First-time poster seeking critique of FIRE plans

[Silhan]

Hi,

I've been reading these forums for the past couple of months as I've been putting together my FIRE plans.  I really appreciate the advice that I've gleaned so far.

I thought I'd post my plans here for critique, just to be sure that I'm on the right track.

My wife and I are both in our early thirties.  We have a seven-year-old son, and we plan to adopt at least one more child sometime during the next ten years.  I earned my PhD in science/engineering about a year and a half ago, and subsequently started working at my first "real" job.  My wife is a full-time stay-at-home mom who volunteers at our son's school as well as with our church.  Consequently, we're really just starting out on our road to FIRE.

Here are our details:

Income: $100K/yr

Savings: $50K + $38K/yr

• 403(b): $10K + $4K/yr (my contribution) + $10K/yr (company match)
• Roth IRA's: $10K + $8K/yr
• Taxable accounts: $30K + $16K/yr

The reason that we're saving so much in our Roth IRA's and taxable accounts is that we're planning on buying a house (in the Baltimore-Washington area: $ouch!) sometime in the next couple of years.   (Although we're convinced that the housing market here is overpriced and potentially primed for a fall, we would like to get into a single-family home soon for our son's sake.)  Although buying a house will significantly deplete our accumulated savings, it shouldn't affect our annual savings rate too much over the long term as long as we don't overspend on the house.  Once we've purchased, we plan on reducing our taxable savings in order to max-out my 403(b).

Here is our planned allocation for retirement savings:

AccountAsset ClassFund%
403(b)U.S. large-capVan. 500 Index Fund Inv (VFINX)10%
403(b)U.S. large-cap valueVan. Value Index Fund Inv (VIVAX)10%
403(b)U.S. small-capVan. Small-Cap Index Fund Inv (NAESX)10%
403(b)U.S. small-cap valueVan. Small-Cap Value Index (VISVX)10%
403(b)Int. large-capVan. European Stock Index Inv (VEURX)5%
403(b)Int. large-capVan. Pacific Stock Index Inv (VPACX)5%
403(b)Int. large-capVan. Emerging Mkts Stock Index (VEIEX)5%
403(b)Int. large-cap valueVan. International Value Fund (VTRIX)7.5%
403(b)Int. mid-capVan. Internatl Explorer Fund (VINEX)7.5%
403(b)REIT'sVan. REIT Index Fund Inv (VGSIX)20%
Roth IRACommoditiesPIMCO Commodity Real Return Strat (PCRIX)10%


Our house savings and emergency fund are invested in a combination of the following, chosen based partially on our tax situation:

• Van. Treasury Money Mkt Fund (VMPXX)
• Van. Short-Term Treasury Inv (VFISX)
• Van. Short-Term Invest-Gr Inv (VFSTX)

As we approach FIRE, we will build up at least five years of expenses in a short-term bond fund, but I don't see a need for that while I'm still working.

Based on these assumptions, I expect that we could FIRE in 15-20 years.   Am I missing anything?

 

[Nords]

Welcome to the board, Silhan!

Your strategies & execution seem fine, especially for the savings rate and degree of organization at your age. A head start on compounding makes a much bigger difference than twiddling with asset allocations.

It's easy to overspend on housing in that area. Focus on the schools & neighborhoods and don't get sucked into the "buy the biggest house you can get a mortgage for" logic. If you haven't read it yet, the "Two-Income Trap" has some priceless thoughts on buying homes in expensive markets.

Is that a "planned" asset allocation or an actual asset allocation? In other words, when do you arrive at that plan? The reason I'm asking is that it's extremely unusual to see someone in their 30s with a 100% equity allocation. It's a good idea, but it's extremely unusual.

As for achieving FIRE in 15-20 years, that evaluation depends on your expenses as well as on asset allocation & execution...

 

[Silhan]

Thanks for the welcome, Nords!

That asset allocation is completely in place, except for the 10% commodities postion, which I will be moving into within the next year or two (starting with PCRDX, then moving into PCRIX when I meet the minimum).

True, I'm at 100% equities with my retirement funds, but I do plan on maintaining 6 months to 1 year worth of expenses in a short-term bond fund while I'm working. Since I can't touch the retirement funds before FIRE without paying a penalty, and since I plan on working for the next 15-20 years, I don't see the use of including any bonds in my retirement pot.

Is this a bad approach?

 

[Silhan]

I almost forgot to thank you for the book recommendation, Nords. My wife is not employed (and has no desire to be), so we feel that we're at a big disadvantage when it comes to buying a home in this area compared to all of the two-income couples whom we know.

 

[sailor]

welcome to the board Silhan,
you obviously did your homework on asset allocation - congratulations.
I would defend 100% equity allocation - I used to be 100% in equities before I bought GIM early this year (now I'm 90% in equities).
Your plan seems fine, the only thing is that you haven't specified what level of expenses you are anticipating at your retirement.

 

[Silhan]

Thanks, sailor.

Living expenses are currently about $40K/yr.  In retirement, and assuming we have the house paid off, I figure we will spend about $30K/yr.  Adding in taxes and charitable donations would bring it back up to about $40K/yr, which would require a portfolio of about $1M at a 4% SWR.

Edit: All of these numbers are in 2006 dollars.

 

[Nords]

Is this a bad approach?

Not necessarily, unless you stumble across your dream house.

Your worst nightmare would be finding a home when the market is down and all your funds are also whacked down 10-20%. For that situation many keep their down-payment savings in CDs or MMs. It's good to keep that money in a Roth since you can make withdrawals for a home purchase, but it's bad if you have to sell equities into a down market to do so.

If you're willing to accept the penalty for that risk then it's not a problem. Otherwise you'll need to set a target date/amount for a down payment and start socking it away into a more liquid cash instrument.

Living expenses are currently about $40K/yr.  In retirement, and assuming we have the house paid off, I figure we will spend about $30K/yr.  Adding in taxes and charitable donations would bring it back up to about $40K/yr, which would require a portfolio of about $1M at a 4% SWR.

Sounds good!

 

[Silhan]

Otherwise you'll need to set a target date/amount for a down payment and start socking it away into a more liquid cash instrument.

Sorry if I wasn't clear above, but our house down-payment fund is invested in short-term bond funds that are held in our Roth IRA's and taxable accounts.  It sounds like we're already doing what you would recommend.  Thanks for the reassurance.

Edit: On second thought, are you suggesting that short-term bond funds are too volatile for a house down-payment fund?

 

[Nords]

Edit:  On second thought, are you suggesting that short-term bond funds are too volatile for a house down-payment fund?

No, I misread the post and stopped reading when the AA numbers reached 100%...

Well, a short-term bond fund is a lot less volatile than equities. It's more volatile than a MM/CD, though.

If you're looking to buy a house in the next five years then it's probably a wash between short-term bond funds or a CD. However if you're looking to make the leap in the next year or two then a CD offers much more reassurance that the closing costs will be there when you need them.

 

[wstu32]

Welcome

I have found this board both informative and extremely helpful.

stay the course! you will be fine.