Author Topic: RE fast approaching - ducks in rows?  (Read 5387 times)

Frankies Girl

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RE fast approaching - ducks in rows?
« on: August 14, 2014, 04:59:26 PM »
So I'm in the last half of my final year to RE. Date is first part of January 2015. Husband is to work through 2015 and then retire himself in 2016. Through 2015, I will be reducing expenses on the homefront, husband's job will pay for health insurance and most of our living expenses (still waiting on the numbers for his company's plan). We will be getting on the ACA in 2016.

Portfolio is a lazy three fund (85% Stocks-REIT/13% Bonds with 2% in cash) with an average expense ratio of ~0.15%. I'm quite happy with it, and has performed ridiculously well, so other than rebalancing to have a bit more in bonds and more in cash in a year or (or sooner), I don't see having to fuss with it much.

Half my portfolio is in retirement accounts (IRA, 401K, inherited IRA) and half in a taxable account (currently invested 100% in FSTVX which is equivalent to VTSAX). So I will be instituting a Roth Pipeline method, while using cash/taxable account to live off of once husband joins me in funemployment. I also have to take an MRD for the inherited IRA that I have taxes withheld from, and end up getting around 4-5K each year minimum.

I've run countless simulators - cfiresim and Fidelity's RIP (ha! Love that acronym) are my faves and using both regular, monte carlo, whatever ... still end up 99% - 100% successful over a 45+ year span. So on paper (computer) I'm good to go.

Oh, and my work situation just keeps getting crappier and I may pull the plug early, but I'm really, really wanting to make it to the first of the year. Sigh. You have no idea how hard it is to keep from blurting out "well screw you guys, I'm outta here."  So one of the dangers of f-u money towards the end is the possibility of derailing the smooth and classy exit strategy I envision. But it will involve dolphins, a towel, and a book with "Don't Panic" on the cover (will be making props for my last day!) cause I'm pulling the plug at 42... "so long, and thanks for all the fish" indeed.

I am shortly (fingers crossed anyway) selling a property that will net me $42K cash. (shouldn't have any short term cap gains since held longer than a year, stepped up value when inherited, and renovations/seller fees offset the "profit" i.e. long term cap gains according to the IRS reading materials I've found so far - hell, I might be able to claim losses considering the renovation costs) so I'm debating about what to do with this cash considering that RE is fast approaching.

1. Invest. Leaning towards this, but maybe not the entire amount because I'm so close to RE, not sure if I should keep more cash somewhere.

2. Pay off current home's mortgage. Would still need to save $350/month for taxes/insurance. House is not our forever home, but planning on staying for at least 2-3 more years. Only owe 50K now, and total worth is around 110K. ADDING INFO: mortgage is 3.75%, we've never had enough interest paid to count towards taxes (lower cost house means not enough interest to pass that threshold). Don't mind having a mortgage payment since it is around $600/mo.

3. Keep as cash. We have an emergency fund that we try to keep around 10K. Agreed upon minimum level with husband. But with me no longer bringing in a paycheck shortly, might be a good idea to keep a larger buffer/living expenses for next two years to avoid having to sell off funds prematurely.


So what am I missing as far as stuff to set up for being "funemployed," what should I do with the cash, and holy crap I can't believe I'm this close....



« Last Edit: August 15, 2014, 05:48:25 AM by Frankies Girl »

yddeyma

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Re: RE fast approaching - ducks in rows?
« Reply #1 on: August 14, 2014, 05:30:41 PM »
If it were me, I'd evaluate what my portfolio needs to look like through this transition.  I am an extremely conservative investor (I'm a scared-y cat, I admit it).  My thoughts were to always have 2 years of cash and three years of secure low risk investments when I'm in retirement.  The rest can get invested as normal.  But, whatever your strategy, have you started moving all of your funds and such so that you are balanced appropriately for retirement vs. working?  Have you evaluated your retirement E-fund needs?  Get those things defined first.  You may have a need for that cash after all.

But lets assume your e-fund is at the right level and your portfolio is snug and accessible.  If it were me, I'd pay off the house.  Why keep debt around if you don't have to?  I never understood the people who want it for the "tax break".  In my case it was always cheaper to avoid the interest.  Unless keeping the debt around actually SAVES you money somehow, I'd knock out the debt.  Unless you have an investment that can generate enough steady income to pay the interest on the mortgage plus a little extra, I'd go for the sure bet of paying off the mortgage.

Okay, that is kinda a lie.  If someone dropped $42k on me right now, I'd buy another rental property.  Its not guaranteed income, but I can buy a house in my area for about $50k and rent it out for about $1k and taxes/insurance are pretty cheap here.  Plus, I enjoy managing the books/business.  That's how I intend to be "funemployed" when I get there.  Not sure what the numbers look like in your area, but its worth thinking about. 

You're making me so jealous!  But I hope to be where you are in 10 years, so you're just the inspiration I need to keep chugging along!

Eric

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Re: RE fast approaching - ducks in rows?
« Reply #2 on: August 14, 2014, 07:13:58 PM »
You only have 2% in cash?  And your husband's job for the next year won't really allow you to increase that much if at all?  That seems kind of light to me.  I think I'd keep it all in cash (or at least most of it).  You'll be able to adjust your stock/bond percentages easily using your pre-tax accounts without a taxable event, but cash is a lot harder to come by.

Have you read Dr Doom's blog about his drawdown scenarios?  While it doesn't quite apply to my situation, I thought it was a pretty good thought experiment.  Here's post 1 of 5:

http://www.livingafi.com/2014/05/drawdown-part-1-the-basics/

Frankies Girl

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Re: RE fast approaching - ducks in rows?
« Reply #3 on: August 14, 2014, 08:44:11 PM »
You only have 2% in cash?  And your husband's job for the next year won't really allow you to increase that much if at all?  That seems kind of light to me.  I think I'd keep it all in cash (or at least most of it).  You'll be able to adjust your stock/bond percentages easily using your pre-tax accounts without a taxable event, but cash is a lot harder to come by.

Have you read Dr Doom's blog about his drawdown scenarios?  While it doesn't quite apply to my situation, I thought it was a pretty good thought experiment.  Here's post 1 of 5:

http://www.livingafi.com/2014/05/drawdown-part-1-the-basics/

Yeah, the 2% used to be a much higher percentage, but we'd been sweeping the majority of our savings over into investments (especially the last year or so) and the investment part has been a run-away train and now the cash percentage is low. I figured I need to start building up the cash reserves over the next 6 months or so - moving some stuff around and saving the incoming cash instead of sweeping to investments. It does look like saving the cash from the house sale is the best idea as that plus what we already have and will be saving will cover 2+ years' worth of expenses. (but damn, I like the idea of sweeping more into the investments cause it has been so good, but must stop and build reserves.)

We will hopefully be able to save some monthly during the next year, but it won't be the same level since I'm not sure about how much the insurance will run with his work. I did a back of the envelope run at our current expenses vs when I'm no longer working, and cut out over $400 with no pain, and I'll be hitting all of the utilities and other bills to see where to cut and reduce what's going out so what comes in goes further.

Definitely will check out the link (I hadn't seen his drawdown method yet, still working through his posts) and if you have any more, do let me know!


Dicey

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Re: RE fast approaching - ducks in rows?
« Reply #4 on: August 14, 2014, 11:40:00 PM »
Wow, Frankie, good on you! Such an exciting time in your life. Keep planning that classy exit and go ahead and hoard some more cash. It will probably help you sleep better at night. If the interest rate on the house is <4%, I'd pay it off as scheduled and not before, but that's just my opinion. A bigger pile of cash makes a better mattress, at least until you both transition to your new light-filled world.

Speaking of classy exits, my cousin had a sabbatical planned but hadn't told his employer yet. One day in a large meeting, the company announced some ugly, sweeping changes. He calmly stood and said he could not in good conscience work for them under the new circumstances and resigned on the spot. He said he felt ten feet tall walking out on the meeting. Yeah, he lived happily ever after. Wait for it and do it as you dreamed. Go Frankie!

neo von retorch

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Re: RE fast approaching - ducks in rows?
« Reply #5 on: August 15, 2014, 05:46:37 AM »
I didn't finish reading your post because some serious intergalactic highway problems just sprung up, and I'm being uprooted from my planet.

Frankies Girl

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Re: RE fast approaching - ducks in rows?
« Reply #6 on: August 15, 2014, 10:26:51 AM »
I didn't finish reading your post because some serious intergalactic highway problems just sprung up, and I'm being uprooted from my planet.

Would you like to have a copy of my book of Vogon poetry to read for the trip?

Gone Fishing

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Re: RE fast approaching - ducks in rows?
« Reply #7 on: August 15, 2014, 10:52:58 AM »
Awsome feeling to be so close, isn't it?  Have trouble fighting the FU urges myself! Go ahead and get a no-cost equity line on the house while you are still employed, this can supplement your cash in a down-market senario if need be.  If you think you might move in 2-3 years, go ahead and start thinking about how you will finance it.  With neither of you working it might be difficult to obtain another mortgage. If you are moving up it might require some of the 'stache, can't say for sure, but be ready for the possiblity.

DoubleDown

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Re: RE fast approaching - ducks in rows?
« Reply #8 on: August 15, 2014, 12:58:54 PM »
Congratulations on being so close!

I also vote for keeping a larger cash buffer so that you can avoid having to sell funds in a potential down market in the future. That is, unless your husband's continued earnings already cover all your living expenses and there are no concerns about having to liquidate investments to meet them.

myDogIsFI

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Re: RE fast approaching - ducks in rows?
« Reply #9 on: August 15, 2014, 01:28:36 PM »
Congrats!

I vote for paying off the mortgage.  The 3.75% return is a guaranteed, after-tax return, and you aren't going to find anything like that out there right now.  If you really want to maintain your same risk profile, you could sell an equivalent amount of bonds in your investment portfolio and buy stocks. 

IMHO, 85% equity is really high for someone who is so close to RE, so paying off the mortgage could be one way to get a little more conservative without having to feel like you are putting the brakes on investment returns buy selling stocks to buy bonds.  But maybe you have other sources of fixed income that are making you happy at 85%.

Carolina on My Mind

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Re: RE fast approaching - ducks in rows?
« Reply #10 on: August 20, 2014, 07:50:33 PM »
Loved reading this, Frankies Girl -- congratulations on being so close!  You and I are fairly similarly situated:  I'm planning to quit my job next summer-ish, at 45.  This year I've been focusing on increasing cash from practically none to around 5% of my portfolio.  (And like you, I would much rather be investing it!) 

Do you mind if I ask what your planned withdrawal rate is?  Four percent, or something else?

Daisy

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Re: RE fast approaching - ducks in rows?
« Reply #11 on: August 20, 2014, 09:47:19 PM »
Congratulations on your approaching FIRE!

Even though I just sold a house and bought a new one mortgage free, in your case I don't think you will get much from paying off the mortgage. Mortgages are amortized so you're paying most of the interest front loaded. By the end of the mortgage, the interest becomes a much smaller part of your payment. So by keeping the mortgage you won't have such a big interest deduction, but by keeping it you are getting close to free money. If it's that far along in the mortgage's payment history, you won't save much by paying it off now.

I'd use that money you get as a cash cushion or to invest.

And yes, FU money is dangerous. I'm going around work dropping little hints like:

- "Well if I get laid off, I'm taking a least a year off with the pay I get." (little do they know that it will be more than a year)
- Some guy quit and/or retired and people were puzzled over it because he had no apparent plans for another job. I said "maybe he's secretly rich and doesn't want to tell anyone."

I've said other such things. It's a little fun throwing these things around. I'm getting strange comments back about me being too young to want to accept any kind of severance. Even though my actual age is something that many would consider young for "retiring" (45), thankfully owing to good genes I look a bit younger than that so it's even more puzzling for people. This is getting fun...
« Last Edit: August 20, 2014, 09:50:08 PM by Daisy »

Frankies Girl

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Re: RE fast approaching - ducks in rows?
« Reply #12 on: August 20, 2014, 10:15:24 PM »
For the first couple of years, don't plan on anything near 4% drawdown if I can help it. Probably closer to 2.5-3%.

Never have gotten any benefit at all in interest deductions on the mortgage - house is a cozy little home in a nice community, but we paid under $100K for it (SE Texas - one of the good things about living here) so the interest has always been pretty low, but I do think that paying it off isn't going to net us much other than a psychological "we own our house" (which isn't 100% true in that we'd still need to pay prop taxes and insurance or we could lose said house).

I've been running more numbers and figure that we'll have two years expenses in cash by January, and then I'll reevaluate the drawdown at that point (but no drawdown on investments for 2015 for sure other than what I have to take on the inherited IRA). I've been reading some SWR scenarios (Nords and Dr. Doom and a few others as I come across them) and I am leaning towards holding some cash in a mix of laddered CDs with a small amount of cash in an e-fund, (for the psychological buffer) and taking expenses out of well-performing mutual funds during up years, and using the CDs to cover the down ones.

I also ran numbers on our spending and there is a whole lot of fat in there. I can cut our expenses by almost half if necessary and still have things like internet and a roof over our head with food on the table. And in no particular order, there's always a HELOC, and I definitely would get a part time job (as would the husband) if things got really tight, so we've got some safety nets built into our plans.

Still much to read and mull over, so any other ideas or things to look at are much appreciated!




Frankies Girl

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Re: RE fast approaching - ducks in rows?
« Reply #13 on: August 20, 2014, 10:27:14 PM »
And yes, FU money is dangerous. I'm going around work dropping little hints like:

- "Well if I get laid off, I'm taking a least a year off with the pay I get." (little do they know that it will be more than a year)
- Some guy quit and/or retired and people were puzzled over it because he had no apparent plans for another job. I said "maybe he's secretly rich and doesn't want to tell anyone."

I've said other such things. It's a little fun throwing these things around. I'm getting strange comments back about me being too young to want to accept any kind of severance. Even though my actual age is something that many would consider young for "retiring" (45), thankfully owing to good genes I look a bit younger than that so it's even more puzzling for people. This is getting fun...

LOL that is awesome.

I've actually started mentioning basic index investing and recommended some reading materials and started discussions with one coworker that I trust a bit about "early" retirement. Haven't dropped too many hints otherwise, but come x-mas, I'll probably be dangerously tempted. :D