Young and feeling wealthy... but how do we actually hit FIRE?

[Jayjayem]

Hello MMM community,

I am seeking your wisdom to help us cross the finish line in 2 years. We have committed to saving every last dollar we can to reach FIRE in November 2020. We worked extremely hard through school, our careers and have been frugally saving and investing (although 2018 expenses are out of control). We hate our jobs and would both quit the day we hit our number. We need to save $500K and we're sprinting there.

Husband: 39
Wife: 33
2 pets and no plans for kids. We like the DINK life.

Income
- Husband: $160K base + $40K variable = $200K
- Wife: $151K base + $150K RSU = $301K
- Rental 1: $7.2K cash flow per year
- Rental 2: $5.4K cash flow per year
Annual income: $513.6K

Due to our income, we don't have many tax deductions. We max out 401K and get match. Every January, we execute a backdoor ROTH of $5.5K. Can't think of any other tax shelters. 

Net worth
1. Non-taxable
- Husband 401k: $638.4K
- Wife 401k: $57.6K
- Wife backdoor ROTH: $26.5K
Total non-taxable: $722.5K

2. Taxable
- Betterment: $170K (90/10 Stock/Bond allocation)
- Wife RSU: $101K
- Husband RSU: $42K
- Wife Schwab brokerage: $36K (mostly Apple stocks)
- Husband ESPP: $23K
- Husband TD brokerage: $14K (random stock picks before discovering low-cost index funds)
Total taxable: $386K

3. Real estate
- Rental 1: Zestimate $776K, mortgage $293K, equity $483K (monthly cash flow $650)
- Rental 2: Zestimate $552K, mortgage $300K, equity $252K (monthly cash flow $450)
- Primary: Zestimate $625K, mortgage $491K, equity $134K
Total real estate equity: $869K

4. Non-mortgage debt = $0
No student loans (paid off $200K several years ago), no car loans (2 used clunkers bought with cash), no personal loans, no HELOC, no credit card debt.

Net worth: $1.977M, sometimes $2M on a good market day

Expenses and excuses

Below is Mint record of every transaction

Row Labels         Monthly
Auto & Transport      $475.44
Cash & ATM         $201.77
Clothing                 $92.23
Entertainment         $130.29 (Spotify, Netflix and Symphony tickets)
Fees & Utilities         $324.69
Food                  $1,170.16
Giving                 $59.39
Health & Fitness         $369.01 (gym membership + contact lenses + my shrink + meds)
Home                 $2,436.73 (we are renovating, mostly ourselves)
Pets                    $842.93 (One of them needed surgery this year)
Misc.                         $11.02
Mortgage & Rent      $7,664.20 (Actually $2,364 after rental income)
Personal Care         $74.75
Shopping                 $618.97 (Costco and Amazon are my weaknesses)
Sports                 $1,664.31 (Adventure trips... our only "luxury")
Tax                         $2,194.15 (we were hit with $22K fed tax for 2017)
Travel                 $383.43
Uncategorized         $-   
Grand Total         $18,713.45

From average monthly total, I'm subtracting what I would assume to be non-recurring or offset expenses:

$18,713.45
- $4,502 (rental income)
- $2,194 (tax bill... we assume we won't be in the highest tax bracket when we retire)
- $2,036 (renovation portion of Home expense, which should be one-time)
= $9,981 per month

Yikes! We will get this down to $8K month in 2019. We want to FAT FIRE with $100K a year ($8.3K per month), which means we would need $2.5M to retire, assuming 4% SWR. We think we can save $500K in the next two years to hit our number.

Specific questions
Our net worth is comprised of 44% real estate, 37% non-taxable accounts and 20% taxable investments. We hold almost no cash in an attempt to plow every dollar into the market. While $2M is a large number, much of it is illiquid and untouchable for 20 - 30 years given our age.

My overarching question is how can we generate $100K of withdraw-able cash from $2.5M asset base, given our allocation today? What do we need to start thinking of to pivot to an asset allocation that will get us to FIRE in 2 years?

- Idea 1: Sell Rental 2 to pay off mortgage on rental 1. Then rent ($3000) would completely cover the mortgage of primary residence, effectively getting us to $0 housing. Keep in mind Rental 2 appreciated by $140K since our purchase -> tax bill!
- Idea 2: Sell Rental 1 to pay off mortgage on Primary. Then we would have $0 housing + $450 a month cash flow from rental 2. Keep in mind Rental 1 appreciated $360K since our purchase -> tax bill!
- Idea 3: Don't sell any real estate since they are cash flow positive. Let them keep appreciating in value and equity. Focus on generating withdrawable cash flow from taxable accounts. The next $500K that we save to get to $2.5M will go into Betterment, which means we will retire with $900K / $2.5M in taxable liquid securities.   

[Boofinator]

You guys are doing fantastic. As you mentioned, 2018 expenses are 'out of control', so if you bring those down to a degree you will be much safer than 4% once you hit your target.

My meager suggestion would be to hold on to the rentals until after you FIRE and live off the taxable account and rental income. When the stock market takes a dump, you may be in a position to do a significant amount of tax loss harvesting, which could then be used to offset the sale of the rental home to minimize the tax hit (hopefully real estate doesn't take a dump at the same time).

I didn't see you mention your mortgage interest rates, but those might pay a factor in the decisions you make as well.

[RWD]

You could be FIREd tomorrow

This. $1200/month in food and $600/month in shopping!? For only two people? Wow... You're not "sprinting", you're taking a limo to the 2020 finish line.

With your income though you're going to have piles of money almost no matter what you do. But it seems your income has also made you accustomed to spending excessive amounts because you can. You have already realized that the pile of money you need to sustain your current lifestyle is quite large.

[Jayjayem]

Thanks for the comments so far. Absolutely, we have a path to reducing expenses by 25% - getting down to one car and shopping alone will cut our expenses down by nearly $1000 and once we stop working, no more dog walker either. Lots of low having fruits here. Believe or not, we were way spendier before but we continue to make provements. Last year was much better so we will get back on track.

Interesting thoughts on real estate. Our net worth was buoyed by incredible real estate appreciation in a short amount of time (3-4 years). Our down payments were $84k on rental 1 and $100k on rental 2, just enough to not trigger PMI. We lived in both of them while we fixed them up (<2 years though) and bought undervalued houses in good neighborhoods because we thought they would be good investments long term. Unexpected real estate gains accelerated our FIRE plan and while we are counting our lucky stars, we don't know what to do with huge equity producing low cash flow.  ROI has been good if you think about equity gains on down payment. Is that even the right way to think about it?

Selling will trigger such a large tax bill and will erase a lot of value. I will have to think about Boofinator's suggestion on potentially tax losses harvesting with the downturn.

Mortgage rate on both are 4.25% and my credit score is much better than before. I could refi to minimize monthly payment and maximize cash flow, but don't think it will make a big difference.

Thanks all

[reeshau]

Your expenses have already been commented on.  You have the right to your plan, but you are far from sprinting; you have a lot coming in and a lot going out.  You mention $100k as a retirement budget, but this is half your current spending.  Could you move to $100k now?  That will both accelerate savings and confirm how realistic that round number budget really is.

Specifically on the real estate:

You should not be counting equity in your primary residence, unless you intend on cashing it in somehow.  Is this a future rental?  current yield = 0

Your other rentals are only yielding about 1%.  And I assume this is gross, not net?  As is, these are risks to any FIRE plan--they are under-yielding.  You will need to fix the yield.  Even paid off, rental #1 at $3k grosses 5%, before taxes and maintenance.

[Jayjayem]

Rental 1: Bought and moved in Feb 2014, moved out July 2015
Rental 2: Bought and moved in Sep 2016, moved out Oct 2017
Primary: Bought and moved in Oct 2017

[Boofinator]

Are you at all willing to move back into the rentals? Because if you turn them back into your primary residences you will be able to exclude at least SOME of the capital gains.  I don't know how prorating the profits/depreciation works, but theoretically you could get a fairly large cap gains exclusion back. 

What are the dates of purchase/move in for all three units?

I believe the rule is you need to have lived in the residence for two out of the last five years.

[Allie]

I don’t think I am qualified to comment on this is detail, but you currently have a nw of 2m, and want 2.5m, so you can generate 100k/year.  Which sounds fine, but you are including your main residence in that number and your rental properties after subtracting out the rents from your insane spending.  I guess I’m not sure how you will be able to generate 100k to cover your expenses at 4% when so much money is locked in the rentals and the rental income is already being used to offset expenses.  Rentals are not part of our FIRE plan (but over 2m in assets is, so I’ll not comment on the asset overkill), but I think you need more detail on that if you want someone to really pick apart your plan...like what are the expenses above and beyond the mortgage, vacancy rates, whatever, I don’t do rentals.

I’m not saying it couldn’t work, cause you have plenty of assets, but I think the math needs to be adjusted.

Or you could just cut all the fat and fire now and figure out how to make 2k per month on passion projects or fun stuff to cover “adventure trips”.  Like go live in a place and provide adventure trips for wealthy people who need adventure trips to feel alive because their jobs are crushing their souls!  Or sell all three residences and spend a few years in an adventurey place with a much lower cola.  If you do this, and it’s amazing, I will need you to get back in touch and convince my husband to do the same!

[Boofinator]

I don’t think I am qualified to comment on this is detail, but you currently have a nw of 2m, and want 2.5m, so you can generate 100k/year.  Which sounds fine, but you are including your main residence in that number and your rental properties after subtracting out the rents from your insane spending.  I guess I’m not sure how you will be able to generate 100k to cover your expenses at 4% when so much money is locked in the rentals and the rental income is already being used to offset expenses.  Rentals are not part of our FIRE plan (but over 2m in assets is, so I’ll not comment on the asset overkill), but I think you need more detail on that if you want someone to really pick apart your plan...like what are the expenses above and beyond the mortgage, vacancy rates, whatever, I don’t do rentals.

That's a very good point. How I'd look at determining the 4% rule for your case (this is simplified to a large degree, but it will give you a good idea where you're at):

Take the amount invested in the market (assuming at least 50/50 equities to bonds), subtract the amount you would need to pay off all of your mortgages, then multiply by 4%. Add this to the income from other sources (the rentals). This is the amount you could live on if you kept the rentals (and paid off the mortgages (including the primary residence), which is not a good idea but helps make the numbers easier to digest).

For your current situation, this would be ($1109k-$293k-$300k-$491k)*4%+($4502)*12=$55.0k

If instead you sold the rentals (and didn't pay tax and including 6% real estate transaction fees), the result would be
($1109k+($483k+$252k)*0.94-$491k)*4%=$52.4k

These numbers don't include either the primary residence mortgage or the additional $20k you'd be making from the extra $500k. Looks like things might work out, depending on what your mortgage payments for the primary residence are.

[Steeze]

Your spending is around $6500/mo. on expenses not related to housing or taxes. You need around 2MM invested to cover your expenses not related to housing.
Lets say you sell one rental, pay off your mortgage, and are cash flowing $450/mo on housing. Lets assume best case this is a break even situation after taxes and maintenance. You still need 2MM invested to cover your lifestyle.

If you can cut your expenses by 25% like you say and sell one rental to pay off your mortgage, your 1.6MM projected should carry you through.

One thing I noticed is that you do not have health insurance in your budget, perhaps this is covered by your work currently. If you need to pay that after retirement, you might consider an extra 300-500k to cover a $1000-$1500/mo health insurance bill. if that is the case I would consider 2MM as a minimum.

[SwordGuy]

3. Real estate
- Rental 1: Zestimate $776K, mortgage $293K, equity $483K (monthly cash flow $650)
- Rental 2: Zestimate $552K, mortgage $300K, equity $252K (monthly cash flow $450)
- Primary: Zestimate $625K, mortgage $491K, equity $134K
Total real estate equity: $869K

@Jayjayem ,

Golly, that's terrible.

For your $483k equity in rental #1, I can set you up 4 houses with no mortgage that should cash flow $1600 or better a month.   

[FIRE 20/20]

My overarching question is how can we generate $100K of withdraw-able cash from $2.5M asset base, given our allocation today? What do we need to start thinking of to pivot to an asset allocation that will get us to FIRE in 2 years?

I have to admit - I didn't read your whole post or many of the responses because I see who has responded and they know far more than I do.  My only comment (hopefully I didn't miss it already) is to remember that your $100k/year budget needs to include the taxes you'll be paying.  For most here people who retire on $30k a year (or whatever - a lot less than you!) the taxes are a small amount and don't impact the budget very much, but in your case they could be very significant. 

[SwordGuy]

You seem to be aiming or a given Net Worth in order to retire.  If so, that's a completely wrong mindset. 

Net Worth has NOTHING to do with whether are Financially Independent.

What matters when determining Financial Independence is if your income will be >= your expenses after you retire.

So, for this purpose, the sales value of any property YOU DO NOT SELL is of no consequence.   The only thing that matters for a building that you keep is how much money it brings in versus how much money it costs.  And, of course, if you rent it out, those expenses need to account for vacancy, repairs, upgrades for marketability, property management, etc., not just the PITI.

If you're going to spend (including taxes) $100k per year, you've got to come up with the income to support it.   

I was serious in my earlier post, those rental properties of yours are dogs as far as buy and hold rentals go.   

[marty998]

3. Real estate
- Rental 1: Zestimate $776K, mortgage $293K, equity $483K (monthly cash flow $650)
- Rental 2: Zestimate $552K, mortgage $300K, equity $252K (monthly cash flow $450)
- Primary: Zestimate $625K, mortgage $491K, equity $134K
Total real estate equity: $869K

@Jayjayem ,

Golly, that's terrible.

For your $483k equity in rental #1, I can set you up 4 houses with no mortgage that should cash flow $1600 or better a month.   

I was serious in my earlier post, those rental properties of yours are dogs as far as buy and hold rentals go.

I like you @SwordGuy but you are really off the mark here.... our OP would not have had 500k equity to spend on those 4 low COL area houses if he listened to this advice.

You cannot tell me that buying 2 properties that have gone up in value by $500k in short order are bad investments, as compared to 4 houses in a LCOL area with little chance of appreciation that might net hm $10-$20k a year after expenses and tax.

[SwordGuy]

I was being tongue and cheek about my properties being available...

They are terrible buy and hold investments.

At the moment they have been excellent speculations based upon property appreciation values.   That current high value may or may not continue.   
My area had a boom in property appreciation prices back in 2005-2007.   Them came 2008.  Foreclosures out the wazoo.  Property values plummeted way below what people could sell the houses for, so they rented them out to stem the hemorrhage to their budget.  Higher level home rental rates dropped because there was now a glut on the market.

If you sell those houses now you'll have been a brilliant speculator.   Your only risk is that you might have been a more brilliant speculator if you had waited to sell.

If you hang on to the homes, you'll have terrible buy and hold investments.   You'll have lots of capital tied up in a poorly performing asset.  If prices go higher, all will be well and you'll be a genius speculator.   If prices stay the same you'll be well off but you won't be as swell a speculator.  But if prices plummet and so do rents, well, that's not so good.   We know a recession is coming.  What's likely to be the result in your area?  Will you be ok to ride it out for 1 to 10 years ( it took 8 in our area) for prices to rebound?


You could buy and fix up about 8 homes in my area, each of which would net about $4500 a year, for that $483k.   On the other hand, quick appreciation would not be likely to be a big profit source.   (Or 4 fixed up and ready to go ones from me, for which overpriced sale I will greatly thank you. :) )

[Jayjayem]

You guys have given me so much to think about. My takeaway so far is that equity needs to produce cash flow for it to serve us in FIRE so I need to actively plan to convert that into cash-generating asset. I think the obvious solution is to sell one or both of the rentals, the question is when. Moving back into the rentals to hit 2 years out of 5 rule isn't really an option for us.

Sell now: $500K (taxed as ordinary income)+ $485K (taxed as long term capital gains at our tax bracket)?

Sell after we quit: For simplication, let's say we somehow generate $70K from our marketable securities + $483K from rental sale proceeds. Does that mean our taxable income that year is $583K?? I'm guessing $583K would all be taxed as long term cap gains?

On a separate note, we've already made changes to our expenses this weekend:
- Cut bi-weekly housecleaning $200/month - aside from not liking it, we're terrible at it. Will need to research tips and tricks to be effective and fast :) 
- Cut ADT: $56 / month
- Switched gyms: $135/month (1 mile away) to $38/month with same amenities (3 miles away)

More to come on fat trimming

[Jayjayem]

Rental 1: $3000 / month
Rental 2: $2300 / month

The mortgage amount above includes insurance and property taxes. Since we've recently fixed them up, maintenance/repair costs have been $0 so far (not that it will continue that way) and we haven't had tenant turnover since they've gotten in.

Another fat trim: Just change our Geico car insurance from $1300 / 6 months to $580/6 months. Turns out we had things like $50k in comprehensive coverage when the car is worth $8K.

See? Low hanging fruits.

[Allie]

You have tons that you can adjust painlessly, so you may be delightfully shocked once you rip through your budget and realize that 100k a year is ridiculous for a couple (especially after you are out of the rat race and can focus on doing all of those things that you don't have time for now!). 

I'm wondering if you have taken the time to go through and figure out what it would look like if you were to drop all of those things that are related to working and laziness, like housekeeping and dry cleaning and commuting costs and such, and sell the rentals to fund a paid off house (I think there is a way that you can transfer from one rental to another and maybe after your consolidate move into a place?).  Then, you can trudge through the blogs and forums and learn to do things like slow travel as housesitters, travel hack, etc. and quit way earlier.

Quick back of the envelope, you could sell rental 1, pay long term capital gains (maybe, I don't do real estate), pay off house, cut food by a few hundred, skip a few adventure vacations (what are these?), skip half of your random Costco shopping, the other stuff you cut this weekend, etc. and all of a sudden you are less than a year away! 

[Jim Fiction]

One caveat to the home sale exclusion that hasn't been mentioned is that there is a look-back provision, which will limit the kind of games you can play with the already accrued primary residence time on the rentals.

"Eligibility Step 4—Look-Back
Determine whether you meet the look-back requirement. If you didn't sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, you didn't take claim an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period."

https://www.irs.gov/publications/p523
https://www.irs.gov/taxtopics/tc701

It doesn't appear that OP is willing to go this route anyways, but I figured I would provide the info for everyone else.

[Papa bear]

I was being tongue and cheek about my properties being available...

They are terrible buy and hold investments.

At the moment they have been excellent speculations based upon property appreciation values.   That current high value may or may not continue.   
My area had a boom in property appreciation prices back in 2005-2007.   Them came 2008.  Foreclosures out the wazoo.  Property values plummeted way below what people could sell the houses for, so they rented them out to stem the hemorrhage to their budget.  Higher level home rental rates dropped because there was now a glut on the market.

If you sell those houses now you'll have been a brilliant speculator.   Your only risk is that you might have been a more brilliant speculator if you had waited to sell.

If you hang on to the homes, you'll have terrible buy and hold investments.   You'll have lots of capital tied up in a poorly performing asset.  If prices go higher, all will be well and you'll be a genius speculator.   If prices stay the same you'll be well off but you won't be as swell a speculator.  But if prices plummet and so do rents, well, that's not so good.   We know a recession is coming.  What's likely to be the result in your area?  Will you be ok to ride it out for 1 to 10 years ( it took 8 in our area) for prices to rebound?


You could buy and fix up about 8 homes in my area, each of which would net about $4500 a year, for that $483k.   On the other hand, quick appreciation would not be likely to be a big profit source.   (Or 4 fixed up and ready to go ones from me, for which overpriced sale I will greatly thank you. :) )

+1,000,000 x 1,000^950

You made your money on speculation (appreciation). Take it out.  You won! If you want rentals, buy rentals.  Not speculative housing.  And then no cap gains on the sale of those houses if you 1031 (like kind exchange) into better properties.


Sent from my iPhone using Tapatalk

[Jayjayem]

Very good caveat @Jim Fiction Thanks for pointing it out. That changes the calculus I was forming in my head just now.

@lhamo We can always move back in, you can call it laziness. The tenants have a lease till Dec 2019. We can move back into our homes in bustling yuppie neighborhoods full of bars and restaurants... Our primary residence is now semi-rural on an acre. We have a peaceful life here with hardly any traffic so the thought of moving back to yuppieville isn't very appealing. If it saves us $100K+, then we just need to suck it up.

I'm thinking that once we quit, we'll sell rental 2 to pay down mortgage on rental 1 and own it outright. We'll rent out our primary residence and move back into our rental 1. We'll do slow travel around the world for a couple of years and sell rental 1.

Does primary residence rule dictate that we physically have to live in the house for X days out of a year?

[ericrugiero]

This was mentioned above but I just want to be sure you understand and consider the option.  You can sell a property and put the proceeds into another property without paying capital gains taxes.  This is called a 1031 exchange and could make a lot of sense if you actually want to have rentals as part of your portfolio.  You could sell these properties that are worth a lot but are not making much money for your investment.  Then you buy other properties that are more profitable rentals and avoid the capital gains taxes.  This only makes sense if you actually want to own rentals.   

[farmGirl14]

I am a little taken aback by the over $500k income and less than $1k a year in giving.

But moving on, there is a lot of fat that could be cut. I agree with others that said you are taking a limo to the finish line. If you were willing to make a lot of changes you could could retire tomorrow and quite comfortably!

I would sell the rentals, cut the budget, and be free.

[patchyfacialhair]

Rental 1: $3000 / month
Rental 2: $2300 / month

The mortgage amount above includes insurance and property taxes. Since we've recently fixed them up, maintenance/repair costs have been $0 so far (not that it will continue that way) and we haven't had tenant turnover since they've gotten in.

Another fat trim: Just change our Geico car insurance from $1300 / 6 months to $580/6 months. Turns out we had things like $50k in comprehensive coverage when the car is worth $8K.

See? Low hanging fruits.

I'm a stickler with insurance semantics because many people don't have a clue what they're doing.

Comprehensive coverage typically does not have a dollar limit. It usually has a deductible that you'd pay in the event of a covered loss, but not a limit to the amount of coverage. Comprehensive pays for damage to your car from things like weather, animals, etc. If your car is old enough, it may not need this coverage, because you're paying for coverage with a relatively limited payout.

So really what I'm saying is please double check your coverage and make sure you didn't take your LIABILITY down to low levels. Remove comprehensive by all means, but make sure that your BODILY INJURY LIABILITY is robust, as well as your PROPERTY DAMAGE LIABILITY. Those are the coverage line items that pay for a 3rd party injuries/damages if you are at fault in an accident, and you want them high enough so as to prevent the injured party from trying to sue you for your assets.