- Reader Case: Choosing Between Health and FIRE - September 25, 2020
- Let’s Go Exploring! Singapore: Futuristic Foodie Paradise - September 18, 2020
- Will COVID Change The Nature of Work Permanently? - August 31, 2020
Since we’re no longer travelling, it’s getting harder and harder to keep track of the days. Thankfully Google Calendar was on the ball and reminded me it’s Friday today. You know what that means. It’s time for a reader case!
I LOVED your book and am a big fan of your philosophy. With the recent pandemic, my company, decided to implement a RIF (Reduction in Force). I was subject to the casualty and after 24 1/2 years with the company, they decided to let me go with a severance package that’ll pay me through the end of November. I’m in no hurry to get back into the work force just yet so I wanted to see if you can help me analyze my current financial situation, offer any suggestions and determine how close I am to FIRE.
Gross Income: $237,574 After layoff $140,000
Monthly expenses: $5882
Automobile: $10,190 Interest @ 2.99 min payment $350/month
Mortgage: $27, 296 @ 2.75 min payment $1665/month
Zillow Home Value: $490,000 ($27K to pay off)
2 Cars Paid in full: $30,000
My 401K – $610,000
Wife 401K – $263,000
My Pension – $160,000
Wife Traditional IRA – $123,000
My Roth IRA – $50,000
Wife Roth IRA – $49,000
My Robinhood Stocks – $530
My HSA – $1000
Our Cash Savings – $24,000
Kids 529 plan – $135,000
Thank you for giving others hope in reaching financial independence.
First of all, I’m really sorry to hear about your layoff. Back in 2015, when all my ex co-workers were facing restructuring and outsourcing at my last job, everyone was terrified and walking around with a cloud of doom over their heads. So I know how scary it is. Losing your source of income and your identity all at once is bad enough, but even worse when you’ve been loyal to one company for over 24 years!
And now, given the lockdown due to the pandemic, this is happening more and more. So please don’t feel like this is your fault. You are not alone.
The one silver lining is that, looking at your numbers, it looks like you’ve been saving and putting away money all this time and most of your house is paid off, so you could very well be FI or close to FI.
Let’s find out if you ever have to go back to work again:
|Salary (gross):||$237,574, after layoff $140,000|
|Expenses:||$5882/month or $70,584/year|
|Investible Assets:||$610,000 (401K) + $263,000 (spouse’s 401K) + $160,000 (pension) + $123,000 (spouses’ Trad IRA) + $50,000 (Roth IRA) + $49,000 (spouses’ Roth IRA) + $530 (stocks) + $1000 (HSA) + $24,000 (cash) + $135,000 (529 plan) = $1,415,530|
|House:||$490,000 * 0.95 (after 5% real-estate agent’s fee) = $465,500|
|Debt:||$10,109 (car loan) + $27,296 (mortgage) = $37,405|
With an annual spending of $70,584/year, you’ll need $70, 584 *25 = $1,765,600 to become FI.
With investible assets totalling $1,415,530 and subtracting total debt of $37,405, you currently have $1,378,125 in liquid assets. That means you are $387,475 short of your FI goal.
But, you also have a house that’s nearly fully paid off. And along with your spouse, you will also have a gross income of $237,574 until end of November, after which severance runs out and your gross income drops to $140,000.
Let’s see how long it’ll take to make up this short fall.
During the Severance Period
Since you didn’t mention which state you are from, I’m going to be conservative and use NY state as a worst case analysis. You can adjust this value later using this free tax calculator.
So plugging in your gross income, you’ll net $171,371/year, assuming you max out your 401Ks. Since you spend $5882 per month or $70,584/year, you’ll save $171,371 – $70,584 = $100,787 per year, or $8399 per month but only until end of November.
From now until end of Nov, that’s 6 months, so 6 x $8399 = $50,394 can be added to your portfolio.
After the Severance Period
At the end of Nov, your severance will dry up, and your combined salary will go back down to $140,000 gross, which gives us an estimated $107,138 after taxes. Assuming expenses stays the same, this means you’ll be able to save $107,138 – $70,584 = $36,554 per year, or $3046 per month after December.
So from now until the end of this year, you’ll be able to save $50,394 + $3046 = $53,440
Putting it All Together:
This means, going forward, for subsequent years, you’ll be able to continue saving $36,552 per year. Assuming your spouse continues to work and their salary keeps up with inflation, you’ll get to FI in:
|Year||Starting Balance||Annual Contribution||Return (6%)||Total|
Now, this is based on the assumption of a conservative 6% return over the long term of 10+ years. Given the current pandemic situation, returns are much lower, so in the short term, your retirement plans will likely be pushed out. On the plus side, since you are still in accumulation mode, a bear market lets you pick up deals as stocks recover over time.
Given how close you are to FI though, you may be able to get to that target quicker and more reliably by reducing your expenses. For example, now that you’re no longer working, do you really need 2 cars? Also, can you cook more now that you’re at home with more time? We’ve found that due to COVID and all the restaurants being closed, we’ve dropped our expenses in Toronto to less than how much we spent in Thailand!
Also, since your spouse continues to work, you’ll be able to leverage something my buddy Carl at 1500days calls “WifeFI”, defined as “Financial Independence via convincing your wife to keep working”.
Now, if your spouse isn’t a big fan of this plan (how could she possible NOT be? *eyeroll*), let’s see if there are other options you can use to get to FI faster:
Ways to get to FI Faster
Since COVID-19 is causing us all to re-evaluate our expenses, could this be an opportunity to cut some fat in your spending?
With liquid assets of $1,378,125, that would produce a passive yearly income of $55,125. To get to that level of yearly spending, you’d have to cut $15,459 of spending per year, or $1,288.25/month.
Could you do that by getting rid of one of the cars, saving money on gas and insurance, and cooking more instead of ordering takeout?
I don’t know how much this cut would hurt so it’s up to you to figure out whether this is the way to go.
Or maybe just use “WifeFI” to get to the $1.77M number. Decide which would hurt less and proceed with caution.
Downsize or Local Arbitrage
So far we’ve assumed you’re going to live in your house and leave the equity tied up inside. But if you could sell the house, you’d be able to free up around $465,500 – $27,296 = $438,204 of equity.
I’m guessing you don’t want to do that since your kids still live at home. So, could you consider moving to another, cheaper location (aka “local arbitrage”) or downsizing to free up some cash? That really depends on whether your wife’s job can be done remotely, but if she’s still working right now with many states still partially locked down, it seems likely that her job can be done remotely. In that case, if you were to relocate to a less expensive city, or even another tax-friendlier state, that would have the advantage of keeping her salary, freeing up home equity by buying a less expensive home, and reducing your living expenses as well as cost of living for everything would go down. I don’t know if your spouse’s company will continue letting her work from home once things open back up, but if that’s an option, local arbitrage is worth considering.
Bottom line, given that you have a home that’s mostly paid off, $1.38M in investible assets, and just 3-6 years from your FI target if your spouse continues to work, you’re in good shape.
So even though, CanIFIREAfterLayOff has been laid off, their financial footing is actually pretty solid.
What do you think? Should CanIFIREAfterLayOff find another job after his severance runs out? Or find other ways to get to FI without having to go back to work?
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Earn a 1.7%* everyday interest rate. No Everyday Banking Fees.: Open up an EQ Bank Savings Plus Account! (Canada only, excluding Quebec)
LIMITED TIME OFFER: Earn up to 4% cash-back (Canada): With Tangerine's Money-Back Mastercard!
Travel the World: We save $18K a year by using AirBnb. Click here to get $40 off your first booking!
Don't Pay FX fees: We used the Scotiabank Passport Visa Infinite card to eliminate foreign exchange fees around the world! Plus, we got 35k points in the first year, and free airport lounge access too! Click here to sign up!
*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.