Author Topic: Can you solve this FIRE math equation?  (Read 1713 times)

theshittybeatles

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Can you solve this FIRE math equation?
« on: April 16, 2020, 12:36:11 PM »
About me: I am a 32 year (happily) single male. I’ve always been naturally frugal and a big time saver. It comes easy to me. I recently realized I have about 60K saved up in my savings account and have been researching over the last 3 months on what to do with it. I’m a bit conflicted because I have a few different scenarios that would work. I am a small business owner with a seasonal business. I own a rental property that generates $650 in cash flow/month. I already only work 6 months out of the year and travel for the other 6. In those 6 months I can save around 20K to invest (without factoring in rental property)

My finances:
6 month small business: 50K
House with 5% rate that I still owe $75K on it and 10 years. Currently rent it out for $1,500/month and rent a small apartment with the $650 it gives me in cash flow per month. I essentially live for free while getting my mortgage paid for.
65K savind in my ROTH
50-75K in Disney Stock

I could sell my business for around $75-100K and I bought my house for 123K and it’s probably now worth 250K. I could make around 140K by selling the house.

My business is stable yet risky in the sense that I could get sued fairly easily as it falls under the “high risk pool” in the insurance world. My insurance is really expensive. It’s essentially a party bus company.

Basic:
Savings: 60K
House: $650/month or 140K by selling
Business: 50K/year or 75K-100K by selling
Stock: 50-75K
Roth: 65K

Here are the 6 scenarios I came up with:
Keep house, keep business, combine all other assets
Sell house, keep business, combine all other assets
Sell house, sell business, combine all other assets
Pay off house (keep to rent out at $1,700/month), keep biz, combine all other assets
Pay off house (keep to rent out at $1,700/month), sell biz, combine all other assets
Keep house (don’t pay off), sell biz, combine all assets

Basically, I’m wondering what would be the best move to make financially to achieve financial independence and retire early? I do LIKE what I do for a living, but the risk it carries scares me long term. I know it would be profitable for years to come, but at what cost? I’m HORRIBLE at math, so I was hoping someone could help me with the numbers….. THANKS!!!!!!

*** I’m aiming for 20-30K/year in early retirement****
*** Assume 7% return in an Index Fund*****

SuperSecretName

  • Bristles
  • ***
  • Posts: 353
Re: Can you solve this FIRE math equation?
« Reply #1 on: April 16, 2020, 02:35:51 PM »
I do LIKE what I do for a living, but the risk it carries scares me long term. I know it would be profitable for years to come, but at what cost?
Isn't "the cost" = your insurance?  You using an LLC?  Have you met with a lawyer to make sure you are protected?  Seems to me that if it's profitable now and will continue to be, no reason to give up if you don't want to.  You may just need stronger personal protections in case something bad does happen.

You don't have enough to FIRE yet, even with liquidating everything.

You have it pretty good now with 6 on/6 off.  If you want more money, then work a few more months.
« Last Edit: April 16, 2020, 02:38:08 PM by SuperSecretName »

dandarc

  • Walrus Stache
  • *******
  • Posts: 5454
  • Age: 41
  • Pronouns: he/him/his
Re: Can you solve this FIRE math equation?
« Reply #2 on: April 16, 2020, 02:53:04 PM »
Why not just flip cars if you're worried about the risk of running a limo service?

formerlydivorcedmom

  • Pencil Stache
  • ****
  • Posts: 701
  • Location: Texas
Re: Can you solve this FIRE math equation?
« Reply #3 on: April 16, 2020, 03:18:26 PM »
Without commenting on the math, why are half of your investments in a single stock?  That's pretty risky.

I'm not sure what the tax implications would be for you to start selling your Disney stock so that you could invest in index funds, but it might be worth looking into moving at least some of that.

Is your Roth also in individual stocks, or is it in index funds or other funds?

ChpBstrd

  • Walrus Stache
  • *******
  • Posts: 6656
  • Location: A poor and backward Southern state known as minimum wage country
Re: Can you solve this FIRE math equation?
« Reply #4 on: April 19, 2020, 10:31:58 PM »
The House:
You say the house cash flows $650/mo or $7800/year, and has equity of $175k. That's a yield of 7800/175000=4.45%, minus the costs of your labor and liability. An alternative to this investment might be an REIT fund like VNQ, which yields 4.64% at the moment. I'd probably go the REIT route because I'm lazy AF and don't like replacing roofs.

The Business:
That's a sweet gig you've got there, earning $50k for 6 months of labor in a relatively LCOL area! This semi-retired lifestyle could go on forever, except you suspect a lawsuit will eventually occur and wipe out the $75-100k you could have captured by selling it. You don't mention what assets are involved in running a party bus business - website, bus, and some "liquid assets" I suppose? Where I'm going with this is: If you are organized as an LLC and have adequate personal liability protection, and someone sues you and takes away your bus, business laptop, and margarita mixer, what's to stop you from starting a new company doing the same thing with all new assets? What's the replacement cost? How much of the replacement cost would insurance cover? That's what is truly at stake here. E.g. if the replacement cost is $80k, and insurance would net $50k, you could eliminate much of your business risk by just setting aside $30k in relatively safe, liquid investments.

The Investment Plan:
Let's say you need $30,000 per year in income. Your rent house or VNQ investment provides $7800 of that, so now we're down to $22,200. If you are using the 4% rule, you would need $555,000 to cover those $22,200. You have, let's say, $60k in stock already, plus another $60k in savings, so you need about another $435k.

At $20k/year in savings, this is going to take a while. The online calculators like networthify.com or similar will tell you how long. Obviously, you could work during the other 6 months and reduce your time to FIRE. Things start to get exciting quickly when you can save $50k/year. Set up a SEP IRA to reduce your taxes and learn about the backdoor Roth you can use to access those assets in early retirement.

100% in Disney? That's weird. I suggest diversifying by selling call options on the DIS stock until you are assigned (unless you are not willing to do many hours of homework first!). Then buy VTI.

LightStache

  • Pencil Stache
  • ****
  • Posts: 760
  • Location: California
Re: Can you solve this FIRE math equation?
« Reply #5 on: April 22, 2020, 06:08:23 PM »
I see you as having an asset protection problem, not really a math problem. This is not legal advice, but this is what I would do to get some peace of mind:
- Spend $ on a good asset protection attorney to put your business capital assets in one entity and lease them to your operating entity
- Start retirement accounts (SEP IRA/401K) and max those ASAP because they have protection from lawsuits; spend down your regular savings and brokerage if needed or transfer the funds to your asset holding company
- Move into your house to get homestead protections

In all of these options where you sell the business, you don't mention what you would do to generate income. Another business? A desk job? It seems like you've created a pretty good system and I wouldn't assume that alternatives are going to be lower stress for you.

If I were in your shoes, I'd build your existing business just to get to FIRE faster. Sell the business and the house when you're FI and can walk away to a stress-free life.

 

Wow, a phone plan for fifteen bucks!