we could rent it out. With a safe 4% withdrawal rate, this would leave us about $12k per year for some other housing option in a LCL area. We both feel pretty good about a $40k spend for all expenses including housing, hence feeling FI.

3. My job right now is part time consulting doing meaningful work I'm pretty invested in for about 10 hours per week. Even if I wasn't paid, I would continue this work for at least 5 hours per week as a volunteer. I'll end up with $60k of income this year and next, and most likely $20-30k after that doing exactly what I want.

4. SO is also planning on wrapping up this year and next at current job. We expect to add about $200k to our NW by then (ignoring market gains). Still not enough to cover full mortgage expenses at a 4% SWR, so we would have to bring in $12k per year for the next 10 years or so until the mortgage is paid off. Between the two of us, I can't imagine not doing this through stuff we do for fun.

5. As with many others, health care is feeling complicated. If the ACA stays as it is, our expenses may go down substantially as we could quality for subsidies if we carefully control our MAGI. This is a big question mark still, but not going to let it control my life. For now we both barely use any health care. I already get my dental work done in Thailand at very reasonable prices.

Anything else I'm missing here? Not ready to say we will never work again, but feeling pretty FI.

Ben Kurtz

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Re: Case Study - selling house windfall
« Reply #14 on: March 09, 2018, 02:10:16 PM »
My rule of thumb is that a small family is eligible for financial independence with a paid-off house and $1,000,000 in liquid investments. So you are in the zone, even if it might be close to the line if you wish to FIRE in place and maintain your precise current lifestyle.

Given that you and your partner seem fairly set on working the next two years at current levels, you will only add safety margin to your financial picture. It will also help to spend the time getting used to living in the same home together, just to make sure that works on a personal level. It would be much easier to unwind that, if worst case scenario you needed to, while you are both still working.

My advice is to spend the next two years thinking long and hard about where you'd want to live and what you'd want to do with your time once you declare yourself FIRE and scale back to less than half time jobs for each partner. One other point is that while neither of you have wanted children so far, it might be worth considering what scenarios might arise that could change the mind of one you, and what effect that would have. My rule of thumb can accommodate 1-2 kids -- less room in the budget for restaurants, more spending on diapers -- but it obviously a fairly big point nonetheless.

diffusate

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Re: Case Study - selling house windfall
« Reply #15 on: March 30, 2018, 02:53:40 PM »
Just wanted to share an update with you all: house closed today! I now have about $450k sitting in a bank account that I'll be transferring over to Vanguard ASAP. Planning on 60% VTSAX, 20% VTIAX and 20% VBTLX.

Any feedback or final thoughts before I invest?

MrThatsDifferent

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Re: Case Study - selling house windfall
« Reply #16 on: March 30, 2018, 04:19:57 PM »
Just wanted to share an update with you all: house closed today! I now have about $450k sitting in a bank account that I'll be transferring over to Vanguard ASAP. Planning on 60% VTSAX, 20% VTIAX and 20% VBTLX.

Any feedback or final thoughts before I invest?

Umm, did you account for any tax hits? Otherwise, congrats and enjoy! Great work! Also, if youíre not getting married, maybe you guys want a pre-nup, just in case? One thing that might come up, that Iíve seen others grapple with, youíll be contributing to her mortgage. If anything happens, will she pay you back the equity gained or will that just be your rent and you get no ownership? Good to discuss and sort these things.

diffusate

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Re: Case Study - selling house windfall
« Reply #17 on: April 04, 2018, 02:42:42 PM »
Tax situation is covered due to two owners and less than $500k appreciation. We've discussed how we are doing expenses and assets and both feel good about it.

A quick update that might be helpful to others doing lump sum investing: with all the volatility I just couldn't pull the trigger on putting it all into the market on one day. On the other hand I know that dollar cost averaging comes out behind most of the time. I sort of split the difference. I put 1/3 in as soon as the $ cleared. The rest I'm putting in with 12 equal installments over the next 12 weeks.

Maybe not a totally optimum solution, but one that helps me relax a little. If markets go down I'll feel good about the DCA. If they go up, I'll feel good I put a solid chunk in at the beginning.

Thanks to all for the advice!

Bicycle_B

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Re: Case Study - selling house windfall
« Reply #18 on: April 10, 2018, 04:26:37 PM »
Glad you made your decision, and a reasonable one at that.  Good job!

diffusate

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Re: Case Study - selling house windfall
« Reply #19 on: May 07, 2018, 05:06:57 PM »
Just writing with a quick update - with a stock vest today, we hit $1,003,000 in cash and investments! Feels like a huge milestone. Fully expecting things to dip below seven figures based on fluctuations, but pretty cool. Can't really tell anyone else, so wanted to celebrate here.

TexasRunner

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Re: Case Study - selling house windfall
« Reply #20 on: May 07, 2018, 05:10:49 PM »
Great job and congrats on the house!!!!
Welcome to FI.  37 is a great age and especially on a 60k/year income.  I really hope to be where you are at in eight years or so.

Enjoy the transition!

diffusate

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Re: Case Study - selling house windfall
« Reply #21 on: May 07, 2018, 05:38:50 PM »
Thanks! Enjoying a barrel aged Belgian-style beer we made ourselves to celebrate. Being 37 feels great, and she's only 28. Both of us have been frugal and hustling since we were young, but there's been a lot of luck as well.