Author Topic: Reader Case Study – FIRE sanity check, eager to make the leap  (Read 4056 times)

type181

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Long time reader, first time posting.

Life Situation: Single 41, in MA  been with same company since high school, has been good for me, but now I feel it is time to reinvent myself, take a step back/time away from the dilbertesque life and rediscover the world around me that I allow to be blocked out in wake of deadlines and corporate ways.

Gross Salary/Wages: 110k +potential bonus

Pre-tax deductions: 401k max each yr

Other Ordinary Income: N/A

Adjusted Gross Income: 85K, est

Taxes: 26K total est

Current expenses:
Mortgage 1500/mo (P/I 1200, plus extra 300/ mo to principle)
Investments -1700mo
Property tax 4k/yr, exise 60/yr, Insurance(home and auto) 2k yr, gas 100/mo, oil heat 1500-2K/yr(depends on the weather), phone -0(work covers, RE plan is to go to republic or other plan for no more than 50/mo max) internet 75/mo(includes 5/mo for a few basic cable channels), food 150/mo, misc(clothes, household, hobbies, etc.) 2-5K yr est

Expected ER expenses: in addition to above: health care- est 4k yr based on ehealthinsurance quotes, and cheap cell plan.

Assets: 401(k) 360K, roth 35K, taxable investments 289K, cash 46k, 10yr old car (not really an asset, but is paid for)

Liabilities: 15 yr Mortgage: bal 143K @2.75%.

Specific Question(s): Found MMM a while ago, realized I was already living a semi mustachian style without knowing it, and reading MMM and others have added focus towards a better way of living. I feel ready to FIRE, but would appreciate a sanity check, as I my mental drive to move away from corporate life may be clouding the reality of being a bit more patient or thorough to have better assurance.
 In a nutshell, with about 730K in assets, and the mortgage of 143K at 2.75% I feel I am at the point where RE is possible provided I realize the mortgage accounts for 18K additional spending for the next 8 years, or pay it off and be with expenses at about 18K/yr.  Either way, if I apply the 4% rule: without paying the mortgage off, I will be above 4% until it is paid(5% for 8 yrs or so), or pay it now and at 18K spending, be below 4% of assets. Am I off in this logic? Anything missing I should look into or account for? The logical choice tells me to stay with the mortgage and keep the assets working for me as they have potential to reap more in return over the 8 yrs than the 2.75% mortgage, but the comfortable option of paying it now has sound mental benefits.
Facepunches or ideas of moving or changing things to further lower expenses are welcome, but I like the area and family are literally a mile away, nice to be close by as parent’s age and be in a position to help them. On one hand, to escape corporate America and take a year or two off to allow myself to reset, find what truly interests me and gain a happier future seems great, but on the other hand I fear I may be making a hasty decision. Feedback from others who have made the transition would be appreciated.  Thanks for reading –


MDM

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Re: Reader Case Study – FIRE sanity check, eager to make the leap
« Reply #1 on: May 31, 2015, 02:36:58 PM »
Gross Salary/Wages: 110k +potential bonus

Pre-tax deductions: 401k max each yr

Adjusted Gross Income: 85K, est
110 - 18 = 92 (+ potential bonus).  Why 85 for AGI?

dess1313

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Re: Reader Case Study – FIRE sanity check, eager to make the leap
« Reply #2 on: May 31, 2015, 04:59:50 PM »
Quote
Current expenses:
Mortgage 1500/mo (P/I 1200, plus extra 300/ mo to principle)
Investments -1700mo
Property tax 4k/yr, exise 60/yr, Insurance(home and auto) 2k yr, gas 100/mo, oil heat 1500-2K/yr(depends on the weather), phone -0(work covers, RE plan is to go to republic or other plan for no more than 50/mo max) internet 75/mo(includes 5/mo for a few basic cable channels), food 150/mo, misc(clothes, household, hobbies, etc.) 2-5K yr est


Interest rates now are cheap, and it may seem like its an easy payment for your mortgage, but what if you went FIRE and interest jumped?  Or life events happened?  Would you still be able to make ends meet?  Why not pay off your mortgage sooner?  2-3k in interest each year seems a waste.   With your current savings rate, cash on hand, you could make a very big dent in it if you have the flexibility to do so.  You're definitely on the right track, it just seems like a big liability hanging over your head at the moment if you want to retire.

Do you have the option of going to part time work? I know a lot of people that have done that to stretch the savings they have, AND save their sanity. It would give you time to try other things that may interest you, and find out what you would like to go to next, while having a secure income.

MDM

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Re: Reader Case Study – FIRE sanity check, eager to make the leap
« Reply #3 on: May 31, 2015, 05:21:24 PM »
Interest rates now are cheap, and it may seem like its an easy payment for your mortgage, but what if you went FIRE and interest jumped?
In the US, most mortgages (unless specified otherwise, e.g., as "adjustable rate" or "requiring a balloon payment") maintain the same interest rate until the mortgage is fully paid.

type181

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Re: Reader Case Study – FIRE sanity check, eager to make the leap
« Reply #4 on: May 31, 2015, 06:57:17 PM »
AGI also has health care and TDI . Mortgage is fixed rate. Have thought about part time work, not sure if it would be entertained, or if I would want to for the same place. Thanks for the replies.

frompa

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Re: Reader Case Study – FIRE sanity check, eager to make the leap
« Reply #5 on: June 01, 2015, 06:15:57 AM »
Hey Type181 - You look like you are in a strong position.  The question of whether to pay off your mortgage despite the low fixed rate, while it may seem one of pure rationality, should nonetheless take into account your capacity for risk taking.  Personally, I opted for paying off the mortgage, despite relatively low interest, because being debt free was something I had to do to seriously consider cutting back on work and income production.  If all financial hell broke loose, I knew that I'd still have a place to live.  (Even with a fully paid off home, one still has to pay taxes and insurance, and that's enough fixed housing costs, to my way of thinking.)  Ultimately, though, how you think of your mortgage is up to you.  Some other thoughts prompted by your post:  Why not set paying off most or all of your mortgage as your final goal before taking the dive to FIRE?  You have a substantial enough income to pull that off without taking too much time.  Or, could you take on a roommate or two to have some rental income to add to your 'stache, and thereby make that house pay for itself as you move into FIRE?  Good luck as you move ahead, whichever way you go. 

bluecollarmusician

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Re: Reader Case Study – FIRE sanity check, eager to make the leap
« Reply #6 on: June 01, 2015, 07:09:18 AM »
Congratulations- you are in a great spot.

I know many here would want the "peace of mind" of paying off the mortgage.  I will disagree whole-heartedly. With a low fixed rate, and significant assets, if you decide to pay it off down the line you will be able to do that. Or if you wanted you could have a roommate- once you are FIRE you may discover that you miss much of the social interaction from work, and having a roommate isn't as bad as you think- or you could keep this in your back pocket in case you need back up help...


Much more important at this stage of the game is understanding how/where your income will come from, and managing your money.

You can totally do this- and if you are ready to get out you probably can- given your age and circumstance, if you tried living on your investments for 6 months- 1 year and threw 100% of your pay towards your mortgage that would also be an option.

It also sounds like if you were able to go part time you could easily live on 30% or so of your current salary- especially if you minimize taxes.  At your age- you will discover (like I have) that you end up accidentally making money just by being active and seeking out things to be involved in- it isn't always paid work- but frequently you enjoy doing things you are good at, and frequently that makes you money. 

And one other thing not discussed (and since you have been at the same place since HS, I assume family/life are all nearby) is strategically moving to decrease taxes and minimize housing costs.  Once you are FIRE this is a possibility...

Bottom line- it sounds like you have the assets to pull this off- however I would caution you spend some time working out all the fine details of housing, income generation, wealth management etc. before pulling the trigger!

Best of luck!

dess1313

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Re: Reader Case Study – FIRE sanity check, eager to make the leap
« Reply #7 on: June 02, 2015, 01:14:24 PM »
a 6 month test run sounds like a really good idea.  It may show you some weaknesses or strengths of what you have planned so far.  Any excess monies could be focused on your mortgage (or your savings depending on what you decide to do) and therefore you would be able to feel more comfortable about making that decision to RE, do a different job, or start another phase of life.  As much as i have planned and budgeted, there's always something that crops up that i have not thought of.

Cassie

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Re: Reader Case Study – FIRE sanity check, eager to make the leap
« Reply #8 on: June 02, 2015, 01:23:59 PM »
The 6 month test drive is important to work the kinks out. I would also consider p.t. work for awhile.

type181

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Re: Reader Case Study – FIRE sanity check, eager to make the leap
« Reply #9 on: June 03, 2015, 01:35:18 PM »
Thank you all, the suggestions of a 6 mo test plan is very helpful. PT work is not out of the question, I just feel after RE, I would like to have a period of no work to free my mind and allow myself to reset. Relocating is an option, just not preferred at the moment. To pay off or keep the mortgage is a debate I have with myself. My other thought for housing is to sell and find a foreclosure /fixer that would cost less than my current, ideally something I can pay for with the profit from the current and use the aforementioned time off to remodel(something I woul enjoy doing). I appreciate the input, good luck to all!

kaizen soze

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Re: Reader Case Study – FIRE sanity check, eager to make the leap
« Reply #10 on: June 03, 2015, 03:28:33 PM »
I think you're either there already, or will be soon.  In regards to the $4000 for health care spending that you estimate, does that include insurance costs alone, or insurance costs + out of pocket health spending (deductibles, copays, non-covered costs)?  I ask because I personally am lucky enough to have low out-of-pocket medical expenses, but I know that these go up with age (on average).  So if I assume that my relatively low health spending stays the same for the next 50 years, I may end up under-estimating my ER expenses.  So, in calculating my FI number, I assume some additional out-of-pocket health expenditures in the future as I get older.  (I used an average out-of-pocket health spending number that I found on the Internet for US residents, which could be wildly off the mark for all I know.  I also added in dental and vision, which was easy to estimate since I can see how much my dentist and eye doc charge my insurance co.)

In addition, I would also consider your mutual fund management fees and taxes.  If you have $1M in invested assets, and you pay an average of .35% in fees for your various mutual funds, that's $3500/year.  You never see this as an expenditure, but the trinity study assumed $0 in management fees, since these vary so much between individuals.  So in figuring whether you have a 4% WR, I believe that you will want to add that in as if it's an expenditure and see if you're still under a 4% WR.

Also, your taxes are likely to be low in ER (even $0) based on low spending.  But I would run your taxes through a tax program using some what-ifs, e.g., a typical ER year in which you realize $X income, as capital gains, rental income, dividends, interest, etc. (whatever you are likely to see), and see what it tells you that you owe in state and Federal taxes.  I did this recently, and it came to $0.  If it told me I was going to we $1000 in taxes, I'd have added that to my projected ER spending number.

Bear in mind, I'm not an expert here at all.  I'm just another guy trying to think this through.

**one quick edit** if you use cfiresim to test your ER plans, it has a configurable field to input your mutual fund expenses (I think it uses .18%), so you don't need to include those fees in the annual spending number that you plug into cfiresim. It's only where you're calculating whether you have a 4% WR where I belive you will need to consider these fees as an annual expense.
« Last Edit: June 03, 2015, 03:44:43 PM by kaizen soze »