Last year was terrific for my household financially, and I believe all the lights on my early retirement dashboard are now solidly green. I would like feedback on my plan.
I should first say that I'm an inheritor. I know the statistics on us as group, and I know I'm not alone. But I'm enough of an odd duck that I've been reading heavily in the FIRE community for several years, and I can't remember anyone posting anything close to some of the issues that come up for me. I'm surely not unique though, so maybe this will reach the ears of someone with relevant experience.
I'm a 53 year old male, my wife is 55. Wife has been a homemaker for the past 13 years, but does have some employment history and does qualify for social security. No kids.
Most posts of this kind start with assets, but I'm going to start with spending and conventional income as it is a lot easier to describe for us.
Spending
-----------
I have excellent Quicken data for all of my adult working life. I've worked up detailed data for the past 7 years, and total spending in that time has been between $120k-$130k per year, save for two exceptional years when we bought a new vehicle for cash, and another year when we bought my mother-in-law a house for cash.
I also track what I think of as "baseline" expenses, which excludes two major hobbies (one for each spouse) and vacation spending from the total spending amount. We spend typically $30-$40k per year on these discretionary expenses, and they are readily cut back. During this Covid year for example, we spent a lot less on vacations, but more on our hobbies as a result. Baseline spending is $70-$90k per year, and represents to me a comfortable fallback position in spending that we could readily resort to when a major market pullback happens.
Employment Income (W-2)
------------------------------
I work in IT for a small company that is perpetually strapped. It resembles a non-profit more than a technology company. I'm paid about $110k. I like the people I work with, but there is no room for advancement or career/salary growth that I care about - I am at the top of my tiny hierarchy. At 53 I figure I will have a very difficult time finding another job paying similar should I get laid off before I quit, so I've been furiously stocking the lifeboat.
No stock options or RSUs. No profit sharing. The 401k has garbage funds with no matching. Worst of all, no mega-backdoor.
Social Security
----------------
Open Social Security suggests my wife file for benefits at 62 for $11,109 /yr, and myself at 70 for $29,343/yr. Sounds reasonable to me.
Assets
-------
I will try to list these in a most-certain to least-certain order, and will attempt to characterize the uncertainty for each of them. This uncertainty has vexed me much of my working life, since if I knew I could depend on all of these things completely I would have retired years ago. Instead I have tried to build a retirement plan that can succeed with a great deal of failure at the more uncertain end of things.
* $4.1 million in Vanguard taxable brokerage account. Unsurprisingly this is the backbone of my plan.
* $175k in tax-deferred retirement accounts (401k, SEP-IRA, Solo 401k, various IRAs). Mostly VTBLX or other similar bond funds.
* Rough asset allocation across taxable and tax deferred accounts:
VTSAX (Vanguard total stock market): 70%
VTIAX (Vanguard total international): 10%
VWIUX (muni bonds) + VTBLX (total bond) + small holdings in non-Vanguard bond funds: 10%
Money Market/Cash: 10% (about 3 years of spending worth)
* Paid-for primary residence. $500k Zillow value. We don't include this in net worth, and aren't planning on moving, but it's worth mentioning.
* Paid-for mother-in-law residence. $400k Zillow value. We don't include this in net worth either, since its value is earmarked for elder care for my mother-in-law should she need it.
* $1.1 million in timberland. This is not a REIT, this is actual real property that we pay a forester to manage. This land has been in the family for 100+ years, and I own it jointly with my younger brother in an irrevocable family trust. I have majority control over the trust, so technically I can dispose of it as I want, but the reality is my brother likes the asset and wants to hold on to it for at least the next decade. (This is not a hardship for me, I like the asset too, at least for that time frame.) During that decade it will likely have irregular timber harvests my share of which will be worth $170k in 2020 dollars. Because of timber growth the timberland will be worth a good deal more than $1.1 million in 2020 dollars after 10 years, even with the harvest value removed, but $1.1 million is easier to think about than speculating about growth rates, timber prices and mill location in 10 years. Estimates above about timber values are believed to be conservative and have proved reliable over the years.
* $500k - $5 million in mineral rights. Our taxable account has been built in large part over the past 15 years using oil & gas bonus and royalty money from these inherited mineral rights. The insane range on the value here represents our frank ignorance of the future, the crazy swings in the price of oil ("$0" to $50+ dollars per barrel in 2020), and the impossibility of knowing what will be leased and produced in the future. We regularly receive unsolicited offers to sell these mineral rights, and a current high-water mark for these offers would be about $1.2 million to me before tax. The $5 million figure represents an extremely optimistic take on the value of all mineral rights, including ones that don't currently have any interest or activity.
Neither my brother nor I want to sell the rights, but they absolutely have real value. Ownership is via the same trust as the timberland, so while again I have full control, I am bound by my brothers wishes. Fortunately our investment objectives here are the same, and we have consistently acted in harmony and agreement for all our shared assets. Our strong mutual preference is to hold out for leases rather than sell the rights themselves.
There is current production on some of the units that have been putting out steady oil & gas royalty income. My wild-ass prediction for immediate future income would be as follows:
2021: $146k
2022: $125k
2023: $108k
2024: $93k
And so on, following a familar-to-us production decline curve down until the current wells are capped. Counting on these specific numbers would be downright stupid, but the leases will definitely produce something. I would be absolutely floored if I did not get at least $10k-30k / year in additional income from these for the next 2-5 years. I have stopped short of actually baking any income assumption from royalty income into my plan, but it is difficult to ignore it entirely, although that would be the wisest course of action.
* A life insurance policy on my parents which will net $600k in 2020 dollars when both parents die (a "second-to-die" policy). This assumes the policies are kept paid. Currently my father uses the yearly tax-free gift amount to keep this policy paid up. I vacillate about whether to include this in planning, and mostly try not to.
* Potential additional inheritance when my parents die. The best conventional wisdom is to completely ignore this, naturally. Like many inheritors, I find this very difficult, especially since my dad's portfolio is headed full-speed for the estate tax limit of $22 million. He's a turbo-charged, modest-living Boglehead with mostly index funds, and he shares in the same stream of mineral income as my brother and I, but at a larger scale. Last year he took in $1.2 million in new mineral income, on top of a good government pension and Social Security income. He has literally never had to draw down on his equity portfolio, and is still in accumulation mode. I recently had to explain to him that there was a 0% long-term-capital gains bracket for the first $80k. Since he's done his own complex taxes his entire life and is still a super sharp DIY investor, the point is just that his portfolio is friction free, with no withdrawal at all, compounding happily, targeting legacy. Once a year he calls us to his house and goes over his will and trust documents like a somewhat morbid but strangely cheerful fire drill. He clearly wants to do a great job for us and so far absolutely has.
When I succumb to the temptation to pencil this in, I plan for an additional $2 million in 2020 dollars when he is 95, which is probably absurdly conservative. (This has made some nightmare Monte-Carlo simulations that I torture myself with work out.) And of course I probably shouldn't be doing even that, admittedly.
Health Insurance
-------------------
I've seen more than a few potential early retirees say health care was the only thing stopping them. My father visited me a year ago to talk to me about retirement. He retired in his early 50s and has been very encouraging, watching me struggle with One More Year with wry understanding. When I mentioned that that the mineral income would make it difficult to control my MAGI in the first years of retirement, and would likely disqualify us from ACA subsidies, he instantly offered to pay for my medical expenses, since medical expense payments don't contribute to the lifetime estate tax limit. I have made it clear to him that this could be as high as $30k/year by the time we were approaching medicare, and he's completely OK with it. He's been paying about $5k of our medical expenses per year since without complaint or problem.
While I have no reason whatsoever to doubt my father on this, I do need to have a backup plan for health insurance before medicare. When I consider this family subsidy possibly going away, I figure I would reduce our discretionary expenses by $10k-$20k, and if mineral income had dried up, also attempt to control MAGI to qualify for ACA subsidies. I think this is reasonable enough, but please challenge me if you think this idea is deficient. I think it would be a tragedy to keep working ONLY for healthcare, and conservative to the point of stupidity to refuse my father's offer. But if I'm being willfully blind to something important here, I need to know.
So what's the plan?
----------------------
Because of all the uncertainty and the restrictions on assets, it has been hard to think about a long-term plan at times. To give just one concrete example, the timberland is an asset 100% in my control and ownership. Yet I can't count on specific income in a particular year as I would be able to do if we owned an apartment complex. I try to treat it as a giant bond with an asymmetrical payoff in my asset allocation, but I can't re-balance it - I can't readily sell it without damaging my relationship with my brother. It's not a terrible problem to have, but it isn't typical either. Perhaps those in family businesses can relate.
All this made me hold out until our current total spend looked to be covered with just the taxable portfolio alone. I think I'm finally there. Everything else that may arrive above that will just make us more secure and comfortable.
Although I complain above about the lack of predictable income, I actually think it has been a blessing that all of my inherited wealth has been so irregular. It has forced my brother and I to treat every royalty or bonus check, every timber sale, as yet another unreliable windfall, one which might never be repeated. I have tried hard to keep my family's basic lifestyle limited to something affordable on just my W-2 income, and while I haven't 100% succeeded, I'm close enough that I don't feel exposed. I've tried to keep spending above baseline limited to things like vacations that did not increase our recurring day-to-day costs. I am certain I would have behaved differently if more of my wealth came from W-2 income, it would have been quite different psychologically.
If I'm FI, why would I keep working?
-----------------------------------------
I'm in what I think is fairly unusual place. Bluntly: People with my W-2 income typically don't get this wealthy except via windfall. The majority of peers in wealth I see on FIRE forums are making $300k+ / year, and have RSUs or other golden handcuffs, or can work to 55 and hope for a buyout offer, retiree health care, or pension. I have absolutely none of that.
With my W-2 income contributing such a relatively small amount when compared with potential investment return and immediate mineral income, it's difficult for me to make a compelling case for continuing to work, at least for someone else on things I don't particularly care about. It might take me another 8 years of working full time to make what my portfolio alone would do passively at 6% in 3 years. That just seems like a waste.
Have other people reached similar points in their progress towards retirement? How did you think about these issues?
I should first say that I'm an inheritor. I know the statistics on us as group, and I know I'm not alone. But I'm enough of an odd duck that I've been reading heavily in the FIRE community for several years, and I can't remember anyone posting anything close to some of the issues that come up for me. I'm surely not unique though, so maybe this will reach the ears of someone with relevant experience.
I'm a 53 year old male, my wife is 55. Wife has been a homemaker for the past 13 years, but does have some employment history and does qualify for social security. No kids.
Most posts of this kind start with assets, but I'm going to start with spending and conventional income as it is a lot easier to describe for us.
Spending
-----------
I have excellent Quicken data for all of my adult working life. I've worked up detailed data for the past 7 years, and total spending in that time has been between $120k-$130k per year, save for two exceptional years when we bought a new vehicle for cash, and another year when we bought my mother-in-law a house for cash.
I also track what I think of as "baseline" expenses, which excludes two major hobbies (one for each spouse) and vacation spending from the total spending amount. We spend typically $30-$40k per year on these discretionary expenses, and they are readily cut back. During this Covid year for example, we spent a lot less on vacations, but more on our hobbies as a result. Baseline spending is $70-$90k per year, and represents to me a comfortable fallback position in spending that we could readily resort to when a major market pullback happens.
Employment Income (W-2)
------------------------------
I work in IT for a small company that is perpetually strapped. It resembles a non-profit more than a technology company. I'm paid about $110k. I like the people I work with, but there is no room for advancement or career/salary growth that I care about - I am at the top of my tiny hierarchy. At 53 I figure I will have a very difficult time finding another job paying similar should I get laid off before I quit, so I've been furiously stocking the lifeboat.
No stock options or RSUs. No profit sharing. The 401k has garbage funds with no matching. Worst of all, no mega-backdoor.
Social Security
----------------
Open Social Security suggests my wife file for benefits at 62 for $11,109 /yr, and myself at 70 for $29,343/yr. Sounds reasonable to me.
Assets
-------
I will try to list these in a most-certain to least-certain order, and will attempt to characterize the uncertainty for each of them. This uncertainty has vexed me much of my working life, since if I knew I could depend on all of these things completely I would have retired years ago. Instead I have tried to build a retirement plan that can succeed with a great deal of failure at the more uncertain end of things.
* $4.1 million in Vanguard taxable brokerage account. Unsurprisingly this is the backbone of my plan.
* $175k in tax-deferred retirement accounts (401k, SEP-IRA, Solo 401k, various IRAs). Mostly VTBLX or other similar bond funds.
* Rough asset allocation across taxable and tax deferred accounts:
VTSAX (Vanguard total stock market): 70%
VTIAX (Vanguard total international): 10%
VWIUX (muni bonds) + VTBLX (total bond) + small holdings in non-Vanguard bond funds: 10%
Money Market/Cash: 10% (about 3 years of spending worth)
* Paid-for primary residence. $500k Zillow value. We don't include this in net worth, and aren't planning on moving, but it's worth mentioning.
* Paid-for mother-in-law residence. $400k Zillow value. We don't include this in net worth either, since its value is earmarked for elder care for my mother-in-law should she need it.
* $1.1 million in timberland. This is not a REIT, this is actual real property that we pay a forester to manage. This land has been in the family for 100+ years, and I own it jointly with my younger brother in an irrevocable family trust. I have majority control over the trust, so technically I can dispose of it as I want, but the reality is my brother likes the asset and wants to hold on to it for at least the next decade. (This is not a hardship for me, I like the asset too, at least for that time frame.) During that decade it will likely have irregular timber harvests my share of which will be worth $170k in 2020 dollars. Because of timber growth the timberland will be worth a good deal more than $1.1 million in 2020 dollars after 10 years, even with the harvest value removed, but $1.1 million is easier to think about than speculating about growth rates, timber prices and mill location in 10 years. Estimates above about timber values are believed to be conservative and have proved reliable over the years.
* $500k - $5 million in mineral rights. Our taxable account has been built in large part over the past 15 years using oil & gas bonus and royalty money from these inherited mineral rights. The insane range on the value here represents our frank ignorance of the future, the crazy swings in the price of oil ("$0" to $50+ dollars per barrel in 2020), and the impossibility of knowing what will be leased and produced in the future. We regularly receive unsolicited offers to sell these mineral rights, and a current high-water mark for these offers would be about $1.2 million to me before tax. The $5 million figure represents an extremely optimistic take on the value of all mineral rights, including ones that don't currently have any interest or activity.
Neither my brother nor I want to sell the rights, but they absolutely have real value. Ownership is via the same trust as the timberland, so while again I have full control, I am bound by my brothers wishes. Fortunately our investment objectives here are the same, and we have consistently acted in harmony and agreement for all our shared assets. Our strong mutual preference is to hold out for leases rather than sell the rights themselves.
There is current production on some of the units that have been putting out steady oil & gas royalty income. My wild-ass prediction for immediate future income would be as follows:
2021: $146k
2022: $125k
2023: $108k
2024: $93k
And so on, following a familar-to-us production decline curve down until the current wells are capped. Counting on these specific numbers would be downright stupid, but the leases will definitely produce something. I would be absolutely floored if I did not get at least $10k-30k / year in additional income from these for the next 2-5 years. I have stopped short of actually baking any income assumption from royalty income into my plan, but it is difficult to ignore it entirely, although that would be the wisest course of action.
* A life insurance policy on my parents which will net $600k in 2020 dollars when both parents die (a "second-to-die" policy). This assumes the policies are kept paid. Currently my father uses the yearly tax-free gift amount to keep this policy paid up. I vacillate about whether to include this in planning, and mostly try not to.
* Potential additional inheritance when my parents die. The best conventional wisdom is to completely ignore this, naturally. Like many inheritors, I find this very difficult, especially since my dad's portfolio is headed full-speed for the estate tax limit of $22 million. He's a turbo-charged, modest-living Boglehead with mostly index funds, and he shares in the same stream of mineral income as my brother and I, but at a larger scale. Last year he took in $1.2 million in new mineral income, on top of a good government pension and Social Security income. He has literally never had to draw down on his equity portfolio, and is still in accumulation mode. I recently had to explain to him that there was a 0% long-term-capital gains bracket for the first $80k. Since he's done his own complex taxes his entire life and is still a super sharp DIY investor, the point is just that his portfolio is friction free, with no withdrawal at all, compounding happily, targeting legacy. Once a year he calls us to his house and goes over his will and trust documents like a somewhat morbid but strangely cheerful fire drill. He clearly wants to do a great job for us and so far absolutely has.
When I succumb to the temptation to pencil this in, I plan for an additional $2 million in 2020 dollars when he is 95, which is probably absurdly conservative. (This has made some nightmare Monte-Carlo simulations that I torture myself with work out.) And of course I probably shouldn't be doing even that, admittedly.
Health Insurance
-------------------
I've seen more than a few potential early retirees say health care was the only thing stopping them. My father visited me a year ago to talk to me about retirement. He retired in his early 50s and has been very encouraging, watching me struggle with One More Year with wry understanding. When I mentioned that that the mineral income would make it difficult to control my MAGI in the first years of retirement, and would likely disqualify us from ACA subsidies, he instantly offered to pay for my medical expenses, since medical expense payments don't contribute to the lifetime estate tax limit. I have made it clear to him that this could be as high as $30k/year by the time we were approaching medicare, and he's completely OK with it. He's been paying about $5k of our medical expenses per year since without complaint or problem.
While I have no reason whatsoever to doubt my father on this, I do need to have a backup plan for health insurance before medicare. When I consider this family subsidy possibly going away, I figure I would reduce our discretionary expenses by $10k-$20k, and if mineral income had dried up, also attempt to control MAGI to qualify for ACA subsidies. I think this is reasonable enough, but please challenge me if you think this idea is deficient. I think it would be a tragedy to keep working ONLY for healthcare, and conservative to the point of stupidity to refuse my father's offer. But if I'm being willfully blind to something important here, I need to know.
So what's the plan?
----------------------
Because of all the uncertainty and the restrictions on assets, it has been hard to think about a long-term plan at times. To give just one concrete example, the timberland is an asset 100% in my control and ownership. Yet I can't count on specific income in a particular year as I would be able to do if we owned an apartment complex. I try to treat it as a giant bond with an asymmetrical payoff in my asset allocation, but I can't re-balance it - I can't readily sell it without damaging my relationship with my brother. It's not a terrible problem to have, but it isn't typical either. Perhaps those in family businesses can relate.
All this made me hold out until our current total spend looked to be covered with just the taxable portfolio alone. I think I'm finally there. Everything else that may arrive above that will just make us more secure and comfortable.
Although I complain above about the lack of predictable income, I actually think it has been a blessing that all of my inherited wealth has been so irregular. It has forced my brother and I to treat every royalty or bonus check, every timber sale, as yet another unreliable windfall, one which might never be repeated. I have tried hard to keep my family's basic lifestyle limited to something affordable on just my W-2 income, and while I haven't 100% succeeded, I'm close enough that I don't feel exposed. I've tried to keep spending above baseline limited to things like vacations that did not increase our recurring day-to-day costs. I am certain I would have behaved differently if more of my wealth came from W-2 income, it would have been quite different psychologically.
If I'm FI, why would I keep working?
-----------------------------------------
I'm in what I think is fairly unusual place. Bluntly: People with my W-2 income typically don't get this wealthy except via windfall. The majority of peers in wealth I see on FIRE forums are making $300k+ / year, and have RSUs or other golden handcuffs, or can work to 55 and hope for a buyout offer, retiree health care, or pension. I have absolutely none of that.
With my W-2 income contributing such a relatively small amount when compared with potential investment return and immediate mineral income, it's difficult for me to make a compelling case for continuing to work, at least for someone else on things I don't particularly care about. It might take me another 8 years of working full time to make what my portfolio alone would do passively at 6% in 3 years. That just seems like a waste.
Have other people reached similar points in their progress towards retirement? How did you think about these issues?
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