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Long time lurker, first time poster and need a sanity check
Old 06-14-2014, 10:22 AM   #1
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Long time lurker, first time poster and need a sanity check

Glad to join this board! I would love your opinions on whether my plan seems reasonable for FIRE.

A little bit about us:

Over the past 10 years, DW and I have been turning around our financial situation from being fairly deep in debt (almost $400k in mortgage, student and car loans) to one where I can see some light at the end of this journey.

Currently, we are early 40s with 2 young kids. We have no debt, own our house and 2 (old) cars outright, and because of this, we can live a very comfortable life with expenses around 50k-60k a year.

Financially, we just passed $2M in NW. We have pre-tax investments (401k, IRA, ESP) of $500k. I have vested stock options of $300k and non-vested equity/stock options of $400k (non-vested not included in NW). We have $800k in after-tax investments and 40k in ROTH IRAs. We also have approximately $30k in 529s for both kids.

Wife is a SAHM and I work for MegaCorp. Recently my income grew and expected total target comp is $500k. We have passive income of $30k from dividends from after-tax investments.

Going forward, we plan to contribute $200-300k annually to our after-tax investment account until it reaches $1.2M, comprised of high quality dividend growth stocks to generate enough dividend income to cover our basic living expenses.

Afterward, we plan to invest in real estate (SFH) likely purchasing them with outright cash to produce steady rental income.

I am hoping that within the next 3 years, we flip from living off my income to living off of our passive income (as a test to how feasible this is).

In the meantime, I plan to contribute max to my 401k and 10k for 529s. For my "retirement" account, it is weighted 70% equity/30% bonds in vanguard funds, whereas, the 529s are in vanguard's target funds.

I am targeting FIRE'ing when I reach 50 or perhaps earlier depending on how things go at work with approximately $100k in passive income. I expect this income to grow slightly faster than inflation.

Does this seem like a good, conservative approach as I plan for FIRE? Also, I tried to use Firecalc but I'm a bit confused on whether I should use my pre-tax and post-tax and stock options (vested or non-vested) for the investments field.

Any advice on this approach would be most welcome!
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Old 06-14-2014, 11:14 AM   #2
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Welcome. Your income is so large, I'm not sure any of my experience will be applicable. You probably have serious tax considerations both now and when you RMD from any tax-deferred savings. But if you can live comfortably on 50-60K you are already FI. Now it's just a question of how long you want to stay in OMY (One More Year) mode while you pile up additional assets.

I would be cautious about counting employer stock options (especially un-vested ones) at some discounted value because they have a lot of risk.

Welcome to the board. I hope you find it comfortable here.
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Old 06-16-2014, 12:46 PM   #3
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You've done a great job saving. I'm impressed

I like your idea of living off your investments for a period before pulling the plug - that will highlight any discrepency between what you think you spend and what you really spend. Folks with large incomes often have large lifestyles. Alternatively, you can document all spending for a period of time (a few years?) to see if the spending matches your assumptions.

Make sure you account for taxes in your spending assumptions.

Good luck and welcome.
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Old 06-16-2014, 01:32 PM   #4
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Welcome. Well done ! Understanding your spending is so important to this process. There is a great FAQ on this. Don't forget to include the impact on healthcare (plenty of threads on this one for you to read).

Some Important Questions to Answer Before Asking - Can I Retire?
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Old 06-16-2014, 02:30 PM   #5
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Welcome to the forum.

Being a landlord is a job in itself. I'm not sure of the reason that you would want to take a big chunk of your savings and buy single family homes. This type of investment also is inherently higher risk than a REIT. If you want to diversify into some real estate, you could buy Vanguard's REIT index fund. You could do the same by buying other index funds. These all pay dividends (some more than others) but you are more diversified than loading up on individual stocks where a big part of their attraction is the dividend yield.

I would suggest you do some reading in index fund investing. An easy read is Andrew Hallam's Millionaire Teacher. A more involved book is William Bernstein's Investor's Manifesto.

Your passive income (IMHO) isn't as important as your total income. You didn't mention any pension or SS. This is real income although delayed from your initial retirement planned date due to your age.

Your biggest risk is that you have a lot of your assets tied up in your employer's stock. I've run across several former Enron millionaires that never saw the crash coming. They lost their income and their personal NW in one shot. Unfortunately, there's not much you can do about it until you retire other than keep that risk in the back of your mind.

You're in a great position with your great income. You seem to have good control of your expenses. I would recommend you not become overly focused on your future retirement and not use some of that great income to enjoy the present. You didn't mention any "fun budget" but you definitely need some.
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Old 06-16-2014, 06:13 PM   #6
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Awesome! I love the idea of living off of the dividends and rental income. While the SFH rental income idea is great, it is not something that I am willing to do. I don't want to be a landlord; I don't want to hire a management company and have them eat into my revenue stream; I don't want to have to deal with the upkeep and repairs, etc.

The pluses however are wonderful: someone pays for your mortgage while the property (theoretically) appreciates and you get to increase their rent annually at least by COLA if not more in most areas. I would love to do this if I had the temperament, but I don't so I stick with REITs. :-)

I think your plan sounds great. best of luck to you.
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Old 06-16-2014, 11:23 PM   #7
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Thank you for all the advice!

I track my expenses and update my finances on a quarterly basis for the past 10 years (I love seeing the trend lines). So I know that during the past 12 months, we spent $44.5k total.

Quote:
Your biggest risk is that you have a lot of your assets tied up in your employer's stock. I've run across several former Enron millionaires that never saw the crash coming. They lost their income and their personal NW in one shot. Unfortunately, there's not much you can do about it until you retire other than keep that risk in the back of your mind.
Agreed. I usually sell any vested RSUs or ESPP as soon as I can to minimize this exposure. This year, I also started selling some of my vested stock options. But it doesn't feel good realizing the gain as ordinary income and being taxed at such high levels.

Quote:
Make sure you account for taxes in your spending assumptions.
The $50-60k in estimated spending doesn't include healthcare and taxes. I haven't tried enrolling in one of the exchanges to figure out a good figure for premiums and deductibles. I'll read the link on that issue and incorporate. I agree that I need to understand and manage taxes. Thanks for the suggestion.

Quote:
You didn't mention any pension or SS. This is real income although delayed from your initial retirement planned date due to your age.
I'm thinking that if I can generate enough passive income from after-tax investments and real estate that grow at inflation perpetually, SS and pensions would be an added buffer. I plan to wait until 67 for SS. I will also receive about 3k annually from a pension when I turn 65.

Quote:
Being a landlord is a job in itself. I'm not sure of the reason that you would want to take a big chunk of your savings and buy single family homes. This type of investment also is inherently higher risk than a REIT. If you want to diversify into some real estate, you could buy Vanguard's REIT index fund. You could do the same by buying other index funds. These all pay dividends (some more than others) but you are more diversified than loading up on individual stocks where a big part of their attraction is the dividend yield.
Yes. Being a landlord is the biggest unknown for me. I don't know if I'll have the time or the patience. If I don't like it, I will likely choose a different path. I want to balance financial instruments with other type of assets.

While I understand MPT, I prefer individual stocks (over indexing) for my after tax investments because I like researching and tailoring my investments at individual companies. After a certain number of well placed investments, you naturally get diversification. I will be weighted towards large cap, value stocks with higher yields than the market with lower expense ratios (my trades are free).

Quote:
But if you can live comfortably on 50-60K you are already FI.
It sure doesn't feel that way
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Old 06-17-2014, 07:11 AM   #8
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Quote:
Originally Posted by Toocold View Post

Does this seem like a good, conservative approach as I plan for FIRE? Also, I tried to use Firecalc but I'm a bit confused on whether I should use my pre-tax and post-tax and stock options (vested or non-vested) for the investments field.

Any advice on this approach would be most welcome!
Welcome to the forum Toocold and congratulations on getting rid of all that debt.

FIRECalc assumes your taxes are part of your expenses, so the easiest way to account for stock options is to include their after tax value.
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Old 06-17-2014, 11:46 AM   #9
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Amazing turnaround. Congratulations!
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Old 07-04-2016, 09:02 AM   #10
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It's been 2 years since I first posted to this awesome community, and I'm proud to say that we've been making good progress. Quick snapshot of where we stand:

Primary investment (individual stocks): $1.2M
Retirement (401k/IRA/Roth IRA: 75/25 allocation): $.7M
Deferred compensation (distributed over 10 years after termination): $.3M
529 for kids: $120k
Vested stock options: $.9M
Others (primary residence/other): .4M
Pension at 65: 12k per year

Our spending has crept up to $62k. I calculate that we are technically FI, but I enjoy my job at megacorp so I'll not pull the trigger on RE just yet. I guess I'm in the OMY stage of FIRE.

My challenge right now is taxes. My investments are too concentrated in stock options, and I want to exercise them, but can't figure out a way to do this without incurring a huge tax burden. And to make it more challenging, I have a significant amount of stocks and options that will vest over the two next years. I already contribute max to 401k and defer 40% of my base and 15% of my bonus. I may increase the deferral % of my bonus to 70% to further minimize taxes.

I hate to say it, but is it time to talk with a financial advisor or a tax planner? What would you do?
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Old 07-04-2016, 10:08 AM   #11
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It might be. Or you could get a book that can walk you through the the steps. I would try that first; spending $20-$30 on a book might work as well or better than a $100/HR tax planner.

But perhaps someone else on this forum can give better, more detailed advice.
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Old 07-04-2016, 11:07 AM   #12
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Originally Posted by Toocold View Post
My challenge right now is taxes. My investments are too concentrated in stock options, and I want to exercise them, but can't figure out a way to do this without incurring a huge tax burden. And to make it more challenging, I have a significant amount of stocks and options that will vest over the two next years. I already contribute max to 401k and defer 40% of my base and 15% of my bonus. I may increase the deferral % of my bonus to 70% to further minimize taxes.
I am not aware of any legal way to avoid taxes for stock options. In our case, we never counted our stock options until after we exercise them, so the big chunk of taxes taken out are never included in our calculation. I would suggest do not count these as your networth until you exercise and have taxes take out from brokerage.

Not knowing what good timing is to exercise ours, DW and I simply do these in January or February.
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Old 07-04-2016, 12:11 PM   #13
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I am not aware of any legal way to avoid taxes for stock options. In our case, we never counted our stock options until after we exercise them, so the big chunk of taxes taken out are never included in our calculation. I would suggest do not count these as your networth until you exercise and have taxes take out from brokerage.

DW and I simply do these in January or February.
I was looking for ways to minimize taxes, not to avoid them altogether. One of the reasons why I'm deferring base pay and bonus was so that I'm in a lower tax bracket during the time of exercise. Do you exercise stock options once they become vested?

On early retirement planning, do you count any of the vested in-the-money stock options?

Quote:
Or you could get a book that can walk you through the the steps. I would try that first; spending $20-$30 on a book might work as well or better than a $100/HR tax planner.
I read articles on tax planning around in the money stock options but haven't found any that are useful. On investing, there are plenty and usually follow rules for indexing for longer term investments.
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Old 07-05-2016, 09:08 AM   #14
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I was looking for ways to minimize taxes, not to avoid them altogether. One of the reasons why I'm deferring base pay and bonus was so that I'm in a lower tax bracket during the time of exercise. Do you exercise stock options once they become vested?

On early retirement planning, do you count any of the vested in-the-money stock options?



I read articles on tax planning around in the money stock options but haven't found any that are useful. On investing, there are plenty and usually follow rules for indexing for longer term investments.
We tend to hold them until they are about to expire. We look at these as windfall. We have options from 2 companies. At one time, the vested values are in 7 digit, but after 2008, they are down to fraction of that. So, it is not a reliable asset to be counted. We do not count on them anymore. YMMV.

There are strategies to hold on to the option values, such as using collar or puts. But many companies do not allow shorting their own stock or buying puts. None of these strategies are straightforward unless you are an active trader.

So, I hold them for a long time. Exercise with cashless trade. Let them take about 1/2 for tax, and be happy to reinvest the remaining amount, then these are added to our NW.
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