- How Has Covid-19 Affected Your FIRE Journey? Part 6 - August 10, 2020
- The Power Of Forgiveness - August 3, 2020
- Reader Case: Lawyer in Pain - July 31, 2020
Hi y’all! Can you believe it 2019 is almost over? Wow. It’s been another crazy year. So, before the year comes to a close, I’m going to tackle a reader case or two. Without further ado, here we go!
“Your gross/net annual family income:
Wife (Software Dev.): $120k gross
Me (Accountant self-employed): $399k gross (pre-expenses)
Total Gross: $295k
Net: $238k (Doesn’t feel like that much!)
Your monthly family spending: $21k
For any debts you have, please include:
- Primary Residence
• The interest rate: 2.75% 7/1 ARM
• Your minimum monthly payment: $5,150
• The outstanding balance: $997k
- No student or consumer debt
Any fixed assets you have (house, car, etc.)
- House Value: $2.2M
- 2 classic cars and dirt bikes: $125k
- Furniture and art: $35k
Any investments or savings you have (cash, bonds, stocks, etc.)
- Roth and 401(k)’s: $520k in your recommended ETF allocation (for the most part). About $20k of this is in cash that I am DCAing into the portfolios.
Now that we got the data out of the way, let me tell you about our story and where you and FIRE came into our lives…My wife and I, 39 and 40 respectively, have been trying to retire early since we graduated college in ’03. We thought the best way to do so was through real estate while also contributing to our 401(k)’s and Roth IRA’s along the way for good measure. So we would buy a fixer-uper, live in it as our primary residence for 2 years, then rent it out. Our plan was to keep doing this until we owned enough properties to have them cash flow our retirement.
It didn’t quite work out that way. While we were fortunate to have good tenants for the most part, we kept running out of cash for the down payments on the next project. As we would fix these houses up, we would do so without piling up debt and put a lot of sweat equity into them. Eventually, we decided to sell them all and buy a lot to build our “dream home”. This dream home is in the mountains of Park City, Utah, overlooking a spectacular lake. Mind you, the plan all along was to eventually sell this house and build the next one mortgage free while getting into the short-term rental game. I applied for a HELOC on our home to put our equity to use, but in the best of cases, we could only access a total of 80% equity, leaving 20% doing nothing for us…then we read your book.
I stumbled upon Quit Like A Millionaire in September of this year and it has completely changed what we thought was possible. I have a degree in Finance, a successful bookkeeping business and I have never seen the methodology you discuss in that book. After skeptically crunching numbers via FIRECalc.com, we realized that if we sold our house for the current market value (around $2.2M), we would net around $1MM. That combined with our retirement accounts, we would have just over $1.5MM to carry us through the estimated 57 years of retirement, especially if using geographic arbitrage.
Right now, we have plans to spend a month in Mexico in January and a month in Costa Rica this coming March as a trial run, then we put the house up for sale in April, which leads me to my questions and why I reached out…
While your book does cover what do with funds over the allowed annual contribution allowance for 401(k) and Roth IRA’s, it doesn’t specifically mention what to do in a case like ours where we will receive a bulk amount of cash at once, at the start of retirement.
- Should we take some of the $1MM proceeds from the sale of our house and max out the 401(k)s and Roth IRA’s for 2020 and put the rest into a non-tax advantaged brokerage account?
- I plan on keeping my business going remotely for at least a few years, so we won’t need fixed dividend income for the first few years. Do you still recommend a 60/40 equity/bond split even though those dividends will create additional taxes?
- What do you recommend for rebalancing a non tax-advantaged brokerage account? Wouldn’t we potentially realize gains, causing a taxable event? If rebalancing is still recommended, how often?
- Regarding dividends, VYM is an ETF with a 5* Morningstar rating and below average risk/above average returns. It has a .06% Net Expense Ratio and a 3.13% distribution yield. Is this a viable option for fixed income over some of the equity or bond allocation of your recommended portfolio? If so, how much do you think? If not, what argument do you have against it?
- With a one-time payout of $1MM, how long do you recommend DCA into the market? Mind you, we will not need any of this to produce income for at least 2 years as I plan on earning income from my business still.
- Your Investment Workshop does not include any Gold or REIT’s. Do you think there is a place for these in a FIRE portfolio? I assume no, or you would have included them, but I am curious as to why.
If this email doesn’t earn a reply or a case study on your website, I want to at least tell you that I appreciate your contributions to the FIRE community. You have already changed the way my wife and I look at things and I have already had a younger sibling read your book and while in his 20’s, started to work towards FIRE. Thanks again and best wishes.
Okay, first of all, I did a double-take at the words “I stumbled upon Quit Like A Millionaire in September of this year and it has completely changed what we thought was possible. I have a degree in Finance, a successful bookkeeping business and I have never seen the methodology you discuss in that book.”
Wow. We managed to surprise a finance nerd? Someone who not only has a degree in Finance but also their own successful bookkeeping business? That’s quite the compliment. *blush*
Anyway, let’s get to SEA’s numbers. As we always say on this blog, it’s time to…MATH SHIT UP!
|Family Income (net):||$238,000/year|
|Spending:||$21,000/month or $21,000 *12 = $252,000/year|
|Total Assets:||($2,200,000 – $997,000) * 0.95 (house) + $125,000 (vehicles) + $35,000 (furniture and art) + $520,000 (investments) = $1,822,850|
So, SEA is kicking ass when it comes to income, but crapping the bed when it comes to spending. Which is probably why he said “doesn’t feel like that much” about a combined family income that dwarfs what Wanderer and I made as two engineers!
Their spending $21,000/month or $252,000/year?! What the Hell? Are you snorting cocaine off gold-covered lobsters or something? Even with that substantial yearly salary, their cash flow is still in the red by $14,000 each year.
With that kind of spending, by the 4% rule, they’ll need at least $252,000/year * 25 = $6.3 Million before they can even think about retiring.
At their current savings rate of -$14,000/year, they’ll be able to retire in…hmmm…let me see…carry the one…oh right!
You cannot retire with a negative savings rate. That’s not how anything works.
This is actually fairly common in careers where the person’s perceived “status” is really important to their success. I’m talking doctors, lawyers, accountants, etc. They need to drive the fancy cars and thousand-dollar suits because it helps them be taken seriously and gain more clients, which in turn means more money, which in turn means more “status” spending.
Engineers are the opposite. We make good money (though not finance industry money), but we just bike everywhere while wearing crocs and ripped t-shirts because nobody gives a fuck what we look like.
BUT, if our reader decides to pull the rip cord and retire, guess what? They don’t have to care about impressing people with their status spending.
Why? Well, if they were to sell all their assets and turn it all a giant investment portfolio, that investment portfolio would be worth $1,822,850. And $1,822,850 x 4% = $72, 914/year. That’s more than enough to retire comfortably in most places in the U.S, given that the median family income is only $63,179. And of course, if you use geographic arbitrage it becomes an insane amount of money that you’ll be searching for ways to spend it in places like Mexico or Costa Rica.
So, the choice is pretty simple. Sell your shit, stop spraying money all over the place to impress jerks you don’t even like and retire comfortably now, or work forever and die at your desk for said jerks.
Now, that we’ve got that out of the way, let’s answer SEA’s questions.
Sell the house, max out 401K and Roth IRAs for 2020, and put the rest into brokerage account?
Yes. You may need to pay some tax on the capital gains, but after that shovel as much as you can into your tax-sheltered accounts.
Will I need dividend income for the first few years if I continue working?
No. Since you plan to keep working, you won’t need the yield to live on, so the Yield Shield is not necessary for you. You can also tolerate a more aggressive equity allocation for the same reason.
How often should I rebalance a non-tax advantaged account?
Once a year.
Should I invest in VYM?
*shrug* I can’t recommend individual funds because I’m not a licensed financial advisor and I don’t want to get sued. All I can tell people is what ETFs I personally own, and I don’t own that one.
How should I DCA a large chunk of money (ie $1 Million) into the market? I won’t need this money for the first few years of retirement.
For an amount that large, I’d do my DCA over a year. Maybe $100k a month for 10 months to make the math easy.
What about Gold or REITs?
We own REITs using the ETF XRE at around 5% of our portfolio. As for gold, we don’t own it directly because gold doesn’t produce anything, and our investing strategy is to own assets that pay us. We prefer to own gold COMPANIES via the index instead.
So there you have it.
What do you all think? Do you think SEA should be able to retire? Do you agree that $238K doesn’t feel like that much?
Note: With Christmas coming up, if there’s someone you care about you want to share with gift of FIRE, consider gifting them “Quit Like a Millionaire” . The response we’ve been getting from people, like the reader above, about how QLM has changed their lives has completely floored us and made us so grateful. Thank you!
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