Goal to FIRE in 2 yrs, Want to Validate Assumptions

[mrsmoneymohawk]

Hoo boy, I know I'm about to encounter a massive face punching for expenses, but hoping you'll take it easy on me since we've never been in debt . . . Let the face punching begin . . .

Life Situation
MFJ, Me = 34, Spouse = 39, Kid = 3, HCOL Coastal So Cal

Gross Salary/Wages
This is complex due to a wide variety of income sources, so for the sake of simplicity, I've decided just to provide net income (day job income has complexities that aren't easily described without a lot of identifying factors)

401k contributions
Me: $21,000 (contribution + match)
Spouse: $32,000 (contribution + generous match)

Rental Income (annual, minus expenses + repairs)
$6,000 (managed by agency)

Side-Gig Income (annual, minus taxes + expenses)
$10,000

Day Job Net Income (annual)
Me: $38,500
Spouse: $64,500

Taxes
Again, incredibly complex due to the variety of income sources, but let's just say these will be streamlined when we are FIREd

Current expenses (monthly)
Housing: $4,000 (yes, this is ridiculous. Let the face punching commence)
Daycare: $1,350
Vehicles: $340 (insurance $120, gas $150, maintenance $100 [amortized])
Medical: $150
Bills: $70 (for internet. Utilities included in rent)
Groceries: $600
Restaurants: $200
Household: $50
Spouse Discretionary: $300 (spouse will not reduce this. Typically clothes, gym membership, entertainment, etc.)
Me Discretionary: $100
Kid Discretionary: $100
Travel $450 (spouse's family lives abroad and we travel to see them 1 or 2x / year)
Misc: $50 (charitable contributions, gifts, etc.)

Annual Spending
$93,480

Annual Savings (401ks + cash)
~$78,000

Expected ER expenses
Housing: $1,000
Daycare: $0
Vehicles: $100
Medical: $400 (kid has ongoing care costs, so trying to account for future without employer provided insurance)
Bills: $200
Groceries: $600
Restaurants: $200
Household: $50
Spouse Discretionary: $350
Me Discretionary: $150
Kid Discretionary: $150
Travel $450
Misc: $100

Total Estimated Annual Expenses
$45,000

Assets (expecting a lot of face punching here - in process of streamlining accounts and beefing up brokerage)
Rental House: $200,000
Car 1: $13,500
Car 2: $14,000
Cash: $102,500 (in 8 different banks / accounts including 1 business and 1 in bank overseas)
Investments: $652,500
     Spouse 401k: $425,000
     Me 401k: $200,000
     Me IRA: $13,500
     Brokerage Account: $14,000

Total Assets
$982,500

Liabilities
*none*

Specific Question(s):
About a year ago, I started getting really into budgeting, because I realized that our expenses had exceeded our income due to lifestyle creep (we live in a very HCOL - houses start in the $1M range, and nannies, lunches out, expensive cars, etc. are common to the point of absurdity). Luckily, we've always managed to put $$ into retirement accounts before we could spend it, so that's been our saving grace. Spouse has typically been the thrifty one, but I've kicked it into high-gear since finding MMM a few months ago.

Since finding MMM and co., I've realized that we could live a totally different life than we thought. In an effort to get off the hamster wheel, we plan to move to Spain (great quality of life, lower cost of living, easier to travel and see family, etc.).

We want to work for the next two years, and then take off for Europe. I've made ER expense assumptions on educated guesses as well as careful research, but am open to any suggestions.

Spouse has indicated a desire to continue working (and will have option to do so based on passport), but I don't want to count on it, as jobs in Spain are fairly low wage considering our careers. May also have option to continue side gig work, but again, don't want to count on it.

Current plan is to sell the house and add that to our investment portfolio since it gets a paltry return. We will also move a lot of cash into our brokerage account. Will probably keep $30k on hand for emergencies (we also have a lot of business expenses that are reimbursable, and typically float about $3-5k of expenses per month for our employers).

Given this, we hope to FIRE with about $1,200,000 in the bank.

So questions are:

Do my assumptions look correct regarding FIRE and retirement?

Are my numbers reasonable / achievable given timeframe?

Any suggestions for how to move anything around to provide greater return (other than moving to a cheaper place, which we plan to do as soon as our current lease is up)?

Any accountants who have experience providing advice to FIRE devotees who plan to retire utilizing the Roth ladder? I've asked a couple of CPA acquaintances, and they both felt that it was incredibly risky given their knowledge of rules governing Roth contributions / rollovers. I know others have employed this tactic, but given the advice I've received, I'm starting to second guess it.

[Freedomin5]

Take the cars out of your calculations of your assets. They are depreciating assets and the idea is that you drive them until they are not worth much.

Other than the housing issue, the rest of your spending looks okay. If you can even find a way to halve that housing cost, you’d be saving an extra $24k per year.

I don’t really understand why your kid needs to spend $100 per month though. Re: $300 for spouse’s extraneous spending - if that’s what it takes to avoid major fights and divorce, $300/month is a lot cheaper than therapy and alimony.

Groceries are a bit high. Check out the “under $200 grocery bill” thread on this forum for ideas to lower that.

Your FIRE calculations look about right. You may want to put some of that $100k+ of cash into investments. Before you FIRE, make sure you have at least one year’s of expenses in cash or cash-like investments to mitigate sequence of returns risk.

I don’t know if you’ll be able to FIRE in two years. You’re at around $950k now, not including cars. So you will need to save up another $250k in the next two years to get to your $1.2M target. Given that your savings are $78k per year, I guess it will depend on how the market performs.

[reeshau]

OP, you talk about selling the house--do you mean the rental house, or your primary residence?  If your primary residence is rented, reduce that ASAP.  Go "camping" for two years; houses in Europe are generally smaller anyway, and you won't want to haul your crap across the ocean, either.  Pare the stuff down now, and think of it as practice.  And you can bank the savings to improve the rest of your lives, rather then optimize just the next two.

In regards to a Roth ladder, you need to understand how you will be taxed in Spain.  There are very few tax treaties that recognize tax-advantaged accounts.  While Spain likely has a territorial basis for income, I would pay particular attention to how they treat money you remit into the country.  You may actually do better moving money from a taxable account.

[chasesfish]

You're not far off on making this work.

Don't underestimate the challenge of "geoarbitrage".  I'm going through it now, you're planning on taking on a lot of disruption all at once between leaving your job and moving overseas.

What kind of jobs do you have right now?  The amount of money you've saved at those incomes are commendable.  Please don't take this the wrong way, but working another two years *isn't exactly bringing in massive sums of money*.  Minimum wage in California brings in around $31,200/year.   I'd be tempted to tell you to take three months off or even a year off now and go try living in Spain while targeting making $25k or so a year in various side gigs.  Life is short, go try it, and worst case scenario you move back and you'e in about the same.

[mrsmoneymohawk]

Take the cars out of your calculations of your assets. They are depreciating assets and the idea is that you drive them until they are not worth much.

Other than the housing issue, the rest of your spending looks okay. If you can even find a way to halve that housing cost, you’d be saving an extra $24k per year.

I don’t really understand why your kid needs to spend $100 per month though. Re: $300 for spouse’s extraneous spending - if that’s what it takes to avoid major fights and divorce, $300/month is a lot cheaper than therapy and alimony.

Groceries are a bit high. Check out the “under $200 grocery bill” thread on this forum for ideas to lower that.

Your FIRE calculations look about right. You may want to put some of that $100k+ of cash into investments. Before you FIRE, make sure you have at least one year’s of expenses in cash or cash-like investments to mitigate sequence of returns risk.

I don’t know if you’ll be able to FIRE in two years. You’re at around $950k now, not including cars. So you will need to save up another $250k in the next two years to get to your $1.2M target. Given that your savings are $78k per year, I guess it will depend on how the market performs.

Plan would be to sell the cars prior to moving overseas, so I figured including them in assets was ok, but I see your point about depreciation. I'm trying to convince spouse that going to one car is the way to go, but am not having much luck.

As for housing: we rent (the market here is so ridiculous that purchasing would be more than $6k / mo in housing alone, without including the absurd down payment). We intend to move into a 1 bed when our lease is up, which should bring this down to about $2,500 / mo for the remaining 1.5 years we're planning to be here.

The kid's expenditures are also mostly related to the spouse (thinks kid needs to do something like a $15/hr play 'experience' every weekend, rather than just taking her to the park or the beach). It's a place to trim for sure, but I'd rather not fight about it every weekend.

Will look into the groceries, especially as I typically do the shopping. There is probably a lot of alcohol included in there (which is something I could definitely stand to cut back on).

Working on putting some of the cash over into the brokerage account. Plan is to do about $70k or so over the next few months.

We're not stuck on the two year plan; if the market takes a major nosedive, we'll either put our heads down and work through it, or we'll take off anyway, and try to do some remote or other work.

OP, you talk about selling the house--do you mean the rental house, or your primary residence?  If your primary residence is rented, reduce that ASAP.  Go "camping" for two years; houses in Europe are generally smaller anyway, and you won't want to haul your crap across the ocean, either.  Pare the stuff down now, and think of it as practice.  And you can bank the savings to improve the rest of your lives, rather then optimize just the next two.

In regards to a Roth ladder, you need to understand how you will be taxed in Spain.  There are very few tax treaties that recognize tax-advantaged accounts.  While Spain likely has a territorial basis for income, I would pay particular attention to how they treat money you remit into the country.  You may actually do better moving money from a taxable account.

RE the house - that would be the rental. We don't own the residence we occupy currently (though I wish we did!). We've actually talked a lot about downsizing in an effort to mimic what it would be like when we move and have smaller square footage. That's why we'll likely move into a 1 bed (as well as greatly reduced cost).

Spain, from what I can tell, won't tax a whole lot provided you're on a specific type of residency visa. So idea would be to minimize taxable income to the point that it will be negligible in the states and only do what we need to in order to comply with residency permit.

You're not far off on making this work.

Don't underestimate the challenge of "geoarbitrage".  I'm going through it now, you're planning on taking on a lot of disruption all at once between leaving your job and moving overseas.

What kind of jobs do you have right now?  The amount of money you've saved at those incomes are commendable.  Please don't take this the wrong way, but working another two years *isn't exactly bringing in massive sums of money*.  Minimum wage in California brings in around $31,200/year.   I'd be tempted to tell you to take three months off or even a year off now and go try living in Spain while targeting making $25k or so a year in various side gigs.  Life is short, go try it, and worst case scenario you move back and you'e in about the same.

I recognize how disruptive the move may be, especially for the toddler. Primary  issue, I think, is that we speak just a bit of Spanish (enough to get by, but not enough to hold our own in conversation). That said, we have family in Europe, and will have lots of support, visitors, and expat communities, and we also have a lot of areas of interest outside of our jobs that we're eager to explore. We've spent quite a bit of time in Spain and can see ourselves there in the long run.

[MrThatsDifferent]

If you’re in Spain longer than 6 months (the requirements for most visas except tourists), then your subject to their taxes (and they tax world wide wealth). That’s why many consider Portugal. I love Spain and living there would be a dream, ahhh Valencia or Sevilla, but I gotta work out the taxes first.

[BrightFIRE]

Check out Wagoners Abroad https://wagonersabroad.com/ They're an American family who moved to Spain "temporarily" several years ago, but ended up loving it and finding a way to stay. They have all sorts of advice about residency, paperwork, etc.

[mrsmoneymohawk]

First of all, I want to thank everyone who replied initially. I feel like in the first go-round of this, I didn't exhibit any gratitude and I want to thank everyone on the forum for reading, replying, and just generally hanging out and providing great advice. This forum has been a community for me, even though I'm not participating actively.

I love when others provide status updates on their case studies, and I figured it was time for me to do the same.

We tried to spend a year or two in Spain, to see if we were cut out for living abroad. We did well with investments and managed to save a fat stack of cash ... only to encounter a global pandemic in the midst of picking up sticks.

So now we're in England.

The current plan is to stay here through the next school year, vacation in Spain throughout the year, and sign a lease beginning approx August 2022.

I have no idea what our ER expenses will be in the end. It will vary depending on location. Last year, we spent about $32,000, but obviously it was an outlier, since we couldn't travel, we were in lockdowns for about 2/3 of the year, etc.

This year, we're on track to spend about the same, perhaps a bit less depending on a number of factors including a change in housing.

I am estimating expenses of about $50k in Spain including taxes (yes, I know that they tax world-wide income as well as assets held abroad. This is included in this estimate).

My (super accurate, not at all back of the napkin math) tells me that we could potentially spend about $55,000 / yr per the 4% rule, IF we did a Roth ladder.

Our net worth is about $1,400,000 including:

Rental House: $200,000 (provides annual rent of approx $7000 after fees and maint)
IRAs: $1,000,000
Cash: $150,000
Brokerage: $50,000

I don't anticipate doing anything in the next 3 years that will earn us a meaningful income apart from the rental house outlined above.

Specific Questions

Are we insane?

Has anyone actually done the mythical Roth ladder with success?

If we are insane, just how insane are we?

[chasesfish]

You're not insane at all...

You have around four years of financial runway saved up and presumably some of your IRA balances consist of Roth Contributions.

I did my first Roth Conversion in 2020...

[reeshau]

I am preparing my first Roth ladder year this year; didn't do it last year as I had regular income.  I think the next two years, particularly, open up possibilities because of the suspension of the ACA cliff.  This year would be a tight fit otherwise. I have enough in my taxable account for spending, but am still doing it to drain down my trad IRA to minimize RMD's.

[yachi]

The Roth IRA ladder is just a means to get around the 10% penalty for early withdrawal from an IRA.  I don't see any risk that the IRS would audit you or anything.  You pay the taxes on the rollover when it happens, so the IRS should be happy.

I find the Roth ladder less risky than a 72(t).  With a 72(t), you have to withdrawal every year what your chosen formula says you should withdrawal.  If you don't the penalties can include retroactively subjecting all prior withdrawals to taxation.

It's also more flexible: If you find your IRA is outperforming your assumptions, you can increase how much you roll over to the Roth.  Granted, you won't see the effect in your spending money until 4-5 years later.

If you don't have 5 years of spending saved up before you need to live on the funds, a Roth IRA ladder can still beat taking the money out of an IRA and paying the 10% penalty.

[toucansurfer]

First congradulations on doing a great job accumulating wealth.  The number is a number you should be proud of.

The major flaw in your plan is a cash flow issue.

You have most of your accesible cash tied up in real estate and 401k.  So you are the perfect candidate for the staircase approach to retirement.

Step 1 (5 years):

Lower hours or either you or spouse quit job.  This will lower your taxable income enough that you don't pay too much on converting some of your 401k into Roth IRA.  Note you cannot touch this principal for 5 year after which you can penalty free (the principal amount converted).  Take out a HELOC if needed to fill in any income gaps.  The person/s that end up working less will watch the kid more (less daycare expense) and start honing in on cost cutting to get from your 98k annual expense to your goal 50k expense.  Remember you only have ~27k you can access penalty free in you investments and the dividends/amount you can draw down on that portion is small, not enough to really matter so somone needs to keep bringing in cash that you can use for expenses.

Step 2:

Through step 1 you are building your ROTH IRA account principal value.  You are taking advantage of the lower tax bracket and amasing a liquid account you can use to live off.  Once you have done 5 years of step 1 you can now start using the ROTH IRA to supplement living expenses.  So between that, the rental and some side income you might be okay.  Ramp up ROTH IRA conversions now since your taxable income will likely be even lower with the current employed Adult throttling down. 

Step 3:

Proper FIRE.  This step will be when the final adult that is making up any gap in the above can finally quit.  This is when you have both a lot of taxable brokerage/roth ira value and a big net worth.  You would have had a long time to hone in expenses by now and daycare will no longer be a problem.  Remember the above can be made much more tenible by doing job swaps.  So one adult holds a full on job while the other does side gigs/watches kid, etc.  Then swap in like a WWE wrestling match and tag in your spouse or vice versa.  I feel in any partnership responsibilities should be shared so this probably will go down better then a conversation such as hey honey i'm going to quit my job, but keep doing what your doing so we have medical insurance.

[secondcor521]

Specific Questions

Are we insane?

Has anyone actually done the mythical Roth ladder with success?

If we are insane, just how insane are we?

1.  Nope.

2.  Yep.  I chose to wait to FIRE until I had 5 years of expenses in my taxable account plus Roth contributions.  I FIREd in early 2016 and did my first traditional to Roth conversion that year. (*)  I have a spreadsheet monitoring the health of my Roth ladder, showing me which conversions are available when, and what my spend down looks like by year based on my current spending.

I made a mistake in being too conservative by ignoring my miscellaneous side income in my calculations, and the market has been kind to my taxable account the past five years.  And I received some life insurance when my mother passed away.  So my Roth ladder is doing better than I expected.  If my miscellaneous side income is cut in half now, I'll start spending my Roth contributions in 2027 and my 2014 Roth conversion in 2028.  I turn 59.5 on 11/26/2028, so at that point my Roth ladder won't be necessary any more.

I have of course reported my conversions on my tax return as required every year.  The IRS hasn't said boo.

Even though my Roth ladder is full enough, I plan to keep converting for another reason:  to reduce my tax torpedo.  If I don't keep converting, I'll end up in some 3x% tax bracket when I start RMDs.  Converting now at a lower rate saves taxes.  This is a well known and frequently discussed topic here and at other early retirement boards.

(*)  I did some non-deductible traditional IRA to Roth IRA conversions in 2014 and 2015.

3.  N/A.  See answer to question 1.