Help me come up with a target number

[greentea2020]

I’m turning 40 this month. Female, no kids, in a serious long term relationship but we keep our finances separate so consider me single for this question.

I am in my peak earning years. Because of my RSUs my W2 says I made $280K this year. Next year probably the same amount if the company stock doesn’t tank. 2019 though it will probably go down to $220K because my RSUs run out and I have no more coming in.

So.. I don’t want to work longer than I have to even if I’m paid well. Tell me if my target amount is good.

I want to have $1.4M in equities/bonds.
I also want to have about $1M in rental property. I own a rental property in bayarea with about $1M in equity but the return is pathetic. I was thinking about doing a 1031 exchange for a brand new 4 unit townhomes with a 4.5% net return after taxes and property manager fees. I have identified it already and thinking about doing it soon.

This year to date I have spent $23000. Let’s say my yearly spending is $25K. Of course health insurance is not included as my company pays for it. So I predict my retirement expenses will be $50K/year.


I already have $1M equity in my rental property so I’m good there. I have $1.15M in equities/bonds, so which means I need another $250K which would take me 1.5 years to get there. Of course I would need to exchange my existing bayarea rental property for the one that I’ve identified for me to say I can get 4.5% net return.

So what do you guys say? Is my plan sound? If so I can FIRE in 2019 summer.

 

[Aiming_4_55]

Congrats on being a saver in a High Cost Of Living area.

If your expense budget is truly $50k, you are good with $1M rental equity with the 4.5% net return = $45k and $1.5M equities/bond with a SWR of 3.5% = $52.5k a year potential. With about $97.5k, you have plenty.

Assumptions:
How sure are your expense numbers?
I assume your personal residence #s is in your budget which is low for the Bay area.
Your asset allocation of equities/bonds support 3.5% SWR
Have you used FIRECalc with your numbers?
Have you factored in potential kids/nephews/nieces, parents, relocation expenses?
Have you factored in long term expenses, i.e. car replacement, etc.

 

[OldShooter]

Good OP. You'll get plenty of advice.

One caution: Do not be concentrated in your employer's stock. In the trust world, trustees are held to a "prudent man" standard. Depending on the trust company, this says that it is an overconcentration if a single investment exceeds 5, 10, OR 15% of a portfolio. Given that you are already "concentrated" by working there, the 5% number is a good one, no matter how attractive the stock looks to you.

If you want a little motivation, read about what happened to employees at Enron or WorldCom who also believed in their company stock.

 

[Another Reader]

Where are the brand new town homes and how are you coming up with the 4.5 percent? With no rental history, I would be cautious. I agree the cash on cash return is weak, but rents and values increase more rapidly here than in many other places.

 

[HarveyS]

Congrats. A few questions and a few things to consider. 23k/yr? does that include rent, utilities, property tax? Car insurance, gas, maint., etc? Do you have an idea on maint. costs for house (furnace, a/c, roof, HW heaters, etc)? What about dental, vision - that's not in most health plans once you retire. Having a keen grasp of expenses, and planning for the expected maint. costs makes FIRE do-able. Good luck!

 

[greentea2020]

Good OP. You'll get plenty of advice.

One caution: Do not be concentrated in your employer's stock. In the trust world, trustees are held to a "prudent man" standard. Depending on the trust company, this says that it is an overconcentration if a single investment exceeds 5, 10, OR 15% of a portfolio. Given that you are already "concentrated" by working there, the 5% number is a good one, no matter how attractive the stock looks to you.

If you want a little motivation, read about what happened to employees at Enron or WorldCom who also believed in their company stock.

I sell my ESPPs and RSUs as soon as they vest. I have no faith in my company stock. It’s at a low price right now.

 

[greentea2020]

Congrats. A few questions and a few things to consider. 23k/yr? does that include rent, utilities, property tax? Car insurance, gas, maint., etc? Do you have an idea on maint. costs for house (furnace, a/c, roof, HW heaters, etc)? What about dental, vision - that's not in most health plans once you retire. Having a keen grasp of expenses, and planning for the expected maint. costs makes FIRE do-able. Good luck!

I’m in a unique housing market so please don’t judge me, I know I need to move out in the next 10 years. I bought a mobile home 4 years ago with cash. It’s in a great location in the heart of silicon valley and I’m less than 2 miles from work. My space rent is less than $800. That’s how my expenses is so low. You guys will want to puke but even my mobile home is worth $250K if I were to sell it. I remodeled it and I love it, perfect size and everything is just right, clean and stylish and comfortable. I would be happy in a 1000 sq ft condo with facilities somewhere else in the country. Sometimes I browse Redfin and do find plenty of condo that cost $250K or less.

 

[greentea2020]

Where are the brand new town homes and how are you coming up with the 4.5 percent? With no rental history, I would be cautious. I agree the cash on cash return is weak, but rents and values increase more rapidly here than in many other places.

It’s in Washington state... pretty close to where I have family so I wouldn’t mind visiting my family then check in on the property. Yes it’s true there’s no rental history so that is a risk.

 

[greentea2020]

Congrats on being a saver in a High Cost Of Living area.

If your expense budget is truly $50k, you are good with $1M rental equity with the 4.5% net return = $45k and $1.5M equities/bond with a SWR of 3.5% = $52.5k a year potential. With about $97.5k, you have plenty.

Assumptions:
How sure are your expense numbers?
I assume your personal residence #s is in your budget which is low for the Bay area.
Your asset allocation of equities/bonds support 3.5% SWR
Have you used FIRECalc with your numbers?
Have you factored in potential kids/nephews/nieces, parents, relocation expenses?
Have you factored in long term expenses, i.e. car replacement, etc.

I am fortunate that my parents are well off and I will even have an inheritance. But I don’t plan to keep it and I will give my portion to my nephew when he’s older.

 

[Live And Learn]

The one thing you need to account for in your expenses are the "non recurring costs" of living. If you own a condo there may be periodic assessment fees, if you own a home you occasionally need to replace the roof, trim trees, buy new appliances, etc. Then you have to account for replacing a car. Periodic dental work (that can add up quickly !). I also include an amount for repainting interior and exterior and replacing the mattress !

I've taken the cost of each of these things, divided by the number of years the item is good for (15 years for a car, 7 years for appliances, 7 years for the mattress) and then include the sum of all that in my annual budget. Some years I spend way less, some years I spend way more but on average I'm pretty close.

For me the amount is $11k / year but that's for 2 cars and owning a 1600 sq ft home.

When deciding the timing of my early retirement I set a benchmark of 3% of my investable assets; meaning that I would not retire until I could support my budget with 3% of my equities / bonds.

I love that you are planning your great escape at such a young age. Hard work, and hard savings pay off !

 

[pb4uski]

..... So what do you guys say? Is my plan sound? If so I can FIRE in 2019 summer.

I would sell the investment real estate (too much concentration risk in a single property) and put the whole $2.4 million in a conservative stock/bond portfolio (somewhere between 40/60 and 60/40 depending on your risk appetite) and plan to spend $75k year (~3% initial WR) and adjust that for inflation.

Plus you'll have some SS someday.

 

[greentea2020]

I would sell the investment real estate (too much concentration risk in a single property) and put the whole $2.4 million in a conservative stock/bond portfolio (somewhere between 40/60 and 60/40 depending on your risk appetite) and plan to spend $75k year (~3% initial WR) and adjust that for inflation.



Plus you'll have some SS someday.

I thought about that but I’ll have to pay a hefty capital gains tax if I sell my rental property. I have about $600K in capital gain and I’m in california.

 

[pb4uski]

Just thinking out loud... you'll probably have a load of depreciation recapture when you eventually liquidate you'll pay one way or the other.... you really don't have $1m in real estate equity because of the huge deferred tax liability associated with the asset.

I'd consider biting the bullet and getting that money into a truly tax-efficient asset.

 

[greentea2020]

I’ll go ask my CPA to see how much I will net after tax if I were to sell it. I bought it for $660K and now it’s worth about $1.35M. I owe $290K. Suppose I were to net $550K after selling expenses and taxes, with my $1.15M in equities, I’ll still need to save another $300K to get 3% from $2M ($60K/year, based on $50K/year projected spending plus $10K of non-recurring costs as suggested by LiveAndLearn).

Hopefully it’s just 2 years of work and I can deal with it. No later than 2020 I hope before I can quit having to work forever. 42 years old then...

 

[ulrichw]

I'll take a different approach - I think the most "iffy" part of your plan is if you can continue to live on $25K a year (not counting health insurance). Heck - even if you will spend more in retirement (free time could mean higher spending), you should be just fine.

Here are the layers of "conservatism" built into your plan:
- Health insurance should not cost anything remotely close to $25K a year for you - in a bad year (accident, severe illness), you might end up spending that much for premium + out of pocket combined, but that's a fairly worst case scenario.
- Your $1.15M of equities should provide you a perpetual safe withdrawal rate of 3-3.5% to cover $34,500 to $40,250 of annual expenses
- Your rental property will give more income on top of that
- You presumably have social security coming to you as well

This is "belt & suspenders" as far as being conservative. If you liquidated your rental property and put it all into your portfolio, your safe withdrawal rate would probably be close to twice your expenses. (BTW: I believe in being conservative with retirement planning - so not criticism is intended here).

So, strictly speaking, you could stop working right now and still have a very safe plan.

 

[LiveBelowMeans]

I second the unloading of the rental. Too risky. Sell the rental and put the money in vanguard mutual funds. You can retire now. Withdraw 4 % per year and if the market drops significantly, pull in the purse strings slightly. With your frugal ways, you will likely not spend all the money each year. JMHO.

 

[CaliKid]

I would encourage you to research the real estate question on biggerpockets.com. It's an incredible resource for real estate investing. I would do that before making the move. If it were me and I was focused on cash flow I would be looking at the cash flow cities like Memphis, Kansas City, Indy, etc.... Or cities that provide less flow but better chance of appreciation like Jacksonville, FL for example. Lots of good options out there but I would look a little before jumping on that.

As to the overall plan just focus on your spending. Know exactly what you are going to spend. If I understand your post you say you spend $230k. That's fine but if that's right, at your age, I would have much more saved. Probably $5m.

 

[marinauser]

If there is a way to do a Starker exchange to a property in another state as a way of avoiding California income taxes, that would be very worthwhile to pursue. If you could trade 11% or greater CA state income tax for, say, Washington, where there is no income tax, you are saving $50,000 or more in taxes. That is well worth doing the exchange even if you might need to hold the property for a couple of years before you sell it as long as there is little risk of devaluation of the property.

 

[joeea]

So.. I don’t want to work longer than I have to even if I’m paid well. Tell me if my target amount is good.

I want to have $1.4M in equities/bonds.

I predict my retirement expenses will be $50K/year.

I have $1.15M in equities/bonds, so which means I need another $250K which would take me 1.5 years to get there.

So what do you guys say? Is my plan sound? If so I can FIRE in 2019 summer.

It's not clear why you have targeted $1.4M.

If you will be receiving any other income in retirement (pension, social security, inheritance, etc) and if your other assumptions are correct, then you most likely can retire today, if not sooner.

 

[greentea2020]

I suppose I wouldn’t mind spending more in retirement as I’ve been frugal all my life. I like to travel but I’ve never spent more than $3500 per trip (mainly asia and Europe during off season). Perhaps business class once in a while, $80 wine with my own home cooked meal once in a while would be nice. My hobbies (table tennis and pot luck with friends) are very frugal. I love eating but am the type to enjoy street food rather than fine dining. So yes I think $60K/year budget would be very nice.

 

[Sunset]

Just thinking out loud... you'll probably have a load of depreciation recapture when you eventually liquidate you'll pay one way or the other.... you really don't have $1m in real estate equity because of the huge deferred tax liability associated with the asset.

I'd consider biting the bullet and getting that money into a truly tax-efficient asset.

+1
This is the trap the landlords (myself) get into, after many years the sale of the asset is all at once with a big tax bill, vs $1,000,000 in stocks that can be sold off over 20 or 40 years, lowering the tax pain.

Besides for OP, being a landlord is a type of work, instead of a collection of ETF's/Funds.

 

[brucethebroker]

Two step solution the to rental property "problem".
1. Sell and 1031 exchange into a single family home you would like to live in yourself.
2. Rent that home out for the first year or so (see CPA for guidance). Once established as a rental, move into it yourself. As I understand it, you will not owe taxes until you sell it. Your taxes will be based on prior years of depreciation/cap. gains, pro-rated with the years you have used it as a personal residence. Yes, it is kicking the can down the road, but could put off taxes for a very long time. Run the whole idea past the CPA. Mine told me it would work, and we are exploring the option.

 

[pb4uski]

Interesting idea, but I doubt that the OP interested in spending $1m on her personal residence since she is currently living in a nice remodeled mobile home.

If she were to go this route, perhaps she could get a multi-unit in a locale that she likes, convert it to condos, live in one and sell the others one-by-one to spread out the tax bite.