Case Study: How do we get there?

[johnnyqnola]

Wanted to get the braintrust's opinion of how close we are to both pulling the plug, living simply, and working solely at our will. Thanks in advance to the MMM community--and sorry for the book, please bear with me!

Life Situation:
H/H 39 and 40 MFJ, Midwestern city

Gross Salary/Wages:
$115k W2 + 6% 401k match
$80k W2 - although I quit my job in Oct 2022

Pre-tax deductions, combined:
401k maxed
HSA maxed
Employee cost of insurance for both 5k

Rental Property:
income $15k
exp $4k
net inc $11k/yr

Monthly Expenses:
We averaged $4200/mo the past 4 yrs, but since moving in 2018 new house expenses have tapered, and now we are keeping it around $3700/mo or 44k/yr. We're not awesome about tracking expenses categorically (harder since we CC hack), but I made a pivot table from our primary CC 2021 YE statement and did my best below.

home RE tax $300
rental RE tax $50
home ins $200
rental ins $100
home utilities $240
rental utilities $100
home maint $400
rental maint $100
RE license expenses $100
internet $75
subscriptions $35
cellphones $45
car ins (2 cars, 2 ppl) $100
gas $100
car maint/tags/etc $100
grocery/hooch $350
dining/bars $250
health/rx $100
misc $950 - clothes and whatever else life demands that is missing above, bad tracking :(

Assets:
cash $215k
Trad 401k $510k
Roth 401k $72k
Trad IRA $168k
Roth IRA $126k
HSA $78k - we've never touched 'em
Taxable (US equities) $400k - actively contributing here $4k monthly

home $350k
rental $150k

No debt

Total assets ~$2,070k including home & rental equity, bulk of non home equity assets is in retirement accounts.  Don't want to consider 72t to maintain flexibility and keep things simple.  Investment allocation:  75% equities, 20% stable value, 5% REITs.

Comments:
We have been working hard at day jobs and side hustles, living frugally and maxing out 401k for about 10 yrs. We don't eat out a ton, have 1998 and 2006 Japanese cars which we don't drive a lot. Our recreation involves walking, gardening, going to free events, etc. I drag treasure home from the alley to sell online or furnish our home, and I try to DIY as much as I can on our buildings/cars. We cut each other's hair. Most of our groceries come from Aldi. You get the point... Our primary residence drives most of our expense line.

We had 2 other rentals that we sold within the last few yrs and used the proceeds to pay off our primary residence, build up taxable investments, and pad our cash reserve. Hindsight is 20/20 and I wish we had them back--as well as our 3.1% mortgage--but live & learn. Our house is an old Victorian, so there has been a $5k+ maintenance project every year (included in avg expenses above). In the past few years, I had lasik and a dental implant (mega fun) which were big one-time expenses. We love Mexico, and have started going there yearly, but with CC rewards and doing it on the cheap, it's averaged <$1500 per 10-day trip incl air/stay/food/fun.

We would really like to use much of our cash to buy one or more rental properties to create income which will replace our jobs and sustain us until age 60 when we can take 401k distributions.  Another option is to take the cash and fully invest it (VTI).  Also, we would like to start doing Roth IRA conversions after stepping away from W2 employment. There is a limited inventory of multi-family properties (we look at all of them) and I'm not sure when we might find something suitable with a decent ROI.  Expect it would be around 500k for a multi-family we would like to live in. Considering selling our primary residence and either moving into our SFR rental, or occupying a unit in a new multi-family purchase. We have also toyed with the idea of spending ~4mos in MX every year renting cheap places, and could STR our house here if we do. Would have to hire a prop mgr for our rental(s) if we did the snowbird thing, of course.

We are just getting burnt out on megacorp work stress, and truthfully I'm not thrilled at the idea of jumping back in.

Questions:
1. Should we invest our cash in taxable accounts, or buy more rentals? I think I want to have some kind of a "job" even if it's "passive". Plus there are tax advantages of depreciation on RE, good hedge, diversification, etc.  I have a RE license so could go that route and label myself a full time RE professional for tax purposes.

If we pursued purchasing additional rentals -
2. Should we stay in our primary residence and leverage it to buy more rentals, or sell it to purchase a multi family that we occupy? We have a 2200sf Victorian rowhouse which we love, but is more than we need and has higher expenses.

Or we could move into our small single family rental.  We would need to put ~$75-100k into our rental to finish the basement and do some other things to make it work for us as our home--but we would lose the income from that property.

3. I think we are getting closer to the point where we can both step away from W2 work if we keep our spending under control but it's also possible math is off on our approach, considering assets we can touch.  44k annual spend minus 11k net income from current rental = 33k needed from after tax investments a year.  Backing into the 4% rule - 25x 33k/year is 825k.  We currently have 400k in after tax investments.  If we deployed the 215k we have in cash into investments we would be @ 615k.  Are we really that far away? Should we be plowing everything into taxable investments and slowing down on 401k contributions to help get there?

[index]

Look into a roth conversion pipeline so you can access your traditional IRAs and you should be good now.

[Laura33]

Look into a roth conversion pipeline so you can access your traditional IRAs and you should be good now.

This.

You are well set for the long term; the issue is managing your $$ until you can start withdrawals from the tax-sheltered investments.  A Roth pipeline will get you there.

Also suggest you make a decision on rentals vs. stock market.  I can't really advise you which is preferable; that decision is driven by both circumstance (e.g., your local property market) and preference (e.g., whether you really want to "retire" to a job managing rental properties).  Either approach can set you up well for retirement; where people can get in trouble is jumping back and forth in-between.  Because those jumps are often driven by circumstance, meaning that rental properties look tempting when the property market is strong and the stock market is weak, and investing looks great when the market is roaring and real estate may not be doing so well.  In both cases, of course, the temptation to follow one path or the other is precisely the opposite of when you should be doing so for financial success.  Better to find a path that suits your goals and circumstances and just stick with it.

[joe189man]

Here is my 2 cents

Question 1 - I would keep ~2 years spending ($44k*2) in cash, and invest the rest in the taxable or if you have a good rental market wait for prices to drop and use the cash to pick up a rental some time later next year. Seems like the RE license would be a decent side hustle to keep some income coming in if desired.

Question 2 - i would stay for now, the primary house sounds like a bad rental and the housing market is likely turning sour. Unless your local market is still awesome and you can get what you want for it i would wait a few years and see what happens

Question 3 - I think you are mixing/separating pots of money, you only need the cash, Roths and Taxable for the next 20+/- years to get to age 59.5 after that you can use the traditional 401k dollars

all added up you have $813k to get you through ~20 years, even if you went straight cash with the $813k it would last 18.4 years at a spend of $44k or 24.6 years at a spend of $33k.

And you can always sell the rental or primary if needed

in 21 years the traditional and HSAs of  $510k+$168k+$78k = $756k will have grown to ~$2.6 million at 6% interest. this would spin off nearly $100k from ages 60-61 on

seems like you have won the game and can quit at your leisure, Congratulations

[former player]

Here is my 2 cents

Question 1 - I would keep ~2 years spending ($44k*2) in cash, and invest the rest in the taxable or if you have a good rental market wait for prices to drop and use the cash to pick up a rental some time later next year. Seems like the RE license would be a decent side hustle to keep some income coming in if desired.

Question 2 - i would stay for now, the primary house sounds like a bad rental and the housing market is likely turning sour. Unless your local market is still awesome and you can get what you want for it i would wait a few years and see what happens

Question 3 - I think you are mixing/separating pots of money, you only need the cash, Roths and Taxable for the next 20+/- years to get to age 59.5 after that you can use the traditional 401k dollars

all added up you have $813k to get you through ~20 years, even if you went straight cash with the $813k it would last 18.4 years at a spend of $44k or 24.6 years at a spend of $33k.

And you can always sell the rental or primary if needed

in 21 years the traditional and HSAs of  $510k+$168k+$78k = $756k will have grown to ~$2.6 million at 6% interest. this would spin off nearly $100k from ages 60-61 on

seems like you have won the game and can quit at your leisure, Congratulations

Yes, this.

Well done, and now have the life free from the corporate nonsense that you have earned through hard work and simple living.

[index]

One thing I would caution is it does not look like you are accounting for long term maintenance on your homes and replacement of your vehicles. You are going to have a long retirement and planning for big ticket housing items - new A/C, furnace, appliances and a new vehicle every 10-15 years would be prudent. You have some margin of safety right now - but make sure you add in those long term expenses, taxes owed, and healthcare into your RE budget.

Depending on ACA eligibility and the ethics surrounding the subsidies - you could easily add 10-20k/yr just in healthcare expenses.

[zolotiyeruki]

By the 4% rule, you are WAY beyond having enough to retire.  With your rental, you have nearly twice as much invested as you need to in order to support your spending.

So here's what I would suggest:
1) Retire today.
2) Stay in your current home.  You love it. 
3) It makes zero sense for you to leave the home you love to convert it to a rental  Neither does it makes sense to take out a loan in order to buy more rentals in order to get more money that you don't need.
4) It doesn't seem like you quite understand the awesomeness that is the Roth Conversion pipeline.  The short version is this:  If you have 1) 5 years' expenses in accessible places like cash, taxable investments, and Roth contributions, and 2) total invested assets of 25x yearly expenses, then you can access your traditional 401k/IRA investments with no penalty, even before age 59.5.
5) Your Roth Conversion Pipeline is already built.  Once you study up on the RCP, you'll realize that can quit today and have zero issues having access to enough funds.

[cincystache]

Congratulations! I would retire from corporate jobs immediately and start making decisions based on what you want to do with your life and not so much based on money optimization. You already have in excess of 47X your annual expenses. Whether you put that into rentals or stock indexes it doesn't matter, you are set for life and you don't need to keep optimizing your finances just do whatever of those two options would make you happier. As far as access to money, see others' suggestions on roth IRA pipeline, that is the answer, look up the madfientist article on the topic.

The quote below is taken from MMM's article from June of this year discussing real estate vs. stocks but more importantly, the philosophy on how to look at money after you reach FI. Don't you realize you've already won the game and no longer need to optimize? Congratulations again, enjoy the victory.

"I’d keep the houses that I love to live in, and sell the rest if I’m only managing them for the money. I would dump a huge chunk of surplus cash into the sensible index funds through the financial firm of my choice, feeling extra good about the fact that stocks are currently on sale.

And then I’d keep doing construction projects alongside great friends just as I do now, only when it suits me. When evaluating a new project, instead of asking myself about the potential profit, I would ask, “Is this project so worthwhile that I would do it for free?”

If the answer is yes, go ahead and do it and celebrate the profits and use them to facilitate even more generosity.

If the answer is no, the project is a no – you’d be taking it on just to make money, which is something you no longer need, because you have already arrived at financial independence. Leave the money in index funds and keep searching for work that you really care about.   " (MMM article June 21, 2022)

[Sandi_k]

A couple of nitpicks:

- How will you handle medical insurance and illness? That isn't shown as budgeted in the $44k of expenses.

- The 25x/4% rule of thumb is for a 30 year retirement. At your age, I'd be assuming 3%.

- The 4% is of your liquid assets: cash, stocks, bonds. You don't count RE and your personal home in that asset calculation. You have $1.2M in liquid assets, not including the HSA. So that will get you $36k annually. Your rent gives you another $11k.

So yeah - figure out healthcare, and you're nearly there.

[RunningintoFI]

A couple of nitpicks:

- The 25x/4% rule of thumb is for a 30 year retirement. At your age, I'd be assuming 3%.

I've never understood why if 4% isn't considered safe enough for a long time horizon that the next logical step is 3% instead of something like 3.5-3.75% first. 

[nouseforausername]

A couple of nitpicks:

- The 25x/4% rule of thumb is for a 30 year retirement. At your age, I'd be assuming 3%.

I've never understood why if 4% isn't considered safe enough for a long time horizon that the next logical step is 3% instead of something like 3.5-3.75% first.

No idea -- and my googling of "is there a cognitive bias against decimal increments" didn't shed any light. :)

There are calculators that allow modeling of different % withdrawals / use of basis point type changes. https://cfiresim.com Just need to remind ourselves to input X.X instead of X.

[Sandi_k]

A couple of nitpicks:

- The 25x/4% rule of thumb is for a 30 year retirement. At your age, I'd be assuming 3%.

I've never understood why if 4% isn't considered safe enough for a long time horizon that the next logical step is 3% instead of something like 3.5-3.75% first.

Note that I said "AT YOUR AGE..."

The OP is talking about a 50+ year time horizon. An incremental step down - of course! - is possible. The other big variable is asset allocation of the portfolio in question.

I like this chart as one way to start the discussion, from Early Retirement Now...

[TyGuy]

A couple of nitpicks:

- The 25x/4% rule of thumb is for a 30 year retirement. At your age, I'd be assuming 3%.

I've never understood why if 4% isn't considered safe enough for a long time horizon that the next logical step is 3% instead of something like 3.5-3.75% first.

Note that I said "AT YOUR AGE..."

The OP is talking about a 50+ year time horizon. An incremental step down - of course! - is possible. The other big variable is asset allocation of the portfolio in question.

I like this chart as one way to start the discussion, from Early Retirement Now...

I see a 90% chance of success using the 4% rule which is more than sufficient for the vast majority of early retirees. This assumes the person who has reached FI and retired NEVER earns another dollar, NEVER decreases spending during years when the market is down, NEVER receives any inheritance, NEVER receives any social security, and NEVER travel hacks or moves to a lower cost of living area. We as the MMM community should be encouraging folks to retire using the 4% rule, not continuing to promote a society in which one is forever clinging onto the idea of more.

[valsecito]

I often wonder about the back testing period. So much of it seems to coincide with (the buildup to) peak Pax Americana.

I still aim for FIRE. I still invest in a passive portfolio consisting of mostly stocks. I just happen to think that some people may be underestimating the risk involved. without me pretending to have any better alternative.

[nouseforausername]

Re: Pax Americana -- I worry about that too.

But, there is always Pax something (Brittania, Rome, whatever). And, equities are more international than ever.  Pax by name and nature is the sine qua non of success here?

Also, if you reframe "risk" not as the volatility of stocks, but as the "risk" of portfolio failure in retirement, equity based portfolios win out of course. Sourced that below as well as a comparison of equity performance among various countries that have not been global leaders, and have not even had Pax itself at times:

Global Asset Allocation in Retirement: Buffett's Advice and a Simple Twist https://blog.iese.edu/jestrada/files/2017/01/Buffett-AA-Global.pdf

[valsecito]

But, there is always Pax something (Brittania, Rome, whatever). And, equities are more international than ever.  Pax by name and nature is the sine qua non of success here?

Certainly. The question is to what extent you and I will be able to buy into Pax Sinica. Or into whatever becomes the norm a generation from now. You get the idea.

Also, if you reframe "risk" not as the volatility of stocks, but as the "risk" of portfolio failure in retirement, equity based portfolios win out of course. Sourced that below as well as a comparison of equity performance among various countries that have not been global leaders, and have not even had Pax itself at times:

https://blog.iese.edu/jestrada/files/2017/01/Buffett-AA-Global.pdf

Thank you so much for that article. Very insightful. It transformed some strong intuitions of mine into battle-tested facts. Much appreciated.

[BicycleB]

Wanted to get the braintrust's opinion of how close we are to both pulling the plug, living simply, and working solely at our will.

@johnnyqnola, you're as close as your mental ability to understand a Roth conversion ladder (you can do this!), and your emotional ability to accept that you are FIRE right this very second.

@index said it perfectly:

Look into a roth conversion pipeline so you can access your traditional IRAs and you should be good now.

Remember, once retired, you can convert 401k accounts into traditional IRAs, then use the trad IRAs to contribute into Roths. Nothing is untouchable. All the accounts you have can be used before age 59 1/2 if your taxable funds are enough to cover your first five years and you apply the Roth conversions correctly. Your taxable funds are more than 10x your stated expenses so you have lots of liquidity without even risking a penalty. Take charge and design the life you WANT.

Starting (three, two, one) now.

PS. Real estate can make or lose money. You don't need to do real estate. As a previous poster pointed out, you can do it as much or as little as you like. I'd only say that if you want to do it, either ensure your return on capital is enough to equal the expected return on normal financial investments, or limit your risk of loss so that the remaining investments can solidly cover your expenses. So, if you love living in your house and you can afford it (evidently so), live there as long as you like. Account for it as a consumer expense, pay that expense from your other investments, don't move just to save more money than you need to. (I mean, I feel guilty in a house too big too, but don't use money as the excuse if you have enough money, which you do based on the facts you presented. Make your consumption decisions on their own merits.)

For your own emotional clarity and upcoming life design, can you articulate more of why you say you want a job?

Whatever your answer is, start exploring the most low risk, high fun, high growth ways that you can think of to fulfill the underlying desires. When in doubt, explore rather than commit, because you are now able to explore anything that doesn't endanger your hefty and quite adequate nest egg. Which you can now configure at will to suit your evolving desires.