When Tom’s comment/question showed up February 5, 2015 in Ask jlcollinsnh it immediately captured my imagination as a potential Case Study, mostly because it offered something different. He has arrived at a crossroad.
On the surface it was just a couple of simple questions. What retirement accounts to use? Can they be accessed before age 59.5? Questions I’ve answered many times here and have discussed in several posts. But the truth is, simply answering those wasn’t going to help Tom much.
Tom’s real issue was in the line: “I simply do not want to work a ‘regular’ job until 59-½, the thought of that is soul crushing…”
At some level Tom knew that’s what he was asking and so he provided some detail as to his situation.
In review, it was clear Tom has arrived at a crossroad. He could continue down the path he’d created hoping to escape or he could make a hard turn down an entirely new path, and actually escape.
The following is a combination of his original note and some additional information he provided in an email exchange. Let’s take a look….
Tom writes:
Hello Mr. Collins,
I am a follower of your site, and point anyone who seems interested here as well. I would find it very helpful to hear your advice for our situation, when you have a chance.
Personal Situation –
- My wife and I are 35 and 37 years old, expecting our first baby this year.
- I have a regular job, with Fidelity 401k and ROTH 401k plans available.
- I currently contribute 15% to the 401k. Plus the 3% company match.
- My wife works from home, has no company retirement plans available.
- Together our annual income is ~$115,000
- I also have additional income of ~$18,000: $1,500+ per month before tax, from side hustles, and intend to grow this further.
Assets –
- 401k (me): $20k (VTSAX)
- Rollover IRA (me): $88k (VTSAX)
- Non-Vanguard Rollover IRA (wife): $75k (Target Date Fund)
- Cash Savings: $30k
Total: $213k
Properties —
- Townhouse (Rental): Value $150,000, $165,000 mortgage @ 4.125% (This property is essentially break even, until we need new tenants, or a repair comes up). Equity = -$15,000
- Current House: Value $195,000 (hopefully, it is a tough market), $178,000 mortgage @ 4.625%. Purchased one year ago. Equity = ~$17,000
Other Liabilities –
Not actually Tom’s
- Boat: $14k on the Loan (Fishing is my one indulgence…important to my mental health
) - Future Car to Replace Wife’s Vehicle: $TBD
Vehicles (both paid for) —
- 2003 Jeep Liberty (high miles and the one we want to replace)
- 2003 Ford F150
I simply do not want to work a “regular” job until 59-½, the thought of that is soul crushing…yet we couldn’t access any of our investments thus far until 59-½ anyways.
How do we get out of that ‘box’? In what order would you recommend investing in the various retirement account options in our situation?
There is a lot of information out there to clutter one’s mind. I feel stuck and unsure how to go forward, or what changes I need to make. I suspect just dumping everything into the 401k is not the best plan. Your thoughts are always appreciated.
-Tom
jlcollinsnh replies:
Hi Tom…
Thanks for the kind words and welcome.
I’m happy to give you my thoughts, but you might not like them. You are asking mostly about your investments when it is your lifestyle that stands in your way.
You say the thought of working to 59.5 is “soul crushing” and yet you’ve constructed your financial life as if you plan to work into your 70s. So let’s start with a reality check.
With the side gig, your annual income is ~$133,000. You don’t say what your annual expenses are but, since your only savings is the 15% to the 401k, they are running very high.
Let’s assume you are going to get those down to half your income: $66,500. Using the 4% rule, you’ll need $1,662,500 to generate that income. You currently have $213,000, plus basically zero equity between the two houses.
Your current savings rate is ~15%, less actually as that is simply against your job income. Take a look at this chart*:
The chart assumes an 8% annual investment return and that you’ll live on the classic 4% withdrawal rate, which implies assets of 25 times your annual needs. So, this is not a gospel, but a guideline.
At a full savings rate of 15%, you’ll be retired in 33 years, when you are 70. Double that rate to 30% and you’re there by ~59.5. If you want to get there by age 47, you’ll need to save ~65%. Maybe a little less as you have a $213,000 head start.
At this point it should be clear that getting there is going to take a major shift in your priorities. Assuming you’re game, let’s take a look at what those might be:
—You need to max out your 401k and an IRA for your wife. You want these to be deductible to defer taxes and to keep as much of your money growing and working for you as possible.
—Don’t worry about not being able to withdraw tax-deferred money before 59.5. There are ways around that as described here: Early Retirement Withdrawal Strategies. But more importantly…
—Your new savings rate is going to allow plenty more money to invest in a taxable account accessible anytime. Read the Stock Series on how.
—Unload the rental townhouse. Break-even is a terrible position to be in and, as you correctly observe, it leaves you vulnerable to large, random expenses. This is going to mean a hit to your cash reserves as you are underwater. But that is a sunk cost and it is important not to let such thinking keep you trapped.
–As an alternative, you could sell your house and move to the townhouse. This would preserve your cash and might (?) offer less expensive living.
–But if it were me, the truth is I’d dump them both and find the cheapest apartment I could tolerate. Ideally close enough to walk to work.
—Dump both vehicles and replace them with one small used indestructible Japanese sedan. Spend less than what you get for the Jeep and Ford on this. Should be easy. With gas prices down, economy cars are cheap just now and the price for your truck will never be higher. Try to bank at least some of the money.
–With your wife working at home, you only need one car. Yes, I know this will be inconvenient. But we did it right thru our teenaged daughter’s driving years. It just takes a little planning and coordination.
–The Jeep you say is used up and an F150 is way too expensive to operate if you are serious about reaching for FI.
–But wait, what about towing the boat? Well, about that…
—You borrowed money to buy a boat?? Look, I’m all for indulging myself. I own a motorcycle (bought used for less than $4000 cash) for that purpose. But then, I’m FI.
Before I was, my biggest indulgence and what was most important to my mental health, was buying my freedom. That meant investing every spare cent I could scrounge up. It is not my place to tell you how to spend your money, but you do need to decide what you truly care about:
Escaping a soul-crushing job or fishing from a fancy boat. If it were me, I’d dump the boat and fish from shore. Hands down.
Finally, congratulations on the little one on the way.
Courtesy of Sketches by Angela
There is no real reason a new baby needs to be an obstacle to your FI goals. But there are a lot of phony ones.
You are going to have to learn to avoid the “babies must be expensive” syndrome. No fancy strollers or SUVs because it’s easier to fit in the child seat. No cute new baby clothes that will be out grown in three weeks. The world is filled with barely used baby clothes. Kids need love, not stuff.
At this point, if you are like the vast majority of folks, you are recoiling in horror at most, if not all, of these suggestions. Precisely. This is why most folks will never reach FI. You have a choice to make.
Your obstacle to becoming FI isn’t one of investing, but one of lifestyle. And if you really want to escape that soul crushing job before you’re 70, reviewing the points above should give you an idea of what the task looks like so you can decide just how serious you are.
If you decide to go for it, turn next to Mr. Money Mustache. More than any other blog out there, he is the one who can show you in detail how to inject into your life the baddassity you’re going to need. But, be warned. He’s not as soft and fuzzy as I am. Here’s a sample of his take on driving a pick-up truck and this guy didn’t even have a fancy boat to tow:
“Holy shit, brother, how many heads of cattle and pigs are you hauling on that roundtrip, while simultaneously carrying international heads of state in the stately cabin? That is a fucking ridiculous vehicle for ANYONE to drive except the rarest breed of Farmer/Diplomat.”
Mr. MM would say your situation calls for a face punch or two. I’ll just say, you have some decisions to make. Oh, and now that you know how to shed that soul crushing job, should you chose not to make the changes needed, you’ve officially forfeited your right to complain about it. 🙂
My guess is, once you get started and see your stash begin to grow, those things that felt like sacrifices to give up you’ll come to see as the blood-sucking leeches they are.
Good luck!
*Chart courtesy of my pal (Can I Retire Yet?) Darrow’s book:
Note:
The original title of this post was “Tom at a Crossroads.” J Money picked it up as a featured post in Rockstar Finance. In the process he retitled it much more compellingly as “Escaping a soul-crushing job before you’re 70.” With his kind permission, I’ve changed it here as well.
Nothing to do with this post, but…
I was recently interviewed on Mike & Lauren YouTube: Why your house is a terrible investment. In the Q&A we also discuss asset allocation, bonds and even dating.