Author Topic: UPDATED CASE STUDY: Just turned 30, is FI in 5 years possible?  (Read 8160 times)

Manatee

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UPDATED CASE STUDY: Just turned 30, is FI in 5 years possible?
« on: September 25, 2014, 12:00:10 AM »
UPDATE BELOW

I just turned 30, my husband is the same age, no kids. I’ve read all the MMM posts over the past month or so, and although we’ve always been frugal we hadn’t seriously considered early retirement until now.

(All amounts are annual unless otherwise noted)

Income:
- Pre-tax combined income for me and my husband: $184,000
- Bonuses, ESPP gains, stock grants: $15,000 (varies; 2014 estimate)
- Dividends and interest: $15,000
- Total effective tax rate for 2013 was about 25%, so assume the same for 2014.

Total after tax income:  $160,500

Current expenses:
- Mortgage: $14,112 / $1,176 monthly
- Property tax and insurance: $6,432 / $536 monthly
- Garbage, water, gas, electricity, internet: $1,560 / $130 monthly
- Cell phones: $276 / $23 monthly (mostly covered by work; expect this will increase in ER)
- Car insurance and gas: $1,476 / $123 monthly
- Public transit: $2,400 / $200 monthly
- Groceries: $4,500 / $375 monthly
- Restaurants: $3,600 / $300 monthly
- Everything else: $4,800 / $400 monthly (clothes, medical, electronics, home furnishings, services, gifts etc.)
- Travel: $6,000 (Includes all food, shopping, etc. We’re considering not traveling until we reach FI.)

I’m throwing in a $10,000 annual buffer for miscellaneous “one time” things like home repairs, car repairs and expensive medical procedures.

Total expenses:   $55,156 ($3,263 monthly without travel/buffer)

Expected ER expenses:
Kids? Undecided

Assets:
- Cash: $28,000
- Bonds: $261,000 ($28K in old treasury bonds; $4k in a 401K fund; the rest are individual bonds, $28K of which are held through an IRA)
- Stock: $437,000 ($80K in index funds/401k; the rest is in about 20 individual stocks, $64K of which are held through an IRA)

Total investment assets: $726,000

Other assets:
- 1 car (no loan, I'm counting this as $0)
- Home in San Francisco (2 bed / 2 bath): $550,000

Liabilities
- Mortgage: $225,000 (rate is 4.65%)

So total net worth is $1,051,000.

Specific Questions:
1. When can we reach FI?
2. How should we plan for taxes (now and in retirement)? We’ve always maxed out 401K contributions.
3. What should we budget for health insurance during retirement? This is the unknown amount I worry about, especially if we have a kid.
4. How much should we budget for 1 kid? We’re fine with public schools all the way but would want to contribute towards college.
5. We’re interested in taking long, slow trips in retirement – how long could we travel on, say, $10,000 if we stay in one place? Any suggestions for good locations for this?
6. How should we allocate our investments? Current non-housing allocation is 60% stocks, 36% bonds, 4% cash. 
7. We plan to pay off the mortgage before retiring. (No plans to move in the next decade or so.) Should we pay off the mortgage all at once right before we retire, or gradually until we reach retirement?
8. Any suggested books/blogs to read?

Thanks in advance!
__________________________________________________________________
2017 UPDATE

Over three years have passed since I found the MMM blog and posted my case study. I haven't posted much since then, but occasionally read the forums and like seeing updates so thought I'd do one. Since then, our net worth increased to $2 million (our portfolio is $1.2 million and our home is about $800k, no mortgage). It's unbelievable how our net worth took off due to raises/bonuses, the stock and housing markets, and continued frugality. Our non-mortgage spending has been:

2014: $34,123
2015: $35,901
2016: $35,902
2017 (projected): $35,266

We buy everything we want, so I'm confident we'll be happy with the same level of spending in retirement (although of course the cost of health insurance is out of our hands). We didn't postpone spending on travel until FI - I'm surprised I suggested that in the original case study. On the income side, our gross last year was over $300k. We're still working, in part because we don't have enough credits to qualify for social security, but we're planning to scale back significantly starting next year.

Finally, learning about financial independence and personal finance over the past few years has profoundly changed our lives. Our strong financial position gave us the confidence to move to more interesting but initially lower-paying work and make a bunch of demands about our work situation that, to our shock, we got. It's amazing to feel so free and in control of our choices. The one downside is that it's become difficult to relate to friends and relatives who are pursuing ever-increasing spending and complain constantly about their jobs. For a while I was telling them what they could do to change their situation, but I eventually realized that they don't want to change, they want to complain. I've learned to just listen and keep my interest in FIRE to myself but it can feel a little isolating. I'm grateful for the online FIRE community.
« Last Edit: October 22, 2017, 01:46:18 AM by Manatee »

waltworks

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #1 on: September 25, 2014, 12:38:05 AM »
You need a vision of what "retirement" means to you before most of that can be answered. If you like to work a little bit, at least, and you don't plan to spend a ton or live anywhere too crazy expensive, you are arguably there now. If you don't want to ever make another dime, want 10 kids, and feel like downtown London is calling your name - you are going to need to keep the nose to the grindstone.

I will attempt to actually answer the specific questions in order...

1. See above. Could be now, could be never, depends on lifestyle choices.
2. For now, max all tax advantaged accounts. In FIRE, if you have so much coming in passive income that taxes are an issue, that is not really a "problem".
3. Do some research on the ACA wherever you plan to live. Price out private insurance. Be aware that the situation is pretty fluid. It's my belief that we'll end up at a gov't-run public system at some point but I can't say when that will be. Essentially: no way to predict.
4. Again, depends on lifestyle choices (stay home w/kid and make own baby clothes? Hire $100k/year nanny? Something in between?)
5. Where do you want to go? What do you like to do when you're there? There are places where $10k will last you a lifetime, in theory, and you like hanging out with subsistence farmers in thatched huts. There are places where it'll get you a few weeks at most.
6. Allocation sounds reasonable.
7. Assuming you are itemizing deductions, sort of a tossup. You do not have a fantastic rate but in the 25% bracket your deduction is worth quite a bit. Sit down with a CPA or something and figure it out. You *probably* want to pay it as slow as possible but I'm far from a tax pro.
8. Haunt the message boards here. Just read anything that seems interesting. You will learn a ton and see references to many other good sites/books/etc.

-W

Mr. Rich Moose

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #2 on: September 25, 2014, 12:46:48 AM »
1. You are doing fantastic! Your FI magic number including your buffers is right around $1.5M at 4% SWR. You're really about 1/2 way there. If you continue saving at your current rate ($110k per year) you should be looking at 5-6 years to retire, depending on market returns of course.
2. As for taxes, you really want to minimize as much of your currently high taxable income as you can. Use HSA, Traditional IRA, etc. Check out this article: http://www.gocurrycracker.com/never-pay-taxes-again/ and a few from: http://www.madfientist.com/archives/ that are related to taxes. These are Jeremy and the Mad Fientist are both very smart people that offer great examples of tax minimization for US citizens.
3. Fund a HSA if you can. Get a high-deductible health care plan. The MadFientist will help.
4. MMM talks about this in his blog. He proves over and over that kids are not expensive if you want to do it right. If you're still working and have high incomes, fund a 529. You may not need to worry to much though. If you are FI in 5 years, even a small amount of part-time work will easily help your future child out with college funding. I'm with MMM that its not good to fund everything for your child. Give him some skin in the game and it will go a long way.
5. There are tons of great places to travel at minimal costs. The only extra spending will be the flights, trains, and some touring costs. For most places in the world your food will be the same or less, lodging can be very reasonable if you're staying for any moderate length of time (consider home swaps, airbnb, etc), and daily life costs the same or less. It's very likely that you could travel to several locations a year for $10k. Just stay away from the big tourist traps and you'll be fine with that budget. Some considerations for places to go that are on my personal list with cheap to moderate costs of living (flight costs excluded in some cases): Vietnam, south-west France, Portugal, southern Italy, Thailand, Ecuador, Panama, Argentina, New Zealand, and South Africa. The trick is to be smart about your flights. New Zealand sets you back a pricey bit for flights, so you may want to stay there for at least 6 months just to bring down your average monthly flying costs. Also, when you're retired you can fly in shoulder seasons while your friends are busy with work and school.
6. Asset allocation is a personal choice that relates to your comfort level. Common allocations are 90/10, 80/20, 75/25, 60/40... you get my point. It's what works for you. Being more aggressive with stocks may help in your build-up stage. Personally when I saw your investments I couldn't help but flinch at your individual stock holdings. I would move to indexing only because I have full faith in indexing. Biggest thing though, make sure you're diversified. Also, if you have a significant amount of money in taxable accounts, consider using these accounts for your international holdings due to the tax advantages.
7. Your current rate is a bit on the higher side. You could consider a refinance if it makes sense for you financially to a 15 year mortgage. If you can lower your rate to ~3% I wouldn't rush to pay it. At your interest rate it may be worthwhile increasing your payments now so it's done by your FI date. It can kind of act like a bond investment, guaranteed 4.65% return isn't too bad.
8. Read http://jlcollinsnh.com/ for the stock series especially. And the two previous blogs I mentioned.

Enjoy!
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Manatee

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #3 on: September 25, 2014, 07:41:12 PM »
Thank you for the detailed replies. I do have a lot of individual stocks... I bought them starting in 2010 so they've mostly done well, but I wish I had bought indexes as it would have been less hassle. I'm not sure how I should move them to indexes - sell them gradually and buy indexes with the money?

With the mortgage paid off, our annual expenses would be about $40k so would a FI number closer to $1.1 million make sense? (We're planning to maintain the same lifestyle and if we have a kid work part time)

Mr. Rich Moose

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #4 on: September 25, 2014, 08:05:56 PM »
Thank you for the detailed replies. I do have a lot of individual stocks... I bought them starting in 2010 so they've mostly done well, but I wish I had bought indexes as it would have been less hassle. I'm not sure how I should move them to indexes - sell them gradually and buy indexes with the money?

With the mortgage paid off, our annual expenses would be about $40k so would a FI number closer to $1.1 million make sense? (We're planning to maintain the same lifestyle and if we have a kid work part time)
On point 1, I hate to sound like a "market timer", but because your individual stocks are held in a taxable account you are best to sell when the market is in a slump, not riding high like it is currently. If you sell now you will likely have a steep and unnecessary capital gains tax bill. If you wait for a correction you might be able to sell when those gains are not as big. If you have any that are down from the time you purchased them you can consider selling them, using the loss against your tax bill, and start purchasing index funds. I would have a chat with your CPA first though.

Yes for $40k your FI number would be around $1M, maybe a bit more if you're cautious. If you're still planning to work part-time, personally I would say you're very safe to "retire" with $1M in investable assets. It looks like you have great jobs and high qualifications based on your current income; you could probably pay all your living expenses with freelance / part-time work and not have to dig into your 'stash at all.
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vagon

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #5 on: September 25, 2014, 08:09:39 PM »
Yeah on that stock converting to index fund note I would also consider doing it when you FIRE as less income generally means less tax. Talk to a CPA to go over your specifics though.

MDM

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #6 on: September 25, 2014, 08:39:56 PM »
On point 1, I hate to sound like a "market timer", but because your individual stocks are held in a taxable account you are best to sell when the market is in a slump, not riding high like it is currently. If you sell now you will likely have a steep and unnecessary capital gains tax bill. If you wait for a correction you might be able to sell when those gains are not as big. If you have any that are down from the time you purchased them you can consider selling them, using the loss against your tax bill, and start purchasing index funds.
Let's think about that.  One could read the words above as "buy high sell low".  If you really think "waiting for a correction" is best then sell now (while your after tax gain is higher than it would be if you sell after a significant market drop), hold cash, and buy later.

Yes, there are times to take losses.  One time is when you think the investment will do even worse in the future.  Otherwise, be cognizant of tax implications but don't let tax minimization be the tail that wags your overall investment strategy.

nereo

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #7 on: September 26, 2014, 10:41:45 AM »
Quote
Specific Questions:
1. When can we reach FI?
2. How should we plan for taxes (now and in retirement)? We’ve always maxed out 401K contributions.
3. What should we budget for health insurance during retirement? This is the unknown amount I worry about, especially if we have a kid.
4. How much should we budget for 1 kid? We’re fine with public schools all the way but would want to contribute towards college.
5. We’re interested in taking long, slow trips in retirement – how long could we travel on, say, $10,000 if we stay in one place? Any suggestions for good locations for this?
6. How should we allocate our investments? Current non-housing allocation is 60% stocks, 36% bonds, 4% cash.
7. We plan to pay off the mortgage before retiring. (No plans to move in the next decade or so.) Should we pay off the mortgage all at once right before we retire, or gradually until we reach retirement?
8. Any suggested books/blogs to read?
Sigh.  Sometimes I wonder if these posts are trolling just to make me feel financially adequit.
Walt and TuxedoEagle already did a good job of summarizing and saying "it depends" for almost all of oyur questions. 
Below are my two cents:
1) you have $726k in investments with the ability to save $110k+ a year.  I'll ignore the value of your home, because it's only an asset when you sell it (or in some circumstances utilize the home equity).  Until then it's a liability.  The only thing missing is how much you expect to spend each year in retirement.  If it's under $30k/year you are already there - but you'd probably have to sell your home and move someplace where you could find something for the ~$500k you'd sell your current place at.  To estimate, in five years you could have anywhere between $1M (for a truly-horrible -5% annualized growth rate) to $1.7M (for a more typical +7% growth).  That's would fund expenses between $40k and $68k, which is in the ballpark of what you spend now anyway.  So yes, retirement in 5 years seems easily doable - even if the market drops a fair bit.
If you're willing to move to a place with a lower COL and where you could buy a home for under $350k, I'd say you could retire this year.

2) your income's beyond my dreams, so I can't comment other than the normal 'max out your 401(k)s, utilize HSAs and IRAs, and then try to hold onto investments for min. 1 year to reduce taxable gains.  Here's I'd recommend talking to a fee-only tax accountant. for ~$200 he/she could sketch out a plan to minimize your tax burden.

3) depends on age/health, and the ACA is just getting its legs, so while there are a lot of opinions, no one knows for certain what costs will be in 5-10 years.  For now the Kaiser foundation gives this useful estimator/calculator: http://kff.org/interactive/subsidy-calculator/. Try plugging in your numbers for each decade of life to get a rough estimate.  Then, take a tablespoon of salt for all estimates of what you will pay in your 50s, 60s, 70s, etc.  no one knows what it will be like in 20+ years.

4) Geez this estimate could be all over the map.  move to a low COL area and utilize public schools and it could be $2-5k per year per kid.  Since you will be retired, presumably you won't need to pay much for daycare, and daily involvement can more than make up for any 'advantage' the child gets from going to an elite private school.  Or, you can enroll them in tons of expensive programs and activities, and each kid can easily exceed $15k/year.  Up to you and your values.

5) My brother works for an NGO, earns around $20k/year working part time, and spends ~6 months a year traveling primarily through Asia and Africa, and he still manages to save money each year. Jacob from extreme early retirement (if I remember correctly) lives on <$10k year and travels extensively.   If you are willing to avoid expensive cities and hotels, cook your own food and rent out your home while you are gone you can visit/live in many, many places for under $2k/month.  It's even possible to MAKE money renting out your house while living someplace else where rent might only be $100/month.

6) Everyone needs to come up with their own asset allocation (AA).  Historically, during most periods an AA heavily weighted in equities has faired better than one with a large amount of bonds and cash/gold/bitcoins, albeit with higher volatility.  My personal preference is around 95/4/1 (stocks/bonds/cash), but there are other schools of thought out there.  Read up on it.  What's most important is that you STICK to your AA.

7)You have a mortgage of 4.65%.  First,  I'd look to see if you can't refinance that now that you owe <$250k.  With a decent credit score you might quality for a rate at/around 3% right now with a 15 year term.  If so I'd favor paying off the minimum amount each month and investing everything else.  Over time equities will almost certainly return more than 3%, and since you already have ~2/3rds of your home paid off there's little chance you'll ever end up underwater.  If the housing market take a nose-dive you'll actually be better off having more money in equities than having no mortgage.

good luck and keep at it.  Once you have more specific quesitons in mind let us know

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Manatee

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #8 on: September 26, 2014, 07:18:28 PM »
Thanks for the thoughtful reply nereo. Out of curiosity, what seemed trollish? (Perhaps my questions are a bit basic...)

We plan to have the same spending in retirement, so it's heartening to hear people think 5 years is reasonable for this. The wild cards seem to be health insurance and the hypothetical kid, but I'm comforted by the fact that we're healthy and don't expect to pay anything for childcare - the plan is for both of us to be at home and we have tons of family in the area. For that reason, we're unlikely to move, but if anyone has a suggestion for a safe, low COL area in Northern California, I'd love to hear it (Santa Rosa? Sacramento?). COL doesn't seem that bad in SF anyway once housing is paid off (I know, implicit loss of investment returns).

I'm surprised the consensus seems to be to refinance and keep the mortgage. Isn't it lower risk to pay it off so that expenses in retirement are lower? Once our retirement fund is large enough to live off of, I imagine I'd be more concerned with living within our investment income than missing out on growth, if that makes sense.

mozar

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #9 on: September 26, 2014, 09:28:10 PM »
My understanding is that you need growth for the safe withdrawal rate to work. If you have conservative investments then your swr is lower. But you still should look into refinance to save interest. And something about if you have less than 5% mortgage rate it makes more sense to keep the mortgage.
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frugaldrummer

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #10 on: September 26, 2014, 11:20:30 PM »
Quote
I'm comforted by the fact that we're healthy and don't expect to pay anything for childcare - the plan is for both of us to be at home and we have tons of family in the area.

You mentioned you were 30 - would you be the one bearing the child, or your spouse?  If it's your spouse - how old is she?

I ask because, if you want a child, I wouldn't wait past 30 to start trying to conceive.  I know FIRE is an attractive goal, but fertility declines and mutation rates like Down syndrome increase with every year.  If this is really important to you, don't assume you can put it off to age 35 and everything will work out fine. (Did you know, btw, that a 35 year old first time mother is called an "elderly primip" in medical terms and considered a high-risk pregnancy?).

mozar

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #11 on: September 27, 2014, 08:28:54 PM »
In terms of fertility most women can wait until 35 and be fine. It's not a cliff like the media says. But I wouldn't wait beyond 35 if you can help it. You can get a vaginal ultrasound to check on your fertility. If you have had difficult periods your whole life you may be infertile already anyways.

I think your post sounds trollish because it's hard (for me at least) to imagine that some people make so much money, and plan to spend so much after FIRE. I plan to retire with 600k, which will take ten years. I understand that some people would be jealous of me as well.
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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #12 on: September 28, 2014, 06:16:02 AM »
I don't post my case study and in fact created a separate account to hide my identity because the forum is not very friendly to high earners.

People think you're a troll (I do not) because your post sounds to them like this.

I make an infitabulous supply of money. I spend twice as much as you and consider myself mustachian. I spend more on vacation then some extremely frugal people spend altogether in 6 months. For most I have enough to retire now but I am a spendy complainy pants and want my cars to be German and I don't camp.

Sometimes I think there should be an ask a mustachian page for high earners. I guess it's white coat investor

Malaysia41

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #13 on: September 28, 2014, 06:47:06 AM »

On point 1, I hate to sound like a "market timer", but because your individual stocks are held in a taxable account you are best to sell when the market is in a slump, not riding high like it is currently. If you sell now you will likely have a steep and unnecessary capital gains tax bill. If you wait for a correction you might be able to sell when those gains are not as big. If you have any that are down from the time you purchased them you can consider selling them, using the loss against your tax bill, and start purchasing index funds. I would have a chat with your CPA first though.


I disagree.  If you've held these stocks since 2010 and sell, they will qualify for special tax treatment as "Long Term Capital Gains" or LTCGs.  That is 15%  tax rate NOT your ordinary income tax rate.

Of course, if you wait until retirement, and squeeze yourself into the 10% or 15% tax bracket, then the special treatment goes to 0 (0% tax rate). 

If you want index funds, move them over.  IMO, I like holding individual stocks, so I'd keep them.  If you like the stocks, and you hold a diversified portfolio, I see no harm in keeping them.  That said, I suggest you max out your 401k contributions before buying any more stocks in your taxed account.
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Manatee

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #14 on: September 28, 2014, 08:44:48 AM »
High income? Our per-person base pay comes out to $92k pre tax - in Silicon Valley, that's nothing special. Starter homes here are over $800k.

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vagon

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #15 on: September 28, 2014, 06:37:16 PM »
High income? Our per-person base pay comes out to $92k pre tax - in Silicon Valley, that's nothing special. Starter homes here are over $800k.

http://www.burbed.com/

Yeah its the same in Sydney. Savings is whats important here and savings are relative to COL. A lot of people cant fathom how COL can be so high.
There's a corollary to that though - it is actually easier to save money by cutting down on (or out altogether) some items that people might regularly perceive as necessary.
I think of this place as trying to maximise the difference between income and COL while retaining happiness.
If you do that you will be fine.

In regards to your specific questions take TuxedoEagle's advice

If you are not attached to the Valley, then why not think about where you would like to live. You can move and release a lot of the equity in your house which can contribute to your retirement funds. Or it might make sense to keep it and rent it out depending on the tax situation.

I would recommend finding a good CPA and talking it through with them. Have them explain it to you so you really understand it rather than just taking advice.
The comparatively small cost will be worth it.
Also ask for a CPA recommendation, I'm sure people on these boards can offer one.

nereo

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #16 on: September 29, 2014, 09:12:10 AM »
Thanks for the thoughtful reply nereo. Out of curiosity, what seemed trollish? (Perhaps my questions are a bit basic...)

We plan to have the same spending in retirement, so it's heartening to hear people think 5 years is reasonable for this. The wild cards seem to be health insurance and the hypothetical kid, but I'm comforted by the fact that we're healthy and don't expect to pay anything for childcare - the plan is for both of us to be at home and we have tons of family in the area. For that reason, we're unlikely to move, but if anyone has a suggestion for a safe, low COL area in Northern California, I'd love to hear it (Santa Rosa? Sacramento?). COL doesn't seem that bad in SF anyway once housing is paid off (I know, implicit loss of investment returns).

I'm surprised the consensus seems to be to refinance and keep the mortgage. Isn't it lower risk to pay it off so that expenses in retirement are lower? Once our retirement fund is large enough to live off of, I imagine I'd be more concerned with living within our investment income than missing out on growth, if that makes sense.

Ok - the troll comment was a bit tongue-in-cheek, and I probably shouldn't have said it.  Basically when I see someone with a very high income (compared to me) with very little posting history I think "aw man.... is this person legit or just trying to make me feel financially jealous". 
From what you've said you are certainly leagues ahead of where my wife and I am, at a similar stage in life (early 30s, contemplating a kid and eventual retirement, alhtough our FI date will likely be 10+ years away).

Regarding the refinancing of a mortgage vs paying it off, it's in the realm of "whatever you are most comfortable with".  Based on previous economic conditions (see firecalc.com) anytime you have the choice of paying off debt under 4% or increasing your savings, the odds heavily favor increasing your savings.  In your case, you could aggressively pay down the $225k, or you could aggressively increase your savings by the same amount.  Chances are you will earn more money in interest from having it in your savings than you would save from having your mortgage paid off.
Also, there's what happens after you pay off your mortgage. While real-estate markets vary wildly, on average across the entire US and over many decades, housing prices just barely outpace inflation.  So if you pay off your home now, in 20 years it will probably be worth just about the same amount.  Contrast this to equities, where after 20 years you can expect the value to be ~3.8x higher after inflation.
Finally, right now you have about $500k of your net worth tied up in your home.  That's roughly 40% of your net worth.   If you paid off your mortgage (at the expense of increasing your savings) that % would only increase.  Personally, I'd want a higher percentage of my retirement portfolio in equities.  Fires, floods, riots, earthquakes, crime and rampant unemployment can (in extreme examples) devastate the value of your home.  It's unlikely, but it happens.
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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #17 on: September 29, 2014, 09:25:29 AM »
The answer to your question of course you already know.   Yes,  it is possible to be FI in 5 years.   It is pretty simple actually.

Cut your expenses and max out your investing.   It is the same formula for everyone. 

Simple,  done!

Good luck. 
 
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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #18 on: September 29, 2014, 09:40:30 AM »
You have received some excellent advice above, however I would simply underline that you need to create a stronger vision of your early retirement.

It may change and evolve over time, in fact....I would be surprised if it didn't, but figure out where you would like to live, how you'd like to live, whether kids are likely or not, and from that you can determine exactly what your target number is, giving you a data-based starting point.

You are doing really well!  I am impressed with your low mortgage, we have a home of similar value and are just a few years older, but have a larger balance left on the cursed mortgage.  I can't wait to have my mortgage disappear!!

nereo

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #19 on: September 29, 2014, 10:17:20 AM »
Quote
Assets:
- Cash: $28,000
- Bonds: $261,000 ($28K in old treasury bonds; $4k in a 401K fund; the rest are individual bonds, $28K of which are held through an IRA)
- Stock: $437,000 ($80K in index funds/401k; the rest is in about 20 individual stocks, $64K of which are held through an IRA)

Other assets:
- Home in San Francisco (2 bed / 2 bath): $550,000

Just wanted to comment on your current AA (personal opinions here folks!)
You have 6 months worth of cash on hand.  While having a "6 month emergency fund" is a popular mantra of financial 'wizdom', right now these are 28k idle employees who aren't doing anything to help your retirement.   You already have a ton in savings (including bonds, see below) which you can draw from if/when an emergency strikes.  Presumably you also could tap into a HELOC as well.  I'd argue you would be better off having just 1-2 months expenses in cash, and put the rest to work by investing it or paying down your mortgage.
see: http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

Second, you've got a ton of bonds - about 36% of your investments (outside of your primary home).  For someone who hopefully has >half a century of life left, I think this is a huge amount.  Do yourself a favor and run some simulations on firecalc.com looking at what different historical returns have been with a different mixture of bonds.  Try 100/0 stocks/bonds, 90/10, 80/20, 70/30 and 60/40.  Bonds certainly smooth out the ride, but through the majority of the last 100 years you would have been better off holding a higher ratio of stocks/bonds.

Your home is your biggest expense, and will continue to be so even in FI because of high property taxes.  You certainly have the income to afford to continue to live there, and if that's what you want to do then by all means stay there - do what makes you happy!  But if consider moving to a place with lower housing costs you could retire today without reducing your lifestyle one bit.  For example, selling your home and purchasing a new one for $350k would eliminate your mortgage, free up $1400/month (no mortgage plus a savings of ~$225 in property taxes) and pad your investments by $200k.  Your resulting portolio would be $926k.  A 4% SWR would give you $37k/year.  With your revised annual spending of ~$23k/year (no mortgage, lower taxes) you would have an effective SWR of 2.5%  Suuuupppper safe!   You'd basically have a $1k/month cushion before ever exceeding a 4% SWR.

just something to consider when asking "can I retire in 5 years" or even it's close cousin "should I keep working this job for another 5 years?"
"Do not confuse complexity with superiority"

Mr. Rich Moose

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #20 on: September 29, 2014, 10:23:15 AM »
On point 1, I hate to sound like a "market timer", but because your individual stocks are held in a taxable account you are best to sell when the market is in a slump, not riding high like it is currently. If you sell now you will likely have a steep and unnecessary capital gains tax bill. If you wait for a correction you might be able to sell when those gains are not as big. If you have any that are down from the time you purchased them you can consider selling them, using the loss against your tax bill, and start purchasing index funds.
Let's think about that.  One could read the words above as "buy high sell low".  If you really think "waiting for a correction" is best then sell now (while your after tax gain is higher than it would be if you sell after a significant market drop), hold cash, and buy later.

Yes, there are times to take losses.  One time is when you think the investment will do even worse in the future.  Otherwise, be cognizant of tax implications but don't let tax minimization be the tail that wags your overall investment strategy.

Yeah MDM you're right, the way I worded my post didn't properly convey what I was trying to say.

@Manatee What I should have said: It really depends on what your stock holdings are and how they've performed. Assuming you want to move to indexing only, Step 1: don't purchase more individual stocks, open a Vanguard account, pick the indexes you want, and start buying them.
Step 2: Evaluate your stock holdings. If you are "down" on any of your individual stocks, consider selling them and claiming the loss on your taxes (talk to your CPA first!). Purchase index funds instead with the money. Claiming losses may help you more now than later because of your high income. Hopefully you didn't buy stocks like BBRY (RIM) in 2008, but if you did... it may be smart to take the loss now, reduce your tax bill, and buy index funds.
Step 3: If you have any stocks that you regret holding due to high volatility, low growth prospects, etc and you potentially have a significant loss to book from Step 2, consider selling these stocks (again talk to your CPA first!). Purchase index funds instead.
Step 4: Look at the rest of your holdings. Its very likely that you have some stocks that are great long-term investments with low volatility such as BRK, GE, KO, CVX, etc... Consider keeping these for life. As for the ones you don't want, wait until their value presents opportunities to sell such as Step 2, or as vagon suggests wait until you're retired and slowly sell them at that time.

MDM is right to say that you don't want to have tax minimization be the driver of your investment decisions, but at the same time in this highly valued market don't make unwise decisions that line Uncle Sams pockets, not yours.
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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #21 on: September 29, 2014, 10:42:13 AM »
+1

Great advice.

CanuckExpat

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #22 on: September 30, 2014, 10:27:35 PM »
Hi Manatee, I'm probably biased, as we are in a similar situation, but I think you are doing great.
As to the asset allocation question, how did you originally pick 60/36/4 and what makes you think you might want to change it?

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #23 on: September 30, 2014, 11:16:26 PM »
Hi Manatee, I'm probably biased, as we are in a similar situation, but I think you are doing great.
As to the asset allocation question, how did you originally pick 60/36/4 and what makes you think you might want to change it?

CanuckExpat, I had just read your post and thought wow this is similar! I didn't base my asset allocation on anything scientific, this is just what I felt comfortable with. I started investing about 5 years ago and was pretty cautious since I had just seen the market crash. I started out with 50/50 stocks/bonds and gradually increased stocks. Working through various scenarios on firecalc recently made me think I might want to change it to 70/25/5.

I also thought about real estate investing but the math doesn't really work out in the SF Bay Area.

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Re: CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #24 on: September 30, 2014, 11:58:43 PM »
Your home is your biggest expense, and will continue to be so even in FI because of high property taxes.  You certainly have the income to afford to continue to live there, and if that's what you want to do then by all means stay there - do what makes you happy!  But if consider moving to a place with lower housing costs you could retire today without reducing your lifestyle one bit.  For example, selling your home and purchasing a new one for $350k would eliminate your mortgage, free up $1400/month (no mortgage plus a savings of ~$225 in property taxes) and pad your investments by $200k.  Your resulting portolio would be $926k.  A 4% SWR would give you $37k/year.  With your revised annual spending of ~$23k/year (no mortgage, lower taxes) you would have an effective SWR of 2.5%  Suuuupppper safe!   You'd basically have a $1k/month cushion before ever exceeding a 4% SWR.

just something to consider when asking "can I retire in 5 years" or even it's close cousin "should I keep working this job for another 5 years?"

My husband and I often talk about this half jokingly, but never worked through the numbers like that. I'll have to give that more serious thought... Both of us have a lot of family in the SF bay area though, so it would be a difficult decision.

TuxedoEagle, thanks that's good advice - right down to the individual stocks I hold! In the last 3 months I've stopped buying individual stocks and starting buying VTSAX.

Manatee

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Re: UPDATED CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #25 on: October 22, 2017, 01:51:36 AM »
Updated original post.

happy

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Re: UPDATED CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #26 on: October 22, 2017, 04:05:56 AM »
Nice update Manatee, and great work keeping your expenses the same each year.
Its a good example of once you reach the stage you were at when you posted in 2014, if you hold your spending in check,  you start to hit the exponential part of the investment curve.
Journalling at Happy Aussie Downshifter

dreams_and_discoveries

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Re: UPDATED CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #27 on: October 22, 2017, 07:17:08 AM »
It's lovely to hear such a positive update. Well done.

MrThatsDifferent

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Re: UPDATED CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #28 on: October 22, 2017, 07:35:48 AM »
Great work! With 1.2m invested, you’d be able to pull $48k/yr under the 4% rule, giving you $13/k more than your current expenses. At 33, that $1.2m should be $11.2 by the time you’re 63. You won’t need SS at all, do you really need to work just for the SS credits? Will you even qualify for any SS?  Just seems like a minuscule amount for where you’re at now if your really did want to FIRE now.

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Re: UPDATED CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #29 on: October 22, 2017, 07:43:33 PM »
Nice update Manatee, and great work keeping your expenses the same each year.
Its a good example of once you reach the stage you were at when you posted in 2014, if you hold your spending in check,  you start to hit the exponential part of the investment curve.

Thanks! It's strange how steady our spending is, considering we don't do any budgeting.

Manatee

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Re: UPDATED CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #30 on: October 22, 2017, 07:46:19 PM »
It's lovely to hear such a positive update. Well done.
Thank you for the kind words. It's so nice to have a community to share milestones I can't discuss in real life.

Manatee

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Re: UPDATED CASE STUDY: Just turned 30, is FI in 5 years possible?
« Reply #31 on: October 22, 2017, 08:06:02 PM »
Great work! With 1.2m invested, you’d be able to pull $48k/yr under the 4% rule, giving you $13/k more than your current expenses. At 33, that $1.2m should be $11.2 by the time you’re 63. You won’t need SS at all, do you really need to work just for the SS credits? Will you even qualify for any SS?  Just seems like a minuscule amount for where you’re at now if your really did want to FIRE now.
That's a good question. We're actually more interested in qualifying for Medicare (the SS payments a nice bonus) given the uncertain state of health insurance in the US. If we were unhappy with our jobs we'd probably FIRE now regardless of the SS credits, but since we made some changes in our work situations we're fine with working into next year.