FIRE Crossroads 026: Brewing a Path to FI

The accumulation phase of savings is generally about piling up money. Money, after all, is the universal lubricant, and more of it makes most problems easier to solve.

One of the thornier issues retirees run into, however, that requires a lot of that universal lubricant is health insurance. While the Affordable Care Act has mitigated a lot of obstacles to obtaining health insurance for many that need it, other impediments remain — sometimes at an unknown cost.

Our interviewee today has a healthy kitty, a frugal attitude toward his family’s expenses, and a dream of moving into craft brewing as a vocation. But his health insurance needs are complex, and quality care for his family’s special medical needs is non-negotiable. Read on to find out how close financial independence is for our latest guest.

If you’re interested in participating in one of three interview series, please download the most appropriate form for your life situation: FIRE Starter, FIRE Crossroads, or Post-FI Notes. To see other posts in the series, visit our Q&A archive.

 

 

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?

We’re almost to the finish line in hitting our FI number. To be more specific, we’re about 87% of the way there! Our current net worth sits at $1.7 million, with an investment portfolio worth $1.3 million. We have a paid-off house which represents $400,000 of our net worth.

It’s a smaller amount, and we don’t include this in our net worth, but we recently opened a donor-advised fund. Big thank you to you, PoF, for the inspiration and for the article laying out the “how-to” of opening one. We went with Fidelity given the lower required balance to open.

Our current spend rate is roughly $50,000 per year and has fluctuated over the last several years due to young kids (daycare and large medical expenses) and recently paying off the house. We’re targeting a relatively conservative withdrawal rate of 3.6%, so with a target spend rate of $55,000 per year (to build in some cushion for insurance and out-of-pocket costs, which I’ll delve into later), we need around $200,000 more to hit our FI number.

I think we settled on 3.6% after reading numerous articles from Big ERN’s SWR series – just in case we want to enjoy a longer retirement, say 50 years or longer, I want to be sure we’re in a “good” spot. For those readers who haven’t read Big ERN’s SWR series, I highly recommend it; as a fair warning, it’s very, very heavy on the math, and not for the faint of heart.

 

Tell us about your household. How many people and at what ages? Are you supporting anyone outside of your home? Where do you live?

We’re a household of 4 – my wife and I are in our mid-30s and we have two young boys; our oldest is 4 and our youngest is 2. When asked, I always say we’re done having kids but my wife always says we’re considering more. I’ll let her have a glitter of hope but between you and me, we’re done!

Currently, I’m the only one working in the household. My wife had worked full-time since leaving college but had to leave her job last year due to having to care for our medically complex youngest child. We live in the great state of Texas!

 

In what field are you working? How is your career going? What do you like best and least about your chosen profession?

I work in commercial real estate. I’m at the mid-point in my career and overall, I would say it’s going okay. Over the last 3-4 years, I don’t think I’ve given it my all, which I know has hindered me in some promotion opportunities and better pay.

Although, I’m at peace with it given the solid foundation we have set financially and my career goals, which I’ll describe in the next question.

 

Do you feel you’ve come to a crossroads of sorts? If so, tell us about it. What options are you contemplating?

I think I hit a crossroads several years back, which coincided with us starting on our FI path in earnest. I don’t have much passion for my job and it doesn’t provide much fulfillment so I’ve been wanting to leave for a while now.

My job pays well and has provided the bulk of our savings and financial contributions towards FI, but it’s just not something that I want to spend the next 5, 10, or 20 years of my life doing.

I don’t think I truly want to retire, at least not now, so I want to transition to something I love. I think the old adage rings true – retire to something, not from something!

Over the last six years, I’ve been passionate about craft beer and would love to do something in that capacity once I leave my job. I homebrewed for several years and really enjoyed it. Once kids came into the picture, I took a break and really haven’t picked it back up.

If I were to go this route, my plan is to get some sort of professional certification, either locally or at one of the nationally certified programs (ABG, Siebel Institute). I’ve never worked in a brewery, of course, so I wonder if brewing would be something I truly would like.

If I do go this route, I think it would be prudent to try and volunteer somewhere to get a sense of what a shift brewer life would be like. If I don’t go the brewer route, I could still see myself working in some capacity in a brewery – I’m just so passionate about beer, I could talk beer for hours.

My wife loves beer but bores of me talking about beer all the time! Speaking of craft beer, rumor is you like to partake in a beer from time to time, PoF? ; )

If working in the craft beer industry doesn’t pan out, I would love to continue to volunteer my time, on a more full-time basis, in the congenital heart disease (“CHD”) non-profit world (I’m currently on the board of a CHD non-profit).

As I hinted above, our youngest son was born with a congenital heart defect that has changed our lives in ways we never could have imagined. We found out prenatally about his diagnosis, which was a godsend because it gave us the time to process, learn about and cope with his life-threatening diagnosis (single ventricle).

During this period before he was born, we were connected with the non-profit where I currently volunteer on the board, and they provided us with invaluable resources, knowledge, and support. Without this support and education, I honestly don’t know how we could have survived this whole process.

I had the opportunity to join the board after we were out of the hospital and home with our son (we spent a total of 5 months in the hospital, while our son recuperated from two open-heart surgeries) so given all the love and support they gave us, I quickly jumped at the opportunity because I wanted to give back to the heart community that has helped us so much.

The fulfillment that has been missing in my career has quickly been found by helping out in the CHD non-profit world. I opened the DAF mentioned above to give back monetarily to our non-profit.

 

Investing

 

How is your nest egg invested? Approximately what percentage is allocated to stocks, bonds, real estate, and alternatives?

It’s almost 100% invested in broad-based index funds. After reading JL Collins’s book, The Simple Path to Wealth, years ago, it really solidified in my mind that broad-based index funds are truly the way to go.

On top of that, keeping it simple really makes our life so much easier and less complicated. We invest almost all of our current taxable funds in our Vanguard account. Although, we do have a legacy Fidelity taxable account from our early investing days (nothing wrong with Fidelity, but I just prefer Vanguard, as JL Collins lays out in his book).

We have most of our wealth tied up in S&P and total stock and bond market index funds.  Our current allocation is 85% stocks (74% large-cap, 19% midcap, 4% small-cap & 3% international) and 15% bonds. If you factor in our paid-off house, our allocation is 76% stocks/bonds and 24% real estate.

I do own a single stock consisting of Disney – I’ve owned it since the start of the pandemic and overall, it represents a very small percentage of our portfolio (only worth $6,000).

To be honest, I can’t remember why I bought this stock but at this point, Disney is such a part of our daily life (Disney+), I’ve decided to hold on to it.

I was up big at one point but it’s now up only a modest amount. My plan is to liquidate it once the kids are a little older and use the proceeds to take them to Disney World.

 

Are your investments primarily in tax-deferred, Roth, or “taxable” post-tax accounts?

I believe we have a diverse allocation by tax status. Roughly 47% is in pre-tax investments consisting of a 401(k) and a Rollover IRA, 37% in our taxable brokerage accounts, and 16% in Roth accounts.

The bulk of the Roth is a result of me contributing to a Roth 401(k) at the beginning of my career, but we also each have modest Roth IRA accounts that we haven’t contributed in years given our AGI has been too high.

If I were to pull the plug on my job in the next year or two and we were to able earn some modest income (say $20,000-25,000 per year), I ran a withdrawal analysis and we could pull between $35,000-45,000 out of our taxable account each year to last us to age 59.5.

At $45,000 per year, it would last us right up to 60 years old – in case it doesn’t last us to 59.5, we have enough in our Roth accounts to pull from and we’re also penciling in to do some Roth conversions early on to fatten up the Roth IRA accounts.

Through my years of devouring FI articles and podcasts, one theme I noticed was that most folks had a large percentage of their wealth tied up in pre-tax accounts. If you’re not wanting to retire early and need funds to draw upon to bide you over until you reach 59.5 years old, I think that’s fine.

But if you’re like me and want to live on some (or all) of your funds well before 59.5, that can be a problem. I think having 37% of our investment portfolio puts us in a good spot if I ever leave my current job and don’t replace it with one as lucrative.

You could probably lump this into one of your questions below that asks for advice during the FI journey. I know not everybody has excess funds to invest in a brokerage account, but if you do, try and bulk up that taxable account, when possible!

 

Do you have investments in an HSA? How about 529 Plans?

No HSA or 529 investments. We have instead invested proceeds for both of our kids in our brokerage account in S&P 500 funds. We have a modest sum in both of their accounts.

Go Curry Cracker convinced me with one of his articles that investing the funds in a brokerage account can be better in the long run given the flexibility associated with withdrawals and penalties involved if kids end up not pursuing a higher education degree.

We don’t intend to fully fund our kid’s college costs; however, we do hope to have a couple of years’ worth of funds for them to draw on. This philosophy mainly comes from me having to fully pay for my way through undergrad and partly paying for grad school.

My parents did not have the funds to pay for my college so I had to work a full-time job, which helped cash flow college, on top of loans that I took out.

I want my kids to appreciate what college costs and to have a little “skin in the game.” My wife says I’ll soften up once the kids are older and college is upon us. Maybe she’s right, but we shall see!

 

What has been your best investment?

We’ve really only invested in broad-based index funds so…..index funds it is!

 

Your worst investment?

Index funds? : )

 

Into the FIRE

 

Numerically, what is your FI goal?

As noted in the intro, $1.5 million.

 

When do you suspect you will achieve financial independence? Will you retire from your career once you’re comfortably FI?

If we get modest returns this year, say 7%, we could hit our FI number by the end of the year when taking into account our expected annual contributions ($70,000 taxable, $30,000 via 401(k)).

Will I leave my job once we hit comfortably FI? I think that’s the million-dollar question. But wait! Has inflation made that the two-million-dollar question now? Ha!

In all seriousness, I think that’s the question that I struggle with all the time. Given the medical needs of our youngest son and with my job having such great insurance, I truly wrestle if I should leave such great subsidized insurance behind and try to rely on the Affordable Care Act (ACA) coverages available.

I think the only way I can get comfortable is by doing more homework on if the ACA coverages are adequate, with our current care team, without breaking the bank. For more context, my wife could potentially try to reenter the workforce to get job-related healthcare.

That’s not the preferred option, because of the lack of freedom and flexibility, but if I leave my job, it’s definitely on the table if the ACA is not a good fit.

 

What are your post-FI plans? How will your life change? What do you look forward to the most?

If I stay at my job, I don’t think there will be much change post-FI. Just more money in the bank.

If I do transition to one of my passion jobs, I think (and pray!), that I will be happier since I’ll be doing something I truly love and am passionate about.

The thing I most look forward to is waking up on a Monday morning and not having to go to a job I don’t love. I think that’s the beauty of FI – it gives you so much freedom and flexibility!

 

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Have you made any major changes in your lifestyle or investments to accelerate your FI path?

When we first started our FI journey in 2015, I think I was similar to the Mad Fientist and tried to scrimp and save on every item to wring out the most savings possible at the expense of being somewhat miserable.

I would harp on my wife for the smallest of spending, which would annoy her to no end since she really is a natural saver like me.

I gradually switched to the mindset of letting loose a little and spending on things that we value and being ruthlessly frugal on most all other items. Once we hit this point, I think our FI path was so much more enjoyable.

No real changes on the investment front. From the beginning, we’ve always been invested in broad-based index funds.

 

Are you facing any unique challenges making FI or RE more difficult?

No, I don’t think so. Just kidding, of course. Yes, a medically complex child sort of makes life in general, and planning for insurance costs, a little tougher.

 

What advice do you have for others who are seeking financial independence?

Instead of being a miser like I was at the beginning of our FI journey, I would say focus on the big 3 expenses – housing, transportation, and food.

On the housing front, I bought a smaller house, by today’s standards, prior to our marriage and we’ve stayed in it even though we can afford to move to a newer and nicer home. It’s big enough for “us” and provides us with a high-quality school district for our kids to attend.

I know not everybody will take the route we took but if you can avoid buying the biggest/most expensive house, it can make your FI journey a lot shorter, if that’s your goal. Since we never “moved up” in house, it helped us pay off our mortgage 23 years early…. woohoo!

On the transportation front, our first cars out of college were modest, fuel-efficient cars that we paid off fairly quickly and drove for 10+ years (we still have one of those cars). We’ve never been car people per se, so maybe that helped out.

Once our second child arrived, we did have to trade ole Betty White in (my car), since it would be a tight fit in either car with two children, and upgraded to a new SUV that we paid for in cash.

On the food front, shopping at low-cost Aldi, buying in bulk at Costco (mostly toiletries, clothes), and eating at home throughout the week aside from Friday and Saturday, have helped us keep our food costs down tremendously. Also, if you don’t know how to cook, I would implore you to try to learn because it is a HUGE life hack.

These three things overall helped us keep our expenses down and provide a big GAP between our income and expenses. This big gap enabled us to have a high savings rate and in turn, the luxury to pay off our house very early.

One area that I always struggled with was with paying down the house early or investing in our taxable account (since we started our FI journey, we always maxed out our 401(k) accounts). Good problem to have, I know!

Paying off the house early is a very hot and contentious topic that, at the end of the day, is really a personal decision. I struggled mightily with this and went back and forth on which way I invested our excess cash flow several times.

I’m not sure which article or podcast I listened to, but they advocated sending 50% of your excess funds to your taxable account and 50% to paying the house down so you get the best of both worlds. At the end of the day, this really worked for me best, so others struggling with this decision may want to consider that strategy.

 

Finally, is there anything under the sun that you’d like some help with? The hive mind would be happy to weigh in.

As you can gather from my answers, I think the insurance piece is our biggest question mark if I were to leave my job. If I’m missing the boat on anything else, please feel free to weigh in!

In pursuing FI, I think for me, the biggest thing I’ve always wanted is the freedom and flexibility to spend our time any way we want. In that sense, I would prefer if my wife did not have to re-enter the workforce in a W-2 capacity in order to get healthcare.

In case I left my job and we still wanted to make some modest income outside of W-2 (assuming I transition to volunteer work), my wife could earn some income via private practice, which would mean we wouldn’t have access to employer-subsidized healthcare.

By going this route, on the other hand, it would allow us more flexibility in the work schedule. In a perfect world, this is the route I would love to pursue if I leave my job in the next year or two.

So would acquiring insurance via the ACA be a smart choice in our situation? I know this may be a tough question to answer, but I’m throwing it out there anyway, because a lot of it may depend on in which city and state you’re located.

I’ve done a little research and know that if we keep our income under a certain level (say $45,000-50,000, which falls in line with our expenses), we can receive subsidies via the ACA and state and local programs for kids.

I think my biggest concern is the quality of the insurance plans on the ACA marketplace and being able to utilize our current care team, since, as you can imagine, we use lots of specialty doctors, all of whom we really like. I’ve never used the ACA marketplace so maybe my fears are unfounded? I just don’t know.

I also think this is my wife’s biggest worry, and a very fair concern, especially since we expect our son to have his next, and hopefully last, open-heart surgery within the next 2-4 years. She’s had to deal with so much emotionally over these last 2 years and I think the last thing she wants to worry about is not having good quality healthcare.

Lastly, given some of the unknown on how much in medical costs we may expect, I have fattened up our “FI” number by about $5,000, in case we encounter higher than expected premiums or out-of-pocket costs in the future.

Thanks for reading along and look forward to any help you can provide!

Cheers!

 

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.

 

 

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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!

Again, if you’d like to partake in a future Q&A, please download a FIRE Starter, FIRE Crossroads, or Post-FI Notes interview form.

 

3 thoughts on “FIRE Crossroads 026: Brewing a Path to FI”

  1. I live in a large Texas metro area, and the ACA options are terrible. It costs you nothing to get on the website and look at plans, and it’s a great way to check if your doctors in their network. Some of the options are very affordable for lower incomes, but none of our doctors are on any of them, doesn’t matter whether gold, silver, bronze, etc. My kids have asthma and do incur some medical costs every year, and not having good asthma doctors is a no-go for me. For now, I’m still working for the group health benefits.

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  3. I’m afraid I can’t provide any info on the ACA question. I did want to congratulate you for the progress you’ve made at such young (compared to my wife and I, at least) ages. You’ve obviously had a good income to accumulate the nest egg you have. It’s probably somewhat unusual to have that income and yet keep the spending rate down to the $50,000 per year range. Living well below your means appears to have really set you up for financial independence with the option of early retirement. I am also impressed that you’ve settled on passive broad based index funds for investment and have recognized the value of tax diversity in your investments. Given your relatively young ages and the many possibilities for future change and uncertainty, my only advice would be to proceed cautiously in leaving your job. I would encourage you to look for ways that the job experience could be changed or improved to make it more satisfying for a few more years. That could keep the insurance in place at least through the upcoming surgery and recovery periods, allow you to enhance your financial independence, provide a hedge against potential market uncertainty or downturn, and still provide for very early FIRE. Again congratulations for all that you and your wife have accomplished.

    Reply
  4. The OP mentions AGI is too high to do a Roth IRA contribution. Why aren’t you doing backdoor Roth IRA? OP mentioned a rollover IRA account which would create a pro-rata problem, but OP should roll that rollover IRA into his 401k and then the problem goes away. Invest in Roth IRA > invest in taxable.

    Reply

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