I have been noticeably absent recently due to life throwing us some curve balls (including a concussion for both me and Mr. SFF within 3 weeks of each other). Now that life is starting to get back on track we are also both trying to get recommitted to our FIRE goal.
Although I never wrote up a post with our 2017 expenditures as life got in the way, to summarize, we spent too much money. 🙁 Well I am not sure too much is really fair as we make enough to cover our expenses but we certainly loosened the purse stings and spent around 10% more than in 2016 – which is a pretty big number. As a result our savings was a little lower than I had hoped. We were able to max out my 401(k), our HSA plan (both of these were a first), and also opened up and maxed out a solo 401(k) for Mr. SFF (maxing the employee contribution plus a little profit sharing). As a result we did the most to minimize our taxes but this meant a lack of savings in our taxable account. As we are hoping to leave our full time jobs in 3 years this prompted a meeting of the minds with Mr. SFF and myself to make sure we were still on track and both on the same page with our plans. I am the one tracking our progress so it was very important to bring Mr. SFF into the planning so that he can see where we stand and also to share my spend down plans with him. Being on the same page when it comes to stuff like this is vital.
Our current plan is to leave our full time jobs in 3 years but at that time Mr. SFF will continue to grow his side business and I may get a job to earn a little money on the side. This should cover about a third of our need. Our rental properties should cover about a third as well but the rest of our money will come from our investments. As we will have some earned income and some rental income showing on our income taxes we have to be careful how we access our investment assets so that our taxable income, or more accurately our Modified Adjusted Gross Income (MAGI), stays below a certain threshold. If our MAGI goes above $60,000 we lose all subsidies for our states health insurance plans, which at least for now is how we are planning on covering this need. If our MAGI went above the threshold this would results in premiums going from a reasonable rate of something around $6,000 per year to more than $12,000. That is a huge difference and means we have to structure our investments differently than some others in the FIRE community.
Many in the FIRE community plan on using a Roth conversion ladder to access their Traditional IRA/401(k) money which will be their primary source of income. Any money that is converted from your Traditional IRA is fully taxed and moved into your Roth IRA. After 5 years you can then access this money without any penalties. The problem though lies in the fact that every dollar converted is reported as taxable income in the year that it is converted. We can’t convert the full third of the additional money we need from our Traditional IRAs because it would put our MAGI over the threshold. For this reason we have been trying to also invest in our Roth IRAs and our taxable brokerage account. Last year sadly we only added $4,500 to our taxable account. We need to increase this amount for 2018 to ensure that we will have enough in 3 years. After 2018 I think we are going to have to put every extra dollar in cash as I want our cash buffer to be pretty sizable when we pull the plug.
One rule for entering retirement, regardless of your age, is to have 2-3 years worth of your income requirement in cash as we never know where the market is going to go. If we were to retire and 100% of our money was in the market and the market has a correction (ie: goes down) then we have to sell our investments at a lower point in order to have enough money to cover our expenses. Depending on how bad the market correction is this could be catastrophic to our entire plan (just think of 2008-2009, ouch). So although I want to increase the value of our taxable brokerage account, I also need to make sure that we have enough cash to cover our expenses in the first few years.
Right now our plan is to fund our first couple of years of retirement close to the following:
Rental income: approx 36%
Part time work and Mr. SFF’s business: approx 30%
Cash: approx 20%
NQ Brokerage Dividends: approx 6%
Roth IRA (accessing the basis only): 8%
After the first couple of years we would have to start selling some of our NQ Brokerage assets. If the market is doing well in those first couple of years then we might sell some of our NQ brokerage assets instead depleting our cash. Conversely if the market isn’t doing well then at least we are not taking much from the market. It is certainly going to be a careful dance flowing either one way or another depending on the current economy and market.
So what does this mean? Well first off we need to buckle down a little more this year and watch our spending. Secondly we need to pay close attention to where our savings are going. I started doing some estimates of our monthly cash flow and set a plan of where to allocate the money each month to ensure we max out our plans again but also save in our NQ brokerage account as this could be the last year that money is going to that account. Another variable affecting things is I need a new car this year so I need to allocate some money towards this in the next couple of months as well. My hope is that if I set this plan now we can stay motivated and keep on track.