CASE STUDY: FIRE TO COSTA RICA?? Financial Planning Help Needed!

[myamnesia]

Hello fellow mustachians,

We plan on soft firing in 2020 by leaving our jobs and moving to Costa Rica for 1-2 years after that is unknown, we could travel more, stay in CR, come back to the US or UK and set up our own business…always good to have options.

Background info…I’m 39, husband is 43, we have 2 kids ages 3 & 5. We both work in private estate management, & private chef before that we worked in private yachting. All our living expenses are currently covered by our employer. We have worked in the same positions for the same employer for 10 years. We have a LOT of perks, but also no flexibility or independence, we are burnt out, ready for a change and to spend some time with our kids.

We are good savers, I wouldn’t say super frugal, but definitely aware of our expenses and live well within our means. We live in a HCOL area, luckily we don’t pay rent, but childcare, food etc is high. We invest $100K annually and plan to hold $100K in cash when we FIRE.


Gross salary: $140K plus $66K annual bonus given as tax free gifts to ourselves and our children by our employer (s)

Taxes: 2016 – federal effective tax rate 15.9%, CA 5.4%


Rental property cash flow: 10 properties generating approx. $4-5K per month this fluctuates depending on vacancy and repairs, currently saving $1500 per month for capex, plan to stop this when we FIRE ($150 per property per month)

We own 10 rental properties, 1 in CA and 9 in MO.

CA property purchased in 2008, mortgage $262K, property value $600K, interest rate 4.1%, has a $100K HELOC – unused

MO properties purchased in past 2 years, 20% down, interest rates  4.5-5%, purchase prices approx. $70-100K

Wealthfront: $290K & Fidelity $50K in stocks

529 Plans: $150K

SD IRA’S: $150K – Peer Street 8-10% & Mortgage debt fund  (PPR) yielding 12% for 3 years

Real Estate Syndications: $200K

 One pays an average of $8K in annual cash flow for 8 years plus profit from sale, cash flow of other investment depends on the hold period between 3-10 years

Cash: $50K

No car loans, credit card debt, student debt etc

Plan on leaving our car at a relative’s house in case we need it if we return to the US.

We are reducing our expenses to boost our cash position, most notably, our daycare payments will reduce by $1K in August when our son starts kinder and then by a further $1K in 2019.

Our current net worth is approx. $1.3M


COSTA RICA BUDGET (work in progress):

Rent                 $2000 – hopefully less
Utilities              $200
Internet & phone   $100
Health Insurance   $300 TBD
Food                 $800
Private school           $1200 (plan to pay in advance for 1st year)

Travel                  $10k annual, plan 2 international trips per year to visit family in UK, Thailand & UK
Car                $15K – cars are expensive in CR!
Gas                Not sure how much driving we’ll do but gas is at least double


I’m really looking for help figuring out with the following…

-   what should we be doing over the next 2-3 years to increase monthly cash flow with our $100K annual investing budget?

-   how our plans will affect our tax liability

-       what am I missing?????

-   Will we be able to do it OR are we living in LA LA Land?!


Please chime I and let me know your thoughts, I need objectivity!

Thanks for reading and any help you wish to give,

Cheers,

Rachel

[OkieM]

You all should be great. I think you are overestimating some expenses, specifically food, rent, and cars. I guess it really all depends on where you live. I have spent a lot of time in Central America and if you live where the locals live you don't need a car(getting a driver is a similar cost per mile) most groceries are cheap (unless they are imported) and housing is cheap as well. If you want to live in a secluded mountain mansion or on the beach with lots of other expats and eat all imported food then maybe your expenses are closer to the mark.

If you have any weakness it is being pretty heavy on real estate but the cash flow alone should cover even your expensive budget.

Sounds like fun, I love it down there!

[KungfuRabbit]

....

Not to de rail this, but can employers give tax free gifts?  If that was the case why wouldn't every employer pay the first $15000 as a tax free gift.

[mxt0133]

....

Not to de rail this, but can employers give tax free gifts?  If that was the case why wouldn't every employer pay the first $15000 as a tax free gift.

Anyone can give anybody gifts valued up to $14K per year per person and it is excluded from the givers life-time tax free limit.

As to why an employer wouldn't pay the first $14K as a tax free gift is because it not compensation for services rendered.  I can gift my employees money and they can walk away without doing the work and vice versa someone can work for me and I can decide not to gift them the money without recourse.  The gift does not count towards earned income and the employee won't get credits for Social Security.

[mxt0133]

-   what should we be doing over the next 2-3 years to increase monthly cash flow with our $100K annual investing budget?

You could unlock the +300K in equity in the CA property and with the 100K additional funds annually you can find another property that significantly increases monthly cash flow, multifamily, apartment building, commercial, ect., using a 1031 exchange to defer capital gains taxes.  I only suggest this because it seems like you are most comfortable in real estate investments vs traditional stocks or bonds.

-   how our plans will affect our tax liability

Your tax liability should be reduced since you will stop having earned income.  It might be a good time to harvest some capital gains tax free or at significantly lower tax rates.

-       what am I missing?????

I assume that when you do decide to return your ability to find employment would be relatively easy since you seem to be in a very niche market. 

Do you have your wills, trusts, and other estate documents in order?  Last thing you want is to have to figure this stuff out  while you are in a foreign land, having to do that kind of paper work via snail mail can take a really long time.

-   Will we be able to do it OR are we living in LA LA Land?!

I personally don't think you are in LA LA land at all.  Your family has amassed significant wealth and when you do go back to work after a year or two will only continue to grow.  I wanted to do something similar a few years ago with a fraction of your net worth with two young kids as well.  Until I did a trial run of 6 weeks and found out I don't do well spending all my time with my family without the structure of work.  We were also not prepared to give up the comforts of our city even if we could live like kings in a developing country.  Something a trivial as no public parks or libraries pretty much changed our minds. I still have plans to spend a few months abroad with my family but with intentions of returning within the year.  However, we find it harder and harder to get way as the kids get involved in more activities and develop friendships.

My only other word of advice is if you have not already done so, actually visit the country you plan on living in before you make the leap.

[BiotechGuy]

You seem in good shape to me. Your ~$60k expected budget is just about covered by your rental property cash flow. Not sure what that cash flow would look like after taxes, but you're probably close to covering everything on that alone.

You're a bit overloaded on real estate, so might consider broadening your stock portfolio with the extra 200-300k over the next 2-3 years. Personally I'd hang in for 3 years if you can and add that $300k into a taxable account. You're at $490k in stock now, so in 3 years adding $300k you'd be at $790k. If this bull market keeps running you could easily be at $1M in stock in 3 years. With that you could pull 1-2% per year (~10-20k per year) to make up the difference in real estate cash flow and expenses and really be sitting pretty. By working that extra year even with a 10-20% market correction in the next few years you'd still be fine.

[shelbyautumn]

You all should be great. I think you are overestimating some expenses, specifically food, rent, and cars. I guess it really all depends on where you live. I have spent a lot of time in Central America and if you live where the locals live you don't need a car(getting a driver is a similar cost per mile) most groceries are cheap (unless they are imported) and housing is cheap as well. If you want to live in a secluded mountain mansion or on the beach with lots of other expats and eat all imported food then maybe your expenses are closer to the mark.

If you have any weakness it is being pretty heavy on real estate but the cash flow alone should cover even your expensive budget.

Sounds like fun, I love it down there!

Even a secluded house is not that much! My mom and step-dad moved to Costa Rica about two years ago. When they first moved, they lived in a town called Grecia and rented a BEAUTIFUL, but small home for about $1500. After six months they purchased their own 2bd/2ba on an acre that came with a vehicle (and a dog!) for about $182k if I remember correctly. They are both still working remote/travel positions, but the move has lowered their expenses so much that they are saving a ton of money. Maybe you could look into some kind of freelance or remote work or buy more rentals to continue having the cash flow?

One thing they did to save on income taxes is become South Dakota residents. Apparently you can become a resident and get a driver's license after spending one night in a hotel there. That's worth looking into!