Author Topic: Middle aged professional. Can I FIRE? (AUS)  (Read 1220 times)

rewardthisman

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Middle aged professional. Can I FIRE? (AUS)
« on: October 12, 2020, 01:37:35 AM »
My fellow Mustachians,

I am a middle aged lawyer who is busily working towards early retirement. My wife is a stay at home mom caring for our infant daughter. I am keen to hang up my shingle as a lawyer and devote the remainder of my life to raising my daughter and pursuing other non-financial goals.

Below is a detailed snapshot of our finances for your consideration. Please keep in mind that all my figures are in Australian dollars. So the US equivalent is approximately 2/3 of those amounts.

Assets
  • Cash - $85,000
  • Property - $2,075,000
    • PPOR (primary place of residence) - $1,200,000
    • IP1 (investment property) - $350,000
    • IP2 - $1,000,000
    • Mortgage - ($475,000)
  • 401k / superannuation - $350,000
  • Index funds / shares - $230,000
  • Total - $2,740,000
My mortgage is due to be refinanced in April 2021. I plan to withdraw all the money from my index funds, together with the cash in my bank accounts (excluding an emergency fund), and use it to repay more than half of the loan. If I were to mortgage the remaining $210,000 for a 25 year term at 1.95% (which is available at my bank), then my monthly mortgage repayments would be $900.

Post-FIRE Monthly Cashflow
  • Rent from IPs: $3,850
  • Offshore pension: $1,850
  • Mortgage Repayment: ($900)
  • Total: $4,800 per month after tax
Our family on average spends $5,000 per month, so the figures work on paper. But there are issues with our assumptions:
  • Rent from IPs: this figure accounts for management fees, but otherwise assumes the best case scenario. In reality, we will have to pay expenses for repairs, tenancy changes, unexpected mishaps and so on.
  • Pension: we’ll only receive the full amount of this payment for the upcoming 5 years. After that, it will reduce to $750 per month.
Again on paper, we are able to drop our outgoings to $3,000 per month. Based on previous experience, however, I don't see this as likely. It is more realistic that we will stay within the $4,000 to $5,000 per month range.

Bottom Line - Can we FIRE?

My concern is that the cashflow figures look shaky long term. I am worried about resigning from my position and, one to two years later, being forced to take on another (lower paying) job.

We have given thought to spending time in low cost-of-living cities once the Covid situation alleviates - mainly Asia given its proximity to Australia. For various reasons, however, we cannot leave Australia for long periods (eg months). If you factor flight costs into the equation, the time spent overseas doesn't necessarily save a ton of money. We also want to move back to Australia at some stage for our daughter's education.

We have also thought of taking on a tutoring franchise to supplement our cash flow. However again, that can easily turn into another full time job which seems to defeat the purpose of FIRE in the first place.

Realistically, do you think we are ready to FIRE or is there still more to do? Many thanks in advance for your advice.

***************

EDIT

As suggested, I have been through my monthly spending and compiled the following table of typical expenses (which is based off the Moneysmart budget planner application):
  • Home and Utilities
    • Council rates: $221
    • Electricity: $190
    • Gas: $220
    • Internet: $70
    • Mobile: $58
    • VPN: $8
  • Insurance and Financial
    • Car Insurance: $100
    • Home & Contents Insurance: $300
    • Health Insurance: $365
    • Charity: $500
  • Groceries: $433
  • Medical: $433
  • Clothing and shoes: $217
  • Transport and Auto
    • Public Transport: $338
    • Petrol: $260
    • Registration & licence: $79
    • Repairs and maintenance: $83
    • Fines: $17
  • Children: $217
  • Eating Out: $700
  • Total - $5,019
« Last Edit: October 13, 2020, 07:07:55 AM by rewardthisman »

deborah

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Re: Middle aged professional. Can I FIRE?
« Reply #1 on: October 12, 2020, 03:18:08 AM »
Since youíre Australian, Iíd like to respond, but Iím having a bit of trouble getting it into Australian terms, since youíve translated your case study into American. There are enough aussies here that you probably should include (AUS) in the title, and use Australian terms. That way youíd get reasonable answers.

rewardthisman

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #2 on: October 12, 2020, 03:27:14 AM »
Thanks Deborah, good tip. I’ve updated the OP. The only bit hard to translate is the pension. It’s from overseas and the equivalent of a payment from a small family trust fund.
« Last Edit: October 12, 2020, 03:31:14 AM by rewardthisman »

mspym

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #3 on: October 12, 2020, 04:24:41 AM »
Your gut check is telling you it's shaky because it is.

As a plan, you would be becoming less diversified, moving almost entirely to one asset class- property.
You also think you could reduce your expenses by 2k a month, would definitely need to reduce them by 200, which has no contingency built in for gaps between tenants/repairs etc, and you would definitely need to reduce by another 1.1k a month in the next 5 years.

What would help you become more certain in the plan?
- Might be helpful to add your typical expenses and the bedgeted expenses that you never hit. Have you doe any regular tracking to see where the gaps between the two are?
- think about building up a sinking fund for property maintenance to reduce any surprises
- any options for you and your wife to both do some part-time work and trade off the childcare, this could cover expenses from work cash flow and allow the other income streams to replenish the index funds, etc.

I am glad you are thinking about this prior to making the leap.
.

middo

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #4 on: October 12, 2020, 05:00:46 AM »
You say you have a young daughter.  If you fire, are you expecting to send her to a government school? Private education account's for more than 35% of high schooling in Australia, and if you do go private, tou need more $.

Like Deborah, I am worried you are only really.in properry.  We also suffer from the Australian affliction of too much property.  Drops in rental values, empty properties, repairs all need to be accounted for.

My suggestion is work a couple more years, pay off the mortgage and get a few more $ in shares and then fire.


TassieFI

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #5 on: October 12, 2020, 05:10:10 AM »
Another future expense to think about is what sort of education you want for your daughter (and any other children you have), not only for grade school but also post secondary (post secondary is very expensive for housing/living costs if your child is unable to live at home)

It would also be a good idea to take a serious look at the investment properties and figure out what the true rate of return is, and then comparing that to a conservative return on index funds to see if its worth it to have so much cash (and in my mind a LOT of risk) tied up in only two assets.

Depending on your age, current income, and marginal tax rate (marginal rate over 15%) you should also probably be shovelling as much money as you can into your super before you pull the pin on work. 

Great that you are looking at all these things now.  I think that yes, you do have more to do before firing, but youíve got a great asset base to work with as well as a career that you could maybe down grade to part-time or consulting that could allow you time with the family but also provide a bit of a safety net. 

rewardthisman

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #6 on: October 12, 2020, 06:03:34 AM »
Thanks all and much appreciated for your replies so far. It's reassuring in a strange way to know that my concerns weren't off base.

@mspym -
  • As you say, lack of diversification and cashflow is a big concern of mine. I cannot think of an easy way to fix it. An extreme option is to sell the houses and invest it all in the stock market (and rent or live overseas), but it would be expensive and time consuming to do so. Plus outside of superannuation shares aren't a tax efficient approach in Australia as far as I'm aware.
  • Good point, I will add my budget soon. My expenses have been a bit all over the place. We lived in the UK until two years ago, and then we were spending loads on IVF treatments that thankfully worked out. Realistically we could live a decent lifestyle for $3,000 a month. Eating out and Ubereats are a big culprit.
  • In terms of part time work, we have thought of being involved in out of school education. This area is a bit of a mental block for me. I don't enjoy my job but it is lucrative. When I think of any other job, I know that at least initially it will pay less, but I don't know whether it will be more fulfilling.
@middo
Thanks for the helpful feedback. I am less concerned about primary school and believe our local option is sufficient. There are high performing public high schools for the academically gifted in our state. I plan to tutor my daughter to help her ace the entrance exam. As a fallback position, I also plan to teach her piano from a young age (we already have a piano and the teaching materials in my house). A lot of private schools offer generous music scholarships and this may alleviate much of the financial stress if we go down this path.

@TassieFI
Appreciate all of those thoughts. There are a number of people who work part time at our firm so that is certainly an option.

michaels

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #7 on: October 12, 2020, 06:16:04 AM »
Are your numbers AUD or USD?  Living on 4100 AUD a month (after mortgage) with kids doesn't sound like there is much scope for further lifestyle savings?

deborah

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #8 on: October 12, 2020, 01:42:09 PM »
Have a look at the Australian investment order - https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333550/#msg1333550 - that was worked out by a few of us some time ago. This doesnít include property, because itís such a big expense in Australia that people tend to get into it after theyíve done their first investment steps. People do tend to prefer either property or the stock market as investment vehicles, and both can be duds or very good for your stash. I became FIRE with my investments in the stock exchange, and several others have done so, and I find it surprising that you say that shares arenít a tax efficient investment, as the same tax incentives are available for both.

However, probably because Iím older, I tend to assume that someone is middle aged when theyíre a bit older than you (from another thread I assume youíre both in your 30s), and have a lot less time before theyíre able to access super. I also assume that your child is still a very young baby and you have only recently changed from being DINKs to being a single income family. Youíve also changed countries recently. Because of these things, I think you really need to have a couple more years of expenses before you can reliably work out your ongoing budget.

You should look at contributing to your spouses superannuation while sheís a SAHM. Unlike others, I think your expenses are rather high.

rewardthisman

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #9 on: October 13, 2020, 07:06:32 AM »
Thanks Deborah. I went ahead and made the $3,000 voluntary contribution into my spouse's super.

I've inserted my typical monthly spending into the OP. There is some obvious fat around the edges:
  • Most obviously, to reduce our budget on eating out to $100 per month.
  • By being judicious about our electricity, gas and water use - i.e. cutting out the long showers, hours of gas heating and unnecessary use of electricity.
  • Looking into more cost effective options for insurance.
I am keen to FIRE hopefully within the next couple of years. The FIRE community has a number of people who took the leap with less funds than us. Also what I haven't taken into account are the hidden earners (appreciation on real estate and superannuation) which would mean that even if I break even on cashflow, I will continue to increase my networth over the long haul. Using the rule of 70, the superannuation balance should be $1,400,000 by the time we reach retirement age.
« Last Edit: October 13, 2020, 07:30:49 AM by rewardthisman »

happy

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #10 on: October 15, 2020, 05:58:42 AM »
OP, the problem I see is that whilst on the bald face of it with 2.74m assets, and an annual spend of 70k ( expenses plus mortgage - which actually is an expense) the figures look not too bad - I mean for an annual spend of 70k you would need 1.75m if you went for 4% SWR.

But there are 2 problems I see with this as a basis for FIRE
1. This net worth calc includes your PPOR, but if you are looking at income producing assets you only have 1.54m, and the majority of which is property, which has a ROI of 3.4% using your raw figures , but probably closer to 2.5% after expenses even optimistically. You could sell your PPOR and buy a cheaper house, but 1.2m for a family home  in a major city like Sydney for example is not that outrageous and depending where you live and wish to live in the future I'm not sure you get too far with geographical arbitrage unless you are prepared to live in radically less.

2. Insufficient cash-flow. Your outgoings are 70k but your current cashflow does not meet that requirement- and in 5 years your pension will reduce further. Not only that but raw rent figures without any allowance for maintenance/repairs etc is not realistic. Nor have you included anything in your expenses for gifts, holidays, household items or home maintenance, all of which could add quite a bit to your budget. If you follow the usual shape of Australian family expenses, your expenses will continue to rise as your child grows up, until they are into young adulthood and leave home.  I agree you can trim your budget quite a lot by mustachian standards, but the fact is that you currently have not developed the appropriate frugal muscles to do so.

IMO as a random internet stranger, you need to start living on less...get those expenses down now. Its a skill that needs to be practiced. Don't fire until your expenses are covered by your cashflow and then some. You might give some thought to restructuring your assets in some way to improve your cashflow....


marty998

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #11 on: October 17, 2020, 12:48:39 PM »
Two big items are missing here. Your age (which matters for determining how much to put into super), and your current income (which matters for how much you can save, salary sacrifice, devote to investing.

Whatís the reason for you wanting to sell up shares to pay off a mortgage costing you only 2% interest? That doesnít make much sense to me. You need more shares, not less. A simple index fund like VAS would work well here for you.

MrThatsDifferent

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #12 on: October 17, 2020, 02:14:29 PM »
Some thoughts:

óyouíve used your current budget, but I find it more helpful to create the RE budget. When you create that, you can see if, say, your public transport costs will be as high? Or maybe if youíre both home you need Ubereats so much?
órelated to the point above, your first goal is to get your expenses down as much as you can, while not compromising your life too much
óI agree with Marty that it doesnít make much sense to get rid of your index shares that get 7-10% return to pay 2% interest rates, youíre throwing money away
óIíd really evaluate those two investment properties, use the people here to give you feedback on them. Maybe you might keep the most profitable and sell the least?
óalso, have you fully evaluated the tax benefits of keeping the mortgages on the IPs?
óI think it would be relatively easy to drop your main job and find other p/t work that could act as supplement or something just to keep you busy? Have you considered teaching or mediation, for example?
óalso, besides looking after your child, have you thought about what the rest of your early retirement life will look like? Have you and your wife discussed how it will be with both of you home, both looking after your child?

rewardthisman

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #13 on: October 17, 2020, 02:50:08 PM »
@happy

Thanks for your thought provoking post. One lesson from putting together the OP is my need for a clearer system to measure our financial progress, as that seems to have made it harder to objectively analyse our position.

In terms of ROI on the IPs, the figures I provided are what we currently receive on average after taxes and fees (this is unlikely to change post FIRE because of how it is structured). Off the top of my head we have spent on average around 20% of that on repairs, maintenance and other expenses, although this is decreasing with time since the tenants usually discover all the major problems early on. I will do a proper calculation soon and let you know. It is also worth mentioning that one of the IPs is located in a capital city and has, at least according to the online valuations, on paper generated a 15% capital gain in less than 5 years (which contributes to the overall ROI but not the cashflow calculation). I am considering to sell the properties and put the funds into index funds, but the time and cost involved is a concern.

I agree with you about the need to reduce our expenses. Development of frugal muscles is a great analogy.

@marty998

We are in our late 30s and we have a six figure income (it varies plus I would prefer not give the actual figure online).

Mathematically speaking, you are right insofar as we are even better off increasing our debt load to invest more into index funds. The issue is twofold. Firstly, while having money in the stock market most likely leads to a better financial outcome long term, in the short term it creates a cashflow problem. This is because the money generated by the 4% rule from index funds would not be enough to offset the additional monthly payments under the mortgage. The same logic applies to repaying the mortgage earlier - we would free up cashflow, at the expense of long term investment growth, which helps us to achieve our goal of retiring earlier. Secondly, there is a psychological factor that comes from having debt that I would like to be free of. As you can probably guess, I don't find my job particularly fulfilling and the mortgage is a large part of why I feel 'trapped' at times.

While I continue to work in my current job, I agree with investing into the stock market. The past few years I have maxed out my pre-tax super contributions and also invested between $60,000 to 80,000 annually into immediately available index funds.
« Last Edit: October 17, 2020, 03:34:31 PM by rewardthisman »

Model96

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #14 on: October 17, 2020, 03:54:31 PM »
As an overall strategy, and to also help with my debt fearing psychology, I found it helpful to know that my debts were at least offset adequately by my investments (if they weren't paid off) before I fired.
I also found it helpful to have my Superannuation looking good for when I could access it at 60, as an 'insurance' in case the FIRE got a bit lean as time went on. So I invested in property in an SMSF (Self Managed Super Fund), which helps a lot with continuing capital growth in that area while I use more cashflow positive investments to FIRE on until I get to 60. Paid off property in Super is a great way to increase the amount of low taxed contributions you can make into Super too!

marty998

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #15 on: October 17, 2020, 04:21:36 PM »
Maybe look at selling the smaller IP then. Cuts out one set of council rates, water rates, strata/repairs & maintenance, property manager fees.

Or keep the smaller one and sell the larger one if that eliminates a land tax headache. Either way, share dividends are going to get you a much higher income from your investments than realestate. Add in franking credits and you'd be laughing.

Sometimes it's better to eat the capital gains tax now and just move on with your life, rather than hold on to a future poorly performing asset because you don't want to pay the embedded tax liability. Of course you can minimise it by selling the property in the tax year following your early retirement, instead of now when you have your employment income.

At the start of the year I realised a $60,000 capital gain on shares (mostly eating PY capital losses, but still paying a little bit of CGT tax on it), so that I could buy another investment property. I'm going to do it again for my next property purchase.

You have a lot of capital that isn't giving you the income you want. You have so much choice here to make it happen.

deborah

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #16 on: October 17, 2020, 04:29:49 PM »
Iíve always been very wary of putting actual property into super, because itís so chunky - as they say, you canít sell off a bathroom. You can easily fill up your lifetime cap that way with one or two IPs, and when youíre in pension phase you have to take out a certain percentage every year. Many people have been burnt having IPs in super because of this.

From the way itís written, the OP has no mortgage on the IPs, but has one on his PPOR. He has about 30 years before he can access super, so he needs to concentrate on investments outside super that will give him an income for that time.

He would be better off having shares (or equivalent) outside super to create a steady income that he can draw down until he retires. At retirement, he could aim to have sold all assets outside super. IPs are ok if you donít need to sell them during this time, but shares are better because he would only need to sell a small batch at any time, avoiding capital gains tax. As you can buy most asset classes (including property) through the ASX, this doesnít mean he has to buy company shares if he doesnít like that asset class.

As his wife isnít working he should be splitting his super and topping up her super each year as much as his. But with so long before they can access their super, they really need to ensure they will have enough to last through those years, if they want to FIRE soon.

marty998

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #17 on: October 17, 2020, 04:41:56 PM »
Iíve always been very wary of putting actual property into super, because itís so chunky - as they say, you canít sell off a bathroom. You can easily fill up your lifetime cap that way with one or two IPs, and when youíre in pension phase you have to take out a certain percentage every year. Many people have been burnt having IPs in super because of this.

From the way itís written, the OP has no mortgage on the IPs, but has one on his PPOR. He has about 30 years before he can access super, so he needs to concentrate on investments outside super that will give him an income for that time.

He would be better off having shares (or equivalent) outside super to create a steady income that he can draw down until he retires. At retirement, he could aim to have sold all assets outside super. IPs are ok if you donít need to sell them during this time, but shares are better because he would only need to sell a small batch at any time, avoiding capital gains tax. As you can buy most asset classes (including property) through the ASX, this doesnít mean he has to buy company shares if he doesnít like that asset class.

As his wife isnít working he should be splitting his super and topping up her super each year as much as his. But with so long before they can access their super, they really need to ensure they will have enough to last through those years, if they want to FIRE soon.

Boils down to wanting to have cake and eat it too :)

rewardthisman

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #18 on: October 17, 2020, 05:33:43 PM »
My perspective on superannuation is the timing aspects are mostly irrelevant, because you can always proportionally overdraw on shares outside of super until you reach 60 (namely, so that you are achieving a 4% overall withdrawal rate on assets outside of PPOR, assuming one moves into 100% shares).

Thanks everyone for the further posts today. I will consider and let you know if I have any further thoughts.

rewardthisman

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #19 on: October 18, 2020, 07:45:04 PM »
@MrThatsDifferent, @marty998 and @deborah

Your posts were really useful and gave me some food for thought. I ran the ROI calculations over the weekend and it dawned on me that the best course of action is to sell the larger IP.
  • Assuming fees and costs of $25,000 to sell the house and that we receive full market value for the sale, we would be in a position to repay the mortgage and invest the remaining $500,000 into index funds.
  • Combined with the existing $550,000 in superannuation and another $50,000 investment from our cash reserves, we would have a total of $1.1 million invested into mutual funds.
  • Using the 4% rule, the safe withdrawal rate would be $3650 per month.
  • If we combine that amount with the monthly rental proceeds of our smaller investment property ($975 after fees and taxes) and the offshore pension ($1,850), we would be left with $6475 per month in cash flow.
  • In theory, if we cut some of the fat out of our budget (which is already underway) and consider our RE budget as MrThatsDifferent has pointed out, on average we would be able to save $2,000 plus per month. That combined with the capital appreciation on our PPOR and IP should give us a decent margin of safety.
My mortgage is coming up for refinancing in early to mid 2021, around the same time that the tenancy term comes to an end, so it seems that now is the perfect time to organise a formal valuation and have it placed on the open market.

MrThatsDifferent, you raise an interesting point about how life will look after FIRE. That's a question I don't yet know the answer to. I suspect it will first involve a period of rest and then some kind of business venture (possibly still in the legal field) that doesn't involve long hours (or even 9-5), is flexible and may be done from locations other than the inside of an office. One thing I didn't mention in my OP is my parents-in-law own untenanted properties overseas that we are free to use at any time. I have always wanted to take advantage of this, but it has been an impossibility outside of annual leave, so I can see us putting our PPOR on AirBNB or something similar and spending 1-2 months at a time in these locations while our daughter is still young.

Moving back to three days a week in my current role is also a possibility, as there are others at the firm who do so, although I suspect that conversation will only come to a head once I tender my resignation. I have already given strong hints to my supervisor about this possibility that so far have been ignored or dismissed. A part time role would deal with @deborah's concern about my wife and I's superannuation balance and ensure we have sufficient assets outside of superannuation until the preservation age. Another factor here is upon further reflection and discussion at home, my wife is keen to send our daughter to an expensive private school and plans to go back to part time work once our daughter reaches school age to fund these fees.

happy

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #20 on: October 19, 2020, 04:15:10 AM »
Its great to see your mind working OP and your plan evolving. If you and your wife plan to do some part-time work along the way, then combined  I think your plans are much more doable.

A word of warning re the expensive private school: I'm not saying don't do it, I sent my kids to a private school. Make sure you budget properly for the real cost. Depending on the school, the advertised fee is not all you pay.  The school uniforms are generally expensive, although you can save a bit getting some second hand. There's often building fund contribution and an annual excursion fee and anything else they can invent. Almost everything costs more than a public school eg textbooks and so forth. Also child is mixing with some kids with wealthy parents ( there will be some who are sacrificing hard to pay for their child but probably not the majority), which has a flow effect on WRT birthday parties, presents and so forth. One of my friends said double the actual fee, but I found it was closer to one third extra. Figure out how you are going to handle it when child says Mary in her class gets $200 a week allowance and Jimmy got a Velostar for his 17th birthday ( true story). Not to mention the poor kid who turned up for school camp with a matching brand new Louis Vuitton luggage set.

Its a good idea to get any longer travel trips done before kid gets too far into school...you then get stuck with school holidays limiting your plans.

MrThatsDifferent

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Re: Middle aged professional. Can I FIRE? (AUS)
« Reply #21 on: October 20, 2020, 02:58:39 AM »
OP, all good moves, congrats for working that through. My only other caution is that global travel will be insane for the next 3 years. Might not be easy for you and the family to travel around or have renters. Itís going to take 3-5 years at least for things to return to where they were (possibly longer). I wouldnít use that plan as your guide.