Landshark Revisited: When is Enough Enough?

Today we revisit the most popular case study I’ve ever published: A conversation with the Landshark.   How did 2020 go for the Landshark?  What takeaways from the original case study did the family act on?  What did they realize from tracking their expenses for more than a year?  What was the transition like while working from home.   Let’s follow up with the toothy king of the deep sea:

2020 Spending:  The number one goal I gave the Landshark for 2020 was to track the family’s spending.  The family went into 2020 with invested assets of $1,830,000 plus a free and clear house.   This meant they were already financially independent if their spending was under $72,000 per year.   The next test was to determine if they could retire immediately without impact to their lifestyle if actual spending was less than $72,000 per year based on a 4% sustainable withdrawal rate.  

What were the results for 2020?  The shark family spent $97,078.

So what did we spend money on in 2020?

Home (Prop. Tax/Insur.) – 8.3%
Utilities – 5.4%
Home Improv./Maint. – 9.4%
Life Insurance – 1.5%
Food & Dining – 30.5%
Shopping – 11.9%
Auto – 4.5%
Entertainment – 5.2%
Kids – 9.0%
Travel – 5.5%
Medical/Dental – 5.4%
Charity – 1.1% https://t.co/7MpbZkGTnj

— Landshark 🦈 (@iamlandshark) January 3, 2021

There you have it, 2020 expenses came in just under $100,000.   The first run of the early retirement calculation would say the Landshark can retire once the total invested assets are over $2.5mil, which is today!   However, one line item jumps out at me.  Medical / Dental:  5.4%.   I believe a portion of Landshark’s medical insurance is being paid for by the employer.  

So what should we use to calculate the Landshark’s Financial Independence target?   This is the two part question that is important to everyone:  What spending number should we use?  What should we use as our sustainable withdrawal rate?  These two decisions are intertwined.

The sustainable withdrawal rate can be realistically argued down to as low as 3% from the generally accepted 4% found in the Trinity Study.  The point of this case study isn’t to dive into this argument, but for those who are interested, they can check out Early Retirement Now’s Safe Withdraw Rate Series

The spending post retirement is a bigger question for me.  There are two variables in the Landshark’s spending I think are important in our analysis:

#1:  Healthcare

Using my favorite healthcare tool, the Kaiser Family Foundation estimator, I assumed a family size of four and $120,000/year in income for the family.  The full cost for a Silver plan is $1,355/mo, or $16,260.   This is before the out of pocket costs, which could easily be another $3,000 to $5,000 per year.  

The Landshark’s early retirement plan includes an annual Roth conversion plus dividend/interest income, which should put their adjusted gross income in the range of $120,000/year.  For a family of four, this is slightly below 400% of the federal poverty level, which would generate a premium tax credit of $4,026/year.  This tax credit can provide some help against the high cost of individually purchased insurance, but will not make it comparable to their current plan supplemented by the employer.  

#2:  Spending Variability:   Case studies that include pre-retirement spending give a good guide to post retirement spending, but there is no guarantee the two will be the same.  There are some things that’ll be more expensive and some things that will be easy to save money on.    For example, the food costs immediately jump out at me as something that would be cut down in retirement.  Nearly $2,500/mo for a family of four is a lot of money.  Since leaving our careers, we’ve found that additional time allows for more optimized food planning between shopping grocery store sales and less purchases of prepared food out of convenience.  Personally we now reserve restaurants and prepare food for experiences with friends or high quality meals we just can’t replicate at home.  

There’s also the question of with kids/without kids spending.   The Landshark family likely has 14 more years of peak spending, which is how long before the final pup would be out of the house/college.   We discussed college spending/plans and the Landsharks have mostly funded a 529 plan that we haven’t included in the numbers.   We could either do a model that recognizes $120,000/year in spending for the first fourteen years, then drop to $100,000 in spending afterwards, or keep it steady at a higher number.   

So what spending rate and sustainable withdrawal rate should we use?  I’ve concluded this study should use a $120,000 spending rate and a 4% sustainable withdrawal rate.   The conservatism in the spending target should offset the arguments that 4% is too aggressive for a safewithdrawal rate.  

Landshark Analysis:   The Landshark put together his own estimates for the follow up case study.  These estimates include the current investment balance and a retirement in 2024.  These estimates also include $54,000 in traditional 401k contributions ($19,500 x 2 plus $15,000 in employer matching) plus $37,000 in Roth IRA contributions ($6,000 x 2 plus a $25,000 Mega Backdoor Roth IRA contribution) for each of the years 2021, 2022, and 2023.  In 2024, after retiring, those contributions cease and we let the balances compound over time.

The Landshark is on target, using a conservaitve 7% return estimate and the family’s current contribution rates, they project retiring the year they turn 45 with around $3.6mil in total assets.   At $120,000 in spending, this results in a 3.33% sustainable withdrawal rate.  Given Landshark’s asset allocation choice, I believe these return estimates are reasonable. 

This led me to move into some interview questions after going through the Landshark’s numbers:

Interview Questions:

What are you projecting as your early retirement date?

1. Projection – right now we’re thinking of retiring in early 2024.  The reason for that would be to do a couple things: (1) have earned income to fund IRA contributions for 2024 and (2) I get my bonus early in the year, so I am able to fully fund my 401k and mega backdoor Roth IRA contributions.  So, I would anticipate income of about $100k by March 31, 2024 as a conservative estimate.

When we originally put together projections, the target spending was $70,000 but you were going to start tracking expenses closely this year.   What has been the biggest surprise?  Not that you need to, but where would you target budget cuts if needed?

2. Spending.  Biggest surprises have been: Dental ($4,850!!!), a couple housing related expenses ($4,500 — plumbers, electrical work, etc…), a shit-ton of groceries ($19,000 — although that’s our Costco purchases too… so it includes non-groceries, but we use Costco as one of our main grocery stores, so it’s probably overly inclusive in the groceries category and undercounting clothing and other shopping); and $6,000 in restaurants!!!  I’m really curious to see how this trends in the future… I don’t know if we consume an inordinate amount of food, or live in a HCOL area food-wise, … but it’s definitely a big line-item.

Tracking expenses has been an eye-opener with lots of surprises.  I’m looking forward to continuing the expense tracking to see if this is what it really costs to live. As for where we would cut… I’m sure there is room to cut, but I think I want to spend more time really studying our spending over 1-2 years… since this is the first year that I’ve tracked expenses.  I appreciate your encouragement to do this exercise… I have learned a lot.  I plan on doing a comprehensive Twitter post in January that lists all of our expenses and then open myself up to mockery from PF Twitter.

Has 2020 and working from home changed any of your outlook regarding FIRE?  The long commute was one of your primary pain points in our last discussion.

3. 2020 Work from Home Perspective — Working from home has been fantastic.  I am a true introvert and never want to go back to the office.  When the kids were in school (which was a limited bit of time and they are now doing remote learning), it was truly wonderful.  I walked them to and from school each and every day.  And when the kids were at school during the day, I was able to work remotely fairly productively.  Now that they are back home, my productivity has definitely fallen off a cliff because our kids are elementary school-aged and can’t do independent work for more than 15 minutes at a time.  That means, neither can we.  But our kids take priority and we will do what we need to do to make sure that they are learning and not falling behind.

Do you think you or your spouse would quit before the other?  Could the Landshark go “wiFI” before Mrs. Landshark retires?

4. WifeFI.  I like the sound of that.  Honestly, Mrs. Landshark’s job is a lot less stressful than Landshark’s.  She works from home, gets to work at her own pace, and has good job stability.  It’s a relatively small company with good people that she works with.  While she doesn’t make as much as I do, she gets paid well for the work she does.  It wouldn’t surprise me if she chooses to continue to work for a bit after I retire.  Frankly, one of the main realizations from all of this FI planning over the past year has been how much STRESS is involved in the legal profession.  One of my partners had a heart-attack and died this year.  Another had a stroke.  They were young-ish (50s and 60s) and healthy.  Life is too short to exchange time, health, and peace of mind for money.

Have you changed anything about your investing thoughts after experiencing the market crash in early 2020?   100% Equity?  Individual stocks?

5. Investing philosophy.  We are still 100% equities.  The only change is that I’ve been dabbling with less than 1% of our investment portfolio in individual stocks.  A little bit of speculation.  A little bit of entertainment and fun.  As far as how I look at things going forward, given that we own our home outright, I view that as our “bond” position and I feel like there is no real reason (particularly in such a low-interest rate environment) to get into bonds.  I’d rather let our investments ride and compound aggressively.  

Interestingly, I journaled about how I felt about our portfolio in March this year and I just ended up buying more VTSAX as the market was going down.  I didn’t panic at all.  It was a good gut check to get to know that I wouldn’t panic sell during times of extreme market volatility.  Honestly, in a sick way, I kind of enjoyed watching the market decline in March purely out of the academic exercise of studying my own behavior.  While it was a scary time and we took a hit to our portfolio at one point where we were down nearly $600,000 at one point, I felt confident that stocks were on sale and bought the dips.

Have you considered any passive real estate options to include in your investments?  Why or why not?

6.  Passive real estate.  Beyond REITs in our IRAs… no plans right now to do any real estate.  I’ve thought about it from time-to-time, but the market here is pretty hot so it would be difficult to get a rental that meets the 1% rule in our area.  I’m open to the right opportunity, but I’m not actively seeking it out.  I guess we could explore rental real estate in a market other than where we live, but I haven’t felt any desire to go in that direction.

Do you have any “bucket list” purchases you want to make before you leave work?

7.  Bucket list purchases.  We drive 2006 and 2012 model year cars.  The 2006 vehicle will die at some point, but our plan is that we’re going to drive it into the ground.  Taking the bus to work (pre-pandemic) and working from home (now) are certainly prolonging the lifespan of the 2006 vehicle.  The only other purchases that I can identify at this point are more housing related expenses: (1) new HVAC system – $12k; (2) new water heater – $5k; (3) bathroom remodel – $20k?; and (4) some new windows – $8k.  Total $40k to $60k.  I wouldn’t call those bucket list expenses, but they are considerable expenses that are coming down the pike in the near future.

In looking at your projections, you’re targeting going 30% over your Financial Independence number:  What do you think is driving the Landshark to overshoot a goal to this extent?

8.  Overshooting the goal… part of me is in disbelief of actually hitting this goal.  I also want to be sure that I am not going to deprive my family from their wants and needs.  I don’t want my selfish desire to retire to result in a mistake that we could regret for the family.  Part of it also is leaving a legacy… and the best way for me to do that financially is via Roth IRA funds — and since there are no RMDs from the Roth IRA, compounding can really do its magic… assuming we don’t draw down all of the Roth IRA funds. 

Follow Up Thoughts:

Retirement Date:  So what jumps out at me about this plan?  The Shark family is overshooting their goal.  Based on our discussions in the last case study, the Landsharks contribute a substantial amount to their accounts in the first part of the year thanks to the timing of bonus payments.  This means in early 2022, the family will exceed $3mil in total invested assets and be comfortably set with more money than they can spend.   In fact, the Landshark should be around $2.75mil by February of 2021 based on the timing of payouts in his compensation plan.  If this payout schedule continues, the Landshark’s retirement timing will be similar to mine, which I announced after late February and mid-March compensation payouts.

That level of assets puts the family financially independent at 25x of $120,000/year in spending.  The spending is intentionally aggressive and I expect the Landshark to find far more flexibility in this number once he is in control of his time. 

I would encourage the Landshark to scale back significantly or outright retire in early 2022.  Time is finite and continuing to trade the best years of health for money they don’t need doesn’t make sense to me.  Productive people are often still productive in retirement, so the likelihood that income permanently drops to zero is unlikely.   The stress of the legal profession is real and I believe the body and mind keep score and I don’t recommend delivering additional years of stress for no financial benefit.

I decided to work One More Year and Early Retirement Now recently published a new entry into the safe withdraw rate series specifically about the Effect of “One More Year”. It can generate a tremendous amount of wealth, just be careful not to overdo it.

Investment Style/Asset Allocation: 

What's your Asset Allocation look like?

The Landsharks are:

– 73.5% equities (VTSAX, etc.)
– 23.5% principal residence
– 2% REITs
– 1% cash

— Landshark 🦈 (@iamlandshark) January 8, 2021

There’s no rule that says the investment style that got you here is what you need to stick with.    As Warren Buffett once eloquently put it, “Why risk money you have and need for additional returns that you don’t need?”   Having your funds in a 100% Total Stock Market Index has been incredible over the past twelve years!  A low cost index fund combined with a high income and high savings rate is the most reliable path to financial independence.   However, once you are financially independent and considering turning off the cash flow firehose, consider making your investment style more conservative.  

The total stock market index fund is heavily weighted towards the United States and specifically US Large Cap Growth Stocks and presents a sequence of return risk to your portfolio.  The biggest time period that blows up early retirement models is the prolonged downturn during the 1970s, which saw highly valued, large cap US stocks underperform all other assets.  The stock list was commonly known as the Nifty Fifty

 I have a couple of considerations

1. If you want to continue this path, add Vanguard’s Intermediate and Long Term Treasury Funds to your asset mix.  These assets have a negative correlation to US Large Cap Growth Stocks and will cushion your volatility.
2. Consider adding the Vanguard Wellington Fund to your mix, especially in your tax deferred accounts.  This buys you professional management with a roughly 65% stock, 35% bond fund with an excellent track record and less volatility.  There are plenty of retired millionaires that hang out on the Bogleheads forums that use this as a one and done retirement fund.  

The Landshark can comfortably retire with a decent percentage outside of equities and still never worry about money again.  

Roth Conversions:  The Landshark’s most recent year worked eliminated one risk of the last case study, running out of available funds from taxable accounts and Roth IRA conversions.   At a minimum, the Landshark would enter early retirement with more than $720,000 in the taxable brokerage account, which provides a six year buffer in living expenses before turning to their Roth IRA.  Thanks to existing contributions and ongoing conversions, there’s no risk of running out of converted funds prior to turning 59.5.

Legacy Planning:  Have you put any time into your legacy planning?  In discussions with the Landshark, they have a solid estate plan setup if something were to happen to the family.   They are now getting to the point of working past their FIRE number and having significant funds left over, perhaps even more than they would want to pass on to two children.  One consideration is to allocate $10,000 or so and go ahead and open a “family” fund with your local Community Foundation.   These are similar to Fidelity or Vanguard Charitable, but are better with legacy instructions and it gives you a fund that is already setup that contributions or estate funds can be directed to that leave a family legacy.  

Wrapping Up:

The decision of when/how to retire early is a personal decision that is about far more than the math.  Walking away from the professional identity, the routine you know, and the firehose of cash that can come from a 15+ year professional career is not easy.  I discussed this jointly when I first met the Landshark on the What’s Up Next Podcast.   Some people love their profession and it is what provides fulfillment, while for others it is a means to an end.  The Landshark needs to decide what he thinks about how this fits for him, as he and Mrs. Landshark are quickly approaching the point of trading the limited time they have for money they no longer need.  It’s a fortunate position to be in, but still a challenge to figure out when enough is enough.