They’re nearly 80% of the way to their personal FIRE goal of $2.5 Million. For this couple in a low-cost-of-living area whose three kids have flown the coop, I agree with the author that the ability to spend $100,000 a year qualifies their pending retirement as fatFIRE, that is, FIRE on a generous budget.
As long as he keeps doing what he’s been doing, and the stock and real estate markets don’t tank, he’ll easily reach his goal. At this point, his portfolio may outearn his software engineering salary in any given year.
His main questions are around the use of Substantially Equal Periodic Payments (SEPP) to access tax-deferred monies early and how to best utilize his taxable investments. Read to the end, and please share your thoughts with our soon-to-be early retiree!
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Getting to Know You
Where are you on your financial independence journey? Have you crossed the halfway point in terms of net worth and/or passive income?
I’m nearing the finish line! The compounding snowball is really starting to work it’s magic. Barring some major market correction, an extended 30-40% decline, I’m within 5 years of fatFIRE, and it could happen sooner.
Like many others, I’ll likely fight the one more year syndrome. I am trying to build in margins of safety because my number is not as big as others I’ve seen.
Tell us about your household. How many people and at what ages? Are you supporting anyone outside of your home? Where do you live?
I’m 49 and my wife is 50. We are new empty nesters. We have 3 kids. The older 2 are independent adults and on their own. Our youngest is 20 and living in a town about 30 minutes away. The only financial support we provide is car insurance and cell phone.
We live in a LCOL area in western Wisconsin and are very happy here.
In what field are you working? How is your career going? What do you like best and least about your chosen profession?
I’m an IT professional at the Director level of a Fortune 100 company. In terms of what I like best, I’d say I ended up in the right field for me. I have a couple of degrees in Computer Science, and it’s a field I’ve always had an interest in. However, at this point, I’m tired of the constant churn in technology and having to keep up.
FYI, In my world, if you don’t keep up with the industry, you’ll quickly be considered a dinosaur. I’m happy that the finish line is in sight.
Over the course of the last 5-6 years, I’ve moved almost completely to the management side of IT. Meaning I have to keep up with tech trends, but I no longer need the depth of knowledge or the ability to do hands-on work. For that I’m glad!
Do you feel you’ve come to a crossroads of sorts? If so, tell us about it. What options are you contemplating?
At this point, I’m probably FI, but not quite ready for RE. My biggest question at this point is where to invest my taxable account. I’ll need access to this money between RE and 59.5. My current thinking is that I’ll tap my retirement accounts using the SEPP rules and supplement with my taxable account.
I also have ~50% of my post tax account in Real Estate Syndications. The deals I’m in are targeted for 5 year holds. This timing should work out well with my planned exit from W2 work in 5 years or less.
Having this money come back into the fold at that point would supplement other post tax accounts and SEPP withdrawals (If I choose this path).
When I get close to RE, I’ll really have to firm up the numbers to see if I can span 5-6 years of living expenses from post-tax accounts only. My current thinking is that I’d rather tap the pre-tax accounts using the SEPP rules for some amount less than living expenses,and then draw down the post-tax accounts at a slower pace.
This approach should be beneficial from a tax perspective, as well. Notice I didn’t say optimal. I’m not into the hyper-efficient strategies, as they seem to be more work than I’m willing to put in to save an extra hundred or couple hundred dollars. Maybe I’ll change my mind when I get closer…
How is your nest egg invested? Approximately what percentage is allocated to stocks, bonds, real estate, and alternatives?
My asset allocation is:
- 25% US Large Cap
- 25% International Large Cap
- 5% Small Cap (Value tilt)
- 5% Emerging Markets
- 10% Mid-term Government Bonds
- 10% TIPS
- 20% REIT
Every couple of years, I make slight changes to the mix. For example, I used to have a 5% allocation to Gold. After the big run-up of the past few years and more reading, I decided to vacate that allocation and move it to REITs.
Overall, I think my allocation is pretty moderate in terms of risk. My nest egg would be bigger if I had a more aggressive stance over the past few years, but hindsight is always 20/20.
Also, note on the REIT line I include my Real Estate Syndications here. That line item is currently 50% pre-tax and 50% post-tax.
Are your investments primarily in tax-deferred, Roth, or “taxable” post-tax accounts?
My current breakdown is:
- 53% pre-tax
- 26% tax-free
- 21% post-tax
I contribute the max to my 401(k,) HSA, do a backdoor Roth for my wife and the rest goes into post tax. I’d like to get the post tax up over 30% before RE.
Do you have investments in an HSA? How about 529 Plans?
Yes. I was a little late getting my HSA started, but I’ve been maxing it out for years now. I also started saving receipts and not drawing on the account about 5 years ago. My current balance is $50,000 and is 100% in an S&P 500 fund.
We do have a 529 plan with a balance of $30,000, also in an S&P 500 fund. Our youngest (20) could access this if he chooses to go back to school. Going virtual during COVID really soured him on the experience, and he is just working full time now while he figures out what his next step is. The good news is that he is out of the house and figuring these steps out on his own 😊
Should he choose not to return to school, we’ll leave the money invested for the long term. Future grandkids could be the beneficiaries. In the case that doesn’t happen, we’ll pay the penalty and use the money for retirement sometime in our 70s. With a 25-year time horizon, a stock market allocation makes the most sense here.
What has been your best investment?
I don’t have any home runs on the investment side. I’m the classic example of slow and steady wins the race. So, I’d say my best investment was in my career field. I’m not in the physician stratosphere, but software developers (and management) have always been paid well. I passed $200,000 a few years ago and now earn in the mid-200,000s.
Your worst investment?
Again, nothing on the investment side that I lost a bunch of money on, but we did start a small retail business with friends back in the mid 2000’s. That was a big mistake, to the tune of $60,000-70,000 and loss of the friendship.
To expand a little further, my wife and a friend wanted to start a side hustle. So they came up with an idea to purchase an existing storefront that contained a UPS Store and a Wild Bird store. A bit of a strange combination, but I digress.
Long story short, they hired employees to run the store while they both worked full-time jobs. This proved to be very difficult! In hindsight, both couples were clearly over extended.
everyone had full-time jobs and each couple was raising 3 young kids at that time. Eventually, tensions rose about who was putting in more time, the business losses, the need for additional loans to keep it afloat, etc. It was not a good experience and led to the business closing, money lost, and the end of a friendship.
I wouldn’t recommend going into business with family or friends!
Into the FIRE
Numerically, what is your FI goal?
For a very long time, my goal has been $2.5 million. That will allow us to draw $100,000 based on the 4% rule.
I include my home equity in my net worth. So, as a margin of safety, I’ll likely target $2.5 million in investable assets and have my home value as that extra margin.
Another margin I’m employing is my Employee Stock Purchase Program (ESPP). I dedicate 10% or my salary to purchasing stock at a 15% discount. I plan to hold it for 2 years to get the long-term capital gain status (the rules are different for ESPP plans). That will give me another ~$60,000 to $75,000 cushion. Not big, but something, particuarly in a LCOL location.
When do you suspect you will achieve financial independence? Will you retire from your career once you’re comfortably FI?
My current NW is $1.95 million and I expect to hit my target of $2.5 million within the next 5 years. I’m currently saving ~$120,000/yr, so the stock market doesn’t need to do much of anything over those 5 years in order for me to make the goal.
I’ll definitely retire once the numbers are there. As I stated earlier, I’ve grown tired of the corporate world. I’m definitely ready to get off the hamster wheel.
What are your post-FI plans? How will your life change? What do you look forward to the most?
We plan to do a lot of domestic travel during the winter months. There is quite a bit of this country we haven’t seen yet, and we are ready to explore.
I’m also looking forward to more time for exercise. My work schedule tends to get in the way of my preferred workout times.
We’ll spend more time at our summer cabin which we can only visit on weekends now. I’m just really looking forward to the pace of life slowing down. I’ve heard other early retirees talk about how the stress just starts to melt away and the transition takes about 6 months. Boy, am I ready for that!
Have you made any major changes in your lifestyle or investments to accelerate your FI path?
The one thing we did over the past year was to downsize the house and become debt-free. Moving to a smaller house, lowering expenses, and not having a mortgage payment will accelerate our path as this plays out over the next couple of years. With the crazy housing market recently, it was also an ideal time to unload the big expensive house. The kids are gone, so why continue the expensive carrying costs?
The other fairly recent thing we’ve done is get involved in Real Estate Syndications, as mentioned above. It’s not a big percentage of our NW, but it’s nice that it throws off some passive income.
We recently had one deal that was supposed to have a 5 year hold go full circle in 1 year. Not expected, but a 32% return in 1 year was nothing to be upset about. We did the 1031 exchange on that property to defer the capital gains, so I look forward to it going full circle for the cash-out opportunity when I am actually RE!
Are you facing any unique challenges making FI or RE more difficult?
No, not really. I consider our story to be pretty boring, but hopefully, there’s a nugget or two in there for others 😊
What advice do you have for others who are seeking financial independence?
Education is key. Personal finance is such a large topic it takes a lifetime of learning. I started my own education in college, funded my first IRA in those years, and now 30 years later spend many hours every week reading and studying. All that, I don’t think I know half of what guys like PoF know.
Everyone has their recommended list of books to read. I’d suggest comparing a few of your favorite bloggers and picking the common books if you’re looking for a place to start.
Finally, is there anything under the sun that you’d like some help with? The hive mind would be happy to weigh in.
Is anyone using or planning to use the SEPP(72T) rules to fund the early years of retirement? I’ll likely have $1 million+ in pre-tax funds available. Is this a wise tax strategy since withdrawals will be low and post-tax money will fill in the gaps?
I also feel like the complexity around these withdrawals is overblown. Anyone who deals in personal finance should be comfortable with basic math, and that is all that’s required for this (other than tax forms).
PoF: Catch all the future interviews from those just getting started, at a crossroads, or at the end of their FI journey with a free subscription to Physician on FIRE.
I thank today’s interviewee for sharing their story, and I’ve shared my feedback privately with them. I wouldn’t want my opinions to influence yours. Please give your take and answer any questions they have had in the space below!