Author Topic: Case Study - Windfall of $120k, Transition to Partial-Retirement  (Read 2649 times)

MapleFarmer

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Good Afternoon fellow Mustachians,

Mr. and Mrs. MapleFarmer will be completing a one year professional excursion abroad in the next few years and anticipate saving at least an additional $120k during the period.  Appreciate your ideas on how best to deploy this capital to generate semi-passive income so that at least one of us can transition from our current 50-70 hr/week employment to another professional pursuit, at potentially lower income.

Life Sit:  Married couple filing jointly, early 30s, no children (two anticipated within five years, sooner if you ask Mrs. MapleFarmer).  When in the U.S., we live in D.C., and we intend to return following the one-year assignment, so that one of us can maintain our employment and retain health care benefits as we begin to expand our family.  We live in an area with good public schools and would likely stay in our current home if we remain in D.C.

Gross Income:  Currently $175k, $85k for him, $90k for her.  During the year abroad, that income will increase by ~50%.  All income is fully taxable (including D.C. "state" income tax).

Pre-tax deductions: Both max out our TSP (401k), $36k total.  Both have deductions for health, ss, fica, etc.  Specific amounts aren't likely to impact your response to our query.

Roth:  Both max out Roth IRAs, $11k total.

Rental Inc:  Own a home with separate rental unit that generates $1,400 per month income (45% of mortgage).  When abroad, we anticipate making necessary repairs or renting the entire home, which would more than cover the mortgage and maintenance.  We will have no housing costs abroad.  After mortgage interest ~($16,000) and depreciation ~($16,000) (among other things), we likely generate a loss of ~($2,400) if fully rented.

Adjusted Gross Income: $143k for 2015, this will increase as a result of the additional $100k-$120k income for the year (hence the need to minimize tax exposure).

Taxes: $21k Fed, $11k State, based on 2015 data.  Will also increase based on increased income for the year.

Current expenses: Our savings rate is 35%, post-tax.  Top spending categories are mortgage, travel, food, and home maintenance, including lots of DIY projects.  We use google fi, have broadcast tv, local internet, etc.  Bike to work daily, rarely use uber, rarely drive locally.

Mortgage: $487k balance (purchased for $695k in 2014) 30 yr fixed, 4.375%. Total PMT $3,100. P&I $2,621, Tax $400, Insurance $75.

Assets: $340k + home
Cash - $30k
TSP - $230k total, Mrs. $120k, Mr. $110k
Roth - $50k total
Old 401k - $30k

Home, ~$800k.  No plans to sell.

Liabilities:  Just the mortgage.  Pay CCs in full.  Have access to 100k heloc for liquidity, seldom use, always pay in full.

Specific Question(s):  We anticipate a windfall of at least $120k (on top of our current salary and savings) as a result of this one-year, one-time professional opportunity.  We recognize this is not a life-changing amount of income, but it could be leveraged to create a revenue stream that would enable at least one of us to leave our gov't employment and forgo the pension.  Doing so would empower us to pursue an advanced degree, reduce/eliminate future childcare costs, contribute to a start-up, pursue a passion, take the time to build a small business, have more time for our marriage, pursue other rewarding professional experiences, etc.  We considered using the money to pay down the mortgage, refinance, and reduce our monthly living expenses but at 4.375% pre-tax, we believe there are better ways to use this money.

a.  How do you suggest we minimize tax burden (income will be spread over twelve months spanning two tax years)/offset this income?

b.  What investments would you consider to generate semi-passive cash flow?  We have experience with real estate investing and would be comfortable investing in more affordable markets but are also open to other vehicles.

c.  For those of you who are planning to transition/have recently left a stable career (and lucrative pension for those willing to stay for 20 more years), what are the key decision points that enabled/will enable you to walk away?  If you had a clearly crafted plan, did your execution closely resemble your plan? 

d.  For those who walked away without a firm plan, what would you recommend to others considering doing so?

e.  What collective wisdom do our fellow Mustachians have to offer that we have failed to consider?

Thanks!
Mr. and Mrs. MapleFarmer

 
« Last Edit: October 19, 2016, 06:47:42 PM by MapleFarmer »

ooeei

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Re: Case Study - Windfall of $120k, Transition to Partial-Retirement
« Reply #1 on: October 19, 2016, 12:24:11 PM »
Well if we assume you invested the $120k in stocks/bonds and went with the 4% rule, You'd expect to withdraw an extra $5k a year from it. 

You currently spend ($143k-$32k)*.65 = $72,150 per year.

If we assume all of your other investments are invested in stocks/bonds and use the 4% rule, you are generating approximately $12k/year right now from your invested assets.  Combined with the $5k, you're looking at $17000 of your expenses covered, leaving a shortfall of $72150-17000= $55k you have to earn somehow.  Keep in mind you also still need to save for retirement, as you don't have it fully covered yet.

I suspect you're looking for more outside the box investments, such as real estate, but I thought it would be helpful to post the relevant numbers. 

farmerj

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Re: Case Study - Windfall of $120k, Transition to Partial-Retirement
« Reply #2 on: October 19, 2016, 04:14:24 PM »
Quote
Mortgage: $487k balance, 30 yr fixed, 4.375%. Total PMT $3,100. P&I $2,621, Tax $400, Insurance $75.

4.375? You should be able to get ~3.5% on a refinanced 30 year mortgage without plugging much, if any, of your windfall into it. Should save around $3000/year over the life of the loan (excluding mortage deduction).

However...

How long will you be in DC? How much do you want to stay in your current location? Most moderately high-income couples with whom I am familiar get out of the city once their children are old enough that they've begun interacting with DCPS. Demographic transition may change that decision, but it hasn't yet.

$800K is a huge amount of house to be supported by a single full-timer earning ~$100k and an uncertain second income, but the rental makes it a lot more doable... as long as you have good tenants. Remember that DC law is quite tenant-friendly.

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30s, no children (two anticipated within five years, sooner if you ask Mrs. MapleFarmer)

To summarize most of the threads I've read recently, get a move on. Move twice as fast if your wife is approaching 35. If she's looking at it in the rear-view mirror, then bring home a bottle of tequila and a bouquet of roses tonight.


205guy

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Re: Case Study - Windfall of $120k, Transition to Partial-Retirement
« Reply #3 on: October 19, 2016, 06:20:37 PM »
In the threads on renewable energy, one problem mustachians have is not paying enough income tax to claim the tax credits for solar panels and electric cars. In a bonus income year, you could invest in solar panels and an electric car, zero out your electric and gasoline bills for 20-30 years (effectively for life), and get a lot of that tax back. It all depends on whether the house is suitable for PV, what the local credits might be, whether net metering is possible (or other wholesale-retail rates), and how long you plan to keep the house.

MapleFarmer

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Re: Case Study - Windfall of $120k, Transition to Partial-Retirement
« Reply #4 on: October 19, 2016, 06:56:29 PM »
Quote
Mortgage: $487k balance, 30 yr fixed, 4.375%. Total PMT $3,100. P&I $2,621, Tax $400, Insurance $75.

4.375? You should be able to get ~3.5% on a refinanced 30 year mortgage without plugging much, if any, of your windfall into it. Should save around $3000/year over the life of the loan (excluding mortage deduction).

Thanks for the tip.  Will look into this!

However...

How long will you be in DC? How much do you want to stay in your current location? Most moderately high-income couples with whom I am familiar get out of the city once their children are old enough that they've begun interacting with DCPS. Demographic transition may change that decision, but it hasn't yet.

When we bought in 2014, we considered schools in the decision and live in a neighborhood with good public elementary schools. A few of our neighbors send their children to the same schools and have had positive experiences.  Your point rings true, particularly for middle and high school, but we aren't ahead of the curve at the elementary level in our particular corner of the city. 

$800K is a huge amount of house to be supported by a single full-timer earning ~$100k and an uncertain second income, but the rental makes it a lot more doable... as long as you have good tenants. Remember that DC law is quite tenant-friendly.

Agreed.  We paid $695k in 2014, have enjoyed some appreciation, and have had mostly positive tenant experiences.  Could be because we live upstairs, offer some generous perks, have had good luck... whatever it is, knock on wood.
Quote
30s, no children (two anticipated within five years, sooner if you ask Mrs. MapleFarmer)

To summarize most of the threads I've read recently, get a move on. Move twice as fast if your wife is approaching 35. If she's looking at it in the rear-view mirror, then bring home a bottle of tequila and a bouquet of roses tonight.
She'll thank you for this feedback.  I appreciate it, too.


MapleFarmer

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Re: Case Study - Windfall of $120k, Transition to Partial-Retirement
« Reply #5 on: October 19, 2016, 06:57:21 PM »
In the threads on renewable energy, one problem mustachians have is not paying enough income tax to claim the tax credits for solar panels and electric cars. In a bonus income year, you could invest in solar panels and an electric car, zero out your electric and gasoline bills for 20-30 years (effectively for life), and get a lot of that tax back. It all depends on whether the house is suitable for PV, what the local credits might be, whether net metering is possible (or other wholesale-retail rates), and how long you plan to keep the house.


Thank you for the useful, efficient, and outside the box idea!

BTH7117

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Re: Case Study - Windfall of $120k, Transition to Partial-Retirement
« Reply #6 on: October 22, 2016, 10:02:06 AM »
Hello, fellow DC'er.  We're also in our 30s, no kids yet, in an expensive area of the city with good elementary schools.  Nice to meet you.

Perhaps consider putting part of it in a DC 529 account.  Both you and your spouse can open one and deduct contributions of $4000 each per year from your state tax.  Assuming you're at the 8.5% rate, that's $680 in automatic savings year one on an $8000 investment.  Unfortunately, DC's plan has high fees, but you can roll it over to an inexpensive plan offered by another state after 2 years with no clawback of the deduction.

Lots of threads here about the pros and cons about 529 plans that you can read, but I think in DC it's worth the risks due to the high tax burden.



MapleFarmer

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Re: Case Study - Windfall of $120k, Transition to Partial-Retirement
« Reply #7 on: October 30, 2016, 06:54:19 PM »
Awesome!  Thanks for the tip, neighbor!

mozar

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Re: Case Study - Windfall of $120k, Transition to Partial-Retirement
« Reply #8 on: October 30, 2016, 09:33:05 PM »
Consider having MrsMapleFarmer get her eggs frozen. Or you can freeze embryos. But based on your case study I support MrsMapleFarmers desire to have a child now. You might be able to make living abroad work to your advantage if the country you live in has maternity leave/paternity leave and subsidized childcare.