- Full Circle - September 11, 2023
- Yield To Maturity Might Be Indicating a Bottom in the Bond Market - August 21, 2023
- Reader Case: Nomadic Superfans! - August 7, 2023
Today’s reader case comes from two self-professed superfans who are trying to pull off this awesome awesome nomadic lifestyle, so how can I say no to that?
Hi Kristy and Bryce,
My husband and I have both consumed your book (favorite personal finance book btw) and your blog. We’ve had the dream to quit our jobs and travel the world as nomads for years, so when we found your book, it spoke to us as a blueprint to success. We love your approach to FIRE, you guys are badass.
We’ve made some serious and honestly kind of tough changes to reach FIRE in hopefully 2 years… we just sold our house in SoCal and “right-sized” back to a condo we will rent for cashflow when we live abroad. However, we’re feeling concerned about some things, particularly how we’d leverage our retirement accounts pre-59.5, everyone keeps telling us we can’t and shouldn’t touch that money til then.
Could you please help analyze our situation?
Thank you!!
NomadicSuperfans
Our current situation:
- We’re both 36, childfree, paying off a condo in SoCal that we just moved back into, it can cash flow about $750/month net when we FIRE and travel abroad.
- We also just received a windfall from selling our house – $560,000. Gotta be honest, we’re feeling overwhelmed about investing it all at once and what to invest it in. Especially now in this random bull market.
- Our goal once we achieve FIRE is to spend $50,000 / year living abroad due to geo-arbitrage, so we’d need about $41,000 in investment returns and $9,000 from our condo.
- We’re quite conservative and thinking of a 3.5% safe withdrawal rate so we’d need $1,171,429 invested + at least a $60,000 cash cushion
Per your site:
- Your gross/net annual family income: $245,000 net ($330,000 gross) in 2022
- Your monthly family spending: $6,200/m ($74,400/yr) BUT with geo-arbitrage in retirement our goal from researching costs in Europe/Latin America/Asia is to reduce spending to $50,000/yr ($4,167/m)
- For any debts you have, please include: condo ($180,000 mortgage remaining, $1,018/m all-in payment, 3.75% w 22 years to go). No other debts.
- The interest rate
- Your minimum monthly payment
- The outstanding balance
- Any fixed assets you have (house, car, etc.) Condo is worth $580,000. Cars are worth $27,000.
- And investments or savings you have (cash, bonds, stocks, etc.)
- 401k’s and Roth IRA: $509,300 (60% ROTH 401K, 40% PRE-TAX 401K) and $62,500 in Roth IRA
- Savings/cash: $658,360 – this is our home sale windfall + emergency funds. Looking to invest this in ETFs (30% bonds, 70% equities?), maybe a bit in Fundrise to get Real Estate exposure (what would you do??)
- Brokerage taxable: $236,809 in mix of stocks and S&P index funds (looking to sell stocks and buy all index funds once recoup some lost value of stocks)
- I-Bonds: $10,500
- CDs at 4.5% (18 month term): $12,600
- Company stock: $53,000
- Cash value life insurance: worth $26,000, I’m thinking of cancelling this to recoup the money, it costs me $300/m and I’m in the negative after 9 years
Some reader cases come from very dire circumstances, while others come from a position of “I think I did everything right, can you double check my work?” This one definitely falls into the latter category.
NomadicSuperfan read our book, clearly reads our blog, and has made some very smart financial moves to get where they want to go, which is living the dream of being a pair of retired child-free nomadic travellers. Retired Early, No Kids, so…RENK? Doesn’t really roll off the tongue like DINK but never-the-less is pretty awesome.
Their first move, which I have to applaud them for, is realizing that owning a lot of real estate and nomadic travel are diametrically opposed financial goals. When you have a huge expensive house sitting empty because you’re on the road, not only do your costs jump since you’re paying for accommodation twice, you can’t venture too far for too long lest some hobo take up residence in your empty unguarded McMansion.
But they do have to do something with that money, they can’t just leave it sitting in a pile of cash. Yet they’re scared of investing in today’s crazy hot stock market in which the S&P 500 has already up 17% YTD. How much higher could it possibly go?
Well, you have to remember that even though yes the S&P 500 went up that much in 2023, that’s after shitting the bed to the tune of -21% the year before!
If you put the two years together, it actually doesn’t seem so crazy that it’s rebounded this much.
Arguably, there’s still plenty of room to go up, since technically it hasn’t even hit the level it started 2022 at yet.
That being said, I totally get the nervousness associated with committing $650k+ all at once into the market. If J.L. “The Godfather” Collins were here, he’d probably tell you to stop being a big baby and do it all as a lump sum, but not everybody has the nerves of steel he has.
My suggestion is to Dollar-Cost Average your way in. Divide your cash up into 12 equal slices. Then every month, you get one slice invested into the markets. For our reader, that means each slice would be $650k / 12 = $54k. There can be some flexibility here. If during the month, stocks take a dive and go on sale, you can grab it for a bargain, but at the end of the month, you have to pull the trigger for that $54k even if you don’t see a good entry point. This way, you can still take advantage of market volatility while ensuring that within a year, you will be fully invested.
Math Shit Up!
Let’s see where NomadSuperfan stands. If we add up their investable assets, we get $509,300 (401k) + $62,500 (Roth) + $658,360 (cash) + $236,809 (brokerage) + $10,500 (I-Bonds) + $12,600 (CD) + $53,000 (company stock) = $1,543,069.
Given that their projected spend while travelling is $50k, this means that I don’t have to do those table projection things I normally do, because they are Financially Independent!
Not only that, they’re comfortably Financially Independent. $50,000 of spending with a $1,543,069 portfolio represents a withdrawal rate of 3.2%. If we plug these values into FIRECalc, we can see that these inputs give us a 100% success rate, so no need to Yield Shield, or emergency funds, or any of that other stuff I recommend to hedge against sequence-of-return risks, because they don’t need to worry about them at all. This portfolio statistically can’t fail.
That also means that they can afford to up their equity exposure. 70% equity / 30% bonds is a good starting point. Aggressive, but not scarily so. And remember, this allocation can change over time, so as they get more comfortable managing their portfolio, they can up this to 80/20, or even 90/10 as their risk tolerance grows with their confidence. However, there’s no point in going past 90/10, since you lose the ability to rebalance after that.
Let’s Talk Real Estate
Normally, this would be the part where I question their decision to own real estate at all, but in this case it actually makes a lot of sense (I know, GASP!).
They locked in a 25 year fixed rate mortgage at 3.75%, and boy are we not gonna see those kind of numbers again for a while. I’d hang onto that one.
So for a little over a grand a month, they get a permanent address they can come home to anytime, and while they’re travelling they can have it produce income! Given that their living expenses are already taken care of by the rest of their portfolio, this income can be treated as bonus “fun money.” That’s a pretty good set up if I do say so myself!
But as for the question about using FundRise to gain exposure to the real estate market…
I’ve had a lot of people ask me about FundRise lately for some reason. For those that aren’t aware, it’s a real estate investing platform where you can buy “shares” of apartment buildings as income producing investments, and while it’s an interesting idea, I have to say the fact that it’s not covered by any deposit or brokerage insurance similar to FDIC or SIPC scares the crap out of me. If that business goes under, everyone’s money would go “poof,” so for that reason, I can’t recommend it in its current form.
If you want real estate exposure in your portfolio, use Real Estate Investment Trusts, or REITs, which I wrote about in more detail here. They serve essentially the same purpose, and if you hold it in a brokerage account like Vanguard or Questrade that DOES have investor protection via SIPC (American) or CIPF (Canadian), then that’s a lot safer way to do it.
Retirement Accounts and Insurance
Finally, let’s briefly address these last two questions NomadicSuperfan has.
Can she safely access her money in her 401(k) and Roth IRAs before 59 1/2? Yes. By building a 5 year Roth IRA conversion ladder, which we wrote about here and in even more detail in Chapter 13 of our book, she can gradually melt down her retirement accounts tax-free and penalty-free.
But what about all the financial experts who warn her against it? You’re going to get that kind of pushback from the traditional financial advisory industry, because to be perfectly frank, they think the idea of retiring in your 30’s is kind of nuts, and that people who do it are giving up decades of tax-free compounded growth in the pursuit of YOLO-style splurging.
However, by making your withdrawals from your 401(k) in-kind rather than as cash, and within your standard deduction, which is what we advocate, you’re not giving up any compounded growth at all. You’re simply making your own money more accessible while taking advantage of an opportunity to pay no early withdrawal penalty or taxes.
And finally, the insurance policy. Cash value insurance policies are a form of permanent life insurance, which you don’t need anymore. The point of life insurance is to make sure your family is financially secure if the breadwinner gets hit by a bus, but financial independence is itself a form of self-insurance. Your portfolio ensures your family’s financial needs are taken care of without you, so it does the same job as life insurance.
That being said, each policy is different, so talk to your insurance provider about the most efficient way to cash out this policy. Just be prepared to endure a whole lot of salesman double-speak as they try to convince you to stay.
Conclusion
I’m always a little surprised when someone reads our book or blog and then actually goes out and changes their life because of it, but that’s exactly what NomadicSuperfans has done. They’ve done a fantastic job setting themselves up for a nomadic FIRE life, and as someone who’s lived that lifestyle for the past 8 years (minus the pandemic), we have to say that it’s easily the best decision we’ve ever made.
You do, however, have to push through the wall of FUD that your friends, family, and the traditional financial advisory industry is going to throw up in front of you. Don’t take it personally, they’re just trying to look out for you, but if there’s anything we’ve learned in 8 years of retirement, it’s that achieving FIRE in your 30’s and travelling the world is everything it’s cracked up to be.
10/10, would FIRE again.
What do you think? Is NomadicSuperfan ready to embark on their nomadic lifestyle, or is there something they aren’t considering? Let’s hear it in the comments below!
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Bonds are not what they were in a portfolio . i went 100 % equities (broad based ETF’s )
Bonds seem to follow the overall market now so its not possible to do the traditional rebalancing .
You definitely have a point about that over the past 18 months as bonds have been hammered by rising interest rates. But as interest rates stabilize, I see us moving back into bonds at some point.
I love seeing these success stories. The one suggestion I would have is to consider lending money privately. It’s not for everyone but it has worked for me. They could use the cash from selling their house to lend at 10%. This is actually the only reason I still own real estate as we borrow 80% of our the value of our home and lend that money out. This is really great when the rates are low as the spread can be 6-8%, which is your profit.
The best part is that I don’t need to re-qualify when I borrow the money. Which is great because I don’t have a job any longer so I would not qualify for a mortgage.
Now, the big caveat is to only lend when there is at least 40% equity in the property that you lend money on. Nobody wants to ever have to do a foreclosure in order to get your money. I typically lend to people who are looking at buying an investment property or building a garage at their home. They usually just need private money for a year or so until they can qualify for a normal mortgage. The best part is that you get your 10% plus a 1% lenders fee and the borrower pays all expenses and legals, the number is a true net number.
It may sound risky or complicated but it is more stable and consistent than anything I have done in the stock market. Our house is worth $900,000 and could rent for about $4,000 a month when we start travelling. This, plus the approximately $4,500 per month in income from our private loans would give us enough to live abroad very comfortably without touching any other assets of ours, allowing them to grow.
Just my two cents.
Is there a service or broker you use for this or are you literally writing checks to people directly? Genuinely curious as to how this works.
You can definitely use a broker, it ends up costing the borrower an extra 1% up front. I’ve chosen not to use a broker only because I have a bit of a handle on it and I try to save the borrower as much money as I can because the interest rate is already high.
The benefit of using the broker is that everything is taken care of and they get the mortgage commitment drawn up signed by everybody and then sent off to the lawyers. I have used a broker a couple of times if I’ve got money sitting and not lent out. I will call brokers in my community and ask if they have any people looking for private money. But a lot of my loans have come from word of mouth.
I will say that it is probably the only reason I own my own and if I stop lending out on the equity I would probably sell it and just rent. And I am extra extra cautious on who I lend to, I don’t like risky loans because I want to be able to sleep at night and not be stressed. I’m happy to help anybody anytime with this, I don’t offer this advice to make any money I just like sharing successes as I have learned so much from people like yourself and others.
My husband and I are in a very similar position…getting very close to being able to pull the proverbial FIRE trigger! My biggest expense concern is health insurance. I’ve looked a little at the ACA site and it seems we’d still fall into one of the highest “income” brackets (since cash taken out of our brokerage account would count) which looks like it’ll be about $600/mo. Also being SoCal based Americans, I wonder what this couple’s plan is for that necessary monthly expense – off they’ll use ACA our plan to stay fully out of the states and go with an expat option.
Very nice! It warms my heart to see so many people hitting their FIRE goals.
One note though: withdrawals from your investment accounts don’t count as income because that’s just moving your own money from one account to another. Withdrawals from your 401k/Traditional IRA count though, but it’s possible to keep that within your personal exemption so that your total tax bill is $0.
Hi Kristy!
I was actually waiting for a case like this to show and I’m so glad it did.
I just reread workshop 6 and still a little confused on the spillover section.
If 401k’s and Roth IRA: $509,300 is the Tax Shield, is the spillover found in the following categories: Savings/cash: $658,360, Brokerage taxable: $236,809, CDs: $12,600
Company stock: $53,000?
Thanks!
In terms of tax optimization, savings/cash, the brokerage account, the CDs and the company stock would all be treated the same as a taxable investment account. If they end up with an a 70/30 allocation, the 30% bonds should be put inside their 401k, and the equity portion should first be put in their Roth, with the spillover being in their taxable account since that’s a tax efficient place to store their equities.
Thanks Wanderer!
If they are keeping a condo valued at approximately 25% of their total net worth for income, why invest in more real estate? I would go with stocks and bonds if keeping the condo for income. As it currently is, 25% in real-estate, 75 % in stocks and bonds. If they use 30% of liquid assets for bonds, that’s about 22% net worth in bonds, 25% in one condo, 77% stocks, very roughly speaking.
I dunno, they like real estate?
Honestly, if it’s done as a REIT, it means no extra work from them so it’s fine. REITs can be used to increase your income in retirement, so that might be a good reason. I’ve used them for that reason in the past.
Withdrawing money by traveling from the 401K, to the Roth IRA and then from the Roth IRA before 59 and a half penalty free – brilliant !!
Hold up! You’re looking at storing your value in bonds, stocks and RE without even mentioning the hardest money on earth? Ever. If a financial advisor or FIRE proponent isn’t suggesting Bitcoin on some level, it should be a huge red flag. Literally all of the “diversification” investors seek is because they’re trying to find a better, non fiat money…..which is why there’s a huge monetary premium attached to all traditional asset classes. Bitcoin is in the process of de- monetizing all of that. Should probably grab some just in case it catches on?
Good luck with trying to convince others of that.
“If a financial advisor or FIRE proponent isn’t suggesting Bitcoin on some level…”
😂
Are you a specuvestor? You come off as one.
What, and have it all be stolen by grifters like Sam Bankman-Fried? No thank you.
Firstly, well done NomadicSuperfans, you guys worked hard and are ready for the RE part. Genuine question for Kirsty and Bryce, are bonds still worthwhile to have in our portfolio. I have read your book and understand why its there but bonds are not risk free and most of the time have an almost nil return. I have chosen instead to invest 30% in a ETF consisting of banks and another made of utilities only as even in downturns their demand seems to be stable. Also 2 years of emergency cash. Thanks
I’ve exited bonds in favour of preferred shares for now for that reason, but as interest rates normalize I could see an entry point back into bonds in the next year or so. I’m writing an article on that now, so stay tuned!
Congratulation, welcome to the FIRE country; the tiny land of the overachievers!
With the intention of giving you additional encouragement and confidence, this FIRE case is very similar to ours 9 years ago when we pulled the triggered.
Our portfolio has doubled since that very first day!
Here are few more ideas for your preparations:
1.Financial
a. Our average withdrawal rates are in the range of 2.5 – 3.0
b. Yearly withdrawals were to maintain 3 years of living expenses
2.Relationship
a. Be mindful that if you and your spouse plan to travel aimlessly and carefree in
foreign countries, establish clear responsibilities, recurrent and meaningful daily
tasks and most importantly few hours of private time.
b. Watch each other backs, as your partner is only reliable and trusted friend beyond
the border.
c. Keep in touch with close friends and family at home. I would advice that you do not
tell them that you are retired. They will not understand and worst of all, the
achievement will create confusion in the quality of your friendships. Give them a
white lie “you are working remotely online!”
3.Health
a. Make sure you are healthy, receiving health care outside of the United States or
Canada (wealthy countries) from the lesser can be of concerns in most cases;
especially, in emergency situations. Regardless, how cheap the medical services
which are rendered.
b. Workout and stay active just as at home.
4.Humanity
a. Be humble when you come to others’ countries, don’t get angry when the culture
values are not in-line with yours. It is time for you to leave that country if it
bothered you on most days.
b. Make little and positive contributions to the people who are less fortunate than you.
By definition, lower economic development countries are less fortunate. The
citizens in these countries are facing the same difficulties as poor families back
home.
Good luck on your next “SHINY OBJECT”!
This is all great advice. Sounds like you have things figured out, my friend!
Dollar cost averaging per JL: giving up gains instead of avoiding losses; what if the big crash happens at month 13, once you’re fully invested? If you are a long term investor, what happens in the next 12 months doesn’t matter. Babies indeed.
for the 560K$, why not
1.Half now,
2.Half in CD (don’t forget cash is king today and it’s better than a classic 3.5% year withdrawal, and there is a lot of country in the world, today, with low inflation) and start a 36M DCA
Just my anal retentiveness and I know that interest rate is great (compared to annual average expected returns on a portfolio) but I would use a lot of that “windfall” to pay off the condo. And then I agree with some others saying that this counts as your real estate investment portion of your portfolio. Now the thing I don’t like about condos is the ever escalating fees, especially if you got in on a new condo. Those are things you have no control over in your future. I doubt I will ever own a condo (or other collective housing with monthly fees) for that reason.
Agreed. Condos are usually the worst way to own real estate, but in this case it’s actually a pretty reasonable portion of their net worth.
Thanks SO MUCH Wanderer and Firecracker for reviewing our case study! And much appreciated to everyone in the community who chimed in! This post really pumped us up and proved that we’re on the right track / have arrived (woot woot).
One follow up question for you and the community:
We have about 60% of our total 401k as Roth 401k, so we’ve already paid those taxes upfront. Does that still qualify for the 5 year conversion ladder in order to then withdrawl gains penalty-free before 59.5?
Totally understand it can be done when converting pre-tax 401k dollars into the Roth IRA, but if the money is already Roth in the 401k, it’s not clear if that counts as a conversion or merely a rollover from the 401k to the Roth IRA. Basically we’re trying to understand if there’s any way to access our Roth 401k gains before 59.5 without the penalty. Haven’t found any article yet that clarifies this and depending on the answer, it does affect our financial situation.
Also, amazing to hear you’re both still loving the Travel FIRE lifestyle. One of the top things people tell us is “Won’t you get tired of travelling”? We tell them, “Heck no, we’ll slow travel, meet people, feel like locals and of course visit friends/family to stay well connected.” But hearing it from people who’ve taken this path and are happy is very reassuring.
You guys are super inspirational… well done!