FIRE comfortably at 42?

[joebloe]

Thank you for a wonderful website!

After being self-employed for 12 years, I'm seriously considering it quit just because I feel like it. My wish is to burn through all the money I have in this lifetime so that I go to my deathbed with zero or negative equity. I like my job just fine and is capable of another 15 years, but I don't want to unless I have to save more. Will my current finance allow me to I retire now to a lifetime of comfortable lifestyle? I am not counting on social security, though that would be a bonus. I not counting on stock market return, because I'm not in it. Are there any pitfall to watch out for? Anything to prepare for? How much should I withdraw monthly? Should I see a financial advisor? I can accrue another $200k for each year working but, again, I don't want to if I don't have to. Here's where I'm at if I retire now...

Age: 42, married w/ 10yo
Debt: zero
Cash saving: $1.9Mil
IRA: $400k
Home worth: $200k
Re income: $7k/mo net ($600k cash purchases of foreclosures)
Lifestyle: simple middle class, no smoking, no alcohol, no country club, drive toyota, foreign travel $10k-20k annually.

 

[growing_older]

You have net income of 7k ($84k per year) and another $2.3 million besides. Simple middle class lifestyle would probably be less than that, so you can withdraw $0 and meet your goals. I'm not sure I understand this question.

 

[obgyn65]

Hello Joe - to begin with, have you entered your numbers in Firecalc ?

Will my current finance allow me to I retire now to a lifetime of comfortable lifestyle?

 

[FUEGO]

My answer - probably. A few questions - How much are you actually spending?

My quick analysis of what your assets can produce in the way of income each year:

$2.3 million, if it were withdrawn in equal annual withdrawals for 45 years (until you were 87), would produce withdrawals of $51,000 per year adjusted upwards for inflation each year, IF your cash can grow at the rate of inflation (zero real growth). That's a big IF right now, but probably won't be over a 45 year period.

The $84k/yr net you get from $600k basis foreclosure properties works out to a cap rate of 14%. That is pretty high for totally debt free property, so it raises a little red flag in my mind as to whether you have allowed adequate cash reserves in your business plan to cover capital expenses and upgrades over the years to keep the property marketable. For example, if those are residential properties, you will have to either replace or overhaul many of the systems in the properties over the next 20-30 years or have very dilapidated, outdated structures that I imagine wouldn't produce the current level of income in 20-30 years.

But overall, it looks like you could spend probably $70k+ per year and not really worry too much.

 

[pb4uski]

+1 with FUEGO if you are willing to invest in a balanced portfolio of stocks and bonds. However, you say that you're not into stock market returns. It is unclear if you are indifferent to stocks or would prefer to avoid stocks. If you are unwilling to invest in stocks then you'll either need to live on less or work longer as equities provide protection against inflation.

Simple middle class doesn't provide adequate insight on what your living expenses would be if you chose to retire. You need to refine that to a dollar amount.

I would suggest that you use Quicken Lifetime Planner to sketch out your plan and how long your assets will last. QLP will provide a nice framework about the things you need to think through (including college for the 10 yo).

 

[FUEGO]

Yeah, simple middle class and foreign travel = $10k-20k annually doesn't exactly add up, which is why I questioned "how much are you actually spending"?

I am planning on a FIRE budget of $35000-45000 per year and in good years that upper end will include $6000-10000 of travel, some foreign. Except for the travel, it will be simple lower middle class (in terms of spending patterns).

 

[EvrClrx311]

I not counting on stock market return, because I'm not in it.

...

I can accrue another $200k for each year working but, again, I don't want to if I don't have to.

My opinion: you should not be avoiding the stock market for the rest of your life, specially if you want to FIRE at 42. Every rolling 45 year period on record for the US has seen stocks or equities return an average of 7.6% or more. On average that number is around 10.5%

My advice: find a good book on retirement investing, or if that isn't worth your time/stress... then a good adviser.

Inflation is your biggest threat right now (in my eyes). Not equities. Putting a good percentage of your assets in stocks will protect you from it. Sitting in cash is dangerous for the rest of this decade.

The average annual inflation rate for the 1970's was 7.06%, and in the 80's it was 5.51%. If those are coming for the next two decades, you'll see your $2,300,000 in cash reduced to $680,016 in today's dollars by 2032 even if you never spend a dime of it.

 

[joebloe]

My personal monthly day-to-day expense can't be more than $2500, not counting $1200 monthly HI that is paid through the business. There's the occasional $2k-3k in foreign travel; airfare and hotel are usually free from cc churning and biz expense so not too costly. I didn't bothered and have never done budgeting cause there's too much profit that gets put away anyway. Only when I saw this website recentlydid I really sat down to seriously add up all my total numbers. Is there a website/program to put down all my monthly expense? I'll check out the Quicken planner.

Every time I'm in the market I've lost money, long or short period, mutual funds or individual stocks. The only times I've repeatedly made money is churning AAPL on the downside, but eventually I'll lose too. I figured it's less stress and worry to accrue another $200k by working each additional year than depending on the mercy of the market. EvrClrx311 calculation looks scary so I'll consider retirement at 45.

While not being in the stock market, I spent the last two years gobbling up 15 newly built foreclosures and shortsells. The net rental income after all expense is $108k, but I subtract $24k as reserve for occasional vacancy and remodeling. Should I acquire more properties or sit on my cash? I don't manage them and have never seen them. Are these rental incomes considered capital gains for tax purpose with no medicare tax? Or are they considered normal income?

 

[Nords]

My opinion: you should not be avoiding the stock market for the rest of your life, specially if you want to FIRE at 42. Every rolling 45 year period on record for the US has seen stocks or equities return an average of 7.6% or more. On average that number is around 10.5%

If he's willing to fight inflation and cover his expenses through rental income (or a COLA annuity) then why would he need to invest in the stock market?

 

[EvrClrx311]

If he's willing to fight inflation and cover his expenses through rental income (or a COLA annuity) then why would he need to invest in the stock market?

Indeed there are plenty of different ways to fight inflation, a COLA annuity being one of them. My suggestion to put at least something into equities is just an opinion and what I would do in his shoes - putting my money to work for me.

He has a lot of options. I'm simply pointing out that that much capital sitting in cash does carry risk... many outside of this board tend to overlook that fact thinking that cash is king today.

Example: We saw many lose 33-50% in the 2008 stock market but recover quickly by staying the course... however losing 50% of ones buying power slowly to inflation over a decade is something a person probably cannot recover from without being forced back into the work force.

The properties are a nice thing to have that offer (pretty much) guaranteed COLA for the rest of OP's life. Because of that, I'd be even more likely to avoid putting any substantial amount of the other 2.3 million into annuities at his age.

Every time I'm in the market I've lost money, long or short period, mutual funds or individual stocks.

Are you familiar with index funds? You'll find plenty that have gained ground consistently over 10+ year periods... even in tough times like we're seeing now.

By the way, Welcome! fwiw, I'm young (30) and still at least 15 years away from retirement. That is why my advice and push to keep stocks and equities as a part of ones investment strategy might sometimes differ with others on the board. I am more risk tolerant because of my age. I tend to believe that the future will not mirror the past, but probabilities and predictive modeling can help us understand what is most likely to happen moving forward by looking back more than just a few years (which emotionally is all we're wired to deal with). Because of this I can't possibly see how stocks could be a bad bet over the next 20 years, quite the opposite. That said, I try to think what I would follow as I near retirement when giving advice to others. Though, I haven't actually lived it yet.

 

[pb4uski]

If ~$3,700 a month is the level of your living expenses plus $20k for fun, you now have enough in my view. I track almost all of my expenses in Quicken - it is fairly easy once you set it up. I have set up my banking and credit card accounts and they import from those institutions automatically and then I need to categorize the charges. Once you categorize one (for example, where you commonly buy gas for your cars) it will do it automatically. You just need to do a quick review that the categorizations are correct and change them as needed.

I think many of us invest in stocks through low-cost index funds and have a target asset allocation (between stocks/bonds/cash) and rebalance as needed. If done properly, this helps you to buy more when prices are relatively low and sell when prices are relatively high. Another easy approach are some of Vanguard's excellent balanced funds such as Wellington, Star, Wellesley, etc.

While rental real estate can be great, it has its hassles and some concentration risk if the area that your properties are in were to have a localized economic downturn. How do you not manage them and never see them? How are you sure that they really exist? Real estate rental income is ordinary income, not capital gains and is generally not subject to self-employment tax but is subject to the new medicare tax.

YMMV

 

[joebloe]

How do you not manage them and never see them? How are you sure that they really exist?

The management agency screened the renters, managed problems, contacted contractors, collected and deposited the rents for me. I guess the properties exist cause I have the deeds with the property tax bills plus the monthly bank statement showing incoming income.

 

[FUEGO]

As for expenses, I keep a spreadsheet where I keep track of what I spend each month. After the credit card accounts close after the first of the month, I download those, then copy my electronic checkbook register. Split the transactions into the categories I have, and I'm done, except for the occasional cash expense I enter manually throughout the month.

It sounds like you are in good shape and even if you are spending more than $2500 per month (before health insurance), you are probably ok. But some people come to this site thinking they spend, say, $2500/mo but their savings show they are spending almost all their income, sometimes double what they think (a few hundred here, a few hundred there ). But it sounds like that isn't the case with you - you actually have been saving a lot every year, so you can't be spending huge amounts of money (other than on tax probably).

As for investing in equities in the stock market - you could probably retire successfully without ever dabbling in stocks. But they do make great inflation hedges over the long term. I think your aversion to investing in the market comes from your experiences with losing money repeatedly, although your investment style seems more like short term speculating instead of long term (10+ year) investing. You could probably throw 20% of your liquid cash into a Vanguard Total World Stock Market index fund (Ticker symbol VT) and let it sit there forever. It will still pay you 2-3% in dividends each year (yields 3.3% right now), and it will go up and down in value, but I bet in 20 years it will be up, not down. And in your case, you will only be taxed on the dividends, not the capital gains (increases in value) each year. Plan on buying it and never selling it. Who cares if it goes down because you are never going to sell it, but it will keep paying you dividends every year.

Sounds like the rentals have a sufficient reserve fund to protect you from big capital expenses in the future and/or lower than average occupancy rates. They will also appreciate from the low purchase price if/when the real estate market they are in improves. I have heard about similar outsized returns from markets like Phoenix and Las Vegas, where decent relatively new residential units were going for $40k each and could be rented for big profits.

 

[Nords]

Example: We saw many lose 33-50% in the 2008 stock market but recover quickly by staying the course... however losing 50% of ones buying power slowly to inflation over a decade is something a person probably cannot recover from without being forced back into the work force.

For starters, losing 50% of buying power over a decade implies a sustained inflation rate over 7%/year.

In the second place, people who aren't accustomed to investing in the stock market are highly unlikely to persevere through a 33-50% drop. They'll sell out way before then... and maybe never buy back in.

Finally, it's a simplistic view of a cash asset allocation. I'd much rather have a cash stash losing a percent or two per year to inflation if I can get a chance to buy assets at a 20% discount once or twice a decade-- especially if the asset has a dividend or passive income. I can't do that if I used my cash to pay down a mortgage or to invest in some other asset (like stocks).

People get all wrapped up in chasing yield and forget that their discount for paying cash (with no risk) can easily top a risky high-yield pursuit.

 

[Mulligan]

Congrats Joe on your financial situation! I doubt anyone could argue against your game plan. You have income producing properties with no debt, bought at probably near market rate lows, and having a nice return with little hassle and aggravation by having properties managed. I would think that strategy is more secure than one who just has equities. We stock market investors are somewhat powerless to the whims of the market. I wouldn't think anyone buying stocks as a whole in relation to the indices right now would say they are buying at market lows. That is something you can say though about your real estate though. Good luck in your future plans.

 

[oldnews]

What to do with 300k cash?

I have just moved 300k into my schwab account, 45, no debt. Wondering about index funds?

 

[NW-Bound]

Schwab is one of 4 brokerages that I have accounts with.

Schwab has several ETF funds with very low expense ratios, such as 0.04% or 0.07%. You can buy domestic total market, or large cap, small cap, international, or emerging market ETFs, etc... As to selecting the right composition for yourself, you may need to do some reading.

 

[joebloe]

I have heard about similar outsized returns from markets like Phoenix and Las Vegas, where decent relatively new residential units were going for $40k each and could be rented for big profits.

I am content with my 15 income properties. However, a bank today accepted my $40k offer to another foreclosed property that can rent out immediately for $800/mo. My worry is, as someone mentioned, I am too greedy and concentrated in one sector and it could all come crashing down. Or should I stock up on more as long as they're cheap?

All projections and data from Europe to Asia is pointing to worldwide economic downturn next year and beyond. Should I wait for a equity market crash before getting in? Or will the unlimited money printing QE3 keep the market artificially high no matter what?

 

[WestLake]

I have 12 paid off rentals and they were about 75 to 80% of my net worth. I started getting heavy into stocks the last five or six years and now real estate is about 60% - I like being more diversified.

 

[marko]

I am planning on a FIRE budget of $35000-45000 per year and in good years that upper end will include $6000-10000 of travel, some foreign. Except for the travel, it will be simple lower middle class (in terms of spending patterns).

In some parts of the country $35-45K is considered subsistence living.... and the only travel is to the food pantry. Respectfully, can you really live 'middle class' on $35K? (45K minus 10K travel)

 

[EvrClrx311]

For starters, losing 50% of buying power over a decade implies a sustained inflation rate over 7%/year.

Inflation average above 7% has happened twice in the last 100 years (1920's and 1970's)... and above 5.5% has happened four times (1920's, 1940's, 1970's and 1980's).

In fact, over the last 100 years we've never had 3 straight decades with inflation averaging less than 5.5%... some people like to think that our government can control it today, but historically speaking I wouldn't count on anything less than 5% on average for the next 10-20 years; we've been hovering extremely low on the inflation scale for the last 22 years. We're due for a correction.

Inflation is a disaster to those of us who have accumulated wealth, but for those carrying massive debt (like our government and many in CC debt or underwater homes) inflation will actually slowly, ironically heal many problems by essentially taking from those with capital and giving to those without. It erases the size of debt while raising wages. It's where we're headed, I'm sure of it.

 

[Mulligan]

In some parts of the country $35-45K is considered subsistence living.... and the only travel is to the food pantry. Respectfully, can you really live 'middle class' on $35K? (45K minus 10K travel)

It certainly depends on where you live, and remember he has no debts. When my financial obligations of my child ends next year, I will be at that level. In fact, paying for my own HI, having a mortgage, factoring in a new car payment with no money down the road, and budgeting $500 on month on entertainment, my yearly retirement budget expenses are still slightly under $40k. My budget really isn't even determined by my finances, as I still have close to $2k a month left over each month ($3500 counting my PT job). I don't lack for anything, so yes it's certainly doable in the right location. Of course being single, and healthy certainly helps in my expenses being lower, though, but a lot of people also don't carry a mortgage, or car payment either while retired, which certainly lower their costs.

 

[FUEGO]

In some parts of the country $35-45K is considered subsistence living.... and the only travel is to the food pantry. Respectfully, can you really live 'middle class' on $35K? (45K minus 10K travel)

Sure! In 2011 the median household income was right at $50,000. Statistically, I would say that amount of income affords one a middle class existence, since half the households in the US live on less than that (some of which periodically visit the food pantry).

The typical $50,000 per year household works for a living. In contrast, I'll be collecting dividends, long term cap gains, and maybe a little IRA withdrawal here and there (in other words, very tax efficient income vs tax inefficient ordinary income from W-2 employment). I won't have a job and the payroll taxes and costs of employment associated with it (car maintenance and depreciation, gas, parking, tolls, work clothes, lunches out, paying a premium because I am limited as to when I can consume goods and services due to work). I will have a paid off house, unlike the typical household, so I won't have a mortgage.

$50,000 middle class income, minus:
3800 payroll tax (7.65% on $50,000
2000 state and fed income tax due to working
2000 Extra work expenses (commuting, work clothes, lunches out etc)
7200 Mortgage ($600/month)

From the $50,000 middle class income, we are left with $35,000 a year to pay for everything else that I will have to pay (except $10,000 per year foreign travel). I would say that is the amount to buy you an average middle class lifestyle in the US overall.

We can debate forever what does "middle class" mean. If one is accustomed to earning $200,000 or $300,000 per year and their peers are similarly situated, then I understand the difficulty in grasping how one could live a middle class lifestyle on $50,000 per year (working with a mortgage) or $35000 per year as an ER.

I'll throw a broad range out there for what constitutes "middle class": $40,000 to $250,000. A South Dakota teacher, fire fighter or police officer making $40,000/yr with a stay at home spouse can afford a middle class lifestyle, as could a pair of NYC apartment dweller 30-ish parents of young kids, whose jobs pay $125,000 each. Obviously the NYC couple could afford what most would consider more luxurious things, but at the end of the day, child care, taxes, and larger cost of living will eat up a huge chunk of disposable income. One couple might like steaks or burgers on Friday nights, the other might dine on molecular food at a gastropub.

And for our household, we are currently spending what will add up to around $35000 after adding in and taking our expenses that will change once we aren't working any more.

There has been so much debt fueled lifestyle inflation the last couple decades it is hard to remember that half the nation does actually earn less than $50,000 and gets along just fine, just not quite as fine as the other half. But that is ok!

 

[marko]

Holy crap! I gotta move out of the Boston area!!

Cheapo rents here are $14K a year (a nice place will set you back $20-$30K) and even if you own your house debt free, property taxes hover around $6-8K. Another $1200 for heat, another $10-15K for mandatory HI, plus taxes on income, excise, sales, meals, gas, road tolls... $50K won't go far.

Might be time...........sounds like I could double my lifestyle by getting out of Dodge!

But wait! I might miss all the legendarily pleasant and super friendly natives and the refreshing below zero winters!

 

[NW-Bound]

My nephew just moved to Manhattan, and rented a little studio for $2K/month somewhere near the UN. He said neighbors of his included a retired couple, who had a real apartment which would have cost quite a bit more. I guess if one wants an exciting city life, one has to pay. I am glad my tastes run cheaper.