27, aspiring FIRE enthusiast checking in

[FIREHacker]

Hi all!

Over the past 7 months or so, I've become increasingly interested in the whole FIRE movement. I've been doing lots of research and have been applying some methods to my own financial situation. My goal is to become FI within 10 years and then retire by 40 with hopefully a net worth of over $1 million.

Some preliminary info before I mention stats. I had a 90% scholarship through college, so I graduated with a $1500 loan. I still live with my folks who are kind enough to not charge me rent, but I'm planning to move into an apartment by Summer. I have no debt and don't plan on making any large purchases in the near-ish future, except for maybe a newer used car for <$12k. Buying a house doesn't appeal to me since I'd rather not deal with maintaining one. I also don't plan on having kids.

With that said, here are my current stats:

Income: $82,000 p.a. gross
Estimated Monthly Budget: $2,200 once I move out
Savings Rate (after taxes): Currently 90-93%. When I move out, it'll be around 64-68%.

Assets
Cash: $137,000, with $100k soon to be invested in a Vanguard ETF; and $10k to be invested long-term in the emerging U.S. and Canada cannabis market.
401k: $55,000 in a low fee index fund mirroring the S&P 500, with a 6% employer match in the form of company stock.
HSA: $4,500 invested in SPTM. Employer contributes $500 annually.

Net Worth: ~$197k

Strats
Current strategies include maxing out both tax-advantaged accounts to maximize potential for growth and reduce taxes now. Also planning to have my asset allocation at 100% equities for the first 80-85% of the accumulation phase; I have a very high risk tolerance since I don't plan on making any huge purchases soon. If the market tanks anytime soon, I'll see it as a 30% sale on companies if anything. When I get close to FIRE, I'm thinking of shifting the asset allocation to 60% equities, 40% bonds/fixed income to mitigate losses from future fluctuations. In retirement, I'd like to maintain a 3-4% withdrawal rate whenever possible.

Any thoughts on what I could be improving or doing in addition to what I've got going on now? Any feedback would be much appreciated!

 

[DrRoy]

You're looking pretty good. I would check on the rules for getting out of the company stock from the 401K and do it when you can. I personally would not do the cannibis investment. Too specific.

 

[exnavynuke]

1. I concur with DrRoy on the cannabis investment. Too speculative for such a large percentage of your current assets imo (especially since the federal government just recently decided to stop "turning a blind eye" to it).

2. How confident are you in your budget numbers? They could be fine, but may need some fine tuning.

3. What is your "goal"? A recurring theme in FIRE discussions is that people need something to retire "to". You're just starting out working, so it's unlikely you've gotten to the "I hate working and my job" stage. So while I think achieving FI is a lofty goal for anyone, I'd say don't get too caught up with the RE part until you're sure you know what you'd like to retire "to".

4. Watch out for inflation. A million dollars 10-15 years from now won't provide the same lifestyle it can today... at 2-3% inflation, you'd need around~$1.3-1.6M in 15 years to have the same lifestyle that $1M can provide today.

Also, I sent you a PM with some generic advice linked up.

 

[Travelwanted]

Welcome.

If you are serious about FIRE, learn the Bogleheads way. If you are not familiar:

bogleheads.org

https://www.amazon.com/Bogleheads-G...sr=8-1&keywords=bogleheads+guide+to+investing

 

[Greencheese]

28 year old here, glad to see some fellow people in their 20's people!

You have a ton of cash, and it doesn't look like you're taking full advantage of your tax shelters. Personally I would make the decision regarding renting vs owning in the next 5 years and perhaps hold onto an amount needed for a down payment if you believe you want to own and place that in a high interest savings account. Otherwise I'd review your 401k contribution limits at work and see if you have access to an after tax 401k while also maxing out your HSA. If your employer is giving you company stock as a match my guess is you should have $36,500 of 401k space remaining. I've funneled some unexpected income into my tax advantaged accounts via after tax 401k contributions and as a bonus it all winds up being Roth money via the backdoor Roth IRA.

I'm with others here, I wouldn't really invest in cannabis stocks, mainly because its too focused in a grey area of the economy. I'm a big fan of the bogleheads set it and forget it via target date funds. There was a study that consistant and high savings rates are the keys for financial independence, so why not stay as risk free as possible and just go total market index fund invest?

 

[97guns]

At 26 I had the same aspirations as you, to retire before 40. If I had kept my Assets in retirement accounts I would not have been able to retire early, my liquid assets allowed me to invest for income rather than drawing down on the retirement accounts when I reach the age that they allow me to.

The tax breaks are great but I don’t like a retirement fund dictating when I retire

 

[97guns]

59 1/2 is a long ways away for you

 

[NgineER]

Welcome to the forum! Great job on the savings rate! If you can truly keep it up, you'd be FI before 40.

Otherwise I'd review your 401k contribution limits at work and see if you have access to an after tax 401k while also maxing out your HSA.

+1 - defer taxes as much as possible so that you can take it out slowly at a lower tax rate.

At 26 I had the same aspirations as you, to retire before 40. If I had kept my Assets in retirement accounts I would not have been able to retire early, my liquid assets allowed me to invest for income rather than drawing down on the retirement accounts when I reach the age that they allow me to.

The tax breaks are great but I don’t like a retirement fund dictating when I retire

There are so many ways that to tap into your retirement accounts without penalties, that the above is not an issue. It requires some planning in order to ensure that you can bridge the 5 year hold requirement for conversions or rollover. Your retirement accounts should never dictate when you can retire.


At your minimalist expenses, you'd need $150-200k in Roth contributions or rollovers over the next 10 years, you could at that point initiate roth ladder to ensure that you could tap into those after five years.

72t could also assist you in tapping your tax deferred accounts.

 

[97guns]

59 1/2 is a long ways away for you

A 20 year gap to bridge does require creative planning

 

[NgineER]

It requires a five year bridge and continual Roth ladder (conversions) in a low tax bracket
Or
72t

You would be accessing retirement accounts the day you retire, not at 59.5. But you are right in that you could not access ALL the money in your retirement accounts right away.
But as a reward, you would have more money since you paid no tax in the way in and little tax on the way out.

 

[NgineER]

https://www.madfientist.com/how-to-access-retirement-funds-early/

 

[FIREHacker]

1. I concur with DrRoy on the cannabis investment. Too speculative for such a large percentage of your current assets imo (especially since the federal government just recently decided to stop "turning a blind eye" to it).

2. How confident are you in your budget numbers? They could be fine, but may need some fine tuning.

3. What is your "goal"? A recurring theme in FIRE discussions is that people need something to retire "to". You're just starting out working, so it's unlikely you've gotten to the "I hate working and my job" stage. So while I think achieving FI is a lofty goal for anyone, I'd say don't get too caught up with the RE part until you're sure you know what you'd like to retire "to".

4. Watch out for inflation. A million dollars 10-15 years from now won't provide the same lifestyle it can today... at 2-3% inflation, you'd need around~$1.3-1.6M in 15 years to have the same lifestyle that $1M can provide today.

Also, I sent you a PM with some generic advice linked up.

1. The cannabis investments currently aren’t factored in my estimated year of being FI or retired—it’s money that I’m okay with investing in something risky.

2./4. I’m pretty confident in my budget numbers. There are certain expenses that I may have over-budgeted for just to be safe. I’ve got a spreadsheet that also accounts for 3% annual inflation on cost of living. Of course, my numbers could end up being off by a bit. Won’t really know until I move out and track my expenses for a few months.

3. As for goals, I’ve got quite a few projects/ideas lined up once I retire, and I’ve already got some hobbies/interests going that I can easily focus on in retirement. Though, the most important thing for me is to continue learning as much as I can and develop as a person.

 

[FIREHacker]

Welcome.

If you are serious about FIRE, learn the Bogleheads way. If you are not familiar:

bogleheads.org

https://www.amazon.com/Bogleheads-G...sr=8-1&keywords=bogleheads+guide+to+investing

Oh yeah, I’m serious about it. Though I've pretty much had to keep my mouth shut about it around friends, family, and especially people at work . I’ve been snooping around Bogleheads occasionally and compiling some notes to apply to my own situation. Still a work in progress.

 

[FIREHacker]

28 year old here, glad to see some fellow people in their 20's people!

You have a ton of cash, and it doesn't look like you're taking full advantage of your tax shelters. Personally I would make the decision regarding renting vs owning in the next 5 years and perhaps hold onto an amount needed for a down payment if you believe you want to own and place that in a high interest savings account. Otherwise I'd review your 401k contribution limits at work and see if you have access to an after tax 401k while also maxing out your HSA. If your employer is giving you company stock as a match my guess is you should have $36,500 of 401k space remaining. I've funneled some unexpected income into my tax advantaged accounts via after tax 401k contributions and as a bonus it all winds up being Roth money via the backdoor Roth IRA.

I'm with others here, I wouldn't really invest in cannabis stocks, mainly because its too focused in a grey area of the economy. I'm a big fan of the bogleheads set it and forget it via target date funds. There was a study that consistant and high savings rates are the keys for financial independence, so why not stay as risk free as possible and just go total market index fund invest?

I’m choosing to rent instead of own.

I'm currently maxing out a pre-tax 401k and HSA. I may have not done my due diligence in regards to this, but I thought the max contribution to a 401k in 2018 is $18,500 (in the U.S.) across pre-tax and after-tax accounts. I'm not quite clear on where the $36,500 comes from.

 

[FIREHacker]

Welcome to the forum! Great job on the savings rate! If you can truly keep it up, you'd be FI before 40.


+1 - defer taxes as much as possible so that you can take it out slowly at a lower tax rate.



There are so many ways that to tap into your retirement accounts without penalties, that the above is not an issue. It requires some planning in order to ensure that you can bridge the 5 year hold requirement for conversions or rollover. Your retirement accounts should never dictate when you can retire.


At your minimalist expenses, you'd need $150-200k in Roth contributions or rollovers over the next 10 years, you could at that point initiate roth ladder to ensure that you could tap into those after five years.

72t could also assist you in tapping your tax deferred accounts.

Thanks! I intend to keep it up to the best of my ability.

I had the same thought as 97guns. From my understanding, if I want to withdraw before age 59.5, I'd need to wait 5 years before I can touch the money from a Roth Conversion Ladder. So to fund the first five years of retirement, I'd need to draw from the taxable investment account. But I don't really understand how the taxable account alone can fund those 5 years. Wouldn't I be drawing on the principle and risk further growth for that account?

Please correct me if I'm wrong about any of this. I've been trying to understand the whole Roth Conversion Ladder strategy.

 

[thumbs]

Make sure you set aside some fun money too. You are only young once. Great start though! You will be amazed how fast your stock pile can grow!

 

[NgineER]

Thanks! I intend to keep it up to the best of my ability.

I had the same thought as 97guns. From my understanding, if I want to withdraw before age 59.5, I'd need to wait 5 years before I can touch the money from a Roth Conversion Ladder. So to fund the first five years of retirement, I'd need to draw from the taxable investment account. But I don't really understand how the taxable account alone can fund those 5 years. Wouldn't I be drawing on the principle and risk further growth for that account?

Please correct me if I'm wrong about any of this. I've been trying to understand the whole Roth Conversion Ladder strategy.

https://www.madfientist.com/how-to-access-retirement-funds-early/

You'd have to withdraw money to live on in those five years anyway, if you look holistically at your investments, it doesn't really matter where your money comes from, it is all one big pot, but taxes can play a big role.

Check out the link above, it explains it well.

In retirement, you would likely pay very little in taxes when you withdraw from your taxable account at your spend level. You might even get away with not paying taxes at all. But you would be paying 22% right now at your income level (which is equivalent to $6k a year on 22% of 18500 +3450+5500)

10%	$0.00 to $9,525.00		$952.50
12%	$9,525.00 to $38,700.00		$3,501.00
22%	$38,700.00 to $82,500.00		$6,886.00
Federal Income Tax Total from all Rates		$11,339.50

If you assume the standard deduction of $12k, you have $70k that is taxable.

As a results you would end up paying an effective federal tax rate of 16% now. I don't know what your state is, so I did not include state taxes here. If you don't contribute at all to a 401k, you'll likely end up with somewhere around $70k after taxes. Expenses of $26k leaves you with $44k to invest annually.

If you contribute the max to a HSA, a 401k and t-IRA you would avoid paying 22% in taxes on that portion of the earnings, leaving you with 22% more contributions each year, woohoo!!! That is awesome, almost $6k more saved each year. As a results you would contribute about $21.5k to your taxable account and about $27.5k in tax deferred accounts, seems like a decent balance to me. Your effective tax rate would be 6.5%.

In retirement you would have about $400k in your taxable account, throwing out about $10k in dividends each year. You would need to withdraw $16k from your 401k to get to your $26k in annual expenses, on which you would have to pay an effective tax rate of 11%. This is half of what you would be paying on it when you stash it in a taxable account now.
You would reduce your taxable account by about a third, not accounting for any growth in the account, to cover the first five years.

You can do a more careful analysis on your own, but to sum it up, you'd end up with more money in retirement and would pay less taxes overall. This would however require more planning on your part.

The following suggestion might be contrary to what people here would recommend, but at your early fire age of fourty I would keep 100% invested in stock until your retirement date, if there is a downturn right before you retire, you could afford to stay a year or two buying basement bargains liekly boosting your nest egg substantially after recovery. Upon retirement, I would shift your tax deferred assets to fixed income to match your AA.

It would be a pretty big taxable event trying to do so in your taxable account, as you would likely not have enough in your tax deferred account to go to 100% fixed and meet your AA.

 

[FIREHacker]

[FONT=&quot]Been really busy for the past few months, but I’ve returned. Thanks everyone for the insight![/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]I definitely plan to do the Roth Conversion Ladder, if it even still exists in the future. My plan is to have my post-FIRE income from cap gains and qualified div yields from a taxable account so that I pay no federal tax. Perhaps I may come up with other streams of income, enabling me to withdraw less. Meanwhile, assuming I maintain my standard of living below the upper threshold of the 2nd tax bracket, I’ll convert from tIRA to Roth up to the standard deduction at the time for even more tax-free money. Though I imagine I’d be able to convert more without getting hit with tax since a good portion of sell-offs would be basis and therefore untaxed. [/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]As for AA upon retirement, I’m actually now thinking 80% equities, 20% bonds—something similar to JL Collins’ AA. I’m a fan of keeping it simple [/FONT][FONT=&quot][/FONT]

 

[97guns]

income is needed to retire early unless you have some kind of sweet pension to rely on