29 y/o planning to retire at 38

[robby152]

Hello all!

First time to post here, but I have been reading off and on for about 6 months. Thanks to all who regularly post here, as I have learned some and been inspired a lot! I have been thinking of FIRE for a while now, but only recently found this forum. I thought I would wade in and share my plan to get some more eyes on it. I realize that it is fairly aggressive, but I look at this as my 'best case scenario' plan, realizing that I very well may need to work another 10 years to cover a more reality-based set of assumptions.

Here are the facts:
Married, wife is SAHM with our first kid (and 2 very bad beagles).
Currently making north of 200K a year, but I work as an independent consultant, so that income depends on my ability (and willingness) to keep working in the sector that I currently work for the duration of the plan. I have a unique set of technical skills so I think it is safe to assume that I can continue to earn at this level, but work is still very stressful with some travel (hence the desire to FIRE).

All numbers are after tax (adjusted any pre-tax amounts by dividing total by 1 - estimated future tax rate of 25% - which is very conservative). Also, all numbers are combined his/hers.

IRAs/Solo 401K: 92K. AA is Age in Bonds - 20, Vanguard 3 fund portfolio (Total Stock Market, Total Intl Stock Market, Total Bond). I am comfortable with this as I invested all the way through 2008 until now, though I realize this is easier to do when young and asset poor.

Emergency Fund: 1 year's expenses

2 Rental Properties: Worth 150k combined. Will pay these off by the end of next year, and they will then throw off about 15K in income after all taxes, allowances for repairs and vacancy, etc. They currently throw off around 5K a year in income (due to the mortgages).

Primary House: Recently purchased for 215K, and I currently owe about 179K. Stable area with good appreciation, but frankly I don't care too much about that stuff. I plan on paying this off aggressively over the next 3-4 years.

Life Insurance: 1.5M, with 1 20 year term policy worth 1M and 1 30 year term policy worth 500K. This costs 900 a year.

Originally, I mapped out my plan in my mega spreadsheet of doom (I am a major finance nerd) based purely on investing increasing amounts in the market as the source of income in retirement, but last year I backed into a really good deal on a rental property. Then we moved and I turned my primary residence into another rental property. Comparing internal rates of return for these properties to what I am expecting in the market long term, my rental properties are significantly outperforming (as in 15% vs 8%). To me, this makes sense as rental properties are a hybrid between an investment and a job and the job part 'adds value' to the investment, but when I retire, I plan to outsource it all to a property management firm. So, now I changed the plan to eventually have 5 rental properties (to diversify risk) and continue my original plan of saving an extra 2K a year in the market compared to the previous year. I am 3 years into the 'plan' and so far so good.

Here are the details of the remainder of the plan:

• 2013 - Invest 19K After Tax (AT), pay off remaining 38K of 1 rental property, save 2.5K in daughter's 529, fully fund HSA.
• 2014 - Invest 21K AT, pay off remaining 50K of other rental property, save 2.5K in daughter's 529, fully fund HSA.
• 2015 - Invest 23K AT, prepay 58K of primary home, save 2.5K in daughter's 529, fully fund HSA.
• 2016 - Invest 25K AT, prepay 58K of primary home, save 2.5K in daughter's 529, fully fund HSA.
• 2017 - Invest 27K AT, prepay 58K of primary home (to pay off house), save 2.5K in daughter's 529, fully fund HSA.
• 2018 - Invest 29K AT, buy rental property 3 for 60K (with another 5K in rehab costs), save 2.5K in daughter's 529, fully fund HSA.
• 2019 - Invest 31K AT, buy rental property 4 for 60K (with another 5K in rehab costs), save 2.5K in daughter's 529, fully fund HSA.
• 2020 - Invest 33K AT, buy rental property 5 for 60K (with another 5K in rehab costs), save 2.5K in daughter's 529, fully fund HSA.
• 2021 - FIRE!

The end result I have projected is an ending portfolio value of 420K with 5 rental properties giving around 25K a year in income. If I withdraw contributions from the Roth IRAs until age 59.5 at a 3% SWR using the remaining portfolio balance method, not the adjusted for inflation method, I should have around 43K a year in income. After 59.5 I can withdraw earnings, and at 65 I can get some additional income from SS. I will have low housing expenses due to the house being payed off and very low taxes, since the portfolio withdrawals will be tax free and 25K of rental income is even less after tax (due to the depreciation deduction).

Risks:
-Stock market returns are low/negative during my short time horizon.
-Stock market variability reduces withdrawal amounts during 'low' years due to my withdrawal methodology, forcing me to work PT some during those years.
-I don't earn as much as I hope to enable me to save this much.
-I can't find 3 more rental properties for as good of a deal as I found the first two (though I know my area pretty well, and I think this is not going to happen).
-Baby expenses rise much faster than projected budget
-Random health issue comes up to slow investment ability.

Offsetting positive factors:
-I can just as easily continue to work 10-20 hours a week after FIRE if I need to by just telling my clients that is the max I can give
-Wife may chose to start photography business or other income project after the baby grows up a little.
-We are major LBYM and can further scale down the budget to the 'emergency fund' level if need be.
-I have tried a couple of times to keep a subcontractor to work under me, but both times I have lost them due to student visa issues (recruit smart mbas who happen to come from India). I may succeed in keeping one of these two guys after I figure out the visa thing or hire someone who is a US citizen with mad tech skills. This would not only increase income now, but could be a future semi-passive income source.

I have a lot more thoughts on the technicalities of how this will work and have a massive spreadsheet to contain all the numbers, but this post is long enough! Thanks for taking the time to read! And don't pull any punches, I am wanting as much constructive criticism as I can get.

 

[Papa bear]

I'm interested to see some of the comments/criticisms on this post. I'm in a similar situation (29, married, looking at rentals to be FI) and I want to be out before 40.

At first glance, if you are actively managing the rentals, doing repairs yourself, etc, I would be looking for a better return on my $'s.

Welcome to the forum! Good luck and I hope you stay on track with nothing terribly unexpected!

 

[papadad111]

Being a slum lord has it's ups and downs. The up is earning an IRR that is higher than what you can get in bonds, stocks, or other investments.

I stopped being a slum lord a few years ago after 15 years. Properties had not maintained value, area went down hill, had some dead beat tenants who skipped out on back rent, maintenance costs were rising, and i was not close enough to keep an eye on them (did not want to live in the declining area).... of course, it seemed like a great idea in 1994 when I got into the first rental......

Here are the downs:

1. property values stagnate or drop. Areas that are fine today and look good on paper appreciating 2% per year ....could actually drop. Areas go through urban change putting your rental property equity at risk.

2. Risk in income stream (rent prices fall or units go vacant or both ) as well as your potential repair and upkeep costs escalate - tweakers move in, burn up the carpet, trash the place, etc Those repairs really hammer your net

3. risk of lawsuit - liability insurance required

4. property upkeep costs - new roof, new water heater, new garbage disposer, snow removal /gardening costs all can escalate over time vs today and typically they rise faster than you can increase rent. Add that when you are older, the fun of doing maintenance wears off and you dont have same stamina to do it .... and it's just plain tiring every time you turn around, you are patching drywall, fixing windows, replacing carpet, cleaning units after a move out, etc. This is especially lousy if you want to travel for weeks at a time, something many retirees do.

There are certainly some good deals out there in real estate land. But I can say that being a slum lord is a lot harder than it looks on paper.

 

[Cooked]

Here are my thoughts. ...mega spreadsheet of doom...

Spreadsheets and Powerpoints are the crucible to the fall of humanity. I do use spreadsheets but refuse to ever again use Powerpoint (or Keynote). Spreadsheets are useful though. IMHO you should make a new mega spreadsheet of doom each years and archive them all. Then you will have a record of your movement through this process.

Your plan appears reasonable as a spreadsheet plan, but it does not reflect what will really happen. Somewhere between now and 2021 there will be great buying opportunities somewhere. If your money is all tied up paying off real estate then you may not be able to capitalize on these opportunities. If your 'pre pay' and 'pay off' statements are more fluid then you may be more able and willing to take advantage of these opportunities.

I applaud your plan but believe that it must be reassessed on an annual basis. Remember that borrowing money (for real estate) is not a bad thing. Sometime its good to repay it early and sometimes it is good to wait.

just my opinion YMMV

 

[MooreBonds]

From a fellow Spreadsheet of Doom Overlord:

1. I second the suggestion of not going crazy paying down your debt IF the rates are low. 10 years from now, in all probability, you are not going to see anywhere near current rates. Accumulate a generous e-fund instead of accelerating the mortgage paydown. Then diversify into other investments.

2. There are differences in opinion, but personally, if you're looking to pull the plug at 38, I would definitely NOT put money into a child's 529 plan. Sure, at your income level your overall tax deferral/savings options are limited, but that extra $ available for whatever need you have is (IMO) better than having $50k tied up into a529 plan that she may wind up not even needing if she scores decent scholarships! (it would be a bittersweet joy - your little girl is so smart or athletically gifted to get a scholarship...but you then have to pay income taxes AND a 10% penalty to take that 529 money back out).

3. Solo 401(k)? Have you looked at a SEP IRA? A SEP IRA lets you put away 20% of your net income, up to about $55k/year.

Other than that, about those spreadsheets: I used to maintain a laughably complex, overpopulated spreadsheet for budgets, account balances, and income ledgers to forecast into my late 90s.

Then I found the ER forum, where I learned that you just need the simple (and very incredibly accurate) 3.5% or so withdrawal rate (less if younger, more if older). Just know roughly what your budget is going to be in retirement and divide it by your WR. The more complex we try to make it in our overly anal obsessions, the more we overlook things that will ultimately most likely balance each other out and leave us with just about the exact same result.

Kind of like the mirage of "more complexity = guaranteed more preciseness and accuracy" in managing an unwieldy portfolio of individual stocks instead of a few general ETFs. (ahem....err....umm.....yeah.....I know nothing of that sorts...

The only other comment is that I've seen experienced property owners suggest a rule of thumb of doubling your mortgage note on your rental property to give you the back-of-the-envelope 'total ownership cost' (vacancy, repair, taxes, insurance, lost rent from deadbeats you're trying to evict, etc.) and then use that total ownership cost to compute your approximate long-term average rental income to see what you can likely expect over the long haul, and not some artificially spiked sky-high return from a good 2 year stretch right after you buy the property, have a good tenant, and don't have any maintenance costs whatsoever.

Other than that, it sounds like you have a great head on your shoulders and a spouse who shares your vision (priceless!).

 

[obgyn65]

To the OP - what are your annual expenses ? Welcome to the forum.

 

[robby152]

Thanks all for the responses!

@Papa bear - Glad to meet someone is a similar boat. Do you have some rental props? I was under the impression that my return was actually pretty good on the properties. I do know people that blow my returns out of the water though. What do you look for as your target return? I don't really 'actively manage' them, but I do call people to go out and fix stuff. All of these allowances are baked into the budget. So far, the allowance funds have been growing (about 10 months into the 'experiment').

@papadad111 - Thanks for your thoughts! I am not sure I would call myself a slumlord, as the tenants I have are 'high quality' and have been great. I try to do a thorough due diligence on any applicant and have personal referrals one one set. But, some people see any category of rental outside of a gated community as a slumlord, so whatev.

For your risks:

1. I agree, though I purchased these properties at such a low level they would both be slightly profitable at fire sale prices, so I am just looking at them as an actively managed bond that will eventually return face value. Oh, actually it looks like you are referring to my house. Ya, I agree it is a risk, though we had to pick somewhere to live and this place seemed like the best option. The breakeven analysis I did on staying here said we are better than renting after 2.2 years. I use the calculator at dinkytown.net.

2. True, so I guess I thought if the return ever dropped too low, I would sell, put the principle in the market and then re-evaluate the plan based on the higher proportion of income needing to come from SWR from the portfolio.

3. Yes, I have good amounts and am trying to get umbrella insurance as well.

4. I totally agree, and already feel older than I am. After rehabbing the first rental place ourselves, we decided to outsource all maintenance and repairs. So, I don't think picking up the phone to schedule a repair person will be too bad until I retire. Then property management will handle it.

I appreciate the thoughts from someone who has done this for a while!

 

[robby152]

@Cooked - Ha, yes I too despise PowerPoint (and thankfully I don't have to use it at work very much any more), and only use Excel because it is so much faster for me to use it than it is to learn something new. I am addicted... sadly. My mega spreadsheet of doom (MSOD!!!) contains archiving and integrates my budget into my retirement projections, so that I know how much faster each cheeseburger I don't spend an extra $5 on will speed us towards the goal. Muwhahaha. I can't tell you how many times my wife has rolled her eyes at me over it

Now, when you say 'buying opportunities', are you talking about other real estate or stocks? If stocks, I purposefully do not ever try to spot 'buying opportunities', but regularly invest according to my investment policy statement and do not ever veer away. Yes, I know this may sound legalistic, but it prevents me from making poor emotional choices. If you were referring to real estate, then I don't understand. How does buying good deals in real estate prevent me from buying good deals in real estate?

I definitely agree with the need to periodically re-assess the plan and make adjustments - good point! I also agree that there can be such a thing as 'good debt', but for me it is now all 'bad debt'. I have found that the psychological boost for us is such a big deal with the potential variability in my income, that moving towards 0 on the liability side of the balance sheet is really chilling us both out a lot (which I obviously need). So, it is a personal decision that is not as mathematically sound as it is emotionally rewarding. All the MBA finance nerd in me screams at the concept of paying off 3.5% debt, but I only have one life and I want it to be low stress.

 

[robby152]

@MooreBonds Thanks for the response!

1. We currently have an emergency fund of one year's expenses. Is that generous enough for you or do you recommend more? I figure that will give me a full year to 'figure out something' and if I can't do that in a year, I have major problems.

2. Interesting thoughts. I have always just wanted to make sure that our daughter at least had enough to put a major dent in the cost of a state school, if not enough to go for free, but that is a good thought about risks if she gets a full ride. I had been leaning towards using the Roth IRA for that, but I need the Trad IRA and Solo 401K now for tax savings.

3. Yes, I looked into SIMPLE IRA, SEP IRA, and SOLO 401k. I talked to the guys at vanguard about it, and for my situation the SOLO 401k seemed best. It doesn't cost me anything extra and is easy to implement. The max limits are higher than I plan on using anyway.

I look forward to when I can just use a simple 3% SWR and forget about all the details, but for now the MSOD is helping me get to that point. I just like being able to integrate every area of our finances, so that everything is instantly updated and I can see when I have enough to invest in something else. I like keeping lots of little 'buckets' for our budget and it is hard to keep track of otherwise. Also, I do the whole credit card bonus game and the MSOD helps me stay organized.

Using your rule of thumb for doubling the mortgage (I am assuming the rule uses a 30 year fixed?), the numbers for my properties tie out to that pretty closely, so that helps me feel better about the projections. Thanks!

And yes, the DW is the crucial factor. Without her, I would probably have 0 assets because we would have spent it all on useless junk. Our weakness is food, but you have to enjoy life somewhere, right?

 

[robby152]

@obgyn65 - Thanks for the welcome. Our current annual expenses are 53K (including charitable giving, life ins. premium, 529 and generous buffer). Our future retirement expenses are 35K (no mortgage, less giving, less 529 savings).

 

[beaglemom]

(and 2 very bad beagles) Is there any other kind?

 

[Htown Harry]

Give some thought to disability insurance.

 

[robby152]

(and 2 very bad beagles) Is there any other kind?

Ha, nice name! Finally, someone who understands what I am going through (tear).

I think the beagles, while potentially elongating my lifespan, are definitely lowering my chances of FIRE. The other day bad beagle # 2 (a lemon beagle) chewed up a pen and stained a rather large area of the carpet. Other recent infractions include chewing up a corner of the piano and eating my favorite hat from my alma mater.

 

[robby152]

Give some thought to disability insurance.

That is a really good thought. I currently do most of my work from home, although if I did have some sort of disability that prevented me from travel, it might cause a lot of damage. I will update the post if/when I get it. Any thoughts as to how much it costs? Is disability insurance typically 'cheap' or is it the classic 'it depends'?

 

[mnopqr]

Regarding 529 accounts, if the student gets a scholarship and does not end up needing the funds, you can withdraw the amount of the scholarship money. You have to pay income taxes on the gain, but do NOT have to pay the 10% penalty.

 

[robby152]

Regarding 529 accounts, if the student gets a scholarship and does not end up needing the funds, you can withdraw the amount of the scholarship money. You have to pay income taxes on the gain, but do NOT have to pay the 10% penalty.

Oh, that's good. I think that addresses the risk for me then, as I am planning on saving 2.5K a year until she is 18. This probably won't cover the total cost of college, as we plan on having her save up some for herself as well as try for dual credit stuff in high school.

So, basically, if she ends up getting a full ride, I would just look at it as having been invested in a tax deferred account until she is age 18. That's nice.

 

[beaglemom]

Ha, nice name! Finally, someone who understands what I am going through (tear).

I think the beagles, while potentially elongating my lifespan, are definitely lowering my chances of FIRE. The other day bad beagle # 2 (a lemon beagle) chewed up a pen and stained a rather large area of the carpet. Other recent infractions include chewing up a corner of the piano and eating my favorite hat from my alma mater.

I always tell them "you're lucky you are so cute".