46 YO wants to FIRE in 16 months (moved Ask a Mustachian)

[firelyve]

This was originally posted here as a question about inflation posted here:

https://forum.mrmoneymustache.com/ask-a-mustachian/inflation-adjustment/?topicseen

but it turned into more of a case study so I moved it to this new thread.

My $39,900 budget (original post had $43,500 projected budget but I reworked numbers and removed the $5100/year 529 contribution that will end in 2029-thanks to Prairie Stash for a better way to look at that!) breaks down as:

$6000 Housing ($3600 for repairs, remaining $2400 taxes/insurance; no mortgage*, house is only 1000sf)
$4800 Utilities ($1800 on cable/internet which we should be able to cut drastically when our current contract is up)
$6000 Car ($1200 insurance, $1200 gas (could conceivably cut gas in half), $3600 repairs/new car savings)
$8400 Groceries, Personal, Household Items ($5400 groceries for 3 + $1200 Costco, $1200 clothes, $600 misc)
$9300 Healthcare ($6000 insurance for 3 w/subsidy, $900 gym memberships, $1200 vitamins/supplements, $1200 term life)
$1200 Cell Phone (2 phones)
$1200 Entertainment (travel, eat out)
$3000 Misc (even more 'fat' in budget)

If I understand the 4% rule correctly, it assumes that you can live off of 25x your yearly budget and be 95% to be successful (not run out of $$$), with a portfolio of something like 70-30 stocks/bonds.  If I were to be more conservative and say I wanted to follow the 3% rule, would it stand to reason I would need 33x my yearly budget with the same mix to be 95% certain to not run out of money?  Then add the 10 years @ $51,000 on top of that for the limited time 529 contribution?  If so:

$40,000 (rounding up $39,900) x 33 = $1,320,000 + $51,000 (for 529 for 10 more years while retired)= $1,371,000

I'm looking to have $1,300,000 at retirement in 2020 (had $1.2MM at end of July until market sputtered, plus a rental property I am selling by year end with about $130,000+ equity) and have some other short term income that will help for the first 7 years of retirement (about $19,000 fixed income per year for those first 7 years). 

I also plan on going 70-20-10 stocks-bonds-cash with my $1.3MM or so portfolio.  I think that I'll be using that $130,000 to fund something that will generate income.

Let me know if anyone sees anything that should prevent me from FIRE-ing at the end of 2020! 

*The only reason that I'm going to work the next 16 months is to generate enough money to kill my mortgage that will be an $84,000 balance @ 3% for 13 more years.  The P+I of $700/mo ($8400/yr) is not included in the above budget.  I'll save about $55,000 and take $30,000 from the rental property sale and no more mortgage.  Some might say keep the $84,000 invested and continue to pay the mortgage.  I'm open to that if someone can really convince me it makes sense.  That is, you see the 'market' returning more than 3% over inflation in the next 12 years.  I think that it could, but it may not.  Trying to be conservative here.

In theory, if my portfolio returns 3% + inflation of about 2%, I should never have to reduce the principal balance.  Does that sound right?

Now if someone could convince me to FIRE even earlier...

Looking forward to your thoughts everyone, thanks!!

[Saskatchewstachian]

Posting as a Canadian so forgive me if this is way off base but health insurance in the US is typically income tested and not means tested correct?

I see $6000 as part of your budget for insurance however once you retire your taxable income will drop to match your spending, say $34,000 plus insurance. At that low of an income do you qualify for any cheaper insurance options?

If that is the case then lowering your spend to say $34,000 + $1,000 (estimated) insurance would only require 35k X 33 + 51k = $1,206,000 for a 3% withdrawal rate.

The plan for killing the mortgage sounds great but just wanted to maybe point out that you may be even more conservative than you initially thought!

[firelyve]

Saskatchewstachian-

You're probably right, but it's so tough to predict the insurance thing.  My best guess is if I have 'income' of about $44,000 or so, my premiums should be like $250/month, rather than $500 per month.  But that could change a bunch.  And IF somehow that subsidy changes, my insurance would probably skyrocket to like $2000 per month or something ridiculous.  I remember 20 years ago I was paying like $5 per bi-weekly check for good insurance as a single guy, now I pay $35 or so x 12 for just myself and it's crap.  Sigh...

I'm sure as I get closer to pulling the trigger I'll do more research and some fellow mustachians who have navigated the system on this forum will help me :)

Thanks for pointing that out though!!  Just inching me closer...

[Car Jack]

The 4% number from the Trinity study looked at chance of failure at 30 years.  If you're retiring at 40, that would mean you plan to die at 70 and that your spouse will just be on their own.

It is very common for lower withdrawal percentages to be targeted for those younger than....say 60, where one could assume they'll be dead at 90 with pretty good accuracy.

There's also padding or as I call it, safety net for black swan events.  I suppose you can go without a net, that's up to you. 

There are a few things in your budget that are very easy to drop.  Gym membership?  Can you not put on sneakers and run outside?  Inside a mall, walk in the winter?  Personally, I cut firewood year round.  You're more than welcome to come split some wood at my house, anytime.  :D

[ChpBstrd]

The plan looks good to me. Personally I would use put options to set a floor on my potential downside with the equity portion of the portfolio, particularly during the first few years. This is my preferred strategy for dealing with SORR - don’t crash!

What is the ROI for the rental property? If it’s above, say, 5% you might consider keeping it. The diversification and depreciation benefits could come in handy, the revenue stream would grow over time unlike bonds, and it would reduce your vulnerability if the assumption of 2% long term inflation turns out incorrect (whereas more bonds would increase your vulnerability to that scenario).

It’s said we are our own barriers to early retirement. I see a metric ton of fat in the budget below. If you can’t cut $5k a year out of that budget with minimal effort, you’re not trying. Why worry about healthcare if you can already afford $150/mo internet/cable, $100/mo on supplements I’m sure you don’t medically need, and $100/mo on clothes? The car has full coverage even though it is worth only $6k, you have the funds to self-insure, and it will soon not be needed for commuting? (K, I’ll stop nitpicking:) but the point is you could greatly improve your retirement risk profile with an afternoon of budgeting and shopping for services, whereas worrying about market returns or healthcare inflation rates will only lead to perpetual OMY syndrome.)

[firelyve]

super interested in learning more about put options to minimize downside risk of stock market losing 10-40% in first few year for FIRE!

rental property would probably generate at least 6% ROI, BUT I would then have my primary house mortgage AND rental house mortgage to deal with.  I've had several rental properties in the past and found that sh*t happens more often than not, so I'd probably opt to sell property and reinvest in paying off principal mortgage.  But open to further discussion on that.

Budget is fat, I know.  However, DW is not FIRE.  Getting her down to $40,000 per year has been no easy feat LOL!  We have 3 kids (18,16, and 8 now).  Kids require new clothes, it's just the way it is.  And we can cut down on connectivity (cable) after our current contract is up.  I probably don't NEED to bench 300lbs or squat 450lbs, but that's part of my passion, so the supplements and gym membership supports that.  Health insurance unfortunately is required to remove risk of a catastrophic event (cancer, heart attack, etc.).  Probably won't happen, but could and would ruin us overnight. Have to hedge against that.  I think I can cut premiums in half with subsidy, but again placing some extra fat in budget is better for me than cutting it close.  I have 3 cars, one for 18 year old that needs to commute to community college and job (he pays his portion, remaining $1200 if for my wife's an my car).  16 year old in 2021 will be 18 with license, so he will go on insurance and get one of our 2 other cars, leaving 1 car for me and my wife and the then 10 year old.  What can I say, kids suck when it comes to planning for FIRE! 

If you could give me some guidance on the put option strategy, I'd be super interested in that. I'm hoping to cut some fat out of the budget, but this is the 'worst case' scenario. 

Thanks!!!

[ChpBstrd]

To learn more about options:

1) Read the blog or listen to the podcast at optionalpha.com. Good stuff.
2) Read about protective strategies here and here:
https://www.optionseducation.org/strategies/all-strategies/collar-protective-collar
https://www.optionseducation.org/strategies/all-strategies/protective-put-married-put?source=3127f1e6-8969-41c7-a0eb-50a711cc9195
3) Start a daily tracking spreadsheet so that you can get a feel for how puts and calls of different durations respond to changes in price (Delta) and volatility (Vega) over a few months. Plot the VIX index alongside them. Comfortable with these price swings?
4) I don’t recommend setting up a hedge until VIX is under 13 or so. This event happens every few months. It means options are relatively cheap, and not pricing in the odds of future volatility. Buying low has a large effect on hedge performance. I use LEAPS (long duration options) so that I don’t find myself with expiring options during a period of high volatility when I need them most.
5) Understand what an options pricing model like Black-Scholes is, even if you can’t recite it all perfectly. Understand that you are trading against supercomputers running relatively simple calculations.
6) Stick to high volume ETFs like SPY or QQQ. The bid-ask spread on other funds is simply too high for an individual investor not to lose money on. Suck up the 0.05% higher management fee or whatever.

[firelyve]

ChpBstrd, thanks for all the info on options and strategies to minimize downside risk!  Looks like I've got a ton of research to do there.

A huge cost in my budget is health insurance and taxes.  There are lots of incentives for 'low earners', such as ACA subsidies, child credit, EIC, saver's credit, etc..  If I can get a little guidance on hitting the sweet spot where taxes are minimized and benefits are maximized, I feel I can quit my regular job very, very soon.  So here is the situation and what I have questions on:

If I generate an AGI of $30,000, I can get:

Silver Health Care Plan for $95/month (way better than my $500/mo initial calculation)
Pay $962 in VA income state taxes
Get $230 in VA tax credit for 529 contribution
Pay $0 in Federal income taxes
Get $2000 Tax Credit for dependent (refundable)
Net Taxes of $962 - $230 - $2000 = REFUND of $1268; this more than covers my yearly health insurance, cutting my budget by projected budget by $6000!!!

OK, so here is the questions:

Could I just use a combination of backdoor Roth and LT capital gains to achieve an AGI of $30,000 and qualify for ACA subsidy? For example, convert $15,000 from my IRA (itself converted from previous 401k many years ago) to Roth and get LT capital gains of $15,000.  Would that work?

Am I way off here, or missing something?  Suggestions?

[RedwoodDreams]

For your planning purposes, keep in mind that the EITC limits the amount of investment income you can have per year:

https://www.thestreet.com/personal-finance/earned-income-credit-14922245

Specifically, for your case:

You must have earned income for employment or self-employment.
You cannot earn over a certain amount of investment income for the year. For 2019 the amount is $3,600.