Wanting to make the right steps forward

[KRABE]

Hi,
I am 28 my wife 30. Both professionals with decent careers living in a low cost of living but also a lower income generating area. I joined hoping to learn more and make sure that I am not only able to retire early but also make good decisions so that I can pass on what I expect to inherit and then some to my two daughters.

Right now we have the following assets
~125k - Home Equity - Balance of mort at 3.75%/30
~ 28k - 16.66% interest in a Commercial Real Estate Partnership ~140k-(loan of 112k) Generating ~10% return on the 140 which is paying my loan.
~40k - Wife Retirement 15% with 6% match all future raises are going towards increasing retirement.
~12k - My retirement - I have no 401k or other matching option as I am Self-employed
~6k - Investment in my Professional partnership
(~47) - Vehicle Loans - my biggest splurge also mostly paid for by work reimbursements so no cash out of pocket. We do have equity in the vehicles (based on kbb about $32k) so if we did decide to just leave there would be additional cash there.

Life events
Within the next 2 years I anticipate a financial windfall at work that will generate about 2.2M pretax
Upon the death of my parents (please let it be a long time coming) I will inherit assets in trust =~3.3M (value not likely to appreciate greatly)

Goals:

I am hoping to be able to semi-retire within the next 5-6 years. My wife and I plan on working our busy season and spend the rest of the year homeschooling, traveling and generally being there for our family ( A stark contrast the the last 4 years) We are throwing around the idea of a sailboat or an RV and traveling as part of the above. We are not necessarily opposed to going back to work after our kids are in college but would rather not.

Questions:
Like I said above I am trying to learn what to do and how to prepare for the financial windfalls that I expect and to make sure that I am able to leave my two kids and inheritance equal to what I am to receive and yet retire plenty early. Any thoughts tips and advice would be greatly appreciated.

Having trouble finding the proper asset allocation since we are so young and do plan on having a withdrawal rate that allows the pot to continue to grow.

 

[Mdlerth]

The more experienced forum members will no doubt observe that the expenditure side of the equation is just as important as the income/asset side. Even you were in current possession of both your work windfall and your inheritance, you should give some thought to what you expect your costs to be.

Even if colleges, sailboats, etc. are far off in the future, one thing you may be certain of is that they won't be free.

Welcome to the forum. I look forward to hearing reports of your progress!

 

[KRABE]

Mdlerth,
In response to the expense side of the equation:

In 2016 we lived on about 75k. However, this was an up year. We finished our basement at a cost of about 12k, and enjoyed the birth of our second daughter even though we didn't enjoy the medical bills associated with it ~6k. Which brings us right in line with some of our past expenses of around 50-60k. This also includes the debt retirement payments that are required.

 

[socca]

Wherever there is a killing to be made (whether via business, inheritance, or some other mechanism), there are predators lurking eager to deprive you of your windfall (and a legal system - at least in the US - more than willing to accommodate them). The lesson: don't count your chickens before they hatch!

 

[KRABE]

Wherever there is a killing to be made (whether via business, inheritance, or some other mechanism), there are predators lurking eager to deprive you of your windfall (and a legal system - at least in the US - more than willing to accommodate them). The lesson: don't count your chickens before they hatch!

Besides, that lesson which I agree with entirely. What tips do you have to ensure that I am not deprived? The legal issues and the tax issues we have nailed down fairly well. I am a transactional Attorney and my wife a CPA.

 

[socca]

I am a transactional Attorney and my wife a CPA.

It looks like you're covered for self-defense.

I do my budgeting and planning assuming no windfalls of any kind, even though it appears that one or two may be coming. This is the least risky approach, although it could be argued that I'm unnecessarily reducing my standard of living as a result (e.g. why live in a middle-class neighborhood when I could go upper-middle instead?) However, I'm satisfied with this approach. YMMV.

 

[joesxm3]

Eric Townsend at macrovoices.com had a series of podcasts to fill in the holiday gaps titled Accredited Investor Academy. You can listen for just registering as a user.

The first episode of the academy was the story of how Eric sold his software business and was lured into the "private banking", "exclusive services" of a large well respected firm and fleeced out of a couple million dollars. You might find that interesting.

Two million is probably a little small for the type of investing Eric talks about, but the story of his turmoil was very interesting and informative. I like listening to his weekly guest interviews, but most here consider it financial porn.

A lot of the people here seem to have a lot more money than I do and to have done very well after learning how to manage their own investments using a style based on establishing a reasonable asset allocation plan and sticking to it.

They recommended the book, The Four Pillars of Investing, to me several years ago when I started with the forum. If you want to read about asset allocation strategy that is a good book. The historical threads here have a wealth of good information, assuming you have the time to browse them.

I am happy for you being so young and off to such a good start and for having the sense to come here for advice.

One word of warning regarding your windfall (based on no knowledge of what it is). A friend of mine had stock options at peak of the dot com bubble valued at close to 3.5 million. He did not know much, so he exercised them as soon as each batch vested even though the company was not yet public. When the company went public, the stock was north of $60 a share, but there was some "clerical snafu" that prevented employees from selling their stock. During the next month, insiders dumped and the price dropped to $30. He then was greedy and held on hoping it would go back up, but it dropped to fifty cents a share. Bottom line, he did not get his three million and ended up owing $40,000 in income tax.

Good luck to you and your family.

 

[DrRoy]

I think you should only plan to draw about $30K/yr from the after tax proceeds of your business event. You would need to earn the rest, as well as keep up with inflation.

 

[KRABE]

Socca,
I agree. Though I have set these up to be fairly certain. The business windfall might be about 500k short from the projection, but otherwise, I am to the point where they can be pretty certain. Which is why I am trying to figure out how to protect them, one of such ways is not to read the what would you do with a $1M thread......

Inheritance would take a complete and utter collapse of the economic system in the U.S. to disappear. I set up the trusts to protect myself and my siblings, my parents are comfortable and still working because it is all they have ever known. It is likely that the inheritance will grow but like you say don't count your chickens until they hatch so I do not even mention or factor increase in as a safety net, whereas the 3.3M is pretty secure.

So I guess what would you do to protect and appropriately utilize the windfall that I "may" receive? I can figure out the tax aspects of it but what about the investing and safe withdrawal rates and some of the other "best" ways to maximize the payoff from past efforts.

 

[joesxm3]

KRABE,

How much do you know now about asset allocation strategy and the effect of asset mix on risk/return ratios given long time periods, which you will have being so young.

If you have not studied much in this area, I would suggest that you read a few of the good books that explain how asset diversification provides equivalent return with less risk and on how the longer your investment time frame, the more aggressive your asset allocation needs to be.

My personal worry is that we are at a point of very high valuations in both the stock and bond market. That makes me want to read research on how this might reduce the average investment return over the next 10 or 15 years. You, of course, would be investing with close to a 60 year time horizon.

There were also some threads and a link to some other blogs that pointed out that most of the original safe withdrawal rate theory was based on a time horizon of thirty years. You should seek out some of the newer research that deals with longer time horizons.

There are several retirement calculator tools that you might want to play with. There is a current thread on the Fidelity tool.

Perhaps, your wife, being a CPA, would be good at making a customized planning tool using Excel. That might allow you to fit your situation more closely, but I made such a sheet with apparently much too pessimistic assumptions since the commercial tools give me a much better outcome than my Excel sheet does.

 

[Golden sunsets]

KRABE; I apologize if this sounds harsh, I don't usually try to burst balloons but I'll give you my honest reaction to your post. I'm unclear on how you plan to support yourself if you retire in 4-5 years. You have no after tax savings at this point, minimal pretax savings and a lot of debt, part of which is in depreciating assets. Even if the 2.2 million becomes a reality, the after tax lump sum would be closer to 1.6 million depending on what state you live in. You mention buying an RV and/or a sailboat to occupy your time. Come on! You're 28 years old!!! You and your wife have excellent earning capacity that if harnessed can set you up for life if you take a longer view. Dreaming of your future inheritance which is likely many decades away is, I think, clouding your judgement. The possibility of inheriting a lump sum in your 60's should not influence how you live life between 30 and 60. Our children who are 32/34 will inherit a similar amount, but are in no way allowing that fact to influence their lives at this point. They aren't even counting on help with funding their future children's education. My best advice would be to start saving regularly, a large portion of your income in both pre and post tax accounts. If you are self employed there are numerous vehicles that would enable you to save pretax. Read up on Asset Allocation at various stages of one's life and become educated on SWR's at retirement. The earlier you retire, the smaller the SWR. Stop dreaming of your inheritance and build your own wealth. Sorry to be a Debbie Downer.


Sent from my iPad using Early Retirement Forum

 

[KRABE]

GS:
I appreciate your negativity. It is one of the reasons I posted here. One of the worst things in life is a group of yes (wo)men.

We do not have significant other assets in part because we have been eradicating student loan debt over the last few years.

I graduated undergrad with an accounting major at the age of 20. Worked all the way through high school and undergrad and could have paid off my student loans in full at that time. I did, however, decide to get my Masters in Accounting and my JD after that accumulating a pile of student loans. During this period my wife had a serious accident that pretty much wiped out all of our cash reserves and then some. Since that point, we have finally found our footing, and this was the first year we were able to heavily contribute to the goal of financial independence.

Within the last 5 years we have retired over 100k in student loans, were able to come up with a significant down payment on our house, and restart the retirement savings. Over the next 5 years, I hope to be able to put between 30-100k a year depending on how business goes. 2017 looks like it will be on the higher side assuming no surprises that we are not insured for.

When I say that I am self-employed, it is not true self-employment. I thought it was apparent that I was part of a partnership which limits some of the tax deferral options. In fact that partnership already has a simple plan put in place that I am bound to. Said simple plan contributes 2% of our net income to it every year and I am able to put in 12500 a year on my own. Any other contributions to our pretax retirement accounts are severely limited.

I probably should not have mentioned the inheritance because for the most part; it does not factor into the here and now decisions other than I do view it as a safety net allowing me to take a few risks financially that I would maybe be more skeptical to take.

I do not plan on contributing to my children's high education in anyway shape or form that I do not derive a tax benefit from. So saving for that is not part of my financial goals. I am a firm believer that the best way to have an unproductive child while at college is for them not to have to worry about paying back the loans upon their graduation. I had too many associates at college that spent a significant portion of their college careers making what I perceive as all of the wrong choices.

To address the support after 5-6 years. I would have whatever we are able to put away during that period, the 2.2 which works out to about 1.54M after tax plus earnings for 4-5 years. We are able to work seasonally for a number of years, while not at the same rate but we are able to work and more or less structure the rest of the income so that other than the SE/FICA tax pay no tax. (for example we can both earn up to about 30k a year before we are not able to make that go away through tax deferral vehicles.) If we end up in a situation where the market takes a significant downturn the plan would be to go back to work a little more/tighten our belts.

The Sailboat or RV would be instead of maintaining a permanent residence, something that we would need to change because of state income tax rules. We would sell the home and vehicles and use whatever equity we have in them at that point towards the purchase of either a floating or a mobile home for us to live in and travel.

Running the numbers through Fidelity indicates that we have a high level of success (even if I don't enter the inheritance) when using the significantly below average option.

Firecalc also indicates a 94%+ chance of success when using a fixed withdrawal rate (as adjusted for inflation) of 60k. The 60,000 a year is rounded at a 3% withdrawal rate, assuming a 5% return, until first withdrawal date, on the 1.54M ((1,540,000.00*(1.05^5)*.03)=58964.20), which to me seems higher than we would need, especially if we will more or less be eliminating any tax bills at that level, and have the ability to generate additional revenue seasonally.

Please pick apart my thoughts and plans, it is why I am putting this out there. I was hoping to play the role of idiot starry-eyed dreamer for a little while longer but I think I am not getting enough response or critique good bad or otherwise because I appear to have presented myself as someone that is too much of a dreamer vs someone who is able to get down in the nitty gritty.

 

[Golden sunsets]

Krabe; An articulate summation and I now have a better understanding of your financial life. It is no surprise that a lawyer and a CPA, would have a fairly well defined plan. You seem to have "done the math" to the extent that you can and I don't see any flaws in it. I'm not sure really what you are looking for from the members of this forum. Surely you already have an instinct for what AA you should have at different points in your life, and have an idea of what your risk profile is. The only issue I see is the concept of not having a home, other than an RV or a sailboat. Travelling is great fun and can be done economically if one chooses (check out GoCurryCracker's blog), but it gets old after a while for most of us. YMMV.

And again I apologize for the negative commentary. You no longer sound entitled, which was my first impression.

 

[KRABE]

GS:
I hope to have people pick apart my plan. Being "partly" done this early is a foreign concept to us but was one that we think we might enjoy.

I apparently went at this from the wrong angle. Generally, I have found in my life that "being stupid" you are able to gain a wealth of ideas that allow for you a person to look at things a different way than what a person that presents such a plan will sometimes garner. Again, group think and yes (wo)men are dangerous people to have in your corner.

Is the 3% to agressive? Is a 90% equities portfolio to great of a risk?

No need for an apology.

 

[Taxman59]

You have a plan that spans 50-70 years. A 90% equity allocation is reasonable. You have the ability to cover some or most of your expenses with seasonal work to cover seriously down years. Given the high valuations at this time, holding a year's worth of expenses to not be forces to sell into a down market is wise.
Be wary of lifestyle creep. You have a large brokerage account and you want to upgrade to a slightly larger boat, and that's only $XXX, the account will hardly notice it. Over a few years, this creep will make a big dent in your account. Be careful!

 

[exnavynuke]

Just a quick note, your calculation for the withdrawal above assumes you don't retire at your "earliest" retirement date mentioned in your first post, and it still comes up slightly short of your current spending, before adjusting spending up for inflation as well. Even without lifestyle creep, your spending is going to increase over time if you wish to maintain your current standard of living. Make sure you're accounting for that increase in spending as well. Accounting for investments going up but forgetting that expenses will go up as well could be very damaging to your plan.

For instance, your $60k spending now, with 3% inflation, 7 years from now (2 to get to the inheritance, and another 5 to account for the 5 years of investment growth in your earlier calculation) is almost $74k by the time you withdraw the $59k at a 3% withdrawal rate, leaving about a $15k shortfall. I personally do projections for 2-4% inflation adjusted spending in my planning to see how those variables could significantly impact my plans.

I know you said you could work, and might plan to, but I imagine that you wouldn't want to NEED to work every year to curtail a shortfall. As such, I might suggest planning for what you would need to not require working at all, then compare that to negative possibilities on spending and return rates. I'd also carefully consider how willing your family would be to reduce expenses in the face of negative market years early in your retirement, and if working a little longer to provide a bit more of a cushion might be a better alternative.

Overall, you're in a great position for someone your age though, and you've got plenty of time to fine tune your plans.

 

[socca]

I notice that many people who start thinking about ER and have dependent children have about $1M per capita. These folks are also MUCH older than you. I'm not claiming that your analysis is faulty - I'm just passing this along FWIW (not much). ?

 

[Bryan Barnfellow]

KRABE,

One thing to think through is the effect on your children of growing up in an RV or on a sailboat. What about schooling? Even home schooling involves social/athletic interaction with other kids. Dating? Hanging with other kids? I have an idea of what kinds of things they will gain. Some certifiably unique. But, what are they giving up in your plan? Where might they be shortchanged? It would be good to spend some serious time mapping that out with your spouse.

That said, good job so far and best of luck going forward. This is an amazingly supportive and knowledgeable community. It will sustain you along many dimensions as you mark your progress in your plan.

A final thought. When my wife and I decided in 1992 to create and follow a plan to achieve financial independence and then retire early, we had 23 years ahead of us. It was daunting; but we were also building careers at that time, so FIRE was central to our thinking but not always the first thing we thought of each day.

How does one make a journey of 8400 days and stay focused? We kept ourselves on track in two ways: I became an expert (to the best of my ability) on how to invest our savings. I spent countless hours becoming the best steward of our nest egg. She became the budget manager extraordinaire. We respected each other's domains, but allowed ourselves to be challenged. We also taught each other a lot.

During those years there were many cool things (toys, vacations, new expensive passions) that we (meaning mainly I) were tempted by. My wife and I developed a knee jerk response to these potential plan disruptors by simply asking, "But is it in The Plan?" Or, "But what about The Plan?" Thus, "The Plan" became a kind of third member of our marriage, always part of our discussions, sometimes frustrating the hell out of us, but mostly helping guide us to our present nirvana--financial independence and ER!

Please note that we did give in sometimes (art, vacations, audiophile obsessions); but lived way below our means for the most part. We lived our life fully those years and don't regret any of our decisions.

I hope this is helpful.

 

[KRABE]

Taxman59: That is a major concern of ours and frankly if we can withstand that creep and continue to save for the period after we earn that windfall until we go will be one of the biggest test of whether we are ready to go or not in my opinion.

ExNavyNuke: Your point is well taken but 15k/.03=500,000.00 in future dollars. SO... we would need to save exclusive of the Business windfall about 448000 between now and then. So I need to average about $89.6k a year. However, I am not sure how the commercial property asset comes into play in that number. So potentially that number is less as the returns from that will reduce the debt against that asset considerably between now and then thereby increasing my assets as well, though I think I will probably just factor that into the 89.6k average that I need to save each year. A hefty number, maybe we will need to take one more year or two to accomplish that.

Socca: Your point is noted, however, (and maybe this is me justifying things to make it work) if you never develop the taste for campaign it is easier to live on a beer budget. I am hoping that by us living somewhat frugally now, and continuing on that we won't have to unlearn many years of higher taste and creep that those further along may have developed because they didn't have the plan early. I need to think about this more and where the justification for the 1M per capita number comes from.

Bryan: This is something we have actually discussed quite in depth, and even communicated with a number of people that have chosen that life. I was surprised by how many there were and we do feel that we can manage not only the homeschooling aspect of things but the social schooling as well. That is one of the reasons we might choose to work for a semester each year regardless of the financial benefits. If we can come back and enroll the kids in the spring semester of a school while we both do tax work. We should be able to give them a taste of both fairly easily. There are downfalls to this split approach as well that people that are Cruising have noted, and actually recommended not splitting the time.

 

[Gumby]

My first thought when you mentioned periodically working while cruising or RV-ing was that you'll need to have a very good handle on being able to practice law while not physically having an office in the jurisdiction in which you are admitted.*** However, I see from your immediately preceding post that you are talking about returning there periodically, so that may not be an issue (also give some thought to how to keep up with registration and any mandatory CLE while you are on the road.). I am wondering where you will live during these periodic returns. Will you stay at an RV park or seek a short term rental? Or do you anticipate retaining something as a permanent "home base". Either way, I would account for that as an extra cost.

*** the unauthorized practice rules are only part of the issue. In some circumstances, you could also potentially expose your partners to income tax liability in another state if you practice while you are there.

 

[KRABE]

Gumby,
If we decide to do this both of us would either sever all ties with our firms. We both do a significant amount of tax work, and unless that tax code changes significantly we should be able to find work pretty much anywhere in the U.S. We realize that it might be at a significantly lower earnings rate than what we enjoy now, but our resumes should allow us seasonal work at a number of different tax prep offices.

We will both maintain our licensure in our current states (I am licensed in 2 and U.S. tax court) thereby allowing reciprocity with several other states if we do end up choosing/need to more permanently relocate. We will also do our best not to have to relocate to a state that would require me to retake the bar. For example, if we feel that we are shortchanging our kids by not giving them a full high school education we would want to be able to transfer our licensure to that state so we can ramp up our earning potential that we would otherwise be willing to forgo in exchange for the seasonal and temporary nature of work otherwise.

Having a home base will be relying on family a little. The family business has several temporary housing arrangements that they own and manage so the ability to come back and stay for a few months would not be a problem logistically, the biggest issue is not wanting this state to try to continue to claim me as a resident after we leave for tax purposes.

 

[Gumby]

If you want maximum reciprocity, I would advise getting admitted to the DC Bar.

 

[Huston55]

KRABE-

First, big congrats on being brave enough to consider such a lifestyle and very-ER! Perhaps a little luck is involved (inheritance) but, hey...

Lots of good advice thusfar so, I'll add just a few thoughts.

1. When evaluating a 50+/- yr retirement (especially in today's environment), I'd do lots of research on what SWR are appropriate. I expect you will find that a 3% WR is at/near the ceiling of recommendations. Suggest you read some Wade Pfau if you've not already done so.

2. I didn't see anything about an emergency fund (did I miss it?). With a 50+/- yr plan, no steady income and two young children, I would have a hefty emergency fund...very hefty. I'd also have a solid, no sh!t back-up plan, and a back-up back-up plan.

3. I also didn't see anything about health care, which I consider an absolute necessity. Sounds like you & DW have already been through one serious/expensive health care experience so, you know first hand that this is one threat to your FI that can change everything...financially and otherwise.

Other than those thoughts, my only other recommendation would be BOAT vs RV.

 

[KRABE]

I have seen others post their progress and I have decided quarterly. This is probably for my own sake and seeing it posted I think will help me stay accountable to the dream.

Right now we have the following assets
~128k - Home Equity - Balance of mort at 3.75%/30
~ 32k - 16.66% interest in a Commercial Real Estate Partnership ~140k-(loan of 108k) Generating ~10% return on the 140 which is paying my loan.
~52k - Wife Retirement 15% with 6% match all future raises are going towards increasing retirement.
~18.5k - My retirement - I have no 401k or other matching option as I am Self-employed
~6k - Investment in my Professional partnership
(~45) - Vehicle Loans - my biggest splurge also mostly paid for by work reimbursements so no cash out of pocket. We do have equity in the vehicles (based on kbb about $32k) so if we did decide to just leave there would be additional cash there.

Total: 191.5 (assuming no value in vehicles, which I am thinking is the best way to look at it)

Changes we have made since starting. We maxed out 2016 tax deferred retirement options that we available. I am contributing more a month into my Simple plan so I don't have to come up with a ton of cash all at once. I am not a huge fan of the offering in the simple plan going to talk to my partners and try to get it moved to FIDO. DW is worried about raising her contribution rate at work any further until she sees how this year ends (she is a tax account so over half of her income is in the first four months of the year and the budget always gets a little tight in the second half of the year)

As to the emergency fund question above, it is not something that I have placed a high value on having. Work right now is way overly busy so I feel very confident in my ability to generate revenue if that would every change I would reconsider one. Being self-employed I also have a separate account that a portion of my income goes into every month for estimates, if I were to ever have a problem that would provide a small amount of cushion that we could use if necessary. Any times when we would have delve into that would almost always be a tax deductible situation which would offset the need for that money anyway.

Gumby... I am not ready for this hurdle yet, but do you know anyone that would sponsor ( i forget the correct term) me? (Tongue in cheek comment) When we get to that point I will definitely think about it.

 

[Gumby]

Gumby... I am not ready for this hurdle yet, but do you know anyone that would sponsor ( i forget the correct term) me? (Tongue in cheek comment) When we get to that point I will definitely think about it.

I am, in fact, a member of the DC Bar (also NY and CT).