Author Topic: Looking to get some feedback on my FIRE plan.  (Read 1129 times)

k99789978

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Looking to get some feedback on my FIRE plan.
« on: January 25, 2024, 11:38:37 PM »
Hi All,

Looking to get some feedback on my FIRE plan.  All constructive comments/feedback welcome

Situation:
I am currently 46 looking to FIRE at age 51.  Currently I am looking on track to hit my targets :)

Assets:

Plan A   
      $50,000.0   Cash
      $400,000.00   401K
      $1,000,000.00   Brokerage
      $1,100,000.00   investment property

      $2,550,000.00 Total

Plan B   Additional assets I would like to pass to my kids but also serve as backup in case anything happens      
      $500,000.00   Home (home is worth about 800K with about 300K left on my loan)
      $950,000.00   investment property

      4,000,000 Total of plan A and B

Spending:

I am planning to spend 7,995 per month/95,940 per year

I am assuming 18% tax.

Including tax that is a withdrawl of 117,000 per year

Plan A:
   That is a 4.59% withdrawl from age 51 - 70

   I am expecting 26,400 social per year from age 70 - 95
   Which means a 3.55% withdrawl from 70 - 95

   Average withdrawl of 4%

Plan B:
   That is a 2.93% withdrawl even if I dont take into consideration social security

Question:
1) Does my plan A and B make sense?  My plan A is optimistic while having the safety net of plan B.  Worst case scenario my kids get less inheritance

2) Taxes - I am calculating at 18% using worst case scenarios, but accounting for only being taxed long term capital gains on my asset gains (sale price minus purchase price).  How do you account for taxes in retirement planning?  Note I do live in California, hence why the high taxes.

3) Social Security - do you ignore social security with your retirement planning?  Given I have a plan B, would you still ignore social security?

4) I have a large percentage of my portfolio in investment property?  Since property prices are so high now, my property only returns around 2% positive cash flow for profit/property value.  Would you sell the property and invest in ETF?   However if I sell I would have a large tax bill.  Or keep the property until I need the money?

Anything else I am missing?  Thanks ahead of time for your comments.

lucenzo11

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Re: Looking to get some feedback on my FIRE plan.
« Reply #1 on: January 26, 2024, 07:52:02 AM »
Hello,

Here are my initial thoughts. I'm somewhat worried about the plan you have because while you are averaging a 4% WR, you then stated that you are only getting 2% on the investment properties. So what I actually think you would get under Plan A is ($400K + $1M)*.04 = $56k/year from investment accounts and ($1.1M + $950k)*.02 = $41k/year. from investment properties The Plan B investment property is included in Plan A because you would still be generating profit from it now unless you plan to turn it over to your kids soon. Additionally I excluded cash since that shouldn't be expected to generate a return. That gives a total income of $97k/year or $20k short of your target. Increasing up withdrawals from you investment accounts to $76k would be equivalent to a 5.4% withdrawal rate.

And then in Plan B there really isn't any additional assets being added to draw from unless you plan to sell your primary home, but you'll still need someplace to live so I'm not sure if selling your home really solves anything. Really depends on what the alternative cost of living would be.

My instinct is saying that even with the tax hit, selling and investing may prove to be more effective, but I'm curious to see what others think. Also, the 4% SWR was generated as a guideline to avoid running out of money and monte carlo simulations have shown that in some cases your portfolio increases in value instead of decreasing. If you sold all the investment properties and even with taxes, you probably end up with an investment portfolio that meets your target with a WR in the low 3s and almost everyone on here would agree that it is plenty conservative even for early retirement. Your Plan A would then be that your portfolio does very well and you pass on a nice nest egg to your kids. Plan B would be the portfolio doesn't do as well and you never run out of money and your kids get a smaller nest egg.

A few questions:

1. Are your Plan numbers based on right now or are those projections for where you will be in 5 years?
2. Is there any debt associated with the investment properties? Doesn't look like it, but would be good to confirm.
3. Is your target spend a bare minimum? Comfortable living?
4. How much time is left on your mortgage? I'm curious when this would be paid off in your plan and how much that would reduce your target spend.
5. Is this a true retirement where you plan to never work again?

Overall though, congrats on being in the position that you are! These are some fabulous numbers.

Laura33

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Re: Looking to get some feedback on my FIRE plan.
« Reply #2 on: January 26, 2024, 08:44:46 AM »
Your plan numbers don't really make sense, because you're mixing investments in the market with rental properties.  There are really two ways to figure this out.

1.  Take the net income from your rental properties and subtract it from your projected annual expenses.  Then apply the 4% rule to your investments and see if it generates enough to cover the remaining expenses.  One benefit of this approach:  it preserves those rental properties as part of your estate to pass on to your kids.  Downside is that you are currently getting only a 2% return, and that may not be enough to cover the delta.  But better to know that now, eh?

2.  Plan to sell the rental properties, and subtract selling costs and capital gains taxes to figure your net profit.  Add that amount to your 'stache and apply the 4% rule to the whole thing to see if you're good to go.  Downside is, of course, taxes, plus no property to pass on to your kids. 

In neither case do you count the value of your home.  You will always need a place to live.  So unless you're willing to downsize significantly to free up some of that equity, or to sell and rent (thus increasing your annual income needs), you don't get to count home value or home equity in the analysis. 

Looking at the numbers you have below, you have $1.4M in invested assets (I'd keep the $50K as an EF), so that gets you $56K/yr.  You also have about $2M in investment property, which you say is generating 2%/yr in net income, for another $40K.  So that's right at your $96K number, even without considering your SS at age 70.  And it also doesn't account for any growth or further investments over the next 5 years.  So I think you are just fine -- basically, you have a ton of assets, which gives you a lot of flexibility here.  And I do count SS, btw, because at your age, it's unlikely to go away completely for you.

What might help is more of a year-by-year analysis -- plan out your income and expenses as they change over the years, which will help you project how much will be left in your 'stache by the time SS kicks in.  You can also run that under various scenarios, including selling one or both properties.  I bet you will find that you are just fine in any case.  But you want that to be based on a more detailed analysis, instead of just general references to the 4% rule -- that's a good target when you're in the planning stages, but it's not the kind of etched-in-stone rule that can accurately predict success at the level of detail you're trying to use it for.


k99789978

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Re: Looking to get some feedback on my FIRE plan.
« Reply #3 on: January 26, 2024, 11:08:41 AM »
Thanks for your feedback. 

For Plan A, the withdrawl rate doesnt include the 2% return on property at the moment as I was considering selling those investment properties at time of FIRE.  But I am just trying to figure out what is the best time to sell.   At 1 - FIRE - pay the tax and invest in ETF, 2 - keep the 2% extra return and sell later in life. 

1. Are your Plan numbers based on right now or are those projections for where you will be in 5 years?
Answer - yes I am looking good to hit those numbers.

2. Is there any debt associated with the investment properties? Doesn't look like it, but would be good to confirm.
Answer - those investment properties are just the equity.  So I have already taken off the loan amounts

3. Is your target spend a bare minimum? Comfortable living?
Answer - I think it is medium living.   I would still be paying off mortgage for another 10 years and I live in california.  Thats why the number is a bit higher than I would like. 

4. How much time is left on your mortgage? I'm curious when this would be paid off in your plan and how much that would reduce your target spend.
Answer - another 10 years after FIRE

5. Is this a true retirement where you plan to never work again?
Answer - Still thinking.  Probably might do some volunteer work.  Open to doing some small part time work to keep me busy


Hello,

Here are my initial thoughts. I'm somewhat worried about the plan you have because while you are averaging a 4% WR, you then stated that you are only getting 2% on the investment properties. So what I actually think you would get under Plan A is ($400K + $1M)*.04 = $56k/year from investment accounts and ($1.1M + $950k)*.02 = $41k/year. from investment properties The Plan B investment property is included in Plan A because you would still be generating profit from it now unless you plan to turn it over to your kids soon. Additionally I excluded cash since that shouldn't be expected to generate a return. That gives a total income of $97k/year or $20k short of your target. Increasing up withdrawals from you investment accounts to $76k would be equivalent to a 5.4% withdrawal rate.

And then in Plan B there really isn't any additional assets being added to draw from unless you plan to sell your primary home, but you'll still need someplace to live so I'm not sure if selling your home really solves anything. Really depends on what the alternative cost of living would be.

My instinct is saying that even with the tax hit, selling and investing may prove to be more effective, but I'm curious to see what others think. Also, the 4% SWR was generated as a guideline to avoid running out of money and monte carlo simulations have shown that in some cases your portfolio increases in value instead of decreasing. If you sold all the investment properties and even with taxes, you probably end up with an investment portfolio that meets your target with a WR in the low 3s and almost everyone on here would agree that it is plenty conservative even for early retirement. Your Plan A would then be that your portfolio does very well and you pass on a nice nest egg to your kids. Plan B would be the portfolio doesn't do as well and you never run out of money and your kids get a smaller nest egg.

A few questions:

1. Are your Plan numbers based on right now or are those projections for where you will be in 5 years?
2. Is there any debt associated with the investment properties? Doesn't look like it, but would be good to confirm.
3. Is your target spend a bare minimum? Comfortable living?
4. How much time is left on your mortgage? I'm curious when this would be paid off in your plan and how much that would reduce your target spend.
5. Is this a true retirement where you plan to never work again?

Overall though, congrats on being in the position that you are! These are some fabulous numbers.

k99789978

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Re: Looking to get some feedback on my FIRE plan.
« Reply #4 on: January 26, 2024, 11:14:33 AM »
Thanks for your comments.

1) I did that analysis and yes there isnt enough to cover at 2% return. 
2) Yeah I am thinking of selling some of the investment properties and just pay the taxes. 

Good point about the year by year analysis.  Thanks for the suggestion.  It might also help me figure out how to optimize my taxes as well. 

Your plan numbers don't really make sense, because you're mixing investments in the market with rental properties.  There are really two ways to figure this out.

1.  Take the net income from your rental properties and subtract it from your projected annual expenses.  Then apply the 4% rule to your investments and see if it generates enough to cover the remaining expenses.  One benefit of this approach:  it preserves those rental properties as part of your estate to pass on to your kids.  Downside is that you are currently getting only a 2% return, and that may not be enough to cover the delta.  But better to know that now, eh?

2.  Plan to sell the rental properties, and subtract selling costs and capital gains taxes to figure your net profit.  Add that amount to your 'stache and apply the 4% rule to the whole thing to see if you're good to go.  Downside is, of course, taxes, plus no property to pass on to your kids. 

In neither case do you count the value of your home.  You will always need a place to live.  So unless you're willing to downsize significantly to free up some of that equity, or to sell and rent (thus increasing your annual income needs), you don't get to count home value or home equity in the analysis. 

Looking at the numbers you have below, you have $1.4M in invested assets (I'd keep the $50K as an EF), so that gets you $56K/yr.  You also have about $2M in investment property, which you say is generating 2%/yr in net income, for another $40K.  So that's right at your $96K number, even without considering your SS at age 70.  And it also doesn't account for any growth or further investments over the next 5 years.  So I think you are just fine -- basically, you have a ton of assets, which gives you a lot of flexibility here.  And I do count SS, btw, because at your age, it's unlikely to go away completely for you.

What might help is more of a year-by-year analysis -- plan out your income and expenses as they change over the years, which will help you project how much will be left in your 'stache by the time SS kicks in.  You can also run that under various scenarios, including selling one or both properties.  I bet you will find that you are just fine in any case.  But you want that to be based on a more detailed analysis, instead of just general references to the 4% rule -- that's a good target when you're in the planning stages, but it's not the kind of etched-in-stone rule that can accurately predict success at the level of detail you're trying to use it for.

dandarc

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Re: Looking to get some feedback on my FIRE plan.
« Reply #5 on: January 26, 2024, 11:21:51 AM »
You're clearly going to be just fine. Sell investment real estate and invest in index funds and let go of perfectionism and enjoy your retirement. Kids can inherit mutual fund shares just as easily (actually more easily) than real-estate anyway, so unless big time emotional attachment for everyone on these properties, why keep the headache around?

k99789978

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Re: Looking to get some feedback on my FIRE plan.
« Reply #6 on: January 26, 2024, 11:26:21 AM »
Good point.  Thanks for your feedback. 

You're clearly going to be just fine. Sell investment real estate and invest in index funds and let go of perfectionism and enjoy your retirement. Kids can inherit mutual fund shares just as easily (actually more easily) than real-estate anyway, so unless big time emotional attachment for everyone on these properties, why keep the headache around?