The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
Photo courtesy of NegativeSpace.co
It’s been a while, so let’s do another reader case, shall we?
Hi Kristy and Bryce!
At 53, I definitely don’t count as a Millennial. But my wife, who was born in 1980, just barely squeaks in, depending on whose definition you use. So maybe I’m okay hanging out in this crowd?
I’ve been studying FI for a while now, but your blog and book were still complete revelations to me. We found the book so valuable, we actually purchased it as a reference tool on our FI journey. (I am a library uber user –- I currently belong to 4 different library districts — so trust me when I say our decision to buy your book was an extremely rare expenditure.)
I guess you could say we were relatively late bloomers when it comes to retirement planning; we didn’t start until I was 45. We’d love to hear your thoughts on where we are and how realistic our plan is.
Thanks for everything you contribute to the FI community.
- Your gross/net annual family income
- For 2024: $219,567 gross/$201,278 AGI/$168,822 taxable.
- The amount that lands in our bank accounts each month, after withholding, 401k & HSA contributions and health insurance premiums, is around $12,725.
- Your monthly family spending
- In 2024, we spent $8,725 per month, see note on how/why this will change in retirement below.
- For any debts you have, please include:
- Mortgage #1, Primary Residence: 3.25% / $1306 / $243,451.69
- Mortgage #2, Rental Property: 3.625% / $958 / $170,160.09
- Any fixed assets you have (house, car, etc.)
- Primary Home Zestimate: $575,000
- Rental Home Zestimate: $526,000
- 1994 Catalina 36 Sailboat: $50,000
- 2009 Toyota Corolla: $4,000
- And investments or savings you have (cash, bonds, stocks, etc.)
- We currently have a $1 million portfolio invested at 80/20 in index funds, with stocks split 65/35 U.S.-International. Bonds are U.S. We keep 3 months of cash in an emergency fund, plus what’s in our HSA.
- Our portfolio location breakdown is 45% pretax / 38% Roth / 17% taxable. We plan to use this combination of accounts to control income in retirement and claim maximum ACA subsidies while doing some Roth conversions to replenish Roth spend and avoid or minimize RMDs. My parents got hit hard with RMD’s in retirement, so we’d like to avoid that.
Plan/Comments: We’d like to retire when I reach 55, so about two years from now.
Our plan is to sell our primary residence and use the equity, which I projected to be $350,000 at the time of sale, to build up our Cash Cushion and invest $50,000 in the ADU at our rental property. Once we do that, we hope to get $4,000 in total rent per month, $2,500 for the main house and $1,500 for the ADU, or $48,000 annually. These rents are currently aligned with market values in our area.
At retirement, with the elimination of the expense on our primary residence, as well as a disability insurance policy, we can reduce our expenses to $80,000 per year. That $80,000 includes $17,000 in expenses we pay each year for our rental property. So our true personal spending is $63,000.
We would then sell our sailboat for $50,000 and eliminate another $12,000 a year from its upkeep to reach $68,000 in yearly living expenses, or $51,000 in true personal spending. At this point, we would start traveling and use travel hacking / geoarbitrage.
For $68,000 in expenses, our FIRE number is $1.7 million.
We have been contributing approximately $124,000 annually to our accounts for the last 3 years and have a stretch goal to do so in 2025 and 2026 despite a drop in consulting income from previous years. We hope to have at least $1.3 million in our portfolio at retirement.
In addition to that, we’ll use proceeds from the sale of the primary house ($350,000) and boat ($50,000) as a Cash Cushion/Yield Shield for the first five years of retirement. We hope the additional income from our rental will make up the gap in our FIRE number. When we stop traveling, we will either rent, stay in the ADU on our property, or buy another boat.
What do you all think? The investment tools (Boldin, Projection Lab, Pralana) tell us we’re on track, but they include Social Security plus I’m just not comfortable relying on a tool like that for our future, so I’m curious what your straight FIRE analysis would be. Basically, we’re wondering if the steps we’ve taken are enough to let us retire when I turn 55, or if we need to keep working a few more years and build up a larger portfolio first.
JJ
So can JJ hang with this crowd even though he’s not a millennial? Absolutely. This site may be named Millennial Revolution, but really it’s a place for spreadsheet nerds to geek out about money. So congrats! You definitely qualify.
There’s a lot of different moving parts here, including a rental property, the potential for geographic arbitrage, and even a *shudder* boat.
Now, don’t get me wrong. I love a good dinner cruise as much as the next guy. But the spreadsheet nerd in me vomits every time I read about the costs associated with owning one. Not only do you have to pay for fuel and insurance, maintaining a boat from the constant damage salt water can inflict is a full time job in its own right. Plus there’s docking and marina fees, winterization costs, and storage. The costs just keep adding up.
JJ indicated that they’re paying $12,000 a year for a $50,000 boat. There’s almost 25% of the boat’s purchase price paid every year! So I’m super happy they’re planning on selling it. A boat is a lot of fun to ride in, but it’s a terrible financial decision.
Remember, if you want to take a cruise, either charter one or become friends with someone else who owns a boat. From a FIRE perspective, the best boat in the world is someone else’s boat.
Math Shit Up
OK so let’s see how much money JJ is projected to have at 55. They’ve indicated that they have a $1M investment portfolio, which they should feel really proud of achieving. Great job!
If they continue saving at their current rate of $124,000 a year, in 2 years their nest egg will have gone up to…
Year
Balance
Savings
ROI
Total
1
$1,000,000.00
$124,000.00
$60,000.00
$1,184,000.00
2
$1,184,000.00
$124,000.00
$71,040.00
$1,379,040.00
$1,379,040.
They’ve also indicated they’re planning on selling their primary residence when they retire, which should net them $350,000. They’re planning on spending $50,000 to build an ADU, which is basically a self-contained living unit in their rental property. This leaves them $300,000 from their house proceeds, which puts their FIRE portfolio at $1,679,040.
A portfolio this size gives you a passive income of $1,679,040 x 4% = $67,161.60.
This is just shy of their $68,000 spending target, but I’d argue it’s close enough. I’m usually pretty hesitant to rely on rental income to fund someone’s retirement, due to unexpected factors like vacancies and maintenance eating into your rental income. But am I confident that with 2 rental units JJ should be able to clear $838 a year after tax? Yeah, I am.
I’m so glad that JJ found our book so useful, because he’s done an amazing job constructing a pretty solid retirement plan here. And let’s not forget that there’s still the cost-reducing benefits of geographic arbitrage and the added pension of Social Security that they could potentially collect starting age 62.
One thing I noticed though is that the amount they’re intending to keep as a Cash Cushion ($300k) is way too high. The Cash Cushion is meant to get you through the first 5 years of retirement without selling any stocks in case of a downturn, but as I described in our book, the Cash Cushion can be calculated using the formula
Cash Cushion = (Living Expenses – Portfolio Yield) x 5
So in JJ’s case, his annual living expenses is $68,000.
And as we described in our book, if you shift your portfolio towards fixed income, you can bring your portfolio yield up during the first part of your retirement, which reduces the amount of Cash Cushion you need. As a quick example, an allocation like the following would yield about 3%.
Asset Class
ETF
Allocation
US Bond Index
BND
40%
US Equities Index
VTI
30%
EAFE Index
IEFA
30%
So armed with these numbers, his Cash Cushion only needs to be
Cash Cushion = ($68,000 – $1,679,040 x 3%) x 5
Cash Cushion = ($68,000 – $50,371.2) x 5
Cash Cushion = $17,628 x 5
Cash Cushion = $88,140
This is a much smaller number than the $300k they were planning on having.
After Travelling
After they return from travelling, JJ is also wondering whether they should move into their rental unit, rent a new place, or buy another boat.
Moving into the ADU of their rental would be easiest, and the cheapest, since they already own the place, so this is always a great cost-effective option.
Another option would be to rent a new place altogether, which would suggest they should sell their rental property, because why would you rent a place AND own a rental property? Doing that would add about $330k into their FIRE portfolio, which would generate an additional $330,000 x 4% = $13,200 of yearly passive income. Add to that the $17,000 in rental costs they wouldn’t have to pay anymore, and that gives them $30,200 per year, or a little over $2500 a month that they could redirect towards rent. Can they find a place to rent for that amount? Their current rental would suggest yes, since that’s how much their main house is renting for, so this move would allow them to move into a bigger house rather than their ADU, plus they don’t have to be a landlord anymore.
So that decision is up to them, both are equally valid choices.
But whatever you do, JJ SHOULDN’T buy another boat.
So what do you think? Is JJ’s ready to retire at 55? Or do you think more boats is the answer here? Let’s hear it in the comments below!
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