FIREd at 37 with Net Worth of approx 5MM comments/criticism welcome

[sonomaguy]

If I made any mistakes/left something out please let me know and I will do my best to edit this. Hopefully there is some discussion about long-term FIRE and maybe some portfolio construction stuff as well. Thanks!

I'm 37 and married with two children ages 10,11 and live in California. I've lurked on this forum and appreciated the insights and thought processes of many involved. I wanted to share my situation and general thoughts, partly to hold myself accountable for where I stand/think right now, but mostly to open my thoughts/portfolios up to suggestions or criticism from the minds of this forum.

I would love opinions/criticism on asset allocation/porfolio construction and future methodology, or anything else that might standout enough for you to comment.

Our current expenses are 13k/month, that includes everything. We can ratchet back if needed.

Our current balance sheet is as follows:

Taxable brokerage account: 2.8MM
Roth brokerage acct: 275k
Roth microcap hedge fund: 266k
Taxable microcap hedge fund: 757k
529 for 11 year old: 138k
529 for 10 year old: 134k
Traditional IRA husband 10k
traditional IRA wife 10k
treasury direct/paper bonds: 32k
private investments: 450k
Cash 325k
House value owned outright 1.1M

Some explanations and thoughts:

I'm a believer in minimizing cost, spending outsized effort on correct assett allocation, and tax efficiency. I do sometimes end up with an opinion and deviate from textbook strategy and in the past it has served me well. I think the time to begin to eliminate/minimize that personality trait might be now.

The hedge fun holding carries expensive fees. It is 1% of assets and 20% of profits in any year the benchmark 10% return is met. If there is no 10% return there is no performance fee. It is my belief that in this particular space of microcap stocks and special situations(mostly microcap arbitrage), this fund/manager adds the value to warrant the fees. The taxable portion is managed with tax efficiency in mind and the roth portion has a bit more freedom to make decisions not constrained by tax implications. I have held/added to this investment over the past 10 years and it has been a stellar performer.

The asset allocation breakdown in my brokerage account is as follows (there is 110k cash in the account earmarked for bonds or TIPS in some way shape or form):

***attachment inserted for this, might sow at the bottom?****



I think we are probably overweight smallcap because of the hedge fund, slighty overweight emerging markets and underweight fixed income. We cannot change our asset allocations quickly without incurring tax gains because all of the stocks in my taxable accounts have gains. I recently turned off our DRIP program and plan to use the proceeds to continue to add to our Fixed income holdings. Additionally, we own 225k worth of NLY in my ROTH brokerage account, which can be considered a fixed income position, also owning our house outright has some of the diversification benefits of long fixed income (maybe?), and some of my "private investments" include notes with characterstics very similar to fixed income holdings.

Since we are young, the FIREd calc becomes a bit interesting, in my opinion anyways. At 65 we will receive a pension of 2,480/month and then at some point the two of us will get whatever social security is still available at that point (approx 30 years from now who knows what that will look like).

Our current income from non-investment activities is limited enough to consider zero.

 

[jclarksnakes]

Way to go and welcome to the forum. New people usually get a lot more responses to their introductory posts. I can only guess that many regular posters here look at your financial success and think there is probably not a lot that they could suggest that would work better for you than what you obviously already know about saving and investing. One thought for you though. With your assets you may have not considered an ACA subsidy. If you look carefully at how and where you take money out of the taxable accounts over the next few years you may be able to keep your MAGI below 400% of FPL and qualify for subsidized health care insurance.

 

[FIREd]

Welcome to the forum! I don't have much to contribute regarding your AA and methodology, but I too am interested in the topic of long-term FIRE. In general, I think that for us young FIREes the ability to remain flexible is particularly important and I have many backups built into my plan.

 

[bradaz2488]

Welcome.... Wow... Net worth of 5M at age 37.. Not many people can claim that, not even doctors & lawyers at that age... Very impressive given that that last 12 yeas of market returns are been well below average. Maybe you can give me some advise. How did you accumulate $541K into ROTH IRA accounts

Roth brokerage acct: 275k
Roth microcap hedge fund: 266k

It is my understanding that ROTH IRA have only been around since 1998 and there has always been a max contribution limits on from $2000 (1998) to $5500 (2013) for people ages <49. Also, you are limited on the amount based on your income. I made too much & to contribute to a ROTH IRA for the last 10 years of my career. I'm looking at converting my IRA's to ROTH IRA now that I retired to avoid the higher tax bracket I was at when working. Is this what you did?

 

[explanade]

Maybe those hedge funds exploded in some years.

Do hedge funds offer ROTH IRAs?

 

[retire2020]

Very Impressive and congrats on 5M Networth! Most people do not even have 100K saved up by age 37. I would suggest you keep 3 years expense in cash and invest rest in 70/30 at your age. Look into O-MAGI discussion thread for ideas and how to qualify for obamacare - can save you lots money by controlling your unearned income.

 

[explanade]

But their monthly expenses are $13k.

So they're going to drastically pull back spending and "income" to save a few thousand?

 

[Texas Proud]

Welcome.... Wow... Net worth of 5M at age 37.. Not many people can claim that, not even doctors & lawyers at that age... Very impressive given that that last 12 yeas of market returns are been well below average. Maybe you can give me some advise. How did you accumulate $541K into ROTH IRA accounts

Roth brokerage acct: 275k
Roth microcap hedge fund: 266k

It is my understanding that ROTH IRA have only been around since 1998 and there has always been a max contribution limits on from $2000 (1998) to $5500 (2013) for people ages <49. Also, you are limited on the amount based on your income. I made too much & to contribute to a ROTH IRA for the last 10 years of my career. I'm looking at converting my IRA's to ROTH IRA now that I retired to avoid the higher tax bracket I was at when working. Is this what you did?

Not that he did, but you can convert a regular IRA to a ROTH... you can convert a 401(k) to a ROTH...

Heck, I bet you could convert some kind of retirement account to an IRA and then convert to a ROTH....

So, you are not limited to the annual contribution limits....

 

[Fishingmn]

That's a lot of money in the 529's.

What happens if a child chooses a state school or gets a huge scholarship? While there are some options for carrying over money for future schooling or future generations you do have a risk of having too much in there right now which could carry a 10% penalty along with the tax hit.

 

[jclarksnakes]

But their monthly expenses are $13k.

So they're going to drastically pull back spending and "income" to save a few thousand?

No. The OP has a lot of money in taxable accounts and may be able to pull from that to cover the 13K in monthly expenses while keeping the MAGI below 400% of FPL.

 

[Gatordoc50]

Nice Job! Planning a fifty year retirement is beyond my pay grade. Your probably gonna have to re- roof a few times.

 

[Bestwifeever]

Just want to say welcome and well-done, Sonoma. I think you should be giving us advice with those results .

 

[GoodWishes]

Congratulations, that is a great accomplishment at age 37.

Today UCs COA (Cost of Attendance) is about ~$120k total for 4 years. States are slightly less. Private colleges cost about twice as much as UCs, ~$250k. Your 529s will cover your kids for CA public colleges and about 1/2 of private colleges now. No telling how much colleges will cost by the time your kids go to college.

You will unlikely get any need based financial aid due to your assets. Top colleges give very little to no merit based scholarships. For colleges that give merit based scholarships, to get substantial amount, the student's stats (gpa, test score, etc) needs to be at top of the applicant pool (i.e. like top 1%).

Also your expenses might go up as your kids get older. For example, driving is a big expense (i.e. insurane, maybe extra car).

I am speaking from experience. I have one finishing college and one starting college. Our car insurance, umbrella insurance went up a lot especially when we got them cars for their jobs.

Have you ran various calculators to see if your portfolio can sustain a $156k annual expense life style for a long time?

It is a lot of asset but the expense is pretty high and it is for a long time.

 

[ERPRECY]

Just want to say welcome and well-done, Sonoma. I think you should be giving us advice with those results .

Yes. Especialy how to accummulate so much in IRAs in a relatively short period. Might be good advice for our kids.

 

[NH Hiker]

That's a lot of money in the 529's.

What happens if a child chooses a state school or gets a huge scholarship? While there are some options for carrying over money for future schooling or future generations you do have a risk of having too much in there right now which could carry a 10% penalty along with the tax hit.

If your child gets a scholarship, you can take the equivalent amount of money out without a 10% penalty - you do have to pay taxes on any gains though.

 

[kmt1972]

Welcome. This is very impressive NW at this age. Congrats.

 

[sonomaguy]

Welcome.... Wow... Net worth of 5M at age 37.. Not many people can claim that, not even doctors & lawyers at that age... Very impressive given that that last 12 yeas of market returns are been well below average. Maybe you can give me some advise. How did you accumulate $541K into ROTH IRA accounts

Roth brokerage acct: 275k
Roth microcap hedge fund: 266k

It is my understanding that ROTH IRA have only been around since 1998 and there has always been a max contribution limits on from $2000 (1998) to $5500 (2013) for people ages <49. Also, you are limited on the amount based on your income. I made too much & to contribute to a ROTH IRA for the last 10 years of my career. I'm looking at converting my IRA's to ROTH IRA now that I retired to avoid the higher tax bracket I was at when working. Is this what you did?

Yes, the hedge fund housed ROTH was a 401k rollover/conversion
The brokerage account ROTH was a conversion from a SEP IRA

 

[sonomaguy]

Congratulations, that is a great accomplishment at age 37.

Today UCs COA (Cost of Attendance) is about ~$120k total for 4 years. States are slightly less. Private colleges cost about twice as much as UCs, ~$250k. Your 529s will cover your kids for CA public colleges and about 1/2 of private colleges now. No telling how much colleges will cost by the time your kids go to college.

You will unlikely get any need based financial aid due to your assets. Top colleges give very little to no merit based scholarships. For colleges that give merit based scholarships, to get substantial amount, the student's stats (gpa, test score, etc) needs to be at top of the applicant pool (i.e. like top 1%).

Also your expenses might go up as your kids get older. For example, driving is a big expense (i.e. insurane, maybe extra car).

I am speaking from experience. I have one finishing college and one starting college. Our car insurance, umbrella insurance went up a lot especially when we got them cars for their jobs.

Have you ran various calculators to see if your portfolio can sustain a $156k annual expense life style for a long time?

It is a lot of asset but the expense is pretty high and it is for a long time.

Thanks for the comments on the expense side.

I agree our nest egg is a good size, but relative to our time horizon and expenses level it's not a slam dunk certainty that we can live the rest of our days with zero additional income or spending changes.

We love the retired lifestyle and plan to continually re-evaluate our spending, investment and work choices. For now, no work, hopefully prudent financial decision making and 13k/month lifestyle works great for us. If we find we need to make changes, we will. I already am hopeful some feedback from this forum will help us make some changes that will continue to make the no-work thing more and more certain for a long period of time - which is one of the major goals.

 

[sonomaguy]

That's a lot of money in the 529's.

What happens if a child chooses a state school or gets a huge scholarship? While there are some options for carrying over money for future schooling or future generations you do have a risk of having too much in there right now which could carry a 10% penalty along with the tax hit.

I'm going to take some time to learn the fine print again on these things. I remember when we set them up they made sense at the time. Since then they have been on auto-pilot for the most part, though I did pull the plug on contributions some time ago.

 

[sonomaguy]

Way to go and welcome to the forum. New people usually get a lot more responses to their introductory posts. I can only guess that many regular posters here look at your financial success and think there is probably not a lot that they could suggest that would work better for you than what you obviously already know about saving and investing. One thought for you though. With your assets you may have not considered an ACA subsidy. If you look carefully at how and where you take money out of the taxable accounts over the next few years you may be able to keep your MAGI below 400% of FPL and qualify for subsidized health care insurance.

thanks for the comments - I will read the information about this on this forum and elsewhere and see if I can figure out a way to make it work for us.

 

[sonomaguy]

Welcome to the forum! I don't have much to contribute regarding your AA and methodology, but I too am interested in the topic of long-term FIRE. In general, I think that for us young FIREes the ability to remain flexible is particularly important and I have many backups built into my plan.

Nice Job! Planning a fifty year retirement is beyond my pay grade. Your probably gonna have to re- roof a few times.

the long term time horizon makes rigid planning difficult. I agree fully with both of you - flexibility will be important - hopefully just the ability to be flexible will be enough, but planning for changes if needed is part of the plan. ha.

 

[urn2bfree]

First of all, to reiterate on the 529- scholarships do not punish you- you get to have more money for your retirement if your kid gets one. Only pay taxes on the withdrawl as you would any other investment in a tax deferred account. No 10% penalty. Also, a stat school tuition and fees can easily burn thru the majority of what you have saved and if child goes to grad school--use up all of it if you want. if there is money left -so,what? That money does not diminish your flexibility or wealth. You can spend on your own education or redesign ate to a grandchild or worst case pay the 10% penalty and the taxes and you still have MORE money for your retirement than you thought.
To this latter point it looks like if I add it up that your Title of this thread is a bit short-- adding in the value of your home you have a net worth closer to $6MM. If you are flexible about downsizing and cutting back--and your current expenses are really $156,000 a year you look as golden as anyone can be based on PAST markets. As 50 years is a long time to plan for, and our data represents a very short time to study trends- there is no way to give more certainty. Nice job and good luck!

 

[jj]

Congratulations! You've won the game, now all you have to do is not screw up.

At 37 you need to be planning for the next 60 years and not 50. If I were you I would discount the pensions due in 28 years, unless COLA'd they will be worth peanuts by that time.

Get a decent umbrella insurance policy. You have a lot of assets at risk there.

It does appear you have about $5m in investable assets, with the paid for house on top. Of course, at these levels fluctuations of $100k or more per day are frequent. An annual spend of $156k is just over 3%. I think this is reasonable especially if you can ratchet back should the need arise, although some would say not. Make sure that you have counted all expenses, including taxes, allowances for capital replacement items, and the cost of your investments in this figure.

Now to the 90+% stock allocation. I think you are completely crazy unless you plan on going back to work. Take $5m as the portfolio. That gives you in excess of $4.5m in stock type investments (I don't think you can count your position in NLY as a bond-like investment). Five years ago in the last crash you would have seen that position reduced by approximately 50%. Yes, you would lose $2.25m. That would leave you with $2.75m of which a draw of $156k pa would constitute almost 5.7%. You can draw less but even a 4% withdrawal on the reduced stash would only be $110k. Do you really want to go this low? I repeat, you have won the game. Look at reducing your stock allocation to at most between 50-60%. You should be investing with the mentality of a 57 year-old.

20% in hedge funds is your decision, I wouldn't do it.

My advice to you is to get reading the bogleheads board.

Bogleheads Investing Advice and Info

And I repeat - don't screw up!

 

[sonomaguy]

First of all, to reiterate on the 529- scholarships do not punish you- you get to have more money for your retirement if your kid gets one. Only pay taxes on the withdrawl as you would any other investment in a tax deferred account. No 10% penalty. Also, a stat school tuition and fees can easily burn thru the majority of what you have saved and if child goes to grad school--use up all of it if you want. if there is money left -so,what? That money does not diminish your flexibility or wealth. You can spend on your own education or redesign ate to a grandchild or worst case pay the 10% penalty and the taxes and you still have MORE money for your retirement than you thought.
To this latter point it looks like if I add it up that your Title of this thread is a bit short-- adding in the value of your home you have a net worth closer to $6MM. If you are flexible about downsizing and cutting back--and your current expenses are really $156,000 a year you look as golden as anyone can be based on PAST markets. As 50 years is a long time to plan for, and our data represents a very short time to study trends- there is no way to give more certainty. Nice job and good luck!

Thanks for the comments. I wasn't sure if home equity generally was included in the NW number but yes that gets us to around 6MM.

I remember now on the 529 - the things you said about being able to redesignate it, the tax benefits we have already gotten from our contributions and the tax advantaged growth, and the possibility to use it ourselves, all make it worth the slight risk of worst case as you said withdrawing with the penalty.

thanks again.

 

[sonomaguy]

Congratulations! You've won the game, now all you have to do is not screw up.

At 37 you need to be planning for the next 60 years and not 50. If I were you I would discount the pensions due in 28 years, unless COLA'd they will be worth peanuts by that time.

Get a decent umbrella insurance policy. You have a lot of assets at risk there.

It does appear you have about $5m in investable assets, with the paid for house on top. Of course, at these levels fluctuations of $100k or more per day are frequent. An annual spend of $156k is just over 3%. I think this is reasonable especially if you can ratchet back should the need arise, although some would say not. Make sure that you have counted all expenses, including taxes, allowances for capital replacement items, and the cost of your investments in this figure.

Now to the 90+% stock allocation. I think you are completely crazy unless you plan on going back to work. Take $5m as the portfolio. That gives you in excess of $4.5m in stock type investments (I don't think you can count your position in NLY as a bond-like investment). Five years ago in the last crash you would have seen that position reduced by approximately 50%. Yes, you would lose $2.25m. That would leave you with $2.75m of which a draw of $156k pa would constitute almost 5.7%. You can draw less but even a 4% withdrawal on the reduced stash would only be $110k. Do you really want to go this low? I repeat, you have won the game. Look at reducing your stock allocation to at most between 50-60%. You should be investing with the mentality of a 57 year-old.

20% in hedge funds is your decision, I wouldn't do it.

My advice to you is to get reading the bogleheads board.

Bogleheads Investing Advice and Info

And I repeat - don't screw up!

I just read this quickly and found myself nodding my head. I agree with what you have written, possibly I agree 100%, let me think about it and come back with a possibly more detailed response/plan of action.

thanks!