Author Topic: Case Study - Back to work or smarter withdrawals?  (Read 2122 times)

embwbam

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Case Study - Back to work or smarter withdrawals?
« on: March 20, 2020, 09:40:06 PM »
Hi everyone! Thanks in advance for your help.

I once bought a house in 2008, and I pulled the FIRE trigger late last year. My timing is uncanny. The downturn has me feeling panicked, and I'm realizing my withdrawal plan is undisciplined. What would you do in my situation? (see below)

Life Situation: I am 37, single, with 3 kids part time (70/30). I live in a converted van, primarily in Utah. I spend a lot of time cheaply traveling and doing things outside.

Career: Contract programmer and mediocre startup guy. I told myself I would avoid profit-focused work from now on. I am happy spending most days exploring and socializing. I do want to add creative work and programming back into my life, but if I'm doing it for money I can't turn my ruthless startup brain off and it's no longer fun.

Assets

I started with about $1M. It's now down to $800k invested 90/10 with Betterment. It was originally divided like this:

$700k - Expenses = $2350/mo at 4%
$150k - House (vanlife escape hatch)
$70k - Big Spending
$80k - Child Support

Notes:
* I'm now $200k underfunded
* The idea with the house bucket is that I can spend some or all of it at any time on rent or an eventual home purchase. In the meantime, I use some of this on the kids (bikes, trips, etc)
* I came up with the Big Spending bucket to pay for travel and gear. These aren't really monthly expenses. Why save up slowly when you already have the money? Maybe this would be better as an annual budget?

Income

An old project will end up paying me a total of $316k more over the next 1-2 years. 25% taxes would mean I will have another $237k in assets eventually.

Expenses

$650 - Groceries
$325 - Gas
$235 - Bills (Insurance, Climbing Gym, Phone, coffee shop office, Spotify, etc)
$150 - Therapy
$0 - Health Insurance - Once reported income goes down this should become affordable.
$1000 - Spending - Stupidly cushy and anti-mustachian. Restaurants, drinks, generosity, concert tickets, etc.

------------
=$2360/mo

$800/mo - Child Support - This ends when the kids leave home, and I should be able to adjust it once my reported income goes down. This comes directly out of the child support bucket since it doesn't have to last forever.

Notes:
* I don't track these closely, I mix them all together in my bank.
* It's too much, so the mix accumulates. I don't have enough data to know by how much, but the surplus makes me happy.
* As mentioned above, I live in a converted van. I love it. When I have my kids I either go stay with my parents for an intergenerational family experience, take them camping, or visit other friends and relatives.
* I recognize my misc category is very large, but my life changes so much depending where I am that I like changing my spending priorities depending on the week.

Biggest Question: Which withdrawal strategy is right for me?

* I want my financial situation to improve over time. Ideally I spend less than I'm allowed, the excess increases my net worth, and my plan allows me to upgrade the amount I'm allowed to reflect this.
* I am ok reducing spending during downturns
* I am theoretically ok finding paid work if severely underfunded.
* It seems like keeping my investments aggressive makes sense long term, so long as I take out less than allotted, no?
* It seems like if I reset my track to 4% now, after the downturn, and follow the Guyton-Klinger rules that will start me on the right track (because it should grow from this point) do you agree?
* Help!

Other Questions
1. Are the buckets a good idea? Or is there a better way to accomplish the same thing?
2. Should I find some work to bring my funding level back to par? Be patient and wait for a recovery? Or restructure somehow?
3. How would you change my budgets?
4. What am I being stupid about?

« Last Edit: March 21, 2020, 09:33:51 AM by embwbam »

FatFI2025

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Re: Case Study - Back to work or smarter withdrawals?
« Reply #1 on: March 22, 2020, 10:23:42 AM »
Your desire to take some sort of action is totally understandable and human. Speaking as a disinterested third party, your situation does not seem dire. If you are truly spending only $2360/mo, then you are not underfunded, especially when you consider that upcoming "old project" income.

All you can really do at this point is to reduce spending as much as possible and start thinking about going back to work for a short time during the recovery. This means going back on your commitment to avoid profit-focused work. What's a worse feeling, making money or worrying about your financial future?

One thing's for certain -- you shouldn't change your asset allocation. You chose to be aggressive, maybe a bit too aggressive for your personality. Maybe after the market has recovered, reassess your risk tolerance. But for now you have to deal with that choice or risk locking in your losses by reallocating now. Successful RE absolutely depends on discipline. If you panic during volatility, you will likely end up broke.

Laura33

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Re: Case Study - Back to work or smarter withdrawals?
« Reply #2 on: March 23, 2020, 06:50:08 AM »
You are not "underfunded."  You have more than sufficient money right now to fund your current needs in perpetuity.  You also have sufficient money to throw $1K/mo. at your current wants.  Both of those things are covered by your $700K/ 4% spend.  What you've lost is a little of your safety net that you have socked away for things you might possibly want at some unknown time in the future -- house, new gear, etc.  But you don't need them yet, right?  And if you do decide you need something now -- say the van needs some major maintenance -- you can divert some of that $1K/mo. toward that.  Right?  So don't worry about it.

I think your response is an entirely normal reaction to watching the investments you've saved for so long just seemingly evaporate with a snap of the fingers.  It's terrifying -- particularly when the market is responding to a great big unknown.  But understand that the 4% rule does not mean that every wants-and-needs bucket will be filled at all times; it is based on historical market data, which includes a series of dramatic market swings.  So your investments will likely fall below your hoped-for total at some point; but they will also come back up when the market turns around.  So if you can avoid selling off a lot of stock when the market is low -- say, by keeping plenty in cash, or reducing your expenses, or getting a little short-term work -- you can ride it out without worrying about your long-term financial health.

In your case, I think you're fine as-is.  You have sufficient money still to cover your monthly expenses, your $1K/mo. of fun, and your child support.  So just sit tight and don't panic.

lhamo

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Re: Case Study - Back to work or smarter withdrawals?
« Reply #3 on: March 29, 2020, 02:01:49 PM »
Please don't attempt to get your child support adjusted because you have chosen to forego income and live in a van.  Even if your ex makes a good income.  It is not worth making the relationship any more strained than it already is, and your kids will probably hear about it.  Consider it a way to avoid THEM having to pay for therapy as adults....

SwordGuy

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Re: Case Study - Back to work or smarter withdrawals?
« Reply #4 on: March 29, 2020, 06:51:45 PM »
Please don't attempt to get your child support adjusted because you have chosen to forego income and live in a van.  Even if your ex makes a good income.  It is not worth making the relationship any more strained than it already is, and your kids will probably hear about it.  Consider it a way to avoid THEM having to pay for therapy as adults....

Agreed completely.

For the first 6 years my wife and I were together we lived on 1/3rd median family income and paid child support.    Child support came first, then rent and food.   Then other stuff.   

If we could do it with a net worth of maybe $2,000 and damn little income, you can afford to as well.


As for the rest, you're not in a bad situation at all.   Relax.

As for your project money coming in, that's a huge amount of cash over 3 years.   Don't count it until you see it.   If the source of that cash has cash flow problems, your bill will be put at the back of the list because it's not buying essentials to keep the business going.   And if they go belly up, that cash flow will disappear into (likely) nothing.

embwbam

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Re: Case Study - Back to work or smarter withdrawals?
« Reply #5 on: March 29, 2020, 09:58:22 PM »
Good advice all around. Thanks everyone for the wise words. I feel calmer about things now. I'm going to read up and come up with a solid plan by the time that extra money stops coming in (and I have a better idea where the markets end up).

And thanks for the warning on the child support. She's threatened to increase it to match my tax return, even though that's never been a realistic indicator of my standard of living (even when we were together). Since it's supposed to help kids avoid having a standard-of-living change between households, I don't feel bad wanting to have it reduced and setting that money aside for them for college / future. However, you're right, no matter what I think about it, it might not be worth straining the relationship over.


ontheway2

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Re: Case Study - Back to work or smarter withdrawals?
« Reply #6 on: March 30, 2020, 08:30:01 AM »
Good advice all around. Thanks everyone for the wise words. I feel calmer about things now. I'm going to read up and come up with a solid plan by the time that extra money stops coming in (and I have a better idea where the markets end up).

And thanks for the warning on the child support. She's threatened to increase it to match my tax return, even though that's never been a realistic indicator of my standard of living (even when we were together). Since it's supposed to help kids avoid having a standard-of-living change between households, I don't feel bad wanting to have it reduced and setting that money aside for them for college / future. However, you're right, no matter what I think about it, it might not be worth straining the relationship over.
I know all states are different, but my state would not allow you to lower it since it was a voluntary income reduction

reeshau

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Re: Case Study - Back to work or smarter withdrawals?
« Reply #7 on: March 30, 2020, 05:42:31 PM »
$0 - Health Insurance - Once reported income goes down this should become affordable.

How hard have you thought through this line?  It seems you understand the importance, given you comment.  But the price tag, which will be a significant percentage of your overall spend, makes you choke.

One question:  is your Betterment account a retirement account?  I would assume not, since you are accessing the money so young.  If that is true, then I would encourage you to think of this as much to protect your stache as your health.  Look up the average cost for an ICU day.  If something happened, whether on the road, or out in the wilds, or yes with a coronavirus, your assets make you a ripe target to sue for payment.

I would look at it this way: when you are making a lot, it is expenaive; when you don't, it won't.  So think of the subsidized amount in your base budget, and think of the difference to the whole amount as part of your bonus payday coming in.  Maybe that would make it more palatable.   And if those paydays don't come in as planned, you can recoup your true subsidy through your tax return.