Reader Case Study - Ready to FIRE? What about opening a small business?

[Garath]

I'm 38 years old and my wife is 36.  We have one son who's 2.5 and we may have one more. We've always lived below our means though in truth we haven't been very good Mustachians.  Looking back, we could have saved far more if we had made some of the changes we're making now much sooner.  That said, we've been fortunate to have high incomes that have compensated for the lack of frugality. 

I've been thinking about leaving my current 8-5 high pay, high stress job and just recently came across MMM.  It's been a revelation and my outlook has completely shifted.  In the last month I've radically cut spending and I'm much more focused on the things that I truly value - including my family, my friends, exercise, etc.  As I've been running the numbers, I think I may have achieved FI without realizing it.  I've been chugging away on the corporate hamster wheel without a clear goal other than "to be successful and retire someday".  Suddenly, a life that involves me doing what I WANT to do seems both reasonable and attainable.  What I'd like to do is take some time to decompress and then possibly open a business that I've been thinking and planning for recently.  I'd probably wait
at least a year to start it but startup costs would probably be about $350K.  Here's the current situation:

Income:
   My Gross Salary: $132,000/yr plus $19,000 annual bonus
   My Stock Options/RSUs: Approximately $50,000 of additional options/RSUs vest in March each year
   Wife's Gross Salary: $95,000/yr
   
Current Expenses (monthly):
   Mortgage Principle/Interest: $1,095
   Home Insurance/Property Taxes: $354
   Food (Groceries, Restaurants): $920 - we expect to cut more here but this is down from $1,300 last month
   Daycare/Preschool: $733 - we'd like to keep this going for the social aspects of preschool but expect it to disappear in a couple years when he starts public school
   Utilities: $341 - just reduced this from almost $400 by cutting TV service, I'm looking at other cuts to drop this significantly
   Auto (Insurance/Gas, 2 cars): $333 - just dropped $70/month by getting new insurance, expect this will drop with only one person working/commuting regularly
   General Merchandise (clothing, kid stuff, etc.): $200 - huge opportunity here but this is already down from over $900+ a couple months ago (we deserve a face punch but not as much as we did a couple months ago)
   Personal Care: $50 - wife's haircuts, etc.
   Pets: $30
   Health (prescription copays, etc): $55
   Family Activities: $100
   
   Total Monthly Spending: $4,211
   We could definitely cut this further but since we're very new to living a Mustachian existence, we're still identifying how low we can go.  Once preschool is done and we've paid of the mortgage, it'll be much better. 

Assets:
   My 401k/Roth IRA Values: $571,000
   Wife's 403b/Roth IRA Values: $164,000
   Son's 529: $18,000
   Taxable Accounts: $241,000
   Stock Option Value: $132,000 (after tax value if I exercised today)
   Cash: $50,000
   House: $220,000
   Cars: 2008 Honda Fit, 2012 Honda CRV both paid off

   Total Portfolio: $1,176,000
   Total Assets: $220,000
   
   The retirement portfolio is entirely in the Vanguard Target Retirement 2040 (90% stock, 10% bond).  The taxable portfolio is 100% stock with a 76/18 split domestic/international.  It's in a few different funds but all new investment is going to VTSAX, VEMAX, and VTMGX (most of it to VTSAX which is a Total Stock Market index).
   
Liabilities:
   Mortage: $135,000 on a 15 year mortgage @ 2.875%
   We're currently putting an additional $800/month towards this to pay it off in about 6.5 years though we'd like stop if I FIREd.  Due to the low rate it's not the wisest financial move but we value the security and we'd like to pay it off.
   
   Net Worth: $1,261,000

My wife doesn't want to retire any time in the near future.  She has a tenured faculty position and I could move to her health insurance if I stopped working.  We definitely
have room to improve on the expense side of things but it seems like we could BOTH retire now if we were willing to cut a bit more on the expense side of things.

Questions:

• It feels like I could be FI now - is there anything I'm missing?
• I could leave my job now or I could tough it out for six months and get an extra $69K in bonus/stock options/RSUs.  Leaving before then seems financially stupid but the same will likely be true next year.  If I don't NEED the money, is it worth hanging in there?  What would you do?
• Spending ~$350K on a business is a big investment but I do have the safety net of my wife continuing to work.  I've thought about getting a part-time job in the industry I'm looking at to make sure it's the thing I want.  What do the Mustachians think of investing this much of the nest egg in a business?
  

[lauren_knows]

Congrats on your work up until now.  I think you definitely have "achieved FIRE without really knowing".

Standard rule of thumb says that you can withdraw 4% of your assets for retirement expenses, close to indefinitely. $1.2M * .04 = $48k/yr. You're expenses are pretty close.  Better still, if your wife has no intention of retiring, if her salary covers your expenses (which is does) and you just let your current investments increase in value, you're definitely way past FIRE in just a couple years.

It feels like I could be FI now - is there anything I'm missing?

Including any sort of Social Security in the equation, even 25% of the projections, you're definitely FI.

I could leave my job now or I could tough it out for six months and get an extra $69K in bonus/stock options/RSUs.  Leaving before then seems financially stupid but the same will likely be true next year.  If I don't NEED the money, is it worth hanging in there?  What would you do?

With your wife interested in working still, I'd definitely pull the plug and seek more fulfilling things (lower stress job, start a small business, work on hobby projects that might make money).

Spending ~$350K on a business is a big investment but I do have the safety net of my wife continuing to work.  I've thought about getting a part-time job in the industry I'm looking at to make sure it's the thing I want.  What do the Mustachians think of investing this much of the nest egg in a business?

I am personally of the notion that "If you've already won the game, why continue to play?".  You've "won the game" of FI. Why risk losing that status? Can you not find something fulfilling for less of an investment?  Or, if you want to still do it, work on the numbers to see how long your wife would have to continue to work if your business venture doesn't work out (ie you lose $350k).

[J Boogie]

I say go for it.  What's Mustachianism for if not for enabling you to do what is truly worthwhile? Seems like you could do it without touching your retirement accounts or tapping into your home equity.

You are FI, and by starting a business you don't have to worry about your wife feeling as though she's the only one contributing to your family financially.

If you're the type to get comfortable in the industry first with a part time job, that's great too - either way you know where you want to be.

If you'd lose sleep over leaving that 70k on the table, then you can map out your last day and let the anticipation build as you plan your moves in starting your new business.

I'm 28 and have a similar timeline in mind (start my own pressure-free business in 10 years).  I'm stoked to see people living their dreams.

Also, if you're not already your son's hero, you definitely would be if you were the captain of your own ship.

Godspeed!

[sandandsun]

Sounds like you are probably ok, but also sounds like some of the cuts in spending are very recent... I'd say slow down, pay off the house asap, track your spending along the way and then, after that relatively small timeframe, if the math still works out, go for it... but no, would not invest 350k in a business after FI unless I truly could afford to lose that much and still be FI...

[Garath]

Thank you all for the replies.  It really helps to have someone else look at it and tell me whether I'm just being overly optimistic or overly cautious.  This site and forum have changed my outlook on many things that are hard to explain to other people in my life.  My parents looked at me like I'd grown a third arm when I suggested that I might retire early - it's just not their understanding of how the system works.  Fortunately, my wife is very supportive.  She's also in love with her job and would do it if they didn't pay her -

sandandsun is very correct that some of the changes are very recent.  I like the idea of slowing down a little bit to make sure that it really works for more than a month.  I have a couple weeks of vacation left this year so maybe I'll try taking Mondays off for a month or so and see how that goes.  This has all come up very recently and I'm having a real mental problem getting OK with pulling the trigger.  I've worked for the same company for over fifteen years and it seems like such a big step to take.  It's a good step but the financially conservative part of me that helped get me here is balking at the change.

On the small business side, it seems like there are good arguments for and against.  I definitely agree that it's putting FI at risk.  On the other hand, I like the challenge associated with the business and there's a concept that my wife and I are pretty excited about (though it caters a bit to non-Mustachians which seems a little dodgy given the epiphanies of late).  If my math is right, if I managed to completely blow all $350K, we'd have to avoid pulling from the 'stash for another seven years to get back to FI at current spending levels.  Given the wife loving her job thing that doesn't seem too bad and we could always reduce spending as well.  I do like the idea of looking for fulfilling things for less of an investment.  Maybe I'll leave the business question open for now, look for fun and fulfilling things over the next year, and then rerun the numbers if I still want to do it a year from now. 

Final question, if I may - at 2.875%, would you spend the capital to pay off the mortgage over the next year or two, stick with accelerated payments that get rid of it in ~6 years or let it go the full term of ~12 years?


 

[Timmmy]

The best financial decision is to not pay off the mortgage early.  However, we are not robots and we don't always make the best financial decisions.  You'll probably be fine any way you choose to do it.  Do the math and then make your decision based on the knowledge you get from that. 

Also, what kind of start up requires 350K?  Since you don't need the income, start small and let the business grow organically. 

[Garath]

Thanks for the advice, Timmmy!

On the business side, I'd like to open a play café similar to Café n Play in Naperville, IL.  Startup numbers are actually closer to $250K including working capital for the first year but I'm leaving a very wide safety margin as there are still quite a few unknowns.  A business venture that didn't include commercial real estate and tenant improvements would likely be much less expensive.

[JGB]

I'm with Timmy on the mortgage: Given the low interest rate, I would not pay a dime early at any point. Having that debt actually makes you money by allowing you to have more money invested.

As to the question about going with the small business, I think you are safe to do whatever you consider best. Personally, I'm in the camp of "why keep fighting once you have already won?" Yet I feel a touch hypocritical saying that; there is a good chance that I will keep running my side-business after I leave my full-time gig, despite waiting until I need no money from the side-gig in order to RE.

[chopper41]

I would:

-not pay off the mortgage sooner than necessary.  Your money can be better used elsewhere.
-absolutely try the business, however, I would probably work for 1 more year and use that extra money for the business.

[Gone Fishing]

Keep working at least long enough to get the $69k, this will allow you to fine tune your spending and ensure you can live with it long term, plus add to the 'stache/startup funds.  As far as the business goes, set your $350k limit (or whatever) and if you can't make it work on that, pull the plug, no ifs ands or buts.  The restaurant/entertainment industry is know for a spectacular failure rate, and every suffering startup out there is just a little more working capital away from making it.  If it catches, great.  If it doesn't, cut your losses and get out!  Otherwise you risk throwing good money after bad.