Author Topic: Here’s our FIRE plan! Does it make sense? What are we missing?  (Read 1792 times)

mrcatsy

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Here’s our FIRE plan! Does it make sense? What are we missing?
« on: November 21, 2023, 09:22:26 AM »
Reader Case Study – Does this plan make sense

Life Situation: Married filing jointly, M42, F42, child8, big city usa.

Gross Salary/Wages: Wages of 156k plus bonus which varies, but expected to be approx. 10k in Dec 2023.

Assets:
Total Retirement: 975K (broken out as 401k account- 224k, IRAs (roth and traditional) – 751k.  Mostly in 20 individual stocks.  401k is in S&P fund, but will be moved into these individual stocks once retired.
HSA: 40K.  In 10 individual stocks.
Taxable Accounts: 1175K.  Made up of 30 stocks, covered calls, puts 
Cash/CDs/gov bonds: 95k.  All non-cash is very short term.  Average about 4.5%.
529: 100k held by M’s parent
Other Assets: House – 550K value, with equity of 360K (mortgage will be paid off in 2043).  1 old car – 3000$.

Other Ordinary Income: Starting March 2024 – 0.

Adjusted Gross Income: This should equal the additions and subtractions above.

Taxes: 2024 expectations: State and city approx. 4% each.  Expect little to no fed taxes.

Current expenses: Total nondiscretionary is 4,100.  Mortgage of 1600 monthly (mortgage/ins/tax).  Electric/gas/clothes/food/all other non-discretionary costs – 2000 monthly. 500 monthly that is put aside to pay big expenses that arise – think new A/C, new car, roofing repair, etc.


Specific Question(s):  Here’s our FIRE plan! Does it make sense?  What are we missing?
Looking to take the leap and quit my job as an attorney at a midsize firm and escape from the years of frustration, stress, and headaches.  Two years ago I stepped down to an 80% role (no more weekends, Fridays).  Best decision as I went from billing 2300+ hrs to 1600ish for only 20% less pay.  However, reached the point where I value my free time more than I am being paid/believe that I need the money.  Additionally, I want the time to focus more on family, health, and happiness.  My wife quit her job 8 years ago to take care of our child.  She was able to work up the ladder quickly and successfully from a starting salary around 30k to 70k as problem solver for a procurement company.  She likely wants to go back to work at some point, but not now.  At this point, we have what we need.  We do not want a beach house, fancy cars, jewelry or status items.
We have done very well in the stock market.  We sacrificed heavily in our early working years, both in terms of hours worked and spending money on ourselves.  In turn, we took the majority of our earnings and heavily invested in good stocks that were at great prices.  Strategy was mostly buy and hold, with some well-timed puts.  The last several years, we’ve moved towards a dividend strategy with covered calls to mitigate risks and start to generate a more even return. 
As of today, we are expecting about 61k in dividends in taxable accounts in 2024.  The majority of our lower yielding stocks (ge, intc) will likely be called away in January 2024.  At that point, we are planning on buying some higher yielding stocks which should push overall dividend income to about 65k.  Stocks are a mix of telecoms – t, vz, vod; gas – xom, cvx, bp; cigarettes – bti, mo, pm; financials – wfc, bac, jpm, nycb, bkcc, v; consumer discretionary – ko, khc, dri, mdlz; and a few others – jnj, cmcsa, can, epd, met, gis, ibm, intc, ge, appl and several others.
I also plan on still selling covered calls and maybe a couple puts, with an expectation of generating anywhere between 7-20k a year.  In a down market, I will not be as willing to sell calls or will be generating little income.  Up markets should yield closer to 25k.  As we hold a fairly wide range of stocks, I expect we will have a mix most years. 
Our plan is to use the dividends to provide for our general lifestyle.  Starting out with a budget of 5,100 a month – 4,100 to expenses and 1,000 discretionary, with the ability to likely move that north a couple hundred a month if necessary.  The budget does not cover health insurance (med/vision/dental) or vacations which are further broken out below.  Additional savings towards retirement are not expected at this point.
Our current discretionary spend fluctuates a bit.  We spend between 1200-1800 a month, with 80-90% of that being spent on going out to restaurants.  We’ve enjoyed some finer restaurants and the ability to go out multiple times a week.  However, we’ve discussed and both agree that we’re ready to cut back on the fallback restaurant meal.  While we still want to do some of this, it is not a necessity.  Both of us enjoy spending time making a nice meal.  Otherwise, we really don’t buy a lot of things.  We just got new phones after maybe 3-4 years with old ones.  I don’t know if my wife ever bought a fancy purse.  Neither of us golf, get tattoos, buy gadgets, collect items, etc. 
Timing – We are planning my stepping away at the end of February 2024.  This will allow us to take advantage of FSA rules – spending 3200 for retainers/contacts/etc while bearing 1/6 of the cost – and get a company 1.3k HSA contribution.  Further, we will likely put 4-5k into the HSA and potentially another 5-6k into a 401K. 
Insurance – This is the biggest question mark in my eyes.  Looking at the options, it appears that we will likely spend somewhere between 6k-10k on a plan through the ACA.  I believe we should qualify for some credits, so hopefully total cost to us at about 6k for a HDHP.  We will then have the ability to tap our HSA for 3k+ in expenses a year.  As now, the HSA is yielding a little north of 2,900.  However, with the additional influx in Jan/Feb 2024, it should move up a bit more.  I think this should cover or exceed most years, but as we get older, I expect we will need to supplement out of pocket expenses from other accounts.
Vacations – Obviously a discretionary item.  However, we did sacrifice many years early on, and we are now looking for some experiences.  Thus, while it isn’t necessary, we will be prioritizing taking some trips.  Expectations here are that we might spend between 5k-10k a year on trips. 

Thus, total additional expenses between 11k-15k for ins and vacations.  I am hopeful that the calls and puts will cover this amount in general, although it may be less smooth.  Our overall cash position, which should grow to over 100k by Feb 2024, should be able to cover any overages.  And it should generate a 3-4k in income as well. 
Moving forward, I expect dividend increases to hopefully cover increases in costs of living.  Each year, the dividends should increase by 5-6% on average.  Additionally, I am toying with the idea of working part time at my current job in retirement.  The idea would be to work 150-300 hours a year (or 1-2 months).  I would expect to be paid about 100$/hr with no benefits. My firm appears open to this arrangement, but I’m not sure how well it will work for me.  If I do work, we will likely fully fund IRAs and then split the remainder evenly between spending, stocks, and cash fund (unless cash fund has been going down then it will all go here).
My wife and I are both capable of working other jobs.  I see myself as not terribly employable outside of my field, and have no interest in ever going back to full time, which would limit my ability to find decent paying positions.  Both of us are more interested in doing work that we enjoy, don’t see as work, rather than working for big money.  I expect that we will eventually earn money in the future, but certainly don’t want to plan on that at this point.   
This is our plan!  What pitfalls/issues do you see?  Obviously if all companies cut their dividends to zero or in half that would be a tough pill to swallow.  But while that happens from time to time, I wouldn’t expect that to effect all of the stocks and that it would be a temporary thing.  I will no longer be carrying life insurance (paid for by firm now) and since I won’t be planning on working, I am not planning on purchasing any.  I don’t see that as a risk since I am not expecting to be contributing any money at that point.  Divorce would also be risk, but we are both committed to our relationship.

swashbucklinstache

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Re: Here’s our FIRE plan! Does it make sense? What are we missing?
« Reply #1 on: November 21, 2023, 10:37:09 AM »
If I added correctly you're at about 2.1 million against an expected up to 65k in expenses per year with the mortgage falling off in a decade. You have a willingness to cut back and to work to earn 20% or more of your expected expenses. For me this means you're in great shape. I think your dividends, calls, puts is between a bad and unnecessary strategy depending on factors no one who doesn't know you can say, but I think you have enough that unless you're particularly bad or unlucky you're probably fine anyway, because of how good of shape your numbers are in. So it's all behavioral at this point I guess, and a few out of the box things for you to think through that probably don't matter is all I got.

  • how will your selected stocks perform under varying market conditions. Have you built a portfolio that is antifragile? Will it always fail at some conditions and how does that match up with how much you'd be able to find work in such conditions? Unless you're pretty bad this is probably fine but it is something we can skip for indexers.
  • As always when one is in good shape, how confident are you in your future expenses? This being off is always way more likely than failing to be able to support 65k out of 2.1. how likely is it that you develop hobbies such that your best life is at 85k? Disability + hobbies? Not a statement that you couldn't make it work, just encouraging you to examine probabilities now to help decide which version of making it work sounds best
  • I'm sure you have, but ensure you've each/combined got credits for social security
  • If you die tomorrow can your wife succeed with your investing strategy or move to one in which she can without huge tax implications? A plan to change strategies as your faculties fail in older age? With your cushion this is probably not a concern
  • anything weird? Family history of needing extensive memory care, the entire rest of your family lives in the bay area so you might want to move there, you currently live in a MCOL big city with natural disaster risk  / in a house that cannot be modified to live in with disability and need to live in a big city thus putting you at risk of walking away from a 3%(?) mortgage with 350k in equity "needing" to buy a more expensive house with a 7% mortgage, family needing financial support

None of these matter unless they make you say Oh Shit, I forgot about X! Congratulations.

I agree re: life insurance.

MDM

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zolotiyeruki

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Re: Here’s our FIRE plan! Does it make sense? What are we missing?
« Reply #3 on: November 22, 2023, 09:04:11 AM »
I have a few questions/notes/things to think about:
--You're invested heavily in dividend stocks, presumably for risk-avoidance, yet at the same time, you're heavily invested in individual companies, which tends to be higher-risk, and on top of that, you're having to actively manage your income stream, including selling covered calls.  What the overall advantage to this approach over a simple "dump it all in index funds and call it a day" or a stock/bond split?  To me, it seems like an awful lot of extra effort for little to no net benefit.
--You're looking at spending ~$80k/year after taxes for your family of three.  Consider this a facepunch--you need to take a harder look at your spending.  Saying "at least we aren't upgrading our phones every year, or getting tattoos or buying beanie babies" is not an excuse to spend $12,000 per year on fancy restaurants.  You are literally spending as much on fancy restaurants as you are on your mortgage!  Yes, fine dining can be really enjoyable, but I suspect you're experiencing a serious case of Hedonic Adaptation.
--There are several safety buffers in your plan that you don't appear to be taking credit for:  1) Social security once you hit your 60's, 2) mortgage ending in 20 years, 3) kid leaving the house in 10 years.
--What are you retiring to?  You mention that you want to get away from the stress, frustration, etc, and that's great.  Focusing on family, health, and happiness is a great start to the conversation, but can you be more specific about how you will spend your time?

blueberrybushes

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Re: Here’s our FIRE plan! Does it make sense? What are we missing?
« Reply #4 on: November 24, 2023, 08:00:40 AM »
Five things that come to mind (and you may have considered them already):

- Dental care can be quite expensive.  DW and I spend more than $1K on cleanings and x-rays each year.  A crown comes along every other year which is a $2K unexpected expense.  For your next 30+ years plus your child's orthodontics, it could be upwards of $100 K in dental.

- Health care:  you hear $250K thrown out for the cost of health care in retirement and I thought it was BS.  But, if you include Medicare Part B for each of you and other medical expenses which will happen, it is NOT hard to get to that number.

- House expenses:  research suggests homeowners spend about $500/month on home projects in retirement and as the house ages.

- Child's college:  depending on the college, $100K in the 529 may not adequate these days.  Now, fast forward 10 years.  It might not be enough.

- Two things hit me when I retired the first time at 45.  I did not realize how much my self-worth was wrapped into getting a regular paycheck.  Did not need the money, but that was not the point.  The other piece was that all my friends were still working, so I did not have anyone to do things with.  I ended up returning to the workforce in various PT jobs to cobble together the 20 years gap until 66.

Financial Independence is liberating to do things you want to do, not things you have to do. 

Good luck.