- 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?
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.
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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