Author Topic: Want to extend my gap year into a permanent situation. How to redeploy assets?  (Read 1201 times)

madisonengr

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I submit this post with great anticipation as I am looking forward to receiving the advice from the sharp money minds on this forum.

I am 49 and single. I got beyond fed up with my six figure job of 20 years last October and turned in notice without a real plan but comfortable that I had enough of a cushion to take at least year off of work. I am in the middle of that year now and have been having a fantastic time traveling the world and getting my house and everything else in my life organized in way that I was never able to before.

I want to keep the party going, but how to do it? My assets are split between retirement accounts, my house, a non-retirement brokerage account and a rental property. I'm looking for ideas on how to smartly use my assets to find $36k of income in perpetuity.

Assets:
401k #1: $700k ($10k roth, $690k standard)
401k #2: $78k standard
Roth IRA: $45k
Brokerage Account: $9k

Rental property: $280k current market value, $48k mortgage @ 2.625% fixed >> $233k equity
Primary Residence: $410k current market value, $98k HELOC  @ 4.5% floating>> $312k equity

Car 1: $3k paid for
Beater truck: $1k paid for

Liabilities:
$48k mortgage @ 2.625% fixed on rental property
$98k HELOC  @ 4.5% floating on primary residence



Annual Essential Expenses: $28,096
Expense breakdown as follows:
Primary residence property taxes: $7600
Homeowner's insurance: $900
Umbrella insurance: $175
Internet: $576
Healthcare: $1000 ($40/month + copays ACA, thanks Obama!!)
Water & Sewer: $600
Electric: $960
Natural Gas: $1200
Cell phone project FI: $480
Food: $3600
Car Insurance and registration: $525
Beater truck insurance and registration: $520
Gas: $360
Heloc: $4800
Clothing: $1200
Miscellaneous: $3600

Annual Luxury Expenses: $8000
Travel: $5000
Hobbies: $3000

Total Essential Budget: $28,096
Total Desired Luxury Budget: $36,096

Income:
Essentially no income right now, I've been living off of savings and plan to make some retirement account withdrawals this year to stay afloat. The rental property shows taxable income of approximately $8k/year. However, after expenses including long term maintenance, the cash flow is roughly 0. I'm in the final 6 years on the mortgage and all of the income is principal payments. For ACA purposes I have estimated my 2019 income to be $18k. I expect this to be a mix of rental income and retirement account withdrawals.

Tax:
This year I anticipate my net tax to be near 0. My mortgage interest and property taxes will offset most of the small income I actually show.



Goals:
1. I might be dreaming here but what I really want is to find enough income to fund my $36k luxury lifestyle scenario while keeping taxable income low enough to continue getting the ACA subsidy. I live in Wisconsin.
2. Payoff the 98k HELOC. How do I do this without incurring a huge tax bill from tapping assets?

Moves I'm considering:
1. The rental property is a single family house. It has a lot of equity and is in an area that has been appreciating nicely while attracting great tenants. If I hold I expect that I will gain about $18k equity per year between principal payments and appreciation. However, it is a cash flow disaster. The basis is low, so the depreciation is low but the principal payments are high. I end up showing a healthy profit each year that I have to pay taxes on but with no cash flow from the property to cover the taxes. I am considering selling it for a more expensive multi-unit property in the $600-$800k range that would cash flow about $12k year but would shield about $20k in income with depreciation expenses.

2. Option 2 for the rental house. Payoff the $48k mortgage (how to do this with existing funds?) so that it cash flows about $9k/year

3. Option 3 for the rental house. Just sell it, payoff the 98k HELOC and after taxes have about 100k of cash to last awhile

4. Selling the beater truck and renting a uhaul pickup on the occasions where I need a truck.

5. Getting roommates. I have a 4 bedroom house with just myself. I could probably rent rooms for $700/month.

6. Tapping into my retirement accounts using 'substantially equal payments' annuitization to avoid tax penalty.

7. Living off of everything except the larger $700k retirement fund until I'm 55. Then at 55 get a job for a short time roll the money into that company's 401k and then leaving that job so that I can access that money tax free. Side note - I would be upfront with my new employer about my intentions and timeline.

8. Working part time low stress/enjoyable job. e.g. Bike shop mechanic

9. Going back to high pay job working for the man for a few years to shore up finances.

Specific questions:
1. How best to redeploy my assets to get $36k of income?
2. Is there anyway to payoff the $98k HELOC and/or $48k rental property mortgage without incurring too much tax penalty
3. Do any of the moves I'm considering seem particularly good or bad. Is there something else I should be considering?
« Last Edit: May 01, 2019, 10:24:58 AM by madisonengr »

feelingroovy

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You are very close and are probably FI if you could fix the rental house situation.

Either selling and investing in index funds or selling and getting a good cash-flowing multi family both could work.

I also like the idea of getting roommates if you're open to it. That alone could give you the funds to pay off one or both mortgages over the next few years.

Other ideas:

1. Sell your own house and buy a smaller one free and clear.
2. Could and would you want to sell your house and move into the rental? That would give you enough.

madisonengr

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Thanks for the feedback.

Well I'm quite attached to my house, probably irrationally attached. I just finished a major renovation and I really like how it turned out. I want to live here and enjoy it for a few years at least before considering moving out. At that point either moving into my rental house or buying a new place that needs renovation would both be options. 

cchrissyy

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I think in your shoes I would sell the rental. That would erase the costs and hassles of the rental you don't like and that doens't bring in enough money even if it didn't have a mortgage. it's also enough money to pay off the heloc on your personal house, which is almost 20% of your current monthly expenses. get rid of it. then, any other income from the sale I would put in a brokerage account not look to getting into another rental.


on the expense side, I'd ask myself if I really get enough value to keep the beater truck. it's only worth $1k and you spend $500 per year to own it, plus whatever variable costs of actually using it. it's not much but your living expenses are so low that even this much makes a difference. do you need this? is your use so occasional that you could rent or borrow instead?

MonkeyJenga

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Congrats on setting yourself up so well and taking advantage of your piles of money.

I am not familiar with rental properties but yours sounds like it's not worth it. Not does the plan to get $12k a year from a $600-800k rental. So I would:

* Sell the rental
* Sell the beater truck
* Get a roommate. Start with one, you can afford to be selective on who you rent to, and if that goes well, consider adding another renter.
* Start a Roth conversion ladder: https://www.madfientist.com/how-to-access-retirement-funds-early/
* Really question some of the spending categories. Is that much clothing spend needed without a fancy job? What's in Misc? Is all of that needed for hobbies and travel?

Low stress, enjoyable jobs are rare - have you worked as a bike mechanic before?

Have you considered the higher costs of healthcare when you're older? It could be that you switch your luxury spending over to that if need be, just want to check that you're planning for it.

MrThatsDifferent

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Thanks for the feedback.

Well I'm quite attached to my house, probably irrationally attached. I just finished a major renovation and I really like how it turned out. I want to live here and enjoy it for a few years at least before considering moving out. At that point either moving into my rental house or buying a new place that needs renovation would both be options.

Only because you asked but Iíd probably sell the house and move into the investment property. You need about $400k to get you to 60 when you can access the retirement accounts, and thatís virtually what youíll get selling that place. Meanwhile, use the next 11 years to travel as much as possible and live in awesome LCOL countries and cities where your $36k goes far. You can Airbnb your place while youíre gone. Your retirement investments will almost double in value and youíll have more than enough to buy a new place outright anywhere. Since youíre single, you have lots of flexibility. Selling your house frees you up as you might discover there are other parts of the world you might want to settle in. Donít just put your toe in the water, throw yourself in.

madisonengr

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on the expense side, I'd ask myself if I really get enough value to keep the beater truck. it's only worth $1k and you spend $500 per year to own it, plus whatever variable costs of actually using it. it's not much but your living expenses are so low that even this much makes a difference. do you need this? is your use so occasional that you could rent or borrow instead?

Yeah the truck is going -- I hardly use it now. There is a Uhaul nearby with rental pickups.

madisonengr

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Low stress, enjoyable jobs are rare - have you worked as a bike mechanic before?

Have you considered the higher costs of healthcare when you're older? It could be that you switch your luxury spending over to that if need be, just want to check that you're planning for it.

Yeah, I've been a bike mechanic before. Long ago and I'm definitely not up to speed on the latest systems (Shimano 11spd, etc) but.... I'm pretty comfortable with a wrench and would relish diving in and learning everything. I really like bike shop environments. Cool people - quite a contrast to my last workplace.

Rising healthcare expenses is a concern... I don't have a plan in place yet.

madisonengr

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Thanks for the feedback.

Well I'm quite attached to my house, probably irrationally attached. I just finished a major renovation and I really like how it turned out. I want to live here and enjoy it for a few years at least before considering moving out. At that point either moving into my rental house or buying a new place that needs renovation would both be options.

Only because you asked but Iíd probably sell the house and move into the investment property. You need about $400k to get you to 60 when you can access the retirement accounts, and thatís virtually what youíll get selling that place. Meanwhile, use the next 11 years to travel as much as possible and live in awesome LCOL countries and cities where your $36k goes far. You can Airbnb your place while youíre gone. Your retirement investments will almost double in value and youíll have more than enough to buy a new place outright anywhere. Since youíre single, you have lots of flexibility. Selling your house frees you up as you might discover there are other parts of the world you might want to settle in. Donít just put your toe in the water, throw yourself in.

Good points thanks. I'll just throw in that I've found I don't need to limit myself to LCOL countries. I just spent a month in a very nice airbnb studio in a French Riviera seaside town for about $1300 total cost including airfare.

MrThatsDifferent

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Thanks for the feedback.

Well I'm quite attached to my house, probably irrationally attached. I just finished a major renovation and I really like how it turned out. I want to live here and enjoy it for a few years at least before considering moving out. At that point either moving into my rental house or buying a new place that needs renovation would both be options.

Only because you asked but Iíd probably sell the house and move into the investment property. You need about $400k to get you to 60 when you can access the retirement accounts, and thatís virtually what youíll get selling that place. Meanwhile, use the next 11 years to travel as much as possible and live in awesome LCOL countries and cities where your $36k goes far. You can Airbnb your place while youíre gone. Your retirement investments will almost double in value and youíll have more than enough to buy a new place outright anywhere. Since youíre single, you have lots of flexibility. Selling your house frees you up as you might discover there are other parts of the world you might want to settle in. Donít just put your toe in the water, throw yourself in.

Good points thanks. I'll just throw in that I've found I don't need to limit myself to LCOL countries. I just spent a month in a very nice airbnb studio in a French Riviera seaside town for about $1300 total cost including airfare.

Correct, you donít. Iím obsessed with a plan similar to yours, so I think about this constantly. My plan is a mix of LCOL for half to 3/4s of the year, which then letís me do some HCOL places the rest of the time. Money wise it all balances out. One of the keys for me is to reduce possessions as much as possible, cause why do we need so much stuff that rarely gets used? Experiences, not things. Enjoy.