Author Topic: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?  (Read 1518 times)

StarBright

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Have edited this post (a second time) for (more) clarity because my first edit made it more confusing.

After being on the MMM boards for many years I'm finally posting a case study :)

Me:37, StarHus 38, kids: 7 and 5

Gross Family Income: $130k a year, or $10,800 a month
Net Income: approx $7,384 a month

Current Savings Retirement Savings (combined):
workplace retirement accounts: 237k
Roth IRAS: 84k
taxable investment: 13k
Total: 334k
EFund: About 18k
Checking: usually about a 5k buffer

Our family plans in regards to career have been in flux for several years but my DH accepted a tenure track teaching offer a couple of months ago and now we have stability so I'm looking for help. I've been in the same, relatively high stress, but somewhat flexible work from home job for the last 13 years. StarHus plans to work until at least his 50s, but almost all professors we know end up working into their 70s (he is currently uninterested in early retirement). DH has three years until tenure and then a year of sabbatical (@ 65% pay) and then I'm pulling the plug on working.

I'm going to give a super vague overview of our budget as I am not currently looking for maximizing but more looking at where to direct money in a big picture way (but will be happy to add micro level detail if people ask about it).

Monthly expenses
Fixed (we aim to keep these around 50% of our take home)
*Edited to add - this number is not barebones fixed, but includes all automated payments include to charities and extra mortgage payments.
Total:    3604.85
*ETA, this number will be $2400 started in January 2020
   
Savings in addition to work retirement accounts(aim to keep around 25%):
Total:   1750
*edited to add, this currently has 1k going to top up of efund. When efund hits desired number this rolls over to Roth funding.
   
Flexible (aim to keep around 25%)  (this is the category where we can make cuts)
Total:   1975
*edited to add - this number could be cut by at least a third if I needed to.

so grand total monthly spend:  approx $7,330

I'm not looking for face punches per se, mostly because we are pretty happy with our current balance. We were too tight a few years ago.
I have four years left at my approximate current salary and then I'll quit or take a lower paid lower stress job etc. 

Starting in August, StarHus gets a 10k raise and youngest child starts kinder so our fixed costs will lower by 1k a month. StarHus will also get another bump up to 68k when he gets tenure in three years (though in his 4th year he'll take a sabbatical cut).

The first year that we lived only on DH's salary, we believe we'd be living on approximately 4k a month.


SO- The Question - If you were us, where would you be putting your "extra" money for the next four years.



My question is really where should I focus on putting our extra savings for the next few years? taxable account? Roth? (and then I can pull out contributions). Should we set a goal to put a certain amount aside before I quit? We aren't worried about having enough in our work accounts: in 4 years mine should be in great shape, and DH is required to put back 15% and gets a 12% match until he retires. But we might need to augment DH's pay?

We are also being responsible and planning to take care of some big expenses before I pull back:
  • We are cashflowing the replacement of our furnace and AC this fall
  • Will probably replace the roof summer/fall of 2020
  • And are looking at replacing our other vehicle (2006 corolla) in 2021

Other confounding future stuff: Kids college in 11 and 13 years. They can attend DH's institution for free, but if they get into Top Top schools in excellent programs we would consider supporting that. Current thought is to do our best to cashflow what we can and pull from Roths (penalty free, but taxes on earnings) within reason for what we can't cashflow.

I'm basically looking for a little direction. We've talked about rental properties (but I'm not really drawn to that), or just throwing more into taxable accounts but we aren't fully committed to a path yet. If you all also tell me that I'm nuts for thinking of cutting back on work I will listen. I will also listen if you think our spending is out of control.

I am open to any and all suggestions and am thankful for folks taking the time to read.
« Last Edit: May 15, 2019, 08:40:18 AM by StarBright »

StarBright

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #1 on: May 15, 2019, 06:12:37 AM »
I edited this post a bit and am happy to edit it further, but TLDR: I'm not sure where to put my money for the next several years while I prepare for coast FIRE/letting husband bring in the money for a bit.

reeshau

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #2 on: May 15, 2019, 06:47:25 AM »

Monthly expenses
Fixed (we aim to keep these around 50% of our take home)
Total:    3604.85
   
Savings in addition to work retirement accounts(aim to keep around 25%):
Total:   1750
   
Flexible (aim to keep around 25%)  (this is the category where we can make cuts)
Total:   1975

so grand total monthly spend:  approx $7,330


Quote
The first year that we lived only on DH's salary, we believe we'd be living on approximately 4k a month.

Quote
We are also being responsible and planning to take care of some big expenses before I pull back:
  • We are cashflowing the replacement of our furnace and AC this fall
  • Will probably replace the roof summer/fall of 2020
  • And are looking at replacing our other vehicle (2006 corolla) in 2021

What you do with the money depends on what you want your money to do, and what your time frame is.  Right now, as presented, you are facing a cash crunch leading up to and into your planned date.  You have a number of large purchases, which you don't have savings for, nor is it clear they are budgeted for.  (though it is smart to take care of them before your earnings go down)  So it seems like your first answer of where the money will go is your big expense list, at least for the next 3 out of 4 years.

But even regarding your regular expenses, you seem to be heading for a tight situation, with $5,600 of monthly expenses (not counting savings) vs. $4,000 expected take home pay.  What do you expect to adjust to that?  Will you keep to your rule of fixed expenses being 50% of take home?  Are you cutting Flexible spending down to $400 per month?

You have to start somewhere, so there is nothing wrong with a rough roadmap to get your thinking started.  But I challenge your assumption that you have leftover money, because I still see short-term and ongoing gaps between your income and spending in what you have laid out here.  Your detailed question doesn't really matter yet, until the big questions are answered.

Nick_Miller

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #3 on: May 15, 2019, 07:00:12 AM »
Well, assuming 7% returns, your monthly $1,750 investment contributions for the next four years would total about $97,000. Added to your portfolio, which again at 7% returns, would have grown to to about $435,000, you'd have $532,000 in investments at ages 41/42, so not bad!

I say this because you might say at that point, "We have enough of a stache." That $532K, assuming 7% returns, would hit around $2M by the time you're in your early 60s.

So this might let you delete the $1750 savings "expense" from your monthly budget in 4 years. But still, you'd be in a situation where you'd have only about $400 in monthly income after fixed monthly expenses are paid. Would you be comfortable with that tight of a budget? Most all of your "flexible" would disappear, and considering you currently have $1,975 in "flexible" it would be VERY helpful for you to list those out now for us and explain which ones you'd be fine cutting (it would be most of them).

So in theory, this could work (assuming your husband's job provides family health insurance), but then you talk about potentially raiding the 401ks for the kiddos' college, and that obviously changes all of the stache assumptions I made in the first paragraph.

What would you do during the day in four years? The kiddos would be in school for what, 7 hours a day? Could you develop a side hussle or some sort of part-time or self employment? I don't see how any of this works if you leave the workforce in four years AND then raid the 401ks AND don't earn any income after 2023. The math doesn't work.


LifeHappens

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #4 on: May 15, 2019, 07:06:18 AM »
We are also being responsible and planning to take care of some big expenses before I pull back:
  • We are cashflowing the replacement of our furnace and AC this fall
  • Will probably replace the roof summer/fall of 2020
  • And are looking at replacing our other vehicle (2006 corolla) in 2021
I'm cheering for you to be able to cut back! You've definitely earned it.

It seems the first task is to fund these expenses. Do you know the approximate costs for the HVAC and roof work? Are you planning to pay cash for the replacement vehicle? You'll need to set a monthly sinking fund budget for these and make sure they get funded if your timeline is going to work.

Do you have any interest in 529 accounts to help with college? Saving into a Roth is a good second option given your unique benefits package, but I tax-deferred savings is always nice.
But even regarding your regular expenses, you seem to be heading for a tight situation, with $5,600 of monthly expenses (not counting savings) vs. $4,000 expected take home pay.  What do you expect to adjust to that?  Will you keep to your rule of fixed expenses being 50% of take home?  Are you cutting Flexible spending down to $400 per month?
These are good questions. Right now you seem to think your spending will go down quite a bit when you leave your job, but what is your plan to get there?

StarBright

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #5 on: May 15, 2019, 08:03:33 AM »


But even regarding your regular expenses, you seem to be heading for a tight situation, with $5,600 of monthly expenses (not counting savings) vs. $4,000 expected take home pay.  What do you expect to adjust to that?  Will you keep to your rule of fixed expenses being 50% of take home?  Are you cutting Flexible spending down to $400 per month?

You have to start somewhere, so there is nothing wrong with a rough roadmap to get your thinking started.  But I challenge your assumption that you have leftover money, because I still see short-term and ongoing gaps between your income and spending in what you have laid out here.  Your detailed question doesn't really matter yet, until the big questions are answered.

@reeshau  Ack- so maybe I shouldn't have edited my post because it had this info originally (though I do now have some responses so that is helpful :))

 
Our fixed amount isn't bare bones expenses. It is just what is set to automatic withdrawal every month. So our fixed amount currently includes:
  • $260 for charity
  • $300 towards paying off the car we replaced last November (which we think we'll have paid off in December or January (because we also throw bonus money at it)
  • $400 extra mortgage payment
  • $972 day care which will end in August.
  • When DD starts 1st grade in 2020, the fixed costs will go down another $235 for 9 months of the year (for some reason public kindergarten costs money in our super bougie town - there is a free option but it is such a pain that no one does it) Though flexible costs will go up in the summer.

So a quick head calculation has my actual 4 walls fixed expenses at just over $1700.00 (we could pay off the car tomorrow from cash savings if we wanted) starting in August. But for intents and purposes let's say that my fixed expenses are approximately $2400 a month starting January 2020 (I'd like to keep paying extra on the mortgage and continue my charity contributions.

The flexible costs are very flexible - These are trips to visit my in-laws across the country (which they request multiple times a year and I would love to have an excuse to get rid of ;) ), activities for my kids, memberships to lots of local organizations, summer vacations, additional charity contributions that aren't set monthly, etc.

We also use the flexible amount to cashflow stuff, so a couple of months ago we replaced a dishwasher, our flexible amount was higher than normal, so the last couple of months we haven't done fun stuff.

I will edit the original post again to put this info back in and not confuse people.
« Last Edit: May 15, 2019, 09:36:22 AM by StarBright »

StarBright

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #6 on: May 15, 2019, 08:35:30 AM »
We are also being responsible and planning to take care of some big expenses before I pull back:
  • We are cashflowing the replacement of our furnace and AC this fall
  • Will probably replace the roof summer/fall of 2020
  • And are looking at replacing our other vehicle (2006 corolla) in 2021
I'm cheering for you to be able to cut back! You've definitely earned it.

It seems the first task is to fund these expenses. Do you know the approximate costs for the HVAC and roof work? Are you planning to pay cash for the replacement vehicle? You'll need to set a monthly sinking fund budget for these and make sure they get funded if your timeline is going to work.

Do you have any interest in 529 accounts to help with college? Saving into a Roth is a good second option given your unique benefits package, but I tax-deferred savings is always nice.
But even regarding your regular expenses, you seem to be heading for a tight situation, with $5,600 of monthly expenses (not counting savings) vs. $4,000 expected take home pay.  What do you expect to adjust to that?  Will you keep to your rule of fixed expenses being 50% of take home?  Are you cutting Flexible spending down to $400 per month?
These are good questions. Right now you seem to think your spending will go down quite a bit when you leave your job, but what is your plan to get there?
Thanks @LifeHappens - I think I deserve a break too!

Also I suck! I edited my original post for clarity and made it more confusing :)

re: Sinking Funds for planned expenses : We do keep a large general sinking fund/e-fund/slush fund. It currently has about 18k. We also keep our checking fund between 3-8k. I like our slush-e fund to be around 23k, so our "savings" number generally includes putting 1k a month into the slush fund. For instance, we replaced our 16 year old CRV in November so drew it down a ton and are now building it back up.

When it reaches my target number (or I know that we don't have any big expenses coming up) we'll put that 1k into Roths or taxable accounts. I know that for the next three years we will be digging into it for big home maintenance/new car. So we'll constantly top it up and draw it down again as needed.

So right now - we are planning on replacing our furnace and AC in September or October for 7k. I expect a new roof to cost about the same. We'll either pay cash for a car or pay mostly cash for a car and take out a small loan for the remainder if the interest is favorable (which is what we did for our recent replacement vehicle).

re: 529s for college. We are seriously on the fence about them. Our 7 year old could end up going IVY league or not attending at all (He is 2E and we suspect he'll need to stay close to home, in which case- free college at DH's institution), Our DD5 is a gifted high achiever and based on our experience with academia she is the personality type that should definitely get good scholarships. We are wary of putting too much in a 529 because our gut says it has a 50% chance of not being needed. Our thought was that we would use the existing Roth IRAs to stash cash in and boost our earnings and if we needed to pull out cash (which we might not need to at all), then you can withdraw for educational expenses with no penalty. Also - sometimes just starting ANOTHER account feels overwhelming to me :)  I am totally open to being persuaded to 529s, it just hasn't seemed worth it.

StarBright

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #7 on: May 15, 2019, 09:34:09 AM »
Well, assuming 7% returns, your monthly $1,750 investment contributions for the next four years would total about $97,000. Added to your portfolio, which again at 7% returns, would have grown to to about $435,000, you'd have $532,000 in investments at ages 41/42, so not bad!

I say this because you might say at that point, "We have enough of a stache." That $532K, assuming 7% returns, would hit around $2M by the time you're in your early 60s.

So this might let you delete the $1750 savings "expense" from your monthly budget in 4 years. But still, you'd be in a situation where you'd have only about $400 in monthly income after fixed monthly expenses are paid. Would you be comfortable with that tight of a budget? Most all of your "flexible" would disappear, and considering you currently have $1,975 in "flexible" it would be VERY helpful for you to list those out now for us and explain which ones you'd be fine cutting (it would be most of them).

So in theory, this could work (assuming your husband's job provides family health insurance), but then you talk about potentially raiding the 401ks for the kiddos' college, and that obviously changes all of the stache assumptions I made in the first paragraph.

What would you do during the day in four years? The kiddos would be in school for what, 7 hours a day? Could you develop a side hussle or some sort of part-time or self employment? I don't see how any of this works if you leave the workforce in four years AND then raid the 401ks AND don't earn any income after 2023. The math doesn't work.

thanks @Nick_Miller

So - I just edited my original post but fixed expenses are going to be about $2700 in August (no more daycare for youngest) and $2400 starting in January. My flexible expenses are just fluff and convenience spending right now (we've let ourselves spend whatever we want this year because I have been burning out badly for the last two years). I have paid for lawn car, oil changes, more car repairs than I'd like, and plenty of convenience food and activities for kiddos. I'd estimate that I could cut those expenses by a third next month if I had to and cut them much further with a little thought.

Re: What would I do during the day? I've developed stress related health issues so I am planning on taking some time off to just get myself healthy again. DS also has a lot of problems at school (he is 2E) so it would give me more freedom to keep him home or take him out early if/when he needs it or ultimately homeschool him for his middle school years if that is what is needed (pretty typical for 2E kiddos).

I also have a goal career that I would be interested in re-positioning myself for (I do not love my current field) and I love volunteering and turn down volunteer opportunities several times a month because of current dearth of time. I am NOT worried about filling up my time at all :)

I do have two side gigs that I could easily do. I have turned down opportunities for both several times in the last year because I don't have time between my job and kids. DH also has a very well paid side gig that he can do when he has time (which he hasn't this year because of TT job search). He writes for MSM publications when he has a fun idea and generally has pulled in 1-3k per article when he has the time. He'd like to write a general interest book in addition to academic books.

Re: extra college money - it wouldn't be 401ks, but Roth IRAs that we would pull from if we needed.

And in regards to continued building of the 'stache: DH will continue to put at least 15k a year into his 401a for the next 15 (but probably next 25 years).

Hope this answers all questions - Original post has been updated to reflect what was previously missing info. Thanks!

reeshau

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #8 on: May 15, 2019, 09:46:42 AM »
Okay, the edits do help to clarify things.

A quick thought on the 529:  one thing that is quite useful to know is that you are allowed to make withdrawals equal to any scholarships penalty free.  (but not tax free)  This turns the 529 into something like a traditional IRA.  (with after-tax contributions)  The other aspect, though, that may be useful to you is that you can withdraw the money at the time of scholarship award, so in effect this is either your kids' college tuition, or an IRA that you could start to withdraw from when you are 48--11 years early.  (not withstanding other methods of early access)  So, this could be a really good fit.

Other considerations:
What tax deduction or credit does your state's 529 have?  That would be gravy
I've not seen any discussion about 529 treatment of free tuition.  Is it given as a scholarship?  This could be worth some time with a specialist.

Here's a starting point:  https://www.savingforcollege.com/article/the-truth-about-scholarships-and-529-plans

With the new detail on your fixed costs, you do look a lot better.  I do worry that your extra "savings" is really spending / sinking fund, but that's just not how I think of it.  I'll think a little more on what the new numbers look like.

LifeHappens

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #9 on: May 15, 2019, 09:49:39 AM »
So - I just edited my original post but fixed expenses are going to be about $2700 in August (no more daycare for youngest) and $2400 starting in January. My flexible expenses are just fluff and convenience spending right now (we've let ourselves spend whatever we want this year because I have been burning out badly for the last two years). I have paid for lawn car, oil changes, more car repairs than I'd like, and plenty of convenience food and activities for kiddos. I'd estimate that I could cut those expenses by a third next month if I had to and cut them much further with a little thought.
All of this, plus the other info you added re: your Slush Fund and thoughts about Roth vs. 529 makes your plan seem a lot more feasible.

I also suspect after a little time for recovery from burnout you will find yourself earning money again, because you're such a high achieving person.

Your other question is about what you would do with the additional savings once your Slush Fund is full. If I were thinking about your plan, I would probably set up an additional Just In Case fund on the off chance you can't actually manage on just your DH's salary the first couple years. Maybe an additional $25,000 kept in a cash equivalent like a CD ladder. With the rest a Roth probably does make a lot of sense for you. You can stash $12,000 per year now between you and your DH.

StarBright

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #10 on: May 15, 2019, 10:31:50 AM »
Thanks guys - Another thing to add is that our mortgage will be paid off in 11 years. So when I say cash flow whatever college costs we can, I'm not just being pie in the sky :) We planned our mortgage payments to end the year oldest child will go to college (if they go :)).

So to really summarize it (if anyone else joins the thread)- starting in August we'll have an additional $1000 a month that we do not have now. I'm wondering what the best place would be to put that for the next 4 years so that I can have freedom to cut way back starting in 2023. DH does not plan on retiring early so this is about me dropping out of the work force or slowing down.

Options include taxable investments, Roth IRAs, pay off mortgage even earlier, work towards a rental property, CD ladder as mentioned by LifeHappens, etc.
« Last Edit: May 15, 2019, 11:09:13 AM by StarBright »

reeshau

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #11 on: May 16, 2019, 02:27:31 AM »
I think @LifeHappens 's idea of an extra slush fund is a good one.  You are anticipating a big change in lifestyle.  If you could somehow model this now--cut back now where you plan to cut back then--you would be sure you could get there.  But after year 4, not only are you quitting, but your DH will be coming off sabbatical:  maybe he will have a change of heart, too.  I don't think there is anything wrong with having some dry powder coming into such a big life transition--you could always deploy it to growth assets once you are settled in.

I don't think Roth is a great idea now, at $130k income.  You know you're going down to $40k, so you know your future tax bracket will be much lower.  If you want to stash it to retirement, I'd do a traditional, and then do a conversion once you make the switch.  Save off some cash to pay the taxes later, if you must.

It's also good to know you are looking to take down the mortgage before college arrives.  Given your future household income, some of the biggies could even give you a free ride, anyway.

I'm not the one to ask about real estate.  Relative to these other choices, it's signing up for a lot more work.  If that is something you think you have passion about, great.  But I would say that's a decision for year 5, and then cash in the CD's to get started, if you want to plunge in.

mistymoney

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Re: Aiming to sort of FIRE in 4 years - Am I doing it responsibly?
« Reply #12 on: May 19, 2019, 09:01:06 AM »
Thanks guys - Another thing to add is that our mortgage will be paid off in 11 years. So when I say cash flow whatever college costs we can, I'm not just being pie in the sky :) We planned our mortgage payments to end the year oldest child will go to college (if they go :)).

So to really summarize it (if anyone else joins the thread)- starting in August we'll have an additional $1000 a month that we do not have now. I'm wondering what the best place would be to put that for the next 4 years so that I can have freedom to cut way back starting in 2023. DH does not plan on retiring early so this is about me dropping out of the work force or slowing down.

Options include taxable investments, Roth IRAs, pay off mortgage even earlier, work towards a rental property, CD ladder as mentioned by LifeHappens, etc.

I think your main question here is difficult to answer because it's unclear if you anticipate being able to live completely on DH's income when you pull the plug or not.

Will that income fund all your living expenses, home maintenance issues that will crop up, plus clothes, activities, vacations, gifts and other holiday expenses?

If so - put your extra money into pre-tax accounts.

If you are anticipating needing additional money on a monthly basis, or periodically for home maintenance, vacay, etc. is your plan to work lower stress, &/or part time, or do some gigs OR to draw monthly from the accounts you currently building? - and if so, how much per month or year are you anticipating that will that be?

If you think that you will, or may be very likely to, need regular withdrawals then I'd opt for a taxable account.

If it is a maybe we can make it/I'm not sure if we'll be drawing down, then split it half and half - half taxable and the other half pre-tax or Roth.