Reader Case Study - Close to FI – But Time for a Break?

[LKS89gs]

Life Situation
Myself and my wife (both in late 30s), with two kids under 5. We live in a small house (1000 sq ft), which is fairly old (1946), and poorly constructed, in the urban center of a fast-growing, non-coastal city in the U.S. I work pretty long hours, travel quite a bit for work, and have had relatively little time for extracurricular pursuits / outside interests over the past ~6 years. Wife spends lots of high quality (albeit exhausting) time raising our children (as we planned and hoped for), while juggling two part-time freelance jobs. 


Gross Salary/Wages
I am full-time employed in information security; wife works two part-time freelance gigs. I own a single member LLC; side projects for which add modest income and periodic stress. Between base salary, typical bonus, and occasional side projects, my gross income averages about $160k; wife’s supplemental income ~$12k. Total gross income: $172k.


Pre-tax Deductions
4% 401k deduction with (max) 4% company match. Company-subsidized family medical insurance - relatively low deductible plan (only because it’s heavily subsidized). Long-term disability insurance for me, and vision plan for wife & I. No dental insurance (until kids get older at least).


Net Income
Approx. “take home” after subtracting taxes, SS, and other deductions (but including 401k): $120-125k


Interest & Dividends
~$3.5k /yr  (mostly dividends at this point as we’re pretty heavily weighted towards dividend-favorable investments, and APY for bank accounts is so miserably low)


Business Expenses
Approx $5k/yr  (professional insurance, computing equipment / hosting services, meals out, sporadic travel expenses for my SMLLC, and wife’s freelance work)


Taxes
No state income tax. (Partially as a result) property taxes are relatively high: ~$6k/yr (we contest the increase in valuation each year, with mixed success). Effective federal income tax rate of ~15%.


Expenditures
First off, a few important notes:

• I’ve excluded house renovation costs - we generally consider these investments.
• Not necessarily investments in the financial sense - for various reasons most renovations in our property are not likely to return close to their full cost - but “investments” in our family’s use of the property.
• Also excluding a possible new (used) car purchase as a one-time cost (which we will pay in cash).
• Conversely, I’ve included company contributions towards medical insurance as expenditures, because we want to keep the true total cost ($1500/mo!) front of mind.
• We set an annual budget, and categorize all expenditures on a monthly basis to compare against budget.

We have no mortgage or car payments, and drive (a fuel efficient) car infrequently (4-5k miles/yr). We’re fortunate enough to be a very healthy family to this point, and hold high quality, low deductible medical insurance. We use HVAC sparingly, generally prefer to eat home-cooked meals (including leftovers for lunch at work), and drink moderate amounts of alcohol.

The amount of money we spend, given the lack of debt payments and our “frugalities”, is a bit shocking. In 2015, we spent $66.5k (excluding renovation costs and (modest) side business expenses). Our budget this year is $83k – note, however that the entire difference is due to incorporating “true” medical insurance costs this year, for the first time. (In other words, we are not actually spending $83k (thanks to company subsidies - our actual out-of-pocket total is about $70k), but would if self-employed / retired and retained this insurance plan)

We are currently at 87% of budget year to date (i.e., operating at 13% under per month) – so, on target for $72k of “expenditure equivalent” in 2016 (again, including full medical insurance cost, but excluding renovations and possible vehicle purchase).

Our most significant expenditure categories are:

• Medical insurance ($1500/month) (again, including company subsidy as an expense)
• Groceries ($1450/month)
• Property taxes ($6000/year)
• Child care ($450/month) (part-time pre-school and babysitters)
• Dining ($400/month)
• Travel ($3000/year) (several visits to out of state family, or to support their visits to us)

Despite the higher-than-expected figure, I don’t think we need a great deal of advice around trimming expenditures - we already know where we’d begin cutbacks if our income were to decline significantly:

• Housing: $100/mo reduction (Cleaning and fixing as many issues as possible ourselves; being even more frugal with climate control)
• Groceries and dining: $300/mo reduction (A common source of discussion and one of the few points of disagreement between my wife and I (she places high value on quality, healthy, and “interesting” food; I view food primarily as sustenance))
• Child care: $300/mo reduction
• Medical insurance: $500/mo reduction (Seems very possible we’d be able to even further reduce these rates (based on http://www.mrmoneymustache.com/2011/09/21/i-can-never-retire-because-of-health-insurance-waaah-waaah/), but haven’t really dug into this yet - so, estimating savings somewhat conservatively here)
• Travel: $600/yr reduction

We’d be looking at annual expenditures of $15k less if we could achieve just these cutbacks - which would put our reduced annual expenditure rate at $57k. If “retired”, I’d hope and expect we can find ways to make this even lower. Further down the road (~20 years), I expect our expenditures will decrease once the kids are out of the house / independent. Very rough estimate of $12k less (primarily between lowered / eliminated child care and food costs) = $45k/yr post-kid retirement expenditures. If we estimate 50 years of life remaining, with 20 years of $57k annual expenditures, and 30 years of $45k, we arrive at a nice round average of $50k annual expenditures over 50 theoretical retirement years.


Assets
Our house is paid off (and has been since five years after purchase). It might sell right now for close to $400k, but the market is frothy - I’d estimate $350k more reasonably.

Important tangent: We live in one of the “hottest” real estate markets in the country (for five years running) - but our house is old, small, and poorly constructed (have I mentioned that?). Due to “heritage trees” and other building restrictions in our neighborhood, a future owner could not simply tear down the house and build a much larger house. By our estimation, this caps our property value lower than many surrounding properties. We paid $205k for the property in 2009 - which at first blush makes it seem like quite the investment - but we’ve poured nearly $100k into renovations (no time available to do much ourselves) to make it more livable since then. Due to the structural deficiencies, regulatory limits on expansion, and other “issues” with the property (poor neighborhood schools, etc.), we shouldn’t invest / spend much more in this property (strictly financially speaking, we’ve already invested too much).

Also: for all of my complaints about the poor construction of our house (and our loud neighborhood), we love living here. The small house suits our family just fine (at least for a few more years), and we’re in close proximity to many “amenities” - parks, libraries, restaurants / taco stands, swimming pools, running trails, office, etc. We mostly bike or walk as a result, and we’d be very hesitant to give this up.

Our vehicle (2009 Honda Fit) is paid off. (We are on the verge of replacing this with a used Prius v, which will set us back approx. $10-12k after trade-in)


Liabilities
None, beyond monthly credit card balances (paid in full each month).


Current Asset Allocation



Notes:

• Long term investments: IRA, Roth IRA, SEP, 401k/403b
• Short-Medium term investments: other (non-retirement) investment holdings
• Childrens’ investments: 529 savings plan funds
• In accounts which we have full control over, we invest almost entirely in low cost, relatively broad market ETFs.
• Social Security funds are not included here (I guess because I don’t consider it truly guaranteed to be there for us in 30-40 years). According to our latest statements, our estimated benefits at "full retirement age" (67!) are between $1,200-1,300 / month.

Financial Independence Calculations
Going on the following assumptions and numbers documented in http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/:

• earn 5% investment returns after inflation during saving years
• live off of the “4% safe withdrawal rate” after retirement
• want the ‘Stash to last forever, so only touching the gains

“To apply it in real life, just take your annual spending level, and multiply it by 25. That’s how much you need to retire, at the most.”

At our current spending levels ($72k/yr), we'd need $1.8M of income-producing funds to retire.

Our current total "net worth" is $1.22M - but this includes non-liquid / non-income producing assets such as our house/property, and child education funds. Excluding these categories leaves us with total current “investable” assets of $810,000. (Note: non-“retirement account” investable assets are only about $300k. How important to the calculation is this distinction?).

Based on these figures, we would need another $1M of investable assets until FI. According to networthify, at our current savings rate (about $50k/yr), this would require a bit over 9 years (https://networthify.com/calculator/earlyretirement?income=122000&initialBalance=810000&expenses=72000&annualPct=5&withdrawalRate=4).
(Side note: I generally find networthify.com a bit too simplistic / inflexible, but www.firecalc.com is the polar opposite – too complicated for me to have high confidence in the results, based on uncertainty of my inputs)

However:

• We can trim expenditures, as documented above – particularly with more time available to DIY. As previously mentioned, we’ve estimated a more frugal lifestyle at approximately $57k/yr, which lowers our target figure to $1.425M. This would require about 5 years at our current income and savings rate (i.e., assuming no additional significant “one-time” costs for renovations, major medical expenditures (up to “out of pocket” insurance maximums) etc.) (https://networthify.com/calculator/earlyretirement?income=122000&initialBalance=810000&expenses=57000&annualPct=5&withdrawalRate=4). Taking into account lower expenditures once the kids are independent, our target figure would be closer to $1.25M, requiring about 4 years (although I’m sure these calculations are not quite accurate, given that the lower expenditures only come into play down the road (https://networthify.com/calculator/earlyretirement?income=115000&initialBalance=810000&expenses=50000&annualPct=5&withdrawalRate=4)).
• As espoused by MMM (and common sense), neither wife nor I intend to fully retire any time soon. I would like to spend a portion of my time continuing to work on the difficult, interesting (and lucrative) problems of information security, and would love to learn some other useful skills that may lead to income eventually, or at least bartering with friends.
• I am likely more interested in a “sabbatical” than early retirement / financial independence at this point. I’ve become almost completely burnt out on my work over the past 2-3 years, which is disheartening to say the least (I was extremely enthusiastic about my work for the first 10 years of my career).

Considerations / Questions / Dilemmas

• 1) Regarding asset allocation / investment decisions: As per the pie chart above, the vast majority of our investment holdings are in (tax-advantaged) retirement accounts (IRA, Roth IRA, SEP, and 401k/403b). I’ve long wondered if we might be contributing too much money to these accounts at this point.
• 1b) Based on http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/, it seems the answer is likely “yes”. More details: "Enough to live on for a good 30 years, from age 60 through 90." Rough estimate that wife and I could live on $30k per year in today's dollars. "Assume that you can safely withdraw about 5% per year from your fund from a combination of its investment returns/dividends and a bit of its principal" = we need $600k in today’s dollars by 2038. "Assume investments can grow at 5% after inflation", by 2038 (age 60) our current ~$500k retirement fund should = $1.462M  ((1.05 ^ 22) * 500k)
• 1c) Based on this calculation, we already have too much in our various retirement accounts, and now “just need funds to get us from now until age 60”.
• 1d) Fortunately it seems there's a reasonable way to take excess funds out of these retirement accounts down the road – at least for the 401k (the “Roth IRA Escape Hatch Loophole”) (I haven’t closely read / fully grokked this yet)
• 1e) Am I correct in surmising that we should drastically shift our investments towards more liquid accounts? (i.e. those that we can withdraw from without penalties prior to age ~60) Or are the tax benefits of continued funding to 401k, IRA, Roth IRA, etc. worth the lack of available funds in the interim / the hassle of needing to exploit loopholes to access funds down the road?  (also, are there similar loopholes for withdrawing funds “early” from traditional and Roth IRAs?)
• 2) Should we consider hiring a financial advisor? My frugal nature of course shouts “no”, but I can think of 3-4 financial snafus over the past several years that have cost us significant money (primarily not having funds available in our investment accounts at the right time to buy in when markets crash). On the other hand, these lapses are mainly attributable to my lack of time due to being too busy with work, a problem which would presumably go away in semi-retirement..) (Note: we’ve also looked into “robo investing” services, but found them unsuitable for various reasons - and, they would not serve our primary need of personalized financial advice / sanity checks.)
• 3) Ongoing concerns about a future economic instability: if the market crashes a few years after we reach FI, taking our balance from, say, $1M to $600k, presumably the job market would tank along with it. Trying to re-enter the job market with a multi-year gap on the resume and rusty technical skills is a harrowing prospect (especially as a 40-something in the high tech sector).
• 4) One of my biggest hangups to retiring, taking a sabbatical, or working part time is the  opportunity cost: I am currently entering my “peak earning years” in an extremely “hot” and therefore lucrative field, with in-demand skills. Every month I choose not to work equates to approximately $13,000 of “lost income” ($10k after taxes). For a family focused on financial independence, that’s very difficult to accept.
• 5) Separate but relatedly: I’m in my late 30s, and work in high tech. Without spending significant amounts of time outside of $dayjob, I expect to (continue) slowly falling behind the curve on the latest and greatest technology. As such, my marketable job skills have a shelf life. (Although, if stories of modern day, high-paid mainframe programmers are to be believed, there’s probably a very long tail to this)
• 6) Living in a medium-sized, quickly growing city, dominated by high tech and other high income jobs means competition for housing is fierce. Subjectively, it seems a significant portion of the population of this city is more money driven than ourselves. All of this means we feel pretty locked in to our current property, despite its shortcomings. 
• 7) The aforementioned “excluded” expenditures (primarily house renovations) have significantly slowed the growth in our net worth / progress towards FI (again, since we consider the increase in property value to represent only a portion of the cost). This is frustrating and a bit demoralizing, but has been necessary to accommodate a growing family in our current location.
• 8) Once I leave full time employment, we’d like to do some traveling as a family. While wife and I have always been fairly frugal travelers, traveling with two kids will change that dynamic somewhat (4 airfare tickets, for example!). This obviously would increase our expenditures.
• 9) Note regarding our childrens’ 529 savings plans: we will probably cut off contributions once both accounts reach approximately $40k. We’d like to steer our children towards some combination of community college or public schools, trade school, partially paying their way through college, or taking advantage of no cost / low cost online education as it continues to proliferate and mature.
• 10) My job involves identifying weaknesses and risks in IT systems. As evidenced by recent headlines, there are many. The financial industry, while better than most, is far from immune. Many people don’t fully understand just how difficult it is to detect “advanced” intrusions, and effectively remediate these situations. I don’t sleep very well at night knowing that 99% of our wealth is stored electronically with third parties, and we have only monthly electronic statements to show for it. Catastrophic failures in the US and worldwide financial systems as a result of hacking (particularly nation state-sponsored activities) are not outside the realm of possibility. While I try not to live in a world of dire pessimism, and I understand some Mustachians scoff at the idea of hoarding precious metals, is converting a portion of our wealth (say 5%) to some form of cash / precious metal / bitcoin really a foolish idea? I understand these assets are not likely to increase in value over time the way that stocks have historically (in fact most physical assets are likely to depreciate due to inflation), but in the event of calamity affecting our infrastructure a few thousand dollars worth of cash and metals would probably be more useful than PDF copies of investment statements, right?

Plan Going Forward
More realistic (and more desirable) than continuing to work long hours with a goal of retiring in 5-9 years is working moderate / varying amounts over the next 10-20 years.

As such, a big question right now is, “How much income do we need in order to not cut into our investment holdings?” (i.e., just live off of income and whatever interest we can currently reap)

• At current spending levels: $32k/year ($800k investments * 5% interest (after inflation) = $40k; remainder must come from income)
• At “frugal” expenditure level: $17k/year

Conclusion: As long as we generate $17-32k of income each year, we do not need to be concerned with draining our retirement savings, which are already (more than) sufficiently funded for retirement at age 65. Any income beyond these thresholds would bring us closer to reaching complete financial independence prior to age 65.

[cincystache]

Hi LKS89gs,

Welcome to the forums, it sounds like you have been around MMM for awhile. I'll start by saying you are way ahead of my own situation and it sounds like you're doing a great job thus far. Concerning your questions.

1. I would keep contributing the max to tax advantaged accounts if your goal is FI. At your income level, the tax benefits do outweigh any cons. Read up on the MadFientist's material regarding accessing retirement assets early. http://www.madfientist.com/retire-even-earlier/. Also, any existing Roth contributions can be withdrawn at any time without penalty or taxes.

2. This one is complicated. My first vote is to keep doing it yourself with index funds. If you insist on an advisor I would hire a fee-only advisor to meet with for an hour or two per year if it helps you sleep at night and provides a sanity check. I would NOT recommend handing over all of your money for someone else to allocate for a % of your account balance. Your comment "primarily not having funds available in our investment accounts at the right time to buy in when markets crash" is particularly alarming. You shouldn't be expecting an advisor to help you time the market. A good advisor will help you stay the course and not freak out when the markets crash or soar. I would suggest dollar cost averaging into broad market index funds at vanguard and be done with it.

3. I can't really comment on this, no one knows what will happen in the future. Obviously you are pretty talented and resourceful and I'm sure you can pivot and find other money making endeavors if need be. You have a much better likelihood of having too much money in the distant future than not enough.

4. I think you need to define what is "enough" for you. There is nothing wrong with continuing to work if you like what you're doing but if you don't define "enough" money, you will always have this attitude. Retiring early is always going to have an opportunity cost. You have to balance between more time or more money. Eventually time will be more useful/valuable to you than money. Most people never get to make that choice because they are forced to work in order to support their lifestyle. Mad Fientist and JL collins also have some good articles on this.

5. Not sure if I can help you here.

6. It seems that you equally like and dislike your area. Again, you have to weigh the pros and cons. If you like your area, great, enjoy the pros and work around the cons. If the cons outweigh the pros, then move. No one is forcing you to stay in your current state/city/house. You could likely retire today and not earn another dime and live a 40k/year lifestyle in several midwest cities. Not saying you SHOULD do that, but it's possible, so don't feel trapped.

7. These costs are sunk, I wouldn't focus on money you've already spent but instead focus on the future. It sounds like you're pretty much done with renovations which is great.

8. I would look to those with experience with travel hacking credit cards and geographic arbitrage for help with this

9. That sounds good

10. If having 5% in gold in a safe in your house helps you sleep better at night then go for it. I would think of that as an insurance policy to economic turmoil more than an investment. Personally I would be worried about someone stealing the safe. If you said 50% I wouldn't probably argue but I think 5% of your portfolio in commodities is worth it if you will sleep better and stress out less. I can't speak to bitcoin.

In your pie chart, do you really have 229k in "banking" meaning cash? That seems pretty excessive for your situation. I would consider investing some of that in index funds. Having more than 6 months or a year of expenses in cash is pretty excessive.

Going forward, If you want to scale back on work or take a break, I think you'd be fine to do that provided you are willing and able to scale back your expenses a little bit. It sounds like you are doing great and could certainly afford to switch things up a bit.

Good luck and well done thus far. I hope this helps.

[former player]

Welcome.  I can't go down your whole list, but do have a few thoughts -

3, 4 and 5 are all about career longevity, one way or another.  I would add in here consideration of your burn-out rate: by your own admission you work long hours, travel a lot, have family responsibilities, have not had a hobby in six years and are burnt out.  That burn-out is potentially the most significant stopper on your career of the lot.  Please consider what you can do in the way of self-care and prioritise it.

One thing you haven't mentioned is that your children are under 5 and you live in an area where the schools are poor.  I don't see anything in your calculations to take account of this.  Your options are 1) moving to an area of good schools (potentially expensive), 2) paying to put the kids in private schools (potentially expensive), 3) sending the kids to the neighbourhood schools while putting your efforts into either improving those schools while your children go through them (a big time and energy commitment not necessarily benefitting your kids) or supplementing what they learn through encouragement at home and possibly paying for tutoring (potentially expensive), 4) letting them sink or swim at the neighbourhood schools (cheap in money terms but potentially a lossmaker in other ways).

You are spending $1850 a month on food for two adults and two children under five, with one of the adults being away from the house most of the time.  There is potential to reduce this to $1550 "if income reduces significantly".  I get from your post that you know this is a problem but have had no success in getting your wife to agree to change it.   I suspect that at those levels of expenditure there is a lot of food waste going on, so a "save the planet for our kids' futures" approach might have some success if done with care.  Make sure you change your own habits on this first (eg eat the leftovers and the soon to be expired) before raising it with your wife with any expectation of change.

[travelawyer]

Some thoughts from someone a few years behind you in a similar situation, about an hour and 15 minutes south on I35 (or so I'm guessing based on description...).

1.  I have the same situation, re if I leave the workforce I'm out with no coming back (lawyer).  I've seen other lawyers take "sabbaticals" and come back and not be able to find a job.  Your fear is probably real, so don't discount it (sorry)--the US is not a friendly place for those who enjoy work-life balance.  However, would your employer be willing to grant you a sabbatical with the promise of continuing employment on your return?  Or allow you to work part-time?  Could you look for another job that is less demanding without too much of a pay cut?

2.  A financial adviser would NEVER advise you to hold on to money in order to market time.  If you need a financial adviser, it's probably so he can tell you not market time, but come on, you know this right?  I think you understand finances better than the average financial adviser, so probably not a good investment.

3. You have to decide for yourself what you think are reasonable expenditures.  I also think I need something in the $2 million range for a family of 4 because I like traveling and restaurants.  If you are planning to travel more after retirement, but at your same "taste" levels, your FIRE expenses are probably going to be more, not less, than your current expenses... 

4. I think your health insurance estimates are too high.  I calculated that my post-FIRE health insurance expenses for a family of 4 would be around $700 a month, assuming an income of around $80k (from investments) (based on those ACA calculators).  Considering we live in the same state, yours should be similar or even lower because of your lower desired income.

5. If the market crashes it should theoretically come back even better.  That's what all the MMM calculations are based off of, so if it doesn't happen we are all screwed.... :)

6. There is a sort of loophole for Roth IRAs that you can take out any of the principal before retirement age without paying a penalty. 

[LKS89gs]

cincystache, former player, travelawyer - Thank you for the thoughtful responses! I realize this is practically book length (I wrote it over the course of several months), and I sincerely appreciate the time you took to read and process it.

To all - regarding my statement "not having funds available in our investment accounts at the right time to buy in when markets crash" - yes, I sheepishly admit that this is essentially an attempt at market timing (albeit on a small scale). What I mean is that in hindsight I would've liked to have $5-20k cash available in investment accounts to dump into Vanguard full market ETFs each time the market has dipped >=2-3% over the past couple years. This is never the case, and by the time I transfer funds from the bank, the markets have predictably recovered.

In general, we are all about "staying the course and not freaking out when the markets crash or soar". We primarily invest on a dollar cost averaging approach, and we haven't sold any investments in the past 15 years.

@cincystache -

• thanks for the links regarding accessing retirement assets early - looking forward to learning about this
• "hire a fee-only advisor to meet with for an hour or two per year" - agreed, this seems the most plausible solution for us (if any)
• "There is nothing wrong with continuing to work if you like what you're doing but if you don't define "enough" money, you will always have this attitude. " - absolutely agreed; that has been the primary purpose of running these calculations and writing this out - to help us understand what "enough" is, and weigh our priorities and how we use our time accordingly
• I would look to those with experience with travel hacking credit cards and geographic arbitrage for help with this - will do; thanks for the tip
• think of gold or similar as an "insurance policy to economic turmoil more than an investment" - absolutely agreed
• "In your pie chart, do you really have 229k in 'banking' meaning cash?" - Yes; this is admittedly another example of trying to "time the market", in a way - i.e., it has seemed overpriced for the past 4-6 years (over which time we've accumulated much of this stash), so I've been hesitant to invest heavily - but I certainly regret this now

@former player -

• "children are under 5 and you live in an area where the schools are poor.  I don't see anything in your calculations to take account of this." - great point; oversight on my part. Of the options you listed, (1) is a possibility; (2) is almost certainly out (due to cost, and on principal (of sorts)); (3) and (4) are both possibilities. We are actually holding out hope that we will get lucky and win the "lottery" (really) for the nearby charter school.
• I have trouble grasping how we spend so much money on food: we're not extravagant, and we are honestly pretty good about minimizing waste. This is something we'd like to track more closely and find solutions for. Having said that, it is also worth noting that we've been a remarkably healthy family to this point, and it seems plausible that our diet contributes to this (thereby reducing medical costs). Pretty tough to accurately calculate, of course.

@travelawyer -

• "sabbatical with the promise of continuing employment on your return? ... Could you look for another job that is less demanding without too much of a pay cut?"  - Yup, both of these are possibilities that I will likely be looking into over the next six months.
• "I think your health insurance estimates are too high.  I calculated that my post-FIRE health insurance expenses for a family of 4 would be around $700 a month" - This is great to hear; another item for us to research more closely as we consider this transition.
• (p.s. - I'm trying to maintain some semblance of anonymity here - but I suspect you've pinned our location correctly ; )

[FIFoFum]

I don't have a lot to add, except I see "mindset" problems in your description of things.

For example, I agree that the groceries and dining budget is super high for the # of people/family. You say "hard to calculate." No, it isn't. It is EASY to calculate. You just have to pay attention. Lots of people eat healthy and interesting food for a lot less, so that explanation doesn't show where this money is going. Saying it keeps you healthy is a rationalization or excuse. Log every single purchase in this category. You don't have to do it forever. Even 2 weeks could show a lot. I'd recommend 1 month. Just long enough to see your choices more clearly. Do you buy hundreds of dollars of stuff at a warehouse store every week? Go out to eat daily? Eating steak and sashimi quality fish every meal? Where is this money going?

I don't understand why you need to spend $10K on a used prius if you have a 2009 Fit.

More generally, I'd be wary of your creativity in deciding what "counts" as an expenditure, as an investment, etc. For one thing, it makes your situation a lot harder to understand for anyone looking from the outside in - so hard to get good advice.

Beyond that, I am getting the impression that you are using your desire to have a different definition for words outside of how they are actually used as a way of sheltering how you feel about things. Money your company pays for your medical insurance is not an expenditure. It is a form of compensation. Money you paid for renovations are almost entirely consumption, not an investment. The issue with overinvestment in 401(k) is framed as poor liquidity but really goes to wanting to time the market. Etc.

Why does it matter? It goes to mindset - changing how these words are used illustrates how you rationalize or understand your finances. It makes costs you are not currently bearing seem "bigger" to you. It makes money you spent as a consumer seem less bad. It obscures what the 'mistakes' you've made actually are, as well as what your goals should be in then future. For all the detail in your post (and it is impressive!), I think you will struggle to work out your situation so long as your financial choices are being filtered and labeled through this mindset.

[Dicey]

Wait - you've spent 100k on your house and it's still lacking? WTH? This sounds awful. Care to provide details of what you got for a hundred grand? Maybe I misread this.

[pbkmaine]

Agree with those above. Need more information on food. Are you buying a ton of prepared food? Are you throwing lots of food away? That number needs analysis. More details on house, please. What's wrong with it? And why trade in a perfectly good car?

[ZiziPB]

Agree with those above. Need more information on food. Are you buying a ton of prepared food? Are you throwing lots of food away? That number needs analysis. More details on house, please. What's wrong with it? And why trade in a perfectly good car?

Very easy to spend almost $2K per month on food if you are shopping at Whole Foods and eating out a lot :-)  I think a reasonable monthly food budget for a family of 4 should be something like $800-900. 

I'm really curious what exactly the OP is spending $83K per year on with no mortgage, no car payments and no debt? 

[LKS89gs]

To all - as mentioned, food expenditures are something we are well aware needs more attention, and we intend to track more closely. But no - we don't buy much prepared food, we don't eat out more than 2x/week on average, we don't eat steak every night, etc. We do shop at Whole Foods more than I'd like..

Regarding the house: picture a shack built in the 1940s in an urban area. Putting $100k into that covers new windows, reconfiguring some interior spaces (to make bedrooms for kids), converting an unsafe garage, etc. It still leaves a fair amount to be desired - but nothing that we need, which is why I expect we won't have to spend much (if any) more here. If we had done all of the work ourselves (though we don't currently have the know-how), it probably would have amounted to half of that figure. This is an example of the tradeoff we've faced between working demanding but high paying jobs vs. having time available to DIY.

The used Prius v will replace the Fit for more room - allowing us to fit a bike trailer more easily, fitting camping gear, etc. Sad to see the Fit go though.


FIFoFum - the "hard to calculate" statement was only in reference to whether our diet has contributed to our health and therefore reduced our medical costs. Calculating groceries and dining expenditures is straight forward; this is not. Apologies if that was unclear. Very valid point on how our creativity in tallying expenditures vs investments etc. makes the picture more difficult to comprehend (and advise on), and possibly muddies our own mindset. I will take this into account going forward.


ZiziPB - While budget is $83k, we're on target for $72k of “expenditure equivalent” in 2016 (including full medical insurance cost, but excluding renovations and possible vehicle purchase). Our most significant expenditure categories are listed above. We have a detailed budget broken out elsewhere, but I'll save that for another post.

[LKS89gs]

Thanks again for the thoughtful responses.

To anyone reading this thread for the first time, who may not want to commit a large chunk of time to reading the entire original post, here's the primary question I'd really like to get more opinions on:

Should we drastically shift our investments towards more liquid / standard taxable accounts? (given that we already have "too much" in our various retirement accounts (by MMM calcs), and “just need funds to get us from now until age 60”) Or are the tax benefits of continued funding to 401k, IRA, Roth IRA, etc. worth the lack of available funds in the interim / the hassle (and uncertainty) of needing to exploit loopholes to access funds down the road?


So far we've received advice to continue max funding the tax advantaged accounts... any opinions to the contrary?

[former player]

Your asset allocation calculation leading you to think you already have too much in your retirement accounts assumes that you and your wife will live on the equivalent of $30k a year from the age of 60.   Who do you think you are kidding?  You are currently spending $18k a year just on medical insurance: are you going to rely solely on Medicare in your old age?  Even then, you still have to pay the equivalent of 5 years' insurance to get you to 65.  You are currently spending nearly $20k a year on food with no realistic prospect of reducing it.  Property taxes are $6k a year.  Travel is $3k a year: are you going to travel less in the early years of your retirement?  What about expenditure on property maintenance (if you don't have the skills or inclination to do it yourself now you probably won't when you are older either) and extra costs on climate control because you are less strong and fit and able to cope with anything outside a narrow comfort range?  What about capital expenditures on renewing cars?  What about paying for extra help as you get older and frailer?

I think FiFoFum made some great points about mindset: you need to critically examine every assumption you are basing your plans on and adjust them to reality.

[ZiziPB]

Very valid point on how our creativity in tallying expenditures vs investments etc. makes the picture more difficult to comprehend (and advise on), and possibly muddies our own mindset. I will take this into account going forward.


ZiziPB - While budget is $83k, we're on target for $72k of “expenditure equivalent” in 2016 (including full medical insurance cost, but excluding renovations and possible vehicle purchase). Our most significant expenditure categories are listed above. We have a detailed budget broken out elsewhere, but I'll save that for another post.

You are twisting yourself in pretzel with all this complicated "equivalent" budgeting, counting some expenditures but not others, overestimating, underestimating.... You are also showing some numbers as monthly, some as yearly.  Which is not difficult to convert but it just muddies the picture even further.  You are making it impossible for yourself to get a clear picture of your spending or planned retirement budget.

Why don't you use the case study template and put all your current spending in?  And then create a second column showing what that specific expense would look like in retirement.

Here is what you have to start with:

Medical insurance $18,000
Groceries             $17,400
Dining                    $4,800
Travel                     $3,000
Property taxes        $6,000
Child care               $5,400

Total                    $54,600

Just to put things in perspective, you are spending $22,200 per year for food for 4 people.  MMM's entire annual budget for his family of 3 is something like $25,000.

[homestead neohio]

Don't sell the fit.  My Prius C is as small as your fit and I took my family of 4 camping for a week covering >1,000 miles with NO roof rack or rear hitch mounted platform.  I've since added a rear hitch and could fit a lot more gear on it.  Get a roof rack, rear hitch, and rear platform for <$1k and camp in your Fit.  It is cheaper to own, operate, insure, and maintain.

My family of 4 eats 90% food that is both organic and from local farms, remaining 10% is usually either local or organic and our food budget is $800/mo.  This I consider very fancy, a combo of sustenance, ecological stewardship, and preventive healthcare.  This year we grew no garden and raised no animals, so this is buying everything in (unusual for us).  Your food expenses are significantly marked up by a middle-man and you pay for convenience.

You and your wife have some choices to make.  You justify extravagant spending based on leading high stress, busy lives.  This is a choice.  Some people think they want less busyness and stress, but our modern culture places value and status on "busy".  Busy = important is something I don't buy into.  Are you seriously committed to bucking the trend?  Sometimes it is harder to be less busy, because it leaves time and space for you to confront fears, dreams you haven't made happen, your own fragility/mortality, etc.  Sometimes having a hectic, stress-filled life strangles your imagination to death, but it is a choice to not fight back and dream a more fulfilling life.

Overall, you don't sound really committed to making major lifestyle changes, just my opinion after reading all the mental gymnastics.  Personal finances and FI optimization can be really complex, or it can be simple.  Keep it simple.  You have a huge pile of diversified assets!  You could make dramatic changes to have a low-cost, low-stress life!  Move to lower cost of living and lower tax area, work a part time job for benefits and slight income while your skills are very much in demand, wife gives up side gig if it is stressful or unrewarding.   Use your new-found additional time to give your wife a break, learn some skills to in-source jobs, drastically cut expenses, enjoy time with your family.  Take some time to dream with your wife about what this could look like.  She might have some great ideas once you get the ball rolling.

If you aren't committed to big changes as I describe above and keep the high income, max the tax advantage accounts.  Your marginal tax rate is high, and there are ways to access this money before 60 if/when you are ready (Roth ladder, SEPP rule 72t, live on taxable and roth contributions, giant pile of money that is currently tied up in home equity).  If you cut your expenses, you could even save in a taxable account on top of all this tax-advantaged stuff.  I would be very concerned about your mental and physical health if you do this, though, given your reported current state of burn-out. 

[clarkfan1979]

Replace Whole Foods with Costco and that should take your grocery budget from $2,000/month to $1,000/month with very little effort.

[arebelspy]

Should we drastically shift our investments towards more liquid / standard taxable accounts? (given that we already have "too much" in our various retirement accounts (by MMM calcs), and “just need funds to get us from now until age 60”) Or are the tax benefits of continued funding to 401k, IRA, Roth IRA, etc. worth the lack of available funds in the interim / the hassle (and uncertainty) of needing to exploit loopholes to access funds down the road?

Absolutely max the tax-advantaged accounts.

You can access it in various ways, and there are scenarios where even paying a penalty you can end up ahead.

Take the free money (in the form of less taxes paid) from the government, the incentive to save they give is worth it.

[LKS89gs]

ZiziPB - thanks for the suggestion; we will do that to more precisely estimate our future expenditures.

homestead neohio - Yes, we want lifestyle change you describe - but it does not need to be imminent. Despite the long work hours, stressfulness, exhausting nature, and excessive spending of our current lifestyle, it is reasonably enjoyable (and we are accumulating savings). We are planning here for somewhere between 1-5 years down the road.

arebelspy - thanks for your take on the taxable/non-taxable investment allocation as well.

[skeptic]

>Should we drastically shift our investments towards more liquid / standard taxable accounts?

No! I'd say absolutely max the tax-advantaged accounts, and don't shift $1

As arebelspy mentioned, you _can_ get the money out, with some conditions.

In particular I'm thinking of 72t withdrawals. These won't let you immediately take out 100k for something, but they'll let you take out a meaningful portion of your accounts over a period of years, penalty-free. Or you could take back your actual contributions to Roth IRAs. And there are other options as well.

Awesome job earning and saving, and all while spending 1850/month on food! (For reference, our family of 4 spends about $600-700/month on food, without trying to keep costs down particularly much, although the catch is we eat vegetarian in the house.)

While I don't want to stop you from continuing to improve and grow and benefit from the good advice of others on this forum and post, I do want to say it seems you have put in a lot of effort on finances and it has paid off well, and you're in an excellent position. Cheers!

[bacchi]

homestead neohio - Yes, we want lifestyle change you describe - but it does not need to be imminent. Despite the long work hours, stressfulness, exhausting nature, and excessive spending of our current lifestyle, it is reasonably enjoyable (and we are accumulating savings). We are planning here for somewhere between 1-5 years down the road.

Can you spend less and still find reasonable enjoyment in your current lifestyle? (That's a low bar to set, as you know.) The answer is almost certainly.

Shop at H** more and Whole Foods less.

[ChpBstrd]

Food:
My wife also has the Whole Foods addiction. That alone doubles your food expense. Try reading labels instead of relying on the WF marketing image. Also, there are websites undercutting the physical stores. Exotic foods like shrimp don't belong in the weekly rotation. When dining out, look for those occasional salad buffets at like $8/plate rather than the $25/plate gutbomb chains.

Housing:
Your 1000sf house in a mediocre school district would cost you $100k in my neighborhood. Less if it needs remod. Consider the $200-300k difference to be a post-FIRE asset, since you aren't attached to the house and plan to move anyway.

Insurance:
You need to shop more.

Pre-tax, Post-tax dilemma:
This is easily solvable using the present value formula on a spreadsheet. First, calc the PV of a stream of living expense payments lasting the years from 60 to life expectancy. That's what needs to be in your pre-tax accounts when you turn 60. Then, calc the PV of a stream of payments from your retire date until 60. That's what needs to be in your post-tax accounts on your retire date. (Set up these formulas with cell references so you can experiment with ROI, retirement date, savings amount, etc.) Now, use the PV formula minus your current balances to calculate how much more needs to be in your accounts and roughly how much you need to add each year to reach these amounts at the times they are due. You can go so far as to calculate the % to target into each account. You'll need to manually factor in an inflation guestimate on a more complex system, but this simple method will get you very close. Precision is deceptive, but the outputs of this simple model may surprise you.

Pre-tax IRA:
Always max this out. The tax deferrals from the highest brackets are available now, during your peak earning years, not later. If you could borrow a million bucks from the government at zero interest would you do it? Yes... So borrow a few thousand now and pay it back as a few hundred later.

Big picture:
You could already retire in the midwest or south if you were willing to completely throw out your current way of life. Just something to keep in mind as you travel and assess cost of living.

Burnout:
How might a new job or complete change of scenery change that? A new life in a new city might do wonders, while also resolving some of your barriers to ER, like the high property taxes. Even if the salary was lower, a different location and disruption of established buying patterns could actually result in more savings. Could you work from home to arbitrage a high salary amd low cost of living? Burnout is a threat to your plans, so hedging with motivational media, career coaching, etc. is justified.

Other:
Walk away from market timing; set it and forget it. If your brokerage gets hacked, your institution would still owe you your funds. They insure against such multi-billion dollar events, and regularly survive them. If you're still concerned about counterparty risk, diversify your counterparties.

[LKS89gs]

skeptic - thanks for reinforcing the "max the tax-advantaged accounts" consensus. Will do. Also, admittedly, meat consumption plays a big role in our food expenditures. One of several reasons for us to try to cut back.

ChpBstrd - good point about a portion of our property value as a post-FIRE asset, and thanks for the spreadsheet suggestion. That does sound pretty straight-forward and very helpful.

[LKS89gs]

By the way, I don't follow twitter closely but I happened to see this on the one and only MMM's twitter account from 9 Nov 2016:

Wow,  those election results are quite a shock.  But they might provide a nice sale on stocks today.

See, I'm not the only one occasionally trying to "time the market"! (on a small scale)

Anyhow, not actually advocating for timing the market - but this amused me.

[LAL]

Same age but kids a bit older.  Same savings a bit more.  But we just burned a $100k for a year living without income.  DH took a year sabbatical to career shift and loves it.  We probably could have FIRE but we chose not to.  DH is not planning on retiring anytime soon.  Early? Probably.  But right now dream job = no way (he's an almost 40 year old man and his job is with online gaming).  Anyway we're easily less than 5 years from a very cushy FIRE number and our year off only put us realistically a year behind.

He stopped in Sept 2015 and started August 2016. We maxed out our Roths and 401k in these past few months plus we spend un frugally.  So it is what it is.  But he's much happier with the sabbatical and time off and new career.  I don't think time off is necessarily a bad thing.

[arebelspy]

our year off only put us realistically a year behind.

Minor quibble: I'm not sure I agree with your math.

If you have a positive savings rate, shouldn't it put you behind by more, automatically?

E.g. say your savings rate is 50%.  Then instead of saving a year's expenses in that year, you spent a year's, putting you two behind where you would be otherwise (the ones spent plus the one not saved).

This is ignoring the opportunity cost on the growth of the money that was spent versus saved, it's assuming a flat market (close enough, over the time frames you mentioned)

Only if you have a 0% savings rate in normal times does it just put you a year behind (because you withdraw a years worth of spending during that year, rather than add zero, meaning you are down one year's spending in your stache from where you would be.)

But your overall point is good--if you're unhappy, do something about it.  Pushing toward FI at the expense of now defeats the point.  I'm glad your husband is happy in his new career, and it's awesome you guys are still only ~5 years out from full FI, if you choose that at that point.  :)

[LAL]

arebelspy, i'm not sure how it happened but it appears to have worked out.  What happened is DH worked until August 2015.  We moved in July and he went back to finish working and give notice.  But our peak "net worth" was June 2015.  After that we started absorping a lot of costs associated with self-moving cross country.  At the end of September 2015 is the last true date I calculated our net worth (all cash investments because we sold our house). 

Anyway DH started a new job but no income until August 2016.  And I just checked yesterday and our net worth is 0.7% down.  I'm not sure how it all happened but our retirement we maxed out the 401k and Roth IRA for 2016 again so not a year missed.  We stashed his signing bonus, and we lived the same life as without income just saving whatever we could.  Our retirement savings went up another 3% mostly from contributions, but we keep staying the course.  Our cash is down maybe $20k and I bet we surpass it in January with a bonus. 

We got a tax break last year and this year able to contribute to our Roth IRA since we split salaries over 2015/2016.  We also are doing a Roth IRA conversion this year on part of DH's old 401k to fill the 25% bracket. 

I guess we also landed a better paying job (ha what a surprise), moved to a lower cost of living area (planned this), and if we really wanted we probably could be FI now.  But that's not DH.  He hated being at home and loves his job. 

So I'm not sure how the math worked out but looking at the numbers it does.  Probably factors are - got higher paying job, cheaper housing (rent is lower than our mortgage was), much cheaper utilities and overall cost of living, and somehow we lived a year purely based on our cash savings and our investments generated some and we saved a nice size bonus.  Probably because we were planning this we had a cash stockpile to live and left our investments alone.

So we can still "retire" in 5 years or less if we choose.  So it added 1 year at the end anyway you look at it. However my DH calculates we just shortened our FI time because of the higher paying job in a lower cost of living.  So it's possible we might be further ahead than we thought.

[arebelspy]

You compare to where you would be in a hypothetical world had you not done itto where you are now, not where you are now to where you thought you'd be.

Like, say you're on track to ER in 5 years.  Then you take a year off.  And the market SHOOTS up, completely covering your spending that year AND reducing your time to FIRE by a year, so after that year off, you go back to work, but only have 4 years left.  Awesome.

But you wouldn't say that year off set you a year forward on your path to FIRE.  It still set you back relative to where you would have been if you worked that year.  Because if you worked that year, you'd have not spent down part of the stache, you'd have still gotten all those market gains, and you'd have saved some from your job.  Your time to FIRE might be 3 years (having gained a year from working, and 1 from the market gains), rather than the 4 it is currently.

So in your case, you may have been 5 years from FIRE, taken a year off, and still be 5 years to FIRE, so the year off only put you back a year.  That is true, and that is what happened.

But had he continued to work, he still could have taken a higher paying job, you still could have moved and reduced cost of living, and you could be even closer to FIRE.

I'm not saying the year off wasn't the right move.  It very likely was.  And to be only 5 years from FIRE after taking a year long sabbatical is awesome!

I'm just saying this math doesn't hold up:

our year off only put us realistically a year behind.

There's no such thing as a free lunch, and a year off only having you only a year behind where you thought you would have been could be true (just like a year off could actually leave you a year AHEAD of where you thought you'd be), but it set you more behind than that based on where you would have been in the real world had you not done that.

I don't mean to quibble, and it's not a big deal, I just think it's worth understanding the opportunity cost, and knowing all realistic numbers.

Summary: The one year gap may have pushed you back only one year from when you thought you'd ER, but it pushed you back more than a year compared to where you'd have been had he kept working (i.e. you'd have been able to ER earlier than you thought in that pre-gap projection, if he had kept working).

In any case, I'm glad it all worked out that you're still on track to FIRE very soon, and, even more importantly, he's happy with his new job.  :)

[LAL]

Actually there are few assumptions that are incorrect in your process.  First we could NOT have moved to where we live period because there were no jobs in his field.  The only place we could have lived is where we were and another location.  That is the nature of his job.  Second we would have been on the tightrope waiting to see if we might have made 5 years with his company or laid off.  Third it wouldn't be paying as much unless he switched because I doubt he'd have gotten a promotion but I could be wrong.  And since we were in the same field I know how hard it was for us to move locations.

So would we be 4 years to FI?  Probably but it would be a gamble as well.  I know the income went up by switching careers.  And the ability to leave where we were is something that banked on.  We aren't engineers and we started late income wise savings.  We spent our 20s in graduate school. 

It'd be probably easier to explain in person many choices because we were land locked with his career and it was killing him.  The only thing keeping him going was the fact that we had a plan.  But I know that long term it would have been harder to move in 5 years with the kids more settled and us being longer in the area.

I know that it probably could have been 4 more years but there was inherent risk in that.