Author Topic: Reader Case Study - Can our family retire now?  (Read 894 times)

danben

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Reader Case Study - Can our family retire now?
« on: September 15, 2020, 09:04:43 PM »
Hi everyone,

First - we'd like to say Thank you! The FIRE community gave us so much and set us to an unbelievable journey. 

If there is anything we learned this year is that life is unexpected. Retiring early and spending time with family is a luxury that not a lot of people can afford. We always believed that the goal is not to create a life of luxury but rather a life of possibility. We'd appreciate your help in understanding if we accumulated enough money to retire and let our money serve us. 

Topic Title: Reader Case Study - Can our family retire now?

Life Situation: IRS filing - jointly, number & ages of dependents - We are a family of four.  I'm 41, my wife is 39 and our kids are 7 and 5.5.    we live in WA; we want to do next year in Europe (We are dual citizens).

Gross Salary/Wages: ~$400k/annual income before any deductions
Current expenses: $6,000 a month / 72k/year
Expected ER expenses: $6,600 a month (adding for Health insurance)  - $78k-$80k/year/

Assets:
Total Assets = $2.4M
cash = $240k
Non-taxable accounts (401k, HSA, FSA, IRA, insurance, etc.) = $260k
Taxable brokerage accounts (invested) = $1.9M (the rest)
No house ownership.
As you can see our total assets consist of 10% cash and 90% stocks.  We re balance (10/90) every Q.  This re-balance gives us ~3 years of cash cushion (as yearly expense is 3.3% of current assets).

Here is the tricky part. We believe in buy and hold and have invested in what we know, so our stock portfolio is not diversified (and diversifying at this point will mean a large tax bill).  Our Stock portfolio looks like that:
60% in growth stocks (40% is in one large cap-growth stock with massive capital gains and 10% is with other large-cap growth stocks and 10% in mid-small-cap ETFs)
30% in S&P index funds and value-core stocks.
10% in Europe index.

More info:
Long Term unrealized Capital Gains = $1M
Liabilities: $0
At any point, if our portfolio gets hit hard, we will go to work part time (or even full time).  Once the kids are older, we'll probably experiment with entrepreneurship. 

Specific Question(s): Can we retire, and if not, what would you recommend us to do to make this dream come true?

Thank you!!!

SwordGuy

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Re: Reader Case Study - Can our family retire now?
« Reply #1 on: September 15, 2020, 10:39:30 PM »
$600 / month for health care for a family of four?   

What will your adjusted income be?   I guess for the first few years it would be whatever dividends you received in taxable accounts, so you would get a pretty good ACA subsidy because you could spend down your cash buffer and pull out the maximum from your portfolio that won't gum up the subsidy.   That might add another year or so..

But once you have to start withdrawing each year to maintain your spend rate that's not going to work.

While you are doing the minimal withdrawals you could do them from the biggest capital gains stocks.  If your income is low enough there's no tax, and it's fairly low otherwise.    That will help long term.  But long term capital gains rates are fairly low, so that's not a huge problem.   

Your spend doesn't include taxes, so those need to be factored in.   If you were stuck paying 15% on ALL your withdrawals (which is unrealistically conservative), your annual spend would be about $94,200, so let's round that down to $90,000.

That's $90,000 /  2,400,000 or a 3.75% withdrawal rate (WR).   That's reasonably conservative and we all (should) know the 4% WR is pretty safe to begin with.

So, in principle, you're good to go if your spending estimates are correct.

These are the risks I see:

1) Do you know that your health care estimates for monthly insurance are correct?   Are these high deductible plans where you might be out an additional $10,000 a year if you're unlucky?

2) Are you sure the rest of your expenses are close to correct?

3) You have a lot of your wealth in a fairly small number of stocks.   One Enron or JC Penney bankruptcy would hurt a lot.

4) Do you have skills that would get you re-employed fairly easily?  Or are you very specialized and would find it hard to find work again?

When I make important plans, I plan two different ways:

1) I plan for success.   I come up with a plan that will reach my goals.

2) I plan for failure.   I look at the ways my plan could fail catastrophically and leave me with an unacceptable result.  Then I make a new success plan that mitigates all the known catastrophic failure reasons.   An obvious test for a catastrophic failure possibility would be your single stock that holds 40% of your net worth becomes worthless before you can sell it off at a decent price.   Your withdrawal rate would go from 3.75% WR to 5.9%  (pretty darn high) but all those realized losses would help with the taxes a bit.    A $20,000 job would add about $15,000 to your pocket, which would drop you to a 4.9% WR. A $40,000 job would drop you back to about 4%.

You would have a number of years to make adjustments and since you're willing to go back to work as needed, that's not a catastrophic failure.

But hey, this is MMM's website, so I have to ask, "Can't you lower those expenses a bit?"

But I think it looks good.













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Re: Reader Case Study - Can our family retire now?
« Reply #2 on: September 16, 2020, 06:56:45 AM »
I myself would not ever look at any single equity as dependable for income, or even as having any dependable value in the future in the same risk-free manner we discuss diversified investments as allowing for a 4% SWR. 

So in your case that means you have assets of 1.6M you can depend on for income over time to support a $80k spend, so a 5% SWR, which is not horrible at all.  And obviously the $800k gamble you hold is most likely gonna maintain significant value, so a large backstop to a 5% failure.   But I wouldn't be basing any SWR calcs on the $2.4 number.  The rest looks plenty diversified to me.

That is not to say sell it all today (the tax hit makes that ridiculous), its just factor that in as added risk and do plan to smartly reduce it as quickly as possible in all the normal ways I would think (after FIRE sell up to the top of the 0% LTCG bracket, maybe even considering going above that, etc).

And its also not to say don;t retire today, I think you're just fine.  One additional point, if you think you or your spouse could return to work in the future and make anything close to the per hour pay you are getting now, I don't think there's really any reason to not walk away today and know if markets and that single stock do well you'll stay out, and if they tank you can always make plenty to cover expenses while they recover

Dicey

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Re: Reader Case Study - Can our family retire now?
« Reply #3 on: September 16, 2020, 07:06:26 AM »
I am sure there are plenty of examples of people with single-stock heavy portfolios (Enron? Lehman Bros?) who dearly wish they'd paid the damn taxes and diversified. Maybe a better question is how to diversify your portfolio in the most mustachian way possible. Figure that out and you're golden.

soccerluvof4

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Re: Reader Case Study - Can our family retire now?
« Reply #4 on: September 16, 2020, 08:41:16 AM »
I am sure there are plenty of examples of people with single-stock heavy portfolios (Enron? Lehman Bros?) who dearly wish they'd paid the damn taxes and diversified. Maybe a better question is how to diversify your portfolio in the most mustachian way possible. Figure that out and you're golden.


What @Dicey said..........!

TomTX

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Re: Reader Case Study - Can our family retire now?
« Reply #5 on: September 19, 2020, 03:18:18 PM »
I am sure there are plenty of examples of people with single-stock heavy portfolios (Enron? Lehman Bros?) who dearly wish they'd paid the damn taxes and diversified. Maybe a better question is how to diversify your portfolio in the most mustachian way possible. Figure that out and you're golden.

Diversifying starting the first year after retiring would take some of the bite out. The first $80K of AGI is at 0% for cap gains. After that, it's 15% - however, if you're going to try and cruise along at $0 tax - it's going to take quite awhile and it's possible you never catch up (which would be a good problem since $80k p.a. is more than you need)

Otherwise - take the hit at 15% tax rate (up to ~$496k) before retiring while you still have the cash flow to easily cover the tax bill.

Drawing it out increases risk that your limited stock selection underperforms. Doing it quickly means more tax.

Figure out the optimal balance for your family.

Personally, I'd strongly consider taking the 15% tax hit by realizing cap gains on ~$100k this year (figure out the precise number for yourself due to deductions/whatever). Individual stocks make me nervous.