I'm going to FIRE soon at 35.

[free4now]

I've been reading the early retirement boards and forums for close to a decade but haven't posted much so this is a bit of an introduction.

I've been working at the same software development job for a large corporation for 13 years now, and have amassed enough assets that I think I'm ready to try not working. Maybe for a lifetime, or maybe I'll find another job in a year or so. I've been getting less and less motivated to work hard at my job and have been falling behind in terms of my job skills and knowledge. My management is really mellow and lets me get away it, so I haven't really felt any need to get my act together at work for a while and I've been sliding down into not really getting much done at work.

I think that FIRE dreaming is a large part of why; I'm not focussed on getting my skills in shape for my next job but rather on just making it through so I can be FIRE. I've just gotten into a little rut working here that has been very financially lucrative and not particularly demanding, so why bother with anything else.

In the dotcom era there was much money to be made and a large portion of my net worth (I estimate between half to 2/3) is from stock options from that era. Since then I've been waiting for all those options to vest and it made absolutely no sense financially for me to go anywhere else to work since the value of my options vesting each year was greater than my salary. But now that they are all vested I am feeling less like I need to stay working here. But I don't really have a desire to work anywhere else, nor strong skills to ease that transition.

Last year I took a 10 month unpaid sabbatical and travelled around the world including across the US. It was a truly great experience and I think cemented for me that I liked being independent financially. My expenses for that period totalled $110 per day. That's everything I spent except the payments on my condo that I left behind. That gave me confidence that I can enjoy life without spending too much money. But it also reinforced for me that I do well with structure in my life; towards the end of the trip I started getting depressed and homesick. In the spectrum between introversion and extroversion I'm definitely on the introverted end, and I do better in places where I see the same people over and over again in structured settings like work or activity groups. So I longed for the structure of my old life and work.

I've been back and working the old job for 8 months now and I've just been getting more depressed... the people I used to go out to lunch with are no longer there and for whatever reason I haven't felt motivated to start many new relationships here. I'm spending most of my work days just avoiding work surfing the internet and not really getting anything done, and it's starting to catch up with me.

So I'm realizing that I'm just done with this job. My original nest egg goal was 2 million dollars which is about what it would take for me to have a bit more than my current income neglecting savings. Right now my post-tax cash out net worth is just a little above 1 million, and I think that's enough for me to live a good life. The one thing that is and has always been a concern is that isn't going to be enough for me to get married and raise a kid on (at least here in California). I'm still unsure whether I need/want to have a wife and kid, but I don't want to shut off that possibility. I suppose I would have to go back to work if I wanted to start a family.

Financially, here's my picture:

Current salary about $100k plus benefits. I'm saving about $25k/year into 401k and stock.

In round numbers I have:
401k $100k
Unexercised stock options and shares: $100k
Brokerage account with mostly BRK and index funds: $700k
2 BR/2BA Condo in California with market value of $550k and mortgage around $270k.

My 5/1 ARM mortage loan costs $1400/month, and taxes HOA and insurance bring my housing payment up to $2100/month. That will go up a few hundred in 2008 if I'm still there when the ARM adjusts.
I have a roomate paying $650 per month in rent.

My after-tax, after-savings take home pay that I live on now while working is about $4200 per month plus the $650 rental income. This pays the $2100 PITI payment and I live well on the rest.

My plan is to live FIRE on 40k per year total, meaning about $3333 per month plus $650 rental income =~ $4000 per month. I'll pay the $2100 PITI out of that and live on the rest. It'll be a reduction in my dicretionary spending by 30-40%, but there are plenty of things I can easily cut out.

I currently have a lot of newish things... 2 year old Prius car, new $4k camera setup (photography is a hobby for me) new $2k car stereo system (learning about audio is another hobby for me). I bought the camera and stereo during my "depressed about work being unsatisfying" period. I really enjoy playing with them but I worry about becoming addicted to expensive consumer electronics that I can't afford on FIRE income. Frankly another reason for stopping work is to stop myself from getting used to buying things as an activity; I spend too much time surfing for bargains. It's not a major issue in that I never spend above my means, in fact live well below my means, and I rarely regret my purchases. But it still seems like I could and should be able to be happy without those purchases. I have in the past been much more into hiking, backpacking, backcountry skiing, and biking, and I look forward to FIRE when I will have time to do long backcountry trips and get back in shape.

The most critical thing for me is I will need some structure in my life so that I don't fall in my own little world of staying at home and working on projects around the house. Some reason for me to take a shower every day Some of the things I'm considering are: Joining up with Buddhist or Unitarian groups that meet regularly, going to the gym regularly, joining an "artist's way" group, taking classes.

I'm interested in any feedback y'all have... some of the questions I'm mulling over are:

I'm thinking it makes sense to convert my $100k 401k to a traditional IRA when I leave in 2006. I'll have about $100k or more ordinary income in 2006 from exercising my employee stock options. Then in 2007 when my tax bracket is much lower I could convert the Trad IRA into a Roth IRA which would allow me to access most of it without penalty in 5 years if needed (e.g. in the unlikely event that a stock market crash took out my brokerage account completely). And I would get the Roth IRA benefits of being able to put more money into the tax-advantaged account.

Most people would say it's crazy to try living in a $550k condo on $40k after tax income, and I would tend to agree. I'm really thinking hard about selling that and moving to cheaper rental housing. But at this point I think I need to wait a year and see where I am then, to decide whether I should keep it or sell it, where I want to live, and if I want to go back to work. The transaction costs of selling are large enough that I think "when in doubt do nothing" is a good approach. After having travelled across the US and the world I do think that the SF Bay area (where I live) may be the best place for quality of my lifestyle in the world. But it is also one of the most expensive and that's a serious problem for living cheaply. As I was driving across the US I was scoping out places I might want to live. I tend to have "California Values" and want to live in a blue state. The most distressing thing I found was that the places that had the most affordable housing were the red states. Austin, Texas was quite appealing because it seems to combine a sort of California attitude with affordibility. Any insights into the sell or stay decision are welcome.

The other issue is how exactly to account for the condo in SWR analysis. I've not seen any SWR studies that incorporate home ownership, so that is uncharted territory. It seems like the most straightforward thing is to just leave it out of the SWR calculations completely and assume zero appreciation. Especially given the current real estate market that is probably not a bad short term prediction. But the whole idea of SWR studies is to analyze things over the long term and I think it's a safe bet that over the 50 or so years of my retirement that housing will appreciate. Anyone come up with a useful model for calculating SWR involving homeownership?

My mother is retiring this year too, and it feels really strange to be considering retiring at the same time as her. My dad will retire a few years later. I recognize that my parents have made enourmous sacrifices to raise me and my sister well; our family started out way below middle class. I would like to somehow share my financial success with them. But obviously that means less for me and $40k per year doesn't leave too much room for generosity. My mom's going to be living on a similar amount in retirement ($2k not including housing) , but I suspect it will be more difficult for her than for me since she tends towards spending at or above her means, which were similar to mine before her retirement. My sister has serious money troubles and I could temporarily make it all go away for her if I wanted to but I don't think that would be good for her in terms of learning to live within her means. It feels a little unfair to be retiring at 35 when my mother and father worked all their lives largely to raise me and my sister. Anyone else navigated through the dilemna of how to deal with that situation?

Looking forward to joining y'all in FIREland soon.

-FireMe

 

[Mr._johngalt]

Interesting post. Austin, Texas is an anomaly, a spec of blue in a sea of red. Just thought you'd want to know as you consider your options.

JG

 

[LOL!]

You definitely have enough to get married and have kids. Of course, it will be helpful if your spouse works, but a lot of folks here are in that situation.

My sister married a retired guy when she was in her twenties. I remember my dad asking him what he did for a living. He said, "I'm retired. You'll enjoy it when you get there." As far as I know, nobody thought that was unfair. We just never worried about it. So why should you worry about what your sister and folks think? That's something for them to deal with, not you.

 

[califdreamer]

I considered Austin last Spring when I had my house here in San Diego sold but pulled back.  You'd be able to live well there with your Bay Area equity.  It's a great place but there are downsides:  hot and humid summers, not close to mountains or ocean, fairly rainy and a bit more cloud cover.  But it's lively, progressive, friendly, has creative vibe, etc.   Chances are housing will go up over the next couple of years there and might go down in SF.  What the heck, you can try it for two years.

 

[REWahoo]

My mother is retiring this year too, and it feels really strange to be considering retiring at the same time as her.

Are you really retiring? Since you don't know for sure, why tell anyone, including your family, that you are? Tell them you are "between opportunities" or "on sabbatical" or "taking some time to smell the roses", but you don't have to say the "r" word because even you don't appear to be sure that's what you are doing. There have been several discussions of this issue on the forum and you might want to take a look at those threads.

I recognize that my parents have made enourmous sacrifices to raise me and my sister well; our family started out way below middle class. I would like to somehow share my financial success with them. But obviously that means less for me and $40k per year doesn't leave too much room for generosity.

If they got in serious financial trouble, you could be there to help. But as you state, at $40k per year you don't have much to share. Your $1M portfolio is going to have to work very hard to sustain you for 50-60 years and, if you are serious about retiring at 35, you don't have much room for generosity, as you said. If you really want to help your parents, you need to keep working.

My sister has serious money troubles and I could temporarily make it all go away for her if I wanted to but I don't think that would be good for her in terms of learning to live within her means.

Another topic much discussed here. Look for the threads. The bottom line is don't do it.

 

[aimhigh]

from what I gather of your intel., age, bored at current job, and interests it seems like what you need is a change. If not early retirement maybe a new job. Start a small business doing something you enjoy maybe. Or get a part-time job doing something that is fun for you and can add a little income at the same time. You need structure, well a part-time job you enjoy going to can do that. It just seems to me that you're like me in the sence that unless you find something to keep you busy you're going to spend money to make things interesting.

 

[retire@40]

One of the better posts I've seen here in a while.  You've got a complex situation, but you've thought it out well.

I kept thinking semi-retirement for you as I read your post.  I semi-retired in my mid 30s with a non-working wife and a child not too far off from where you are financially, and it's worked out well (so far).

 

[dex]

This is one of the better posts in recent times as it touches on many points for people to consider.

I would suggest they be broken out as:

1. Work burn out, lack of challenges and loss of friends at work.
2. Family background influences (less than middle class upbringing)
3. Financial analysis - current assets and income needs/wants
4. Lifestyle in retirement

Fireme,
How does this sound to you?

Do I have the finances correct below?
100 401K
70 Stock Options-after Tax
700 Brokerage account
247 Net Condo Value 550-33 clossing - 270 mortgage
1,117 Total Net Assets

Assets not available for income production
-100 401K
-247 Net Condo Value 550-33 clossing - 270 mortgage
-347

770 Assets avaialbe for income production

50 Income needs gross of taxes ((4000-650) x 12)/.80 taxes

6.5% investment rate of return

A couple of suggestions:
1. prepare a detailed budget of retirement expenses - not based upon your working budget
2. what is your current investment rate of return? Is it more or less than the 6.5% - others can check my math.

Have you read any of the books recommend on this site?
How to live happy wild and free for example?

My gut tells me you have a lot of thinking to do. But you are on the right track and appear to have the correct thinking process to reach your goals.

 

[thefed]

imvho, i say work for about 5 more years and SOCK AWAY the dough...at least 1/2...that extra 1/4 mil in liquid assets could prove to be invaluable 30 yrs down the road.


and i think it'd be hard in CA to retire @ 45...but again, just my humble opinion

 

[preben]

I FIREd at your age a year ago and have never looked back .
$1M is plenty in most places on the planet - but naturally that is an individual evaluation. Nowhere will you starve or not be able to get a roof over your head .

I noticed that I spend much less than I thought I would - one has time for smart-shopping/price comparisons, one gets full value for purchases (gym membership - go every day, no food thrown out as time to cook and eat at home Etc.), pays much less taxes and generally needs less transportation - all biggies in my "working" budget.

As for the real estate part of the portfolio I do not incorporate it in the 4% calc as the historical SWR is not based on this asset class, but any rental income from it (after repairs/maintenance/management fees Etc.) can of course be added into the spending column thereby reducing the amount needed from invested part.

Cheers!

 

[free4now]

I'm an opportunist

Thanks for all the great feedback and keep it coming. 

dex, you've got the financial stuff right.  I've been getting much more than 6.5%; most of my investments have returns similar to the S&P 500.  The major exception was that I put my 401k in a risky tech fund right before the dotcom collapse and now it's value is much less than my contributions.

One big lesson I've learned from all the SWR debates has been the role of volatility in determining survivability... I now know that trying to earn a percent or two more than the indexes usually has a high volatility cost that will reduce survivability.

I also understand how more conservative investments such as bond ladders can increase survivability, although as the retirement timeframe gets longer and longer they end up being less practical.  And in my situation where I'm not sure I'm going to stay retired I think they probably don't make much sense at all. 

I think some form of semi-retirement might be good.  It would be great to find some really satisfying part time work that I wouldn't be tied down to.   I used to own an electric vehicle and there was a person who travelled the country repairing and upgrading these particular electric vehicles; that's the kind of thing I would really like to do.  I just haven't found my particular calling I think.   

I am really thinking of this year as a year to explore different things and see what kind of work I want to do.  But I am leaving the possibility that the answer is "none", so I want to make sure that is feasible before I get too excited about not working.

One concern I have is that because I have a newish car and things, I won't have to make any major purchases, which might give me an artificially low sense of my income needs.  Then when things break or need replacement in the future I might get squeezed on the replacement costs.  I think I'll have to figure out car depreciation and some other depreciation costs and exclude that from the monthly living costs I allow myself for now.

It is interesting to consider how I will answer the "what do you do?" question.  For a while after getting out of school it seemed really cool to be able to say I'm a software engineer, but now I suppose I'm wanting to connect more with the people who would say they are a "healer" or "student of life".    The answer that just came to my mind is I'm an "opportunist"!

 

[eridanus]

I considered Austin last Spring when I had my house here in San Diego sold but pulled back. You'd be able to live well there with your Bay Area equity. It's a great place but there are downsides: hot and humid summers, not close to mountains or ocean, fairly rainy and a bit more cloud cover. But it's lively, progressive, friendly, has creative vibe, etc. Chances are housing will go up over the next couple of years there and might go down in SF. What the heck, you can try it for two years.

Yep, it rains more then a lot of California but Austin is considered semi-arid. It IS hot. The hottest part this year was early September through late October; temps then were often in the high 90s and low 100s. The hottest period is usually in August.

You could easily get a large McMansion for your Cali equity...but it'd be in the 'burbs. If you want to live in the central city, and I recommend it, you'd need all your equity for a nice, fairly good sized, house. The downtown condos cost $350k and above.

The mountains are 6 hours away and they top out at ~5000 feet. The ocean is around 4 hours away.

One advantage of moving to a lower priced area is that you could travel more. Since you mentioned outdoor activities, have you looked at Moab or Durango or Missoula? Small towns with a college often have a good vibe.

 

[TromboneAl]

My two comments:

1. Get out of the SF bay area. Too expensive. Unless you like the opera, you'll never miss it.

2. I include the cost of my home in my SWR analysis. If I need the money I'll sell it or get a reverse mortgage.

 

[retire@40]

...I include the cost of my home in my SWR analysis.  If I need the money I'll sell it or get a reverse mortgage.

If you are going to include your home in your SWR analysis, it's not your cost that you include, it's the current net fair market value.

 

[eridanus]

You could easily get a large McMansion for your Cali equity...but it'd be in the 'burbs. If you want to live in the central city, and I recommend it, you'd need all your equity for a nice, fairly good sized, house. The downtown condos cost $350k and above.

I went to pay my tax bill this morning. My property taxes have gone up 50% in the last 5 years. That's another downside to Austin and Texas. All those roads have to be paid for somehow.

 

[Jarhead*]

I went to pay my tax bill this morning. My property taxes have gone up 50% in the last 5 years. That's another downside to Austin and Texas. All those roads have to be paid for somehow.

Eridanus: What's the market value of your property?
What is your tax bill?

 

[Ol_Rancher]

Your Austin, Texas property taxes do NOT pay for roads. The several proposed toll exchanges over IH 35, Mopac to Dell, and the fly over at the 'Y' in Oak hill, and the one at Mopac South and Ben White Blvd. will pay for them. Keep in mind your taxes have already paid for at least 4 of them so you are looking at lifetime double taxation via tolls.

You property taxes pay for the declining schools and the feel-good liberal give aways and incentives to attract business or keep them from leaving. I wouldn't live in Austin if you agve me a house for free.

Welcome to the Californicated aberration in central Texas. You can have it. Don't tell me or anyone living there that it is 'laid back'. That description is no longer operative. Ask yourself " When was the last time a driver in Travis county waved hello as he passed by?" That is still done elsewhere in the state.

 

[Mr._johngalt]

Your Austin, Texas property taxes do NOT pay for roads. The several proposed toll exchanges over IH 35, Mopac to Dell, and the fly over at the 'Y' in Oak hill, and the one at Mopac South and Ben White Blvd. will pay for them. Keep in mind your taxes have already paid for at least 4 of them so you are looking at lifetime double taxation via tolls.

You property taxes pay for the declining schools and the feel-good liberal give aways and incentives to attract business or keep them from leaving. I wouldn't live in Austin if you agve me a house for free.

Welcome to the Californicated aberration in central Texas. You can have it. Don't tell me or anyone living there that it is 'laid back'. That description is no longer operative. Ask yourself " When was the last time a driver in Travis county waved hello as he passed by?" That is still done elsewhere in the state.

This is true. When I am out on the highways and byways of Grayson County
(outside the city) just about everyone waves. I love it. I have been in almost
all of the lower 48 and no one is more friendly than Texans. I am quite serious about this.

JG

 

[eridanus]

Your Austin, Texas property taxes do NOT pay for roads. The several proposed toll exchanges over IH 35, Mopac to Dell, and the fly over at the 'Y' in Oak hill, and the one at Mopac South and Ben White Blvd. will pay for them. Keep in mind your taxes have already paid for at least 4 of them so you are looking at lifetime double taxation via tolls.

You property taxes pay for the declining schools and the feel-good liberal give aways and incentives to attract business or keep them from leaving. I wouldn't live in Austin if you agve me a house for free.

I am all for toll roads. It's a use tax that directly makes people think about the costs of road building and maintenance. Toll roads are also a state issue; the rules were put in place by the state leg and DOT, not by the city councils.

The greatest tax rate is by far for the public school district, which represents 60% of the tax bill. I also hardly think declining public schools is unique to Austin or other "liberal" cities. Houston? Dallas?

I'm also unclear as to what you mean by "feel-good liberal" give-aways. Are you talking about the Samsung, etc., tax abatements? I'd consider that more of a pro-business scratch-my-back move rather than a feel-good liberal move.

 

[free4now]

Budget

I came up with a non-work budget for planning purposes. Although it's much tighter than I've been used to recently, it seems very doable. The major disappointment is that there isn't as much budget for travel as I had hoped. There is a real concern that when the mortage adjusts in a couple of years and goes up a few hundred, and if healthcare costs continue to rise over time. I could get squeezed pretty tightly. On the other hand, by moving to a place with cheaper cost of living than California, I could probably compensate for those things.

There are clearly some other ways I could save money as well like selling my newish car and driving and older vehicle, going to basic cable TV, etc.

Income: $3333 from nest egg + $680 rent = $4010

Expenses:
Mortgage: $1300
HOA dues: $380
Prop Taxes:$280
Condo insurance: $15
Condo maintenance: $50
Internet: $20
Electric&Gas: $80
Phone: $40
Cable TV: $45
Health Insurance: $350
Medical: $100
Car depreciation: $200
Car insurance: $80
Gas $70
Food: $450
Clothing: $40
Travel: $250
Misc: $250
--------------------------------
$4000

 

[kramer]

Hi fireme,

Here is some feedback on the budget, since I have gone through the same exercise:

* Condo maintenance, at $600/year, seems low. Think back to the 70s, you would have wanted to upgrade some decor by the 90s, for instance. There are issues like hot water heater, carpet, furniture, plumbing problems, etc.

* There is no entertainment budget: going to the movies, DVDs, playing pool with friends, going skiing for the weekend, having a few drinks with friends, golfing, bowling, dating, etc.

* Gifts and charity: You probably have family and friends that you might buy birthday and Christmas gifts for.

* Your medical costs will increase as you age, possibly significantly, so this is something to keep in mind. Getting dentistry done in Mexico can save a lot on costs (Tijuana, Algodones). The latter claims to have more dentists per square mile than any other city on earth.

* Auto maintenance (I use $60/month for this)

* Household items: New appliances, vacuum cleaner, luggage for travel, new computer and anti-virus software, postage, camping supplies, theft loss, etc., etc.

* Income tax: This can be significant, like 10% of your budget in some cases. It could increase over time as your taxable account grows with respect to your tax basis.

* If you travel for long periods of time, some of your home costs will decrease, allowing you to spend more on travel: monthly utilities, food, gas, entertainment costs can be applied to travel while you are gone, increasing your effective travel budget.

Hope that helps.

Kramer

 

[free4now]

Thanks Kramer for the feedback on the budget.

As far as the condo maintenance, I think you're right that $600/year is too low. Most people seem to use 1% of home value per year for Single Family Residences, but my condo association handles the maintaintenance of everything outside the drywall so I can get away with considerably less. Probably $100/month would be more accurate.

I lumped my entertainment, gifts, furnishings, and household items into the "Misc" category, but on reflection it's clear that $250 for all misc expenses is pretty thin. I'm going to be getting my end of the year credit card report of my spending soon and that will help me to get a better sense of how much I'm spending on such items.

I have a separate vanguard charitable trust account that will be used for some charitable contributions, so that isn't included in this analysis.

Auto maintenance is a good catch. I'll definitely have to add that in.

I've left income tax out of this analysis intentionally; I'll pay that separately and it shouldn't be much because much of my equity has a taxable basis similar to the current value, and the rental always runs at a loss under IRS rules.

It is becoming more and more clear that living in my current place with my current car is not very feasible on $40k/year. For me this whole process is about figuring out how to set my expectations, so that I know what will and won't be possible over the long term.

 

[free4now]

This post is mostly about minutiae of my personal situation so I won't be offended if some people don't read it...

It occurs to me that the $1300 mortgage payment includes about $450 of principal payback that I'm paying back to myself. I suppose I don't really have to count that as spending since it's not really monetary outflow. Perhaps for the purposes of estimating my spending I should only consider the $850 interest portion of my mortgage payment. If I'm going to be less conservative that way, I should be more conservative in terms of using the interest after my 5/1 ARM adjusts, which I estimate will be about $1150 interest (as opposed to 850 before it adjusts).

It's not quite right to ignore the $450 principal payment since I do in fact have to take that out of my liquid savings every month to pay the mortgage and so it is in fact a withdrawl for SWR purposes. However by rebalancing, remortgaging over time, or perhaps getting an interest only loan later, it's somewhat mitigatable.

So using that interest only number and including the factors Kramer mentioned, my budget looks like this:

Income: $3330 from nest egg + $680 rent = $4010

Expenses:
Mortgage interest: $1150
HOA dues: $380
Prop Taxes:$280
Condo insurance: $20
Condo maintenance: $100
Condo subtotal: $1930
Car depreciation: $200
Car insurance: $80
Car maintenance: $70
Gas $70
Car subtotal: $420
Internet: $20
Electric & Gas: $80
Phone: $40
Cable TV: $50
Health Insurance: $350
Monthly bill subtotal: $540
Medical: $100
Food: $440
Clothing: $50
Travel: $200
Entertainment: $100
Gifts: $30
Household items: $100
Other: $100
Variable expenses subtotal: $1120
---------------------------------
Total Spending: $4010


It is kind of thin but I'm adaptable and having my days free sounds like it'll be worth it!

 

[califdreamer]

Couple of thoughts regarding your housing situation. Even though a fair chunk of your mortgage payment goes to pay down principal it's still a drain on cash flow and you can't pay the bills with home equity. Which leads to the second point. That quarter million of tied up equity would go a long way toward making ER more comfortable if you could free it up. The price of freeing it up most likely involves relocating. If you're happy in SF and prefer to stay it may be worth a few more years of work. On the other hand, if you could relocate your arbitrage opportunity may be at its peak. That is, the difference in housing costs between SF and other places is likely to narrow over the next five years. That last sentence is, of course, only my opinion.

 

[free4now]

I agree with everything you say, califdreamer. I generally believe that renting makes more sense than owning for the early retired, and I see myself moving towards that eventually if I stay early retired. The possibility of a housing "bubble burst" in the near future is one good reason for me to take time off now and decide whether to stay or go, rather than staying at my current job.