Critique My Personal Crash Plan

[WhatsIRR]

As I have seen the world change and my career stability approach zero the last 5 years I have gotten deeper into FI. I enjoy my work if I can keep it so I’m not chasing RE so much as preparing for a forced RE or change.

I work in oil and gas and have survived more layoffs than I can remember (5+) and a merger in the last five years. The company is solid but with the commodity cycles and the hard push to green energy I have growing doubts of long term prospects. If I can get 5-10 more years I’d be ecstatic.

I’m 38, married and no kids. My wife has worked the past 15 years but recently stepped out of the work force for 3-36 months. The plan is for her to eventually go back but if we end up enjoying her full time at home she may not unless forced.

I have zero hope of being able to replace my income if I lose my job, I expect a 50-75%+ reduction in salary/benefits and the possibility of having to go back to school.

I have little concerns of our “real” retirement at 60+, we have saved well in our 401Ks and if the market has any type of growth in the next 25 years we should be fine.

What I am worried about is getting there and that is why I am here to get some feedback on my current plan and actions. My goal is to grow our investments to supplement/replace future reduced earnings until we get to retirement.

Expenses:
$6,000/month. This lets us do/buy basically anything we want within reason but does not include vacation savings or major purchase savings. Bare bones spend would be in the $4,000 range. This does not include health insurance.

Debt:
Mortgage $130,000 @2.5% 14 years left

Assets:
Taxable: $350,000 ~$10,000/yr dividends
Commercial Real Estate: $300,000 -$20,000/yr in cash
Cash: $350,000

Plan:
Taxable is a mix of whole market ETFs and individual stocks. Individual stocks are Dividend Aristocrats and Dow Jones. I’m looking for 3% yields and value entries. I try to DCA into the ETFs and buy individuals as I find them. These are all buy and hold.

Work cash down to 2 year EF ($150k). Will probably do this with real estate as opportunities become available

Try to keep real estate and taxable accounts about 50/50 balance

If extra cash comes in (bonus/tax refund/3rd pay check/etc) 15% goes on the mortgage, 42.5% goes into ETFs and 42.5% gets held as cash for future opportunities. Our AA is 85/15 so I am using the mortgage pre payment as my bonds. A paid off mortgage removes $1,000 from our budget.

Use monthly surplus from salary to DCA into stocks/ETFs

What am I missing or should I look at differently? I’m trying to attack this from two side by reducing expenses by paying down the mortgage and increasing income with investments. I know we are losing some tax efficiency by holding dividend stocks in our taxable.

 

[RunningBum]

My opinion is that you should not pay extra on the mortgage, for two reasons:

1) 2.5% is a really good rate that you should be able to beat with investments. If inflation takes off even a money market or CD will beat that.

2) If you get laid off you may need liquid assets to pay the bills while you find another job. Real estate is not very liquid. If the mortgage is paid off you've reduced your expenses by $1000 but you still have at least $3000 left to cover. I'd rather have more liquid assets and $4000 to cover.

 

[Ramen]

If you enjoy working, have you considered going with the flow and entering the green energy field? You could increase your career stability, salary, and benefits in one fell swoop. You are young. Plenty of time to retool. Just an idea.

 

[HawkeyeNFO]

Whatever you do, don't pay the mortgage down now! At 2.5%, it's probably less than inflation. In other words, it FREE MONEY for you to borrow. I'd DCA 100% into equities if I were your age.

 

[WhatsIRR]

If you enjoy working, have you considered going with the flow and entering the green energy field? You could increase your career stability, salary, and benefits in one fell swoop. You are young. Plenty of time to retool. Just an idea.

Current plan is to ride this horse until it dies and then reevaluate if I need to get another professional job or go work at Academy. The pay and benefits are too good for me to walk away.

 

[pb4uski]

You're close to FI, but not comfortably there. You minimum basic spend is $48k a year and the commercial real estate provides $20k so you have a $28k gap, which is 4% of your financial assets... so just barely.

But if you can ride the horse for another couple years, between additional savings and asset growth it's get looking better every day!

Keep the mortgage... keeping the assets that it would use to pay it off gives you more financial flexibility if you lose your job. And get some of that cash invested.

 

[Sunset]

I have to wonder is that $20K real estate income actually NET ?

Why did the wife stop working for 3-36 months ?
I notice very few men consider not working an option in life.
Perhaps there is a good reason not explained.

 

[rodi]

A few questions.

- like Sunset I wonder if the commercial real estate $20k is an income or expense?

- You mention your 401ks being healthy - but don't mention how much... I guess you figure that at 59.5 years old you can start drawing on that. So is your plan just to get from age 38 to age 59.5?

- Does your $6k/month include taxes? You mention it doesn't include health insurance. Have you priced health insurance in your area?

You have $1M in assets outside your house. Those either generate $30k/year or cost you $10k/year. You need to come up with $72k/year plus health insurance.

I agree you should invest some of the cash into tax efficient growth stock. I also agree that paying off the mortgage doesn't make sense if you job may disappear.

 

[WhatsIRR]

You're close to FI, but not comfortably there. You minimum basic spend is $48k a year and the commercial real estate provides $20k so you have a $28k gap, which is 4% of your financial assets... so just barely.

But if you can ride the horse for another couple years, between additional savings and asset growth it's get looking better every day!

Keep the mortgage... keeping the assets that it would use to pay it off gives you more financial flexibility if you lose your job. And get some of that cash invested.

Some theoretical questions:

I understand the math behind keeping the mortgage at 2.5% while earning in excess of that in investments.

But looking at the straight FI side as you pointed out we are close to a baseline FI with the $20k and 4% draw on the $700k for $48k/yr. If we took $130k and paid off the mortgage we’d be left with $570k in assets and a baseline of $36k/yr. We’d need an additional $16k on top of the $20k to get the new minimum base. $16k pull on the $570k assets would be a more reasonable 2.8% draw rate. Would this not have a greater chance of long term success with the debt removed and the lower withdraw rates? (I am not planning to lump sum pay off the mortgage).

 

[WhatsIRR]

A few questions.

- like Sunset I wonder if the commercial real estate $20k is an income or expense?

- You mention your 401ks being healthy - but don't mention how much... I guess you figure that at 59.5 years old you can start drawing on that. So is your plan just to get from age 38 to age 59.5?

- Does your $6k/month include taxes? You mention it doesn't include health insurance. Have you priced health insurance in your area?

You have $1M in assets outside your house. Those either generate $30k/year or cost you $10k/year. You need to come up with $72k/year plus health insurance.

I agree you should invest some of the cash into tax efficient growth stock. I also agree that paying off the mortgage doesn't make sense if you job may disappear.

The $20k is net income to us. These are commercial syndications returning an average 7% cash on cash.

401Ks are currently at $1.7 million. They are all set Boglehead 3 fund style at 85/15 with 25% international. Assuming a normal market over the next couple decades we should be approaching or past $5 million at 60. You are correct that I am trying to build a taxable and real estate portfolio to survive on if I lose a job until I can access the 401ks without some of the SEPP or Roth conversions.

$6k does not include taxes. We have not priced any insurance. Honestly if it happened in the next few years I’d probably pick up a job to get some benefits. The investments will hopefully give me enough income to be able to pick up a $15/hr job with benefits and not have to sell the house or make massive changes.

I have to wonder is that $20K real estate income actually NET ?

Why did the wife stop working for 3-36 months ?
I notice very few men consider not working an option in life.
Perhaps there is a good reason not explained.

Real estate provide $20k net income to us.

Wife had grown to despise her job and it was bleeding over into our home life. Her income provided blow money and extra savings. She was already on all of my benefits. The range for time out varies from her just taking a summer breather and finding something this fall to going back to school for a new career.

 

[pb4uski]

Some theoretical questions:

I understand the math behind keeping the mortgage at 2.5% while earning in excess of that in investments.

But looking at the straight FI side as you pointed out we are close to a baseline FI with the $20k and 4% draw on the $700k for $48k/yr. If we took $130k and paid off the mortgage we’d be left with $570k in assets and a baseline of $36k/yr. We’d need an additional $16k on top of the $20k to get the new minimum base. $16k pull on the $570k assets would be a more reasonable 2.8% draw rate. Would this not have a greater chance of long term success with the debt removed and the lower withdraw rates? (I am not planning to lump sum pay off the mortgage).

Probably, but not by much.

FIRECalc with $700k portfolio, $18k inflation adjusted spend and $12k fixed spend on mortgage for first 14 years.

FIRECalc looked at the 121 possible 30 year periods in the available data, starting with a portfolio of $700,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 121 cycles. The lowest and highest portfolio balance at the end of your retirement was $391,326 to $4,703,161, with an average at the end of $1,998,225. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.

FIRECalc with $18k inflation adjusted spend and $570k portfolio (paid off mortgage).

FIRECalc looked at the 121 possible 30 year periods in the available data, starting with a portfolio of $570,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 121 cycles. The lowest and highest portfolio balance at the end of your retirement was $402,471 to $4,364,843, with an average at the end of $1,867,754. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.

Both cases are 75% equities.

 

[mystang52]

OP: If your wife no longer working was by choice, it seems to me she should get back in the work force........especially in light of your concerns about long term job security. Every year she works and contributes to household savings means that much more of a buffer in the event you find yourself unemployed years from now.

 

[yhoomajor]

OP - with roughly $2.7m under your belt and no kids, what are you afraid of?

Go enjoy your life. Let chips fall where ever they may.

 

[Scuba]

If I were in your situation, I would value liquidity highly given the uncertainty around your job longevity. I would not pay off the mortgage, nor would I invest in additional real estate since it is not that liquid.

How certain is the commercial real estate return? 7% sounds pretty good but I wonder how that will hold up in a recession?

Taxes and health insurance definitely need to be considered. Don’t know what health insurance costs in your area, but we pay about $1,500/month for a high deductible plan. We are in excellent health with no chronic conditions or prescriptions, yet medical still costs us well over $20K/year including the insurance.

 

[bada bing]

I worked a career in oil & gas and retired last fall just before I turned 62. Other than working in the same industry, my situation is significantly different, being older and single. I was bounced around in my career by mergers, buyouts and facility closures which made for a lot of drama, but it always was good for me in the end. I worked for 4 of the oil "majors" and got severance packages 3 times. The last one, last fall, was almost 2 years base pay. I never missed more than 2 weeks being employed and had the option to continue working last fall if I wanted. I'm not sure if you have a similar outlook, but perhaps your fears are overblown. Like I said, lots of drama, but remarkable stable income was what I experienced. Once you get close to FI, the oil biz soap opera becomes more entertaining and less threatening, particularly working for majors which tend to pay severance when they put people out. You're doing it right by focusing on FI. Lots of my co-workers suffered considerable angst from uncertainty because they absolutely needed every paycheck to arrive on time.

 

[The Cosmic Avenger]

As someone who paid off their mortgage early, I'll agree with those who say don't. Not that I regret it, but I probably would be doing even better overall if I had invested that money instead. However, since you're concerned about your income, I'd say put some or most of that "extra" money into a taxable brokerage account and/or a Roth IRA, where it would be easier to withdraw the money to pay your mortgage if needed. As long as you prepare for that kind of eventuality, you should be fine either way.

 

[EastWest Gal]

If a couple's MAGI is under $68K, there is a substantial subsidy through the ACA. And for 2021-2022, HI premiums are capped at 8.5%. And at age 38, HI premiums are far lower than they are in one's late 50s and early 60s.

Take a look at your skills and begin to retrain. You don't necessarily need a new college degree either. I know a college professor in the arts, with a PhD, that used Coursera courses to learn computer skills over a period of one year, became an Android developer, and works for a very large company now.

 

[mrfeh]

OP - with roughly $2.7m under your belt and no kids, what are you afraid of?

Go enjoy your life. Let chips fall where ever they may.

At 38 years of age? With $70K annual expenses?

I disagree.

 

[WhatsIRR]

How certain is the commercial real estate return? 7% sounds pretty good but I wonder how that will hold up in a recession?

Only time will tell.

It’s a mix of apartments and hotels. The apartments paid as planned through Covid but the hotels took a hit. Occupancy has rebounded so they should be back on track. I’d expect the apartments to continue to perform but without the planned rate increases but the hotels to slow with a reduction in leisure travel from a recession.

 

[rodi]

At 38 years of age? With $70K annual expenses?

I disagree.

That's a withdrawal rate well under 3%... It should be sustainable.

 

[mrfeh]

That's a withdrawal rate well under 3%... It should be sustainable.

For 50 years or more? I certainly would not.

 

[yhoomajor]

For 50 years or more? I certainly would not.

Also keep in mind that OP still has a Job and is not leaving it voluntarily.

So 2.7mil at 38, still with the job that made this pile of networth possible (apart from his spouse's contribution). My advice would still be same - Enjoy your life. Don't worry about any potential layoff.. If they happen.. so be it. It will not be end of world in your situation especially because there are no kids.

 

[pb4uski]

OP - with roughly $2.7m under your belt and no kids, what are you afraid of?

Go enjoy your life. Let chips fall where ever they may.

At 38 years of age? With $70K annual expenses?

I disagree.

Nah, I agree with yhoomajor.... $70k/$2.7m is only 2.6%... plenty safe even for a 60 year time horizon.

Per FIRECalc... $70k spend, $2.7m portfolio, 60 year time horizon.

FIRECalc looked at the 91 possible 60 year periods in the available data, starting with a portfolio of $2,700,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 91 cycles. The lowest and highest portfolio balance at the end of your retirement was $2,700,000 to $84,642,310, with an average at the end of $31,688,072. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 60 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.