Reader Case: Financial Independence After a LayOff?

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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!

 

Hello,

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
Debts –
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

Retire Investments:
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.

CanIFIREAfterLayOff

 

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:

Summary:

Category Value
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
1 1,378,125 53,440 82,687.50 1,514,252.50
2 1,514,252.50 36,552 90,855.15 1,641,659.65
3 1,641,659.65 36,552 98,499.58 1,776,711.23

3 years!

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

Drop Expenses

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?


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29 thoughts on “Reader Case: Financial Independence After a LayOff?”

  1. I think wifeFI is the best choice now. Like you said, they are in good shape, but a few more years of work and they’ll be golden. Just a couple things.

    One is that the 130k in 529, I am not sure how liquid that is since there are penalties associated with it if used other than for school related expenses.

    The second is their age and how far away they are from SS as this could help them.

  2. wifeFI! Ha, love it.

    Sounds like that’ll work for them. Getting to that $1.7m number sounds like it’s the best goal from the choices available.

  3. Wow…Thank you for posting our case! Our plan is to supercharge and pay off our house and car payment by November and be completely debt free. Being debt free would drastically reduce our monthly/yearly expenses to $3,842.00/$46,104.00 and would bring our FI number to $1,152, 000.00 vs. $1,765,600. In that case we would then reach FIRE and have more options. My wife is in healthcare and working remotely is not an option. We are decades away from claiming SS being in our mid to late 40’s. We wouldn’t necessarily stop working but FIRE would give us options to follow our passions and move away from the 9-5. Thank you for the analysis and maybe we’ll get to see each other in the future globetrotting. Cheers!

    1. I’m actually really confused that this case study didn’t follow this line of thinking. Paying off your debt by November means you’re FI already.

      1. I couldn’t agree more. I kept waiting for the “just pay off your mortgage and your FI number will decrease immensely”. Mathing shit up is great, but there must be sense and practicality behind the numbers. This kind of obvious oversight make me question if this is the right forum to be doing case studies.

        1. They did mention cutting costs some how though. Though I have to agree, paying off debt seems to be a Shortcut for them to get to FIRE since they have only about 47K left I think?

          It looks like most of their money is in 401k and Roth IRA. How do you get money out of this without getting hit with a fee? I thought you can’t access it until a certain age (59.5 years I think) (Recently finished residency and started investing recently, so I’m still learning. Has this topic already been talked about?)

        2. I totally agree. Paying the house off is obvious first thing to do. This shows the value of owning a house that Firecracker never even considers.

      2. Yeah, their car debt and house mortgage can be paid easily during the severance period. After that’s done their expenses drop by 34%… They are then FI with about 3.3% withdrawal rate!
        I think someone droped the ball here…

    2. Looks like we’re on the same age group, CanIFIREAfterLayOff.
      I was also a casualty of a layoff, forced to embark on my retirement life earlier. I knew I had achieved my FIRE number but decided to continue working, then that unexpected ‘call for a discussion’ came…;-)
      After being retired for 2+ years now, I can say that retirement life is unbelievably good. I do get some surprised looks every now and then, but never something negative, more of amazement actually. Many people asked me how, and I just referred them to this website as a starting place.
      Congratulations on your FIRE. It’s a beautiful life out here, you won’t look back.

      1. Thank you for the encouragement, Ben. I’m glad it worked out for you after being laid off. Care to share your story, how you got to FI and tell us what you are doing to pass the time now that you free?

    3. I totally agree with your choice, actually my first reaction was to pay off ALL the cars debt then the Mortgage before November and last to re-consider cutting your expenses by :

      1. Selling one of the cars.
      2. Review the reoccurring monthly expenses and adjust accordingly.

      The case study didn’t includes a breakdown of the 5.8K expenses so It was not easy
      to recommend where to trim the expenses.

  4. Great case study, one other item that was missing was the assumption that the 529 $ accumulated would cover the kids education costs in the future. maybe $130K is enough, maybe not. who knows. I just spent $80/year on my son’s NYU undergraduate education. thanks.

    1. I do not understand why the 529 was included in the list of assets assumed to be spent during retirement. That money is for education and therefore, not $$ that are going to be used for living expenses and thus, should not be included in an FI calculation. That coupled with the obvious oversight of the debt payoff scenario…I think this case study was a miss.

    2. In state public university for tuition/room/board is 28K a year. Academic and college major scholarship covers 8-10k a year. So the current 529 plan balance should be able to cover the four years for each child.

  5. Thanks for sharing but this feels obscene guys. You have over $1.4 million of assets, a house, two cars, extremely high incomes and the advice is to keep working for another 3 years? If you enjoy the work by all means go for it. But it feels like the priorities are all over the place guys. Put the spreadsheet away and realise you’ve been let go, you’re free now, you have time. Find what’s important to you and nourish all the parts of yiu which work may have drained out of you for the past few years. Forget about the money, you will have enough, simplify and spend a little less. This is an obscene amount of money 💰 to 99% of the world’s population, even about 80-90% of the USA or Canada. You are insanely rich. To think you need to be accumulating ever more seems really pretty crazy. If you were to volunteer in somewhere that needs you and that will be a real eye opener of how fortunate and wealthy you are. Use your precious time and energy and connections and health while you still have it. I know you can’t do that much in lockdown but look at how you can grow yourself, your skills, your well-being and sanity during this period🤯 rather than money. You can’t take that with you into the afterlife. Feel things. Do yoga. Make art. Dance. Get out of this cultural rut of wealthy boredom and get into what feels edgy and passionate and alive for you.

    1. There is nothing obscene with their situation. Also, I don’t see anything here to indicate they are crazy. I see the internet police are alive and well though.

      Virtue signal here. Virtue signal there. Virtue signal everywhere.

      Bored? Lonely? Have no friends? By all means, virtue signal. It’s free and requires little effort.

    2. Definitely obscene and not relevant to the other 99% of the world. You poor soul. How are you going to manage? Get a grip. This feels more like…look how much money we have guys! Please post more realistic case scenarios for now on.

      Oh…and it sounds like 3 cars no?
      #thestruggleisreal

      1. I’m sure the struggle is real for you. Outside of whining about it, what concrete steps are you taking to deal with it? That would be much more interesting than to hear you cry about your judgement of what you believe is obscene. You do realize what you’re doing is pointless and a waste of oxygen. Now that is obscene.

  6. Hi CanIFIREAfterLayOff,

    This is an excellent position to be in. In addition, both you and your spouse are in the 40s which will be the excellent and perfect time to spend the time doing the things which you like without any worry of monetary issues.

    WTK

  7. I don’t understand some of the plan that is outlined here, in addition to my comment about the mortgage above. I’m Scandinavian, so maybe I don’t have a firm enough understanding of the American system. This couple is in their mid-forties. Can they even access their retirement accounts yet? And isn’t a 529 account earmarked their children’s education, thus it can’t be counted on to cover living expenses?

    1. I’m 51 and WifeFI and you are correct that you typically can’t access money in 401Ks and IRAs until 59 1/2 without penalties. You would have to rely on cash, regular brokerage accounts and Roth contributions if both were to FIRE. So to me they are “cash poor”. They don’t have enough to bridge the gap for 10-15 years until they can access their retirement accounts. Personally I have 7 1/2 years until I can get at my IRA money so it makes sense for my wife to keep working (very flexible) and carry the health insurance. As long as we cover our yearly expenses we don’t have to save anymore (even though we do). We will let our investments keep working for us until we need them. If all our money was outside of traditional retirement accounts we could live off the interest and dividends.

  8. I love reader case studies, as someone who is focusing on paying off my home loan to reduce my annual expenses, I was expecting the pay off your debt with the cash payout too. No mortgage and no car debt

  9. There’s so much I’m not following in this case study.

    1.) Does their annual expense include mortgage and car payment?
    2.) The mortgage is so small it should be ignored from the FI calculation.
    3.) The 529 plan will be spent on their children’s education, how can it be included in assets to live off?
    4.) What are those tax advantaged accounts invested in? If they are in inefficient funds the SWR might be far lower than otherwise. They could be in cash for all we know.

    Liquid assets without the 529, after paying off the house and car are 1.24m, giving a reasonable safe withdrawal of 43k to 50k, not including taxes.

    Assuming the ‘expenses’ above include mortgage, they’re right on the hairy edge of FI.

    Saving severance might bump that up to 1.3m, but either you need a good accountant to set up SEPP to get that money out of your tax advantaged accounts, or you need to get a new job.

    Given the long retirement timeline, the uncertainty that comes with dependents, and the numbers, true retirement for both earners seems unwise.

  10. I think they should consider the Roth IRA conversion ladder to get some of that money out of the tax advantaged accounts penalty free. Since there is a 5 year waiting period to touch, they’d have to stretch the cash, brokerage, and Roth IRA contributions, which wouldn’t be enough. So a probably add in the WifeFI option or SEPP IRA withdrawal mentioned in a previous comment. You could also pull in some side hustles to lower your expenses and stretch out your cash further. Too many options available to say they can’t FIRE.

  11. I am making a good salary from home $1200-$2500/week, which is amazing, under a year back I was jobless in a horrible economy. I thank God every day I was blessed with these instructions and now it’s my duty to pay it forward and share it with Everyone, Here is what I do….
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