- Does Gen Z Have it Harder Than Millennials? - November 20, 2023
- When To Pay Off Your Low-Interest Mortgage - November 6, 2023
- Reader Case: Can’t Work Because of Health Issues and Worried - October 23, 2023
I think it’s time for a reader case, so let’s dip into the ol’ mail bag and see what we find, shall we?
Hi Millennial Revolution.
Let me start by saying that I love your book! I discovered the idea of early retirement (and personal finance) about a year ago and I cant stop thinking about it. I took some days off of work so I have time to organize and plan how to get to early retirement – and got hooked reading your book. The section on taxes was amazing to me and something that I had not even considered. The section on building a portfolio is a lot to think about (especially since I put all my money in company stock only because everybody around me was doing it and then only VTI).
I would love if you could provide any thoughts into my situation. Here it is:
- Annual gross income: $235K annually from my job + $25K from dividends I own of my company stock (its a privately held finance company)
- Taxes: ~$65K 🙁
- Monthly spending: ~$11,500, which includes below. I am trying to reduce but some of these I can’t / don’t want to reduce and some are only for fixed amount of time.
- $1,900 for student loans (details below)
- $2,000 for loan payment used to purchase my company stock (details below)
- $2,000 for rent (I live in Los Angeles, CA)
- $1,100 for tuition for my child’s preschool. Expect to only pay for 1.5 more years until they start public school. Will also have another $1,100 for 2.5 years (starting in ~1 year) when my other child goes to preschool.
- $600 contributions to my parents / family
- Student loan: $77K balance at 2.55% interest; $1900 per month; scheduled to pay off in January 2025.
- Stock loan: $110K balance at 5% interest; Loan is interest only for monthly payments and annual paydown of 1/5 balance every March. Minimum payment is ~$450 but I pay $2K per month.
- Car loan: $29K loan balance at 0.90% interest; $557 per month
- Car: Last estimate was ~$33K but I owe $29K
- Investments / Savings:
- Cash: $110K (includes $35K for emergency fund and remainder was saving for house down payment – but I have decided not to buy anymore 🙂 )
- Traditional IRA: $8,400
- 401K: $3,800
- Stock: $18K ($10K in VTI, remainder invested via Betterment)
- ESOP: $644K (employee stock option, this was contributed pretax and my company matches 4%, I can rollover to IRA when I leave company)
- Company stock: $900K (I owe $110K on loan I used to buy this, my company is privately-held finance company, this money isnt very “liquid” – I have to leave company to get or ask board for approval to sell).
- Note: Current value is $78 per share. I have options that I can execute in December 2021 for 2,500 shares at $30 and in December 2022 for 3,000 shares at $46)
- I am in my 30s and have 2 young kids. I live with my kids and my boyfriend in LA. My boyfriend and I split expenses and have separate finances.
- I want to quit my job now for a lot of reasons. I am trying to think of how to do this as soon as possible, responsibly.
- I am calculating my 4% rule number at $90K per year, or $2.25M. However, I would plan on continuing to work at a different, more meaningful / enjoyable job – so don’t think I would need full $2.25M to quit.
- My ideal situation would be to work part-time / remotely so I can have time / flexibility to spend time with my kids.
- I would love to be able to quit in January 2022 after I execute my company stock options (details above). I am thinking if I can become a financial planner (love building spreadsheets and can’t get enough of personal finance this last year) and considering if I should get the CFP certification.
- Current savings / investing is ~$34K per year in:
- Contributing $16K per year for ESOP, where my company matches 4%
- Investing $6K per year in IRA
- Investing $12K in stock (VTI)
- Does paying down $3,900 per month in debt count as “savings”? (details below)
- The real question – is it really irresponsible to quit my job in January 2022? Do you think I should at least wait until after I execute stock options in December 2022 (so quit in January 2023)? Or do you think I should wait until I am closer to 4% number?
- For taxes – I think I will have at least $650K in IRA after I quit job. It would take me a very long time to do ROTH conversions and then withdraw. Do I have to accept paying some tax on this and convert more than $12K per year?
- For my company stock – I think I will have to sell all my stock when I leave my company and will just get lump-sum payment. I think my basis here is about $450K so a lot of gains. The good news is that I think worst case here is that I pay capital gains tax which is much better than my income tax rate. However, can I do better than this? I think having limited options since its private company and getting lump sum payment takes away the harvesting options for me. Do you have any ideas that I can look into / do here to reduce the tax bill?
- For building my early retirement portfolio – I understand how you guys decided on building your portfilio. However, my money is currently already somewhere. Any thoughts on how I can move it to be properly allocated?
I know this is a really long email :/ Any thoughts would be so appreciated.
And I should really say – thank you for your book and your blog and doing so much to educate others on how to follow your example!
This one’s jumped out at me because of her asset breakdown. Our reader works at some kind of financial company and she actually has quite a bit of money, but it’s almost entirely in a single stock: her employer’s!
It’s not unusual for tech or finance companies to offer stock options as part of their compensation plan, and you should definitely take advantage of it if it’s offered, but our reader really bet hard on her company’s stock. Not only is the majority of her net worth all in one company, she even took out a loan to buy more! That makes me super nervous, because if her company were to go under, it would take her job and all her savings along with it! Yikes.
But because this is a private company, she can’t sell her holdings until she retires or quits. So from a purely diversification perspective, I 100% agree with her that she should leave. Once she quits, she can cash out her company stocks and build a properly diversified portfolio that won’t get destroyed if her CEO does coke and crashes his Ferrari into a police car.
So…when can she quit? Let’s find out by…MATHING THAT SHIT UP!
Can She Retire Now?
So first of all, let’s look at her current situation.
|Income||$235k (salary) + $25k (dividends) = $260k gross, $195k net|
|Expenses||$11,500 monthly, $138k annual|
|Assets||$110k (cash) + $8,400 (IRA) + $3,800 (401k) + $18k (investments) + $644k (ESOP) + $900k (company stock) = $1,684,200|
|Debt||$77k (student debt) + $110k (investment loan) + $29k (car loan) = $216k|
If you’re wondering what an ESOP is, it’s an Employee Stock Ownership Plan. Typically, it allows you to purchase the company’s stock at a discount, and can be structured as a pre-tax vehicle, as our reader seems to have done since she mentioned it can be rolled over into an IRA after she leaves.
She has stock options vesting in December 2021 allowing her to purchase 2500 shares of her company stock at a strike price of $30. Doing so would cost her 2500 x $30 = $75k, but the resulting stocks would be worth 2500 x $78 = $195k, for an instant profit of $195k – $75k = $120k. Yowza. No wonder so much of her money is in her company’s stock. Those stock options are worth nearly 50% of her salary!
So let’s assume she executes her options. How does this change her financial situation? Well, let’s see…
|Income||$260k gross, $195k net|
|Expenses||$11,500 monthly, $138k annual|
|Assets||$1,684,200 – $75k + $195k = $1,804,200|
At her current spending level, she would need $138k x 25 = $3.45M. That’s a LOT of money, and even with her impressive $1.8M total assets, it’s still only halfway there.
That FI target seems WAY too high, even for someone living in L.A., and I think I know why. She’s trying to aggressively pay off her debts, which is great, but those higher debt payments are screwing up her FI target calculation. The FI target calculation is a multiple of your living expenses, but those debt payments will eventually end, so by including her debt payments in the calculation we are assuming that she’s going to be paying that amount forever, which is wrong. So let’s cash out her stocks, use the cash to pay off all her debts and see if that makes the numbers make more sense.
|Income||$260k gross, $195 net|
|Expenses||$11,500 – $1900 (student loan payment) – $2000 (investment loan payment) – $557 (car loan payment) = $7043 monthly, $84,516 annual|
|Assets||$1,804,200 – $216k = $1,588,200|
Her new FI target is $84,516 x 25 = $2,112,900. We still can’t quite make the numbers work for her to retire, but it’s a lot closer, so that means paying off all her debt is definitely the right thing to do.
So unfortunately, from where I stand the answer is no, she can’t retire quite yet on January 2022 on her current trajectory. But all is not lost, because she has options. Specifically, she has 3 paths she could go down to make the numbers work. And here they are:
My natural inclination whenever someone writes in from LA is to yell at their spending. That being said, GoldenHandcuffs isn’t doing too bad. $84,516 in annual spending for a family with 2 kids in LA, the land of $25 burritos, ain’t too bad. But it’s still quite a bit higher than the national average family income of $67k.
To be able to retire on these numbers, our reader would have to bring their expenses down to $1,588,200 x 4% = $63,528, or 24.8% less. Is it doable? Probably, but unfortunately they didn’t break down their spending in enough detail, so I can’t comment on where she could potentially cut her spending, but you know what always works? Moving out of L.A.
Seriously, L.A. is easily the most expensive city in the U.S. to live, since not only is housing and food super expensive, but everyone needs a damned car. By moving to a cheaper location in the U.S., you’d be able to drop your expenses, simplify your life by getting rid of your car, and retire now. And if she’s willing to move outside the U.S., living on that kind of budget becomes trivially easy.
Work Part time
But not everyone wants to uproot their family. I get that. I mean, we can grab our backpacks and leave the country at any moment, but she has a boyfriend and 2 small children, so that solution will be a little bit more complicated. Another option is something she’s already open to: Working part time.
To calculate how much her new part-time/remote gig will need to pay, we simply take the amount her portfolio will be able to support and subtract it from her projected spending, so $84,516 – $1,588,200 x 4% = $20,988.
Can she find a part-time or remote job paying $21k? Well, that depends. If her post-retirement aspirations are to be a podcaster or artist, that might take a while. But she says her passion is in spreadsheets and personal financial planning. That should be pretty doable, as a quick search of Associate Financial Advisor jobs on Glassdoor.com showed an average salary of $58k. She wouldn’t even have to get her CFP first either, as she entry-level jobs don’t require it, and it might make more sense to see if she even enjoys the work before committing 1-2 years towards the certification.
And finally, there’s always the option of sticking with her current job for just a little while longer.
If we go back to her original income and spending numbers (before we pretended we paid off her debts), we would have a starting balance of $1,684,200.
She’s saving $34k per year in her own accounts, and has options worth 2500 x ($78 – $30) = $120k at the end of this year, and 3000 x ($78 – $46) = $96k and the end of 2022. And her FI target is $2,112,900 (to cover living expenses) + $216k (to cover her debts) = $2,328,900. Put it all together and this is what we can project…
3 more years. It could be faster or slower depending on whether she gets more stock options in 2023, but I think it’s a pretty good estimate.
She also has some questions that need answering. Specifically…
- Should she retire next year?
- Maybe. You have 2 options that will let you do that: Reduce your expenses by relocating or find a financial planner job that pays at least $21k
- ROTH conversion
- It’s supposed to take a long time, but you can still access the dividends produced by your IRA to fund your retirement in the meantime by using the cash-asset swap technique that we describe in our book.
- What about taxes for her stock options?
- That’s an excellent question for your finance department. How this will be taxed depends on how your compensation package is structured, but I don’t have visibility into that so I can’t answer this for you. When I was working, my stock options were taxed when I made my purchase, resulting in very little capital gains when I sold, but if your plan only reports capital gains when you sell, your tax bill may be in the $65k – $75k range when you leave. Check with your company and update the above calculations accordingly.
- How to build her retirement portfolio?
- I highly, highly, highly recommend moving away from a single-asset investment strategy and diversifying your holdings using index funds in retirement. Check out our Investment Workshop for the specifics.
This reader case turned into a bit of a tome, but it was certainly interesting (if you find stock option plans interesting anyway, which I certainly do).
What would you do? Would you relocate? Work longer? Or just quit and figure things out later? Let’s hear it in the comments below!
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