Midpoint to FI #4: Brewing To FIRE

Reader’s Question:

I am 35 and Mrs. BTF is 33.   We have an eighteen month old and a second on the way.  We’ve been wanting to execute a “fully funded lifestyle change (FFLC)” (idea courtesy of the SSC’s), given my job in commercial real estate no longer brings me fulfillment or joy. We could slog it out for another 3-4 years in my current job to reach full FI but I really crave a job with less stress and more passion/fulfillment. I don’t want to look back and regret staying in my unhappy job and not following my passion.

I have a pretty good handle on what we spend now (roughly $60K) but the wild card could be what our expenses would look like going forward with a growing family. We had a soft “FI” number in mind when we started this journey without kids but that has been more fluid as we’ve adjusted to child expenses. The attached spread provides my best guess at what those could look like into the future. Mrs. BTF still finds joy in her work, so this is mostly being driven by me. I want to transition over to being a brewer, since I’m passionate about brewing, and of course, drinking beer! My plan is to get some professional training, with the hopes of landing a brewing job locally. Mrs. BTF plans on staying in her job for the foreseeable future so we would not have to worry about healthcare, for now. We would transition to hers once I leave my job (family is on my plan). If/when we enter retirement and assuming it’s still around, our goal would be to utilize the ACA and optimize our income to receive subsidies. 

The “FI” in FIRE has always been our main goal, with the “RE” as more of a luxury, there in case our future jobs are no longer satisfying. If we were to execute our FFLC, we would aim to work at least 5 more yrs., in order to cover our living expenses so we wouldn’t draw on our taxable accounts. This would also coincide with daycare expenses going away so our expense load should be much lower and in turn, allow our retirement to be more achievable given the $20Kish drop in expenses. Mrs. BTF’s salary should be able to cover most of our expenses during this FFLC in case it takes some time for me to land a brewing job. From preliminary research, I could expect to make anywhere from $20-$40K in a brewing position, depending on what kind of position I land. Worst case, we could pull some funds from our taxable account to cover any shortfall in expenses in the near term. I’m not factoring in any additional potential savings from my brewing gig in order to be conservative.

Given my healthy salary, we naturally have trepidation in pulling the trigger on the FFLC so looking to see if our plan has “legs” and/or if we’re missing anything. I believe we’re in a good spot given the amount of savings we’ve accumulated to pull the FFLC in the next 1-2 yrs but would love to have another set of eyes look at our plan. We’re targeting a 3.5% – 3.75% SWR but as with any plan, we are willing/able to be flexible with our expenses based on market conditions.  So the ultimate questions are:

(a.)  Do we have “enough” saved in our retirement and taxable accounts to execute our FFLC at the end of 2020 and retire after 5 years, if we so desired? Or would it be more prudent to stick it out another year thru end of 2021? Once the FFLC is executed we will likely not be saving much beyond the 4% match on Mrs. BTF’s 403b. We’ve been plowing tons of money over the last 4 years into our taxable account in anticipation of an early retirement/FFLC. However, the biggest concern, which I’m sure you prepared for, was having enough in accessible/penalty free funds (i.e. taxable, Roth contributions) to last to 59.5.

(b.)  Should we pay off our mortgage once we execute the FFLC? Our estimated FFLC expenses are based on us paying the mortgage off, however, we’ve debated to no end if we should keep it or pay it off based on our above goals, as we have more than enough in taxable accts. to pay it off. We’re leaning towards paying it off since I hate carrying debt but would love to see what the numbers say is the best choice

Thanks for the consideration and hope your retirement continues to treat your family well!

The BTF’s

Shirt’s Response:

Mr. BTF,

Congratulations on what you and your wife have accomplished – the power of taking a high income that everyone else around you frivolously wastes away and just adjusting your spending down to something that’s still above the average household income of $53,000 is pretty incredible.   Yes, the market has helped some and a 13% or so return over the last four years is a few percent above the average, but it’s your earnings and savings rate that is driving this – the conscious decision that you and Mrs. BTF are making every day for as little as $10 at a time is adding to your freedom fund.  

I tell people that reaching full financial independence takes a decade to a decade and a half.  For someone like yourself, finding it at 30 can be frustrating vs those who found it at 22,, but it also comes at a time where you already had a net worth and higher earning potential, so a decade (or even a decade minus a year or two) is perfectly achievable.  Has it sunk in to your and Mrs BTF that you are now millionaires?

Two housekeeping items now that you’ve passed $1,000,000 in Net Worth:

• Have you met with an estate attorney and updated/completed a will, medical directives, and limited powers of attorney for each of you?  
• How much life insurance do you carry and is it independent of your employer?  $500,000, 10 year term life insurance is probably appropriate for each of you.  You probably end up cancelling this after five years, but make sure you are both appropriately covered, especially with Jr. BTF #2 coming along.

There’s two external posts I’d recommend looking at as you consider a FFLC or “Slow FI” path, courtesy of the Fioneers and Four Pillar Freedom.

How I’m Buying Back My Time Before I Achieve Financial Independence

The Shockingly Simple Math Behind Slow FI

Here are some questions I like to send over to people both for an interview and to help with the case study:

Midpoint to FI Questions

When did you discover financial independence and where would you describe your current position on the path to FI? I discovered FI in late 2015 after a rough/stressful year at work. I somehow stumbled across a MMM article and quickly went deep down the FI rabbit hole. Our expenses are a moving target with a growing family but as best I can estimate, we’re 75-80% of the way towards FI.

What made you decide you wanted to achieve financial independence? As noted above, a rough year at work made me start thinking about my employment and career path. Things at work got better after that, but the FIRE bug was lit by then and I didn’t want to spend my entire career in a profession I wasn’t passionate about.

How long do you think you are from being financially independent? Assuming the market doesn’t plunge, I would say three years, plus or minus a year.

Career / Income

What is your current career and how long have you been in it? I’ve been working in commercial real estate for 10+ years, all with the same company. Wife has been working in healthcare for about 8 years.

What is your current income? Combined gross income of about $274K.  I earned $184,000 last year (15% of the salary is a bonus paid each February) and my spouse earns $90,000/year.

Did you go to school for this career? Yes, we both did – we have degrees in Finance and Counseling.

What have you done to grow your income since you started working? Always strived to learn more, worked hard, go above and beyond what’s required of you and grow your network and relationships within the company. This has been the framework for the promotions we’ve received over the last decade.  

Describe the “corporate/professional ladder” where you work/worked? I’ve only had one employer but it seems to be similar to other big corps from talking to other colleagues – some folks get rewarded for great performance/hard work but a lot of times it boils down to who you know and how hard you brown nose. I’ve never been political/brown noser so it’s probably been a detriment to me moving up further but honestly, I don’t care. Yes, I could have made some more sheckles and inched closer to FI, but I wouldn’t change a thing – I’ve done well financially, and more importantly, save a lot of it, in my 10+ years in my job.

Do you have aspirations to climb it further?   Why or why not? Has this changed over time? No – since I don’t see myself at my job for longer than a couple years, so I have no desire to move up and gain more responsibility for a bit more money

Do you have options to do your job on a part time/contract/remotely? No to part time. My employer would be open to working remotely.

Have you ever considered a career change?  Why or why not? Yes – I want to transition over to being a professional brewer. I’ve homebrewed for several years and have enjoyed it very much. I compare it to cooking, which I do in our household – mixing together a host of ingredients to create something special.

Geographic Questions:

Describe where you currently live and why? The Dallas-Fort Worth Area. Lived here since I was a toddler and have never left, primarily because all of my immediate family (and most of extended family) still being here. 

Did you/do you intend on moving geographically when you reach financial independence?  If so, what challenges keep you from doing this today? Not sure when, but at some point, we’d love to build a home on my in-laws ranch in the Texas Hill Country. Mrs. BTF grew up there and we both believe it would be a great place to raise a family.   Long story short, there’s some family issues with the property that eventually have to be resolved in order for us to do this. 

Expense Questions:

We know most people spend the majority of their income on a combination of housing, food, and transportation.   What have you done that readers may find interesting to reduce how much of your budget these three consume? On food, similar to you, we purchase most of our groceries from Aldi’s (whatever we can’t get there, we buy at Kroger) and most of our household essentials/toiletries from Costco. We noticed a nice decrease in our grocery bill once we switched over from Kroger (thanks mom!). On cars, we both don’t care what we drive, so we both bought used cars about 10 years ago. Both are paid off and running well at the 150K mark. With baby #2 on the way, will need more room given our compact cars, so we are looking to buy a bigger car, most likely a mid-size SUV (used, 3-4 yrs old).

Look at the BTF’s expenses! They have nice incomes but still remained discplined on the Big 3 Expenses: They live in a house worth around 1x income, drive used cars they purchased ten years ago, and shop at Aldi and Costco for food. Well done!

Investments:

What are your account balances and in what type of accounts? Our total portfolio is $814K.  This split includes $296,000 in Taxable Accounts, $374,000 in pre-tax accounts, and $143,000 in our Roth Accounts.  

Do you have any debt? Yes – only debt is our mortgage ($99K)

Specific questions / advice:

What specific questions do you have or advice you might be looking for? Here is my question if you can turn it into a case study:  Any feedback on any holes in my plan would be greatly appreciated. 

Case Study

Let’s start with the numbers.   The BTFs have done a great job and have a lot going for them!   They have a significant amount saved, aren’t trying to quit right away, and both have skill sets that can keep earning money.  We need to run a few scenarios forward to figure out what will likely happen to their portfolio over the next few years depending on various work situations. They’ve already achieved The First $500,000, so the “heavy lifting” is already done!

What happens if the BTFs work for three more years.  

	Assumed Return	8%
Year	Starting Balance	Returns	Contributions	Ending Balance
1	$814,000	$65,120	$150,000	$1,029,120
2	$1,029,120	$82,330	$150,000	$1,261,450
3	$1,261,450	$100,916	$150,000	$1,512,366
4	$1,512,366	$120,989	$0	$1,633,355
5	$1,633,355	$130,668	$0	$1,764,023
6	$1,764,023	$141,122	$0	$1,905,145
7	$1,905,145	$152,412	$0	$2,057,557
8	$2,057,557	$164,605	$0	$2,222,161
9	$2,222,161	$177,773	$0	$2,399,934
10	$2,399,934	$191,995	$0	$2,591,929

At an 8% average return rate, the BTFs will reach their full financial independence number in three years.  In this example, we also run the chart out to show what happens if they earn just enough income to cover expenses afterward, which would move them squarely into the FatFI category.  It was important to show this since Mr. BTF’s retirement goal involved an income producing hobby and Mrs. BTF enjoys her profession. That’s a significant net worth the BTFs are staring at in their mid 40s!

Switch to Brewing Today, Spouse Keeps Salary.  10 Years Working

I also wanted to model out what it would look like if Mr. BTF made this career shift today – assuming he earns in the $25,000 to $35,000 and with Mrs. BTFs salary, I conservatively estimated they could continue to contribute $35,000 per year to their investments.  

	Assumed Return	8%
Year	Starting Balance	Returns	Contributions	Ending Balance
1	$814,000	$65,120	$35,000	$914,120
2	$914,120	$73,130	$35,000	$1,022,250
3	$1,022,250	$81,780	$35,000	$1,139,030
4	$1,139,030	$91,122	$35,000	$1,265,152
5	$1,265,152	$101,212	$35,000	$1,401,364
6	$1,401,364	$112,109	$35,000	$1,548,473
7	$1,548,473	$123,878	$35,000	$1,707,351
8	$1,707,351	$136,588	$35,000	$1,878,939
9	$1,878,939	$150,315	$35,000	$2,064,254
10	$2,064,254	$165,140	$35,000	$2,264,395

This extends out their full FI date by three years based on acheving a $1.5mil target, but executes a lifestyle change today.  This is tempting, but there’s a lot more to leaving a high income job than just the money. The important questions under this scenario are:

1) Is six years in the second career going to be that much more fulfilling than three more in the existing role?  Exchanging three years of your working life for six may or may not be appealing.

2) Just how much does Mrs. BTF love her job?  This plan centers around Mrs. BTF continuing to work at her level for some period of time.

What about poor market returns?

We could experience a “lost decade” in market returns.  This happened in both the 1970s and 2000s.   

	Assumed Return	0%
Year	Starting Balance	Returns	Contributions	Ending Balance
1	$814,000	$0	$150,000	$964,000
2	$964,000	$0	$150,000	$1,114,000
3	$1,114,000	$0	$150,000	$1,264,000
4	$1,264,000	$0	$150,000	$1,414,000
5	$1,414,000	$0	$150,000	$1,564,000
6	$1,564,000	$0	$35,000	$1,599,000
7	$1,599,000	$0	$35,000	$1,634,000
8	$1,634,000	$0	$35,000	$1,669,000
9	$1,669,000	$0	$35,000	$1,704,000
10	$1,704,000	$0	$35,000	$1,739,000

In order to reach financial independence in a 0% return scenario, the BTFs would need to stay in their current role for another three to four and a half years depending on their exact FI number (which is partially mortgage dependent, which we’ll talk about later).

Final Scenario:  One More Year, then FFLC.

	Assumed Return	8%
Year	Starting Balance	Returns	Contributions	Ending Balance
1	$814,000	$65,120	$150,000	$1,029,120
2	$1,029,120	$82,330	$35,000	$1,146,450
3	$1,146,450	$91,716	$35,000	$1,273,166
4	$1,273,166	$101,853	$35,000	$1,410,019
5	$1,410,019	$112,802	$35,000	$1,557,820
6	$1,557,820	$124,626	$35,000	$1,717,446
7	$1,717,446	$137,396	$35,000	$1,889,842
8	$1,889,842	$151,187	$35,000	$2,076,029
9	$2,076,029	$166,082	$35,000	$2,277,111
10	$2,277,111	$182,169	$35,000	$2,494,280

In exchanges with Mr. BTF, the earliest he would plan on doing this career change is February of 2021.  The availability of paternity benefits and time off available combined with the life change of adding Jr. BTF #2 would likely be too much to leave in the next twelve months.   In this scenario, the one additional year worked in the current role drops the financial independence timeline from six years with a career change now to 4.5 years in total.  One working year today equals one and a half working years in the future. Not a bad tradeoff if he can coast in the final year at work.

Notice in all of these scenarios the contributions from earnings on the portfolio continue to creep up. The power of compounding is at work.

Now lets touch on what I see as the big considerations around this case study:

One More Year or Not:

Financial independence is inevitable for the BTFs.  They have the right mindset around money, the correct investments, and they will be financially independent.  The only question is when.

I can also see why Mr. BTF would struggle to leave his job today for a FFLC. Combined the BTFs are able to save roughly $150,000/year compared to a portfolio balance today of $814,000.   That plus even some modest growth on the existing portfolio is catapulting the BTFs towards not just financial independence, but financial abundance.  However, a high paying finance job can come with plenty of pain. The same goes for Mrs. BTF who’s in management now vs. direct practicing. I actually asked Brad Barrett of ChooseFI a question similar to this at the FIRE panel they held during Fincon, when to make the grind it out decision vs. FFLC.  His reaction was the same as mine, “It’s a tough one” and depends on the amount of replacement income”.

A twelve year year finance professional taking a job change to a brewer is a big gap. On one side Mrs. BTF can grind it out for three more years and have complete freedom and flexibility, while on the other side he can take a different course of action which will stretch out the “some level of work” years for a bit longer.   If he takes the “some level of work” option, this is an exchange of control from savings rate to investment returns. This isn’t an easy decision, every month that decision is delayed is parking another $13,000+ into their net worth. Personal finance is personal – this is his choice.  I think it’s a choice many people pursuing FIRE eventually face! 

Financial independence is inevitable either way, continuing what the BTFs are doing or considering a Slow FI approach.  There is not a wrong answer for this couple.

Let’s Not Downplay Control:

My thoughts are at a minimum, the BTFs should work through next February, retire the mortgage (more on that later) over the next 12-15 months, then make a decision on doing another two to three years in the current profession or executing a FFLC.  There’s a big life event happening with #2 on the way and both of the BTFs can both use up a significant amount of maternity and paternity leave with some level of pay. I would also carefully use all of the vacation and sick time – I did this in my final year and it helped me get through the feelings of burnout.  

Since financial independence is mathematically inevitable, the question comes down to control.    Saving $150,000 against a net worth of $1,000,000 and investment balances of $814,000 gives them control over a down market.  That savings rate can outpace the worst of bear markets and then they are buying low. Control is appealing…but so is free time.   What is more valuable today? This won’t be a forever case of one more year because the marginal increase of working one more year slows down as investment earnings eventually outpace savings.   The balance here is picking where on that curve it becomes a point of trading time today for money the BTFs will never need.

Mortgage Payoff vs. No Mortgage Payoff.

This is always a fun debate I’ve followed in the FIRE community and I’ve been on both sides of it at different points in my life.   I generally fall on the side of keeping the mortgage and keeping the liquid investments as it provides maximum flexibility. I’m also critical of people who promote paying off a mortgage early for someone who doesn’t have multiple years worth of living expenses available and could be putting themselves in a bind or missing opportunities. Here is where I think the risk point tips to paying off the mortgage early:   

• The house is the ‘long term” house
• You still have 5+ years of living expenses in liquid assets after payoff.  

In the BTFs your case, it sounds like the mortgage is about $12,000/year until paid off and they have $296,000 saved outside of retirement accounts.   Living expenses are around $60,000/year and without it is $48,000/year.   

Here’s how I recommend looking at the payoff the mortgage question:

Existing			Payoff Mortgage
Mortgage/Year	$12,000		Mortgage/Year	$12,000
Mortgage Balance	$99,000		Mortgage Balance	$99,000
Taxable Account	$296,000		Liquid Assets	$197,000
Living Expenses	$60,000		Living Expenses	$48,000
Years Expenses	4.933		Years Expenses	4.104166667

Today the BTFs have 4.93x years of living expenses in their taxable account with the mortgage.  Payoff the mortgage and that number drops to 4.125x. They are saving almost $100,000/year in a taxable account and will exceed five times living expenses either way next year.   Its time to retire the mortgage.

In a practical application, they probably already have investment gains and shouldn’t be in a hurry to sell off their investments.    I would however slow or stop investing in taxable accounts at $300,000 and start taking what they would be putting in the taxable account and instead paying down the mortgage.   When the balance gets to around $60,000, I’d then just retire the debt completely and celebrate. It is also a nice tangible goal for Mr.and Mrs. BTF if they want one more milestone to reach before pulling the FFLC lever.  

The BTFs talked about the possibility of eventually building/moving to Texas’s Hill Country.  If that is still in the realm of possibility, I would still payoff the mortgage but do it monthly vs. lump sum when the balance got smaller.   They can always get a no closing cost home equity line if a future event causes them to need to access the home equity for the move.

Traditional vs. Roth 401k:

The BTFs have contributed to both the Roth 401k and the traditional 401k.  I would encourage the BTFs to be contributing the maximum to their traditional 401k.  If they still have access to Roth 401k accounts once their balances exceed $600,000 in pre-tax accounts, that’s the point to start moving more contributions towards the Roth.   The reason I say this is as someone who’s on the path to FIRE sometime between tomorrow and age 45, it is unlikely they will earn this level of income post FIRE.

One of the powers of financial independence is the ability to defer taxes when you’re at a high tax rate then pull that money out at a lower tax rate.  In discussions with the BTFs, they have less than $600,000 in pre-tax accounts and are utilizing Roth 401ks. I would recommend they move this back to pre-tax 401k investments. Investing the full $39,000 available to the both of the BTFs pre-tax frees up $9,360 at a 24% marginal federal tax rate to invest in their taxable account or throw at a mortgage.  

We don’t know future tax policy, but my opinion on the retirement accounts for a FIREy person is:

Up to $600,000:  All Pre-Tax

$600,000 – $1,000,000:  Split the contributions

Above $1,000,000:  All Roth.

The math/theory relies on the idea that our tax code will at least have its progressive nature that it has today, where the person earning up to $100,000 pays a 12% marginal rate and around 8% all in rate, then it jumps into the 20s over $100,000.   The benefit of financial independence is being able to convert some of the traditional IRA up to that 12% limit through IRA conversions then take it out in regular distributions after 59.5 without breaking into that higher tax rate. Saving 24% today with a high probability of withdrawing it in the 10-12% range is a bet I would take.  Where I believe the odds start changing when you hit $600,000 saved in pre-tax accounts and turn against you when a family saves more than $1,000,000 in pre-tax accounts.  

We can’t know the future with tax policies just like we can’t know the future with investments – All we can do is make an educated decision about the odds and choose what we think is in our best interest.  In the case of the BTFs, I think taking the tax savings today is a pretty good bet at the BTF’s income level and the projected FIRE expense level.  

Other Questions to Consider

Here are some other questions to think about that may guide the decision; it’s about outside financial pressures and any psychology around doing this.  

• Are Mr. and Mrs BTF’s parents are in decent shape financially?   Is there any potential desire to provide support to them as they age and if that’s something the BTFs would consider doing if needed?  The exponential additions to savings become more valuable if the answers are “Yes” to these questions.

• How would Mr. BTF’s family would react to him becoming a “stay at home dad” or “brewer”?  (and just how much does he care?) What about extended family? One of the odd things about FIRE is some people might believe there are money problems or “you can’t hold a job”.  It sounds trivial, but it’s actually something to be prepared for, especially if the path involves Mrs. BTF still working.  

• It’s important not to underestimate the pride that comes from a professional identity both for the individual but sometimes for their extended family.  It’s not a deal killer for being FI, but a side effect you should be adequately prepared for. (My father in law said something around Christmas like “I’m sure something will work out” regarding my “job hunt”.  Neither my parents or my in laws finished college and seemed to be proud of my career for some reason). Part of leaving your work involves leaving external validation that comes with the position. Some people handle that better than others and it’s been an adjustment for me.

• What is Mr. BTF’s ability to re-enter the workforce in his current profession?  There’s a message in the FIRE community of “what’s the worse that can happen, you just got back and get a job?”.   It may or may not be as simple as that. Some professions can replicate almost 100% of their income while others take a significant discount for taking time off.    Mr. BTF needs to think about what the replacement job would be if he left and re-entered the workforce. (In my case it was about a 50% haircut, which drove me to work a bit longer).

Summary:

I want to congratulate the BTFs for what they’ve accomplished.  While they didn’t find FIRE in their early 20s, the changes made over the last 4.5 years to grow their income, reduce their expenses, and invest the difference is approaching the moment of buying them a lifetime of freedom.   What that freedom looks like is up to the two of them. Going for “Full FI” between three and four and a half years isn’t the only option. They both invested time and energy in their 20s and early 30s to grow their income and grow their savings rate and have now afforded themselves flexibility that the majority of people can only dream about.  

I concur with Mr. BTF’s initial thought of working at least one more year.  The ability to pay off their house and still have $300,000+ in taxable investments at the end of the next twelve months would be an incredible accomplishment.   This also reduces the risk associated with a career change and lowers the household’s expenses if Mrs. BTF’s employment situation were to change after Mr. BTF makes the switch.   The consideration then becomes about control – do they want to leave full financial independence up to market returns or be in full control through their income and savings rate? Does Mrs. BTF still enjoy her job in twelve months?   Is there a desire for either Mr. or Mrs. BTF to be a stay at home parent now that there’s two little BTFs at home?  

These are all variables to consider, but I fully endorse the FFLC path in early 2021 or at any point thereafter.

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