Seeds of Doubt?

We’re in Bali right now and so far it’s been a bit underwhelming to put it kindly.  Maybe it is our preconceived notions, but there doesn’t seem to be much to do or interesting to see.  But that being said, we just got here and have a month to explore the region.  I hope things will get better when we leave the touristy areas and get to Lombok and the Gili Islands.

Per a recent post, I’ve been thinking more about buying a house when we get back.  But it starts to feel more and more like a financial stretch possibly indicating that we are not as FI as we need to be…

Let me explain.  As we started to zero in on the the Folsom and El Dorado Hills area near Sacramento, I started hearing more about Mello Roos taxes, which are essentially an end-run around the 1% limit on property taxes set by Prop 13.  These taxes can add thousands to the property tax bill in a year, depending on your housing development.  I found myself factoring more recurring costs and at the same time I suddenly became acutely aware that our taxable portfolio will have to bear all of these housing costs, including the entire purchase price of the home.

Say we have $1.4 million in taxable accounts.  Taking $400k out for the purchase of a house drops us to $1 million in taxable, which supports a 3% withdrawal of $30k a year of which $6k will go towards property taxes.  The remaining portfolio will be our primary war chest going forward.  (I know we can do a Roth IRA ladder to tap into some retirement accounts, but hate to plan on doing that.)  If we have kids, then we have to fund them through our taxable accounts as well.  That starts to feel like a stretch and the anxiety of living in a scarcity mindset versus an abundance mindset rears its head again.

So that leads me to my current thought that (1) we are either not as FI as we should be, (2) we should just plan to rent or (3) figure out a way to qualify for a mortgage so we’re not losing the opportunity cost of $400k towards buying a house in cash.  Qualifying for a mortgage requires working again, but that would also alleviate the scarcity concern.

That got me thinking about having *just* another million in our taxable account.  Then I started feeling a little depressed lol.  Maybe all of this has something to do with being in a place I thought would be paradise, but so far is coming far short, or maybe that I was too optimistic about how far I could stretch $2 million.  The whole Brexit rollercoaster didn’t help things, although I’m sure I would be even more concerned had the market not come back at the end of the week.

43 thoughts on “Seeds of Doubt?

  1. Thanks for your honest postings. I think your adventure of leaving your job and doing something other than working to 65 under heavy mortgage and dyeing burnt out and rich, after 40 years in the rat race, is very original and fascinating. But I can relate to some of your doubts. For example, I once traveled for a month, from city to city, place to place, in a foreign region, and found it very repetitive and shallow after a while. Sightseeing gets quickly. Setting down roots and aiming at something substantial becomes more inviting. And as for the required money amount to reach FI, for me it has been $5 Million (4% withdrawal means $200,000/year). Renting. Not to live high on the hog, but to have a cushion in case of downturn in stocks, unexpected expenses, hopefully a long retirement and old age, and in my case, three kids still with college ahead. And I still expect to get Social Security moneys and like the idea of paying in a full 35 years worth and holding off on collecting until 70, if possible. I have been fortunate with a good job to date but now at age 56, feel a bit bored and wanting a change, and yet am also change adverse so continue to do what I have to do to hang onto my job. So I have chosen the conventional “work for 30 to 40 years” route, in the end, but am fascinated by your kind of choice.

    • Thanks for your comment! Definitely understand your perspective. It becomes not just a balancing act, but a maximizing act for the remaining years you have in your lifetime. If you work until 70, you have maybe 20-25 years left, and it would seem hard to spend $5 million in that span of time. Just how I come at it. Certainly think a happy medium is a reasonable approach.

  2. I think you covered this earlier, but for me I don’t see the reason to rush into the house purchase. It sounds like (quite understandably) you still have a lot to figure out in terms of decompressing from working at the firm and deciding what to do next. Just a few posts ago you weren’t even sure what city to live in!

    What you’ve worked for is the ability to buy yourself time to figure out the next step. Why would you give that up for a $400K house purchase!?

    Rent a nice place in a new city/area for a year and figure out what you want next.

    • Agreed! I’m just thinking about what if we wanted to buy a home down the line? Without earned income, our net worth is unlikely to go up absent significant growth in the markets. If we don’t have enough now, maybe it’s time to work more in one capacity or another.

  3. I hope you’ll feel better in less tourist-y areas of Bali. I’ve never been there myself, but some people have been really enthusiastic about it – for example the nature or the people or the cultural heritage. But I can imagine the touristic part of *any* country is not the part that you want to be in to really appreciate the country.

    Would there be a rush to buy a place, once you’re back in the States? Couldn’t you go for plan 2 (renting) for at least the next year, while you figure out whether to buy, what to buy, how to buy, etc? (And also while you figure out this “retiring early”-stuff). I would say: take your time, no rush …

    • Thanks for the comment! We are in Sanur right now which we thought would be less touristic, at least compared to Kuta.

      As I mentioned in my reply to BLI, totally agree we should not rush. But if we are not ready now, it is unlikely we will be in a better position in the future due to absence of earned income. Just trying to figure out the optimal path as I do have a professional shelf life…

  4. A bit out of topic, but if you guys ever want to have a great fusion meal in bali that doesn’t hurt your wallet much, check out chandi in seminyak. I enjoyed it when I was there a couple months back 🙂

  5. Just enjoy your trip and don’t worry about the housing stuff. Every thing will work out for you. You don’t want to practice law again for a while. Don’t forget the grind of law.

      • I got one without an earned income. I paid it off after a few months after my old house sold, but it was a standard 30 year deal.

        It was more difficult with a lot of explanations and paperwork plus 40% down, but ultimately I got a good rate.

        On that topic, however, I’d be reluctant to take the mortgage route. If you do that, you’re essentially taking a somewhat risky financial position (living solely on investments) and doubling down by leveraging debt to invest more then you have. A downturn in the market would then have an increased impact on you, because your mortgage payment remains constant.

        That was my logic, anyways. I know it’s a much debated topic that probably come down to optimism vs. pessimism.

      • Thanks BNL – that’s good to know we could qualify. You’re right that we would be doubling down on investments. I hadn’t thought about that.

  6. Some thoughts. I have been “retired” for 8 years. I originally thought I would just take 1-2 years off, and go back eventually, but that never happened. Instead, I ended up living overseas for about 3 years, then got married and had a kid.
    The travelling got old for me after about 3-4 years, but that is likely because I did a lot of travelling while working, to about 50 countries. I used to be a chip designer, and sometimes miss working on the next big thing, but my shelf life is likely expired at this point so I don’t think I can ever go back.
    I needed a much bigger nest egg to feel comfortable enough to leave the workforce, mainly because I live in SF with a high cost of living. I own a house with no mortgage but still spend around 100k a year (including 12k property taxes, 12k – 15k health insurance, 15k for daycare). These costs are pretty typical for my area. I see how other early retirees almost eliminated these costs, but I’m not really willing to go down that same road.
    It is possible to get a mortgage without income, it’s been suggested to me by one of my bankers. It’s essentially a margin loan against an investment account. For example, Chase offers such a loan for their private client customers. I believe it requires 500k – 1M account size, and the interest rate is super low, just over 2% currently.

    • By the way, although the investment banks offer this type of loan, I personally would not take one. Seems to me might lose the house if the stock market crashes and they called for more funds. I think it may be useful for someone with other reserves.

    • Thanks for sharing your thoughts. We’re from the Bay Area too and our spending habits definitely are not the norm, but could see it going up with a kid, etc.

      Thanks for tip about the loan. We have a private banking relationship, although it like it is in name only since it is thru a former employer. For the reasons you said in your later post, we probably wouldn’t do it.

  7. You might find yourself enjoying Indonesia (and other countries) more if you do things other than the most generic and touristy options possible. For example, when I went to Indonesia, I didn’t even consider visiting Bali. Indonesia has THOUSANDS of islands. Some are nearly untouched by humans and development – just pristine nature, perfect beaches, and some of the world’s best diving. You might learn of more interesting places if you knock your travel luxury level down a few notches, hang with the backpacker crew, and learn about which places are affordable yet amazing.

    Also, my wish for you: Turn off your brain and please calm down!! Your blog is marked by so many moments of you dipping into insecurity and self-doubt. Let it go. Live in the moment. Enjoy what you’re doing now, and if you don’t enjoy it, go somewhere else. Repeat the mantra, “I have enough, I am enough” whenever doubt pops up. You have plenty of money. If you ever need more money, both you and your wife will be able to earn it. For now, how about actually trying out retirement? For real. Like 5 years. At least. Without stressing. And with lots of enjoyment.

    • I couldn’t agree more. But I’m also becoming more suspicious that it’s not going to happen. I want it to happen, I’m sure we all do, but I don’t think your mind is in the right place. I think you’ll be more content when you come home from travel and plant some roots.

    • Yeah we left Bali. On Lombok now and heading to Gilis in a few days.

      I think I’m just wired to make sure things will always go smoothly so the gears in my brain are always turning. I guess that’s what made me a good litigator because I was conditioned to think several moves ahead. I really should turn it off, but my subconscious tells me that thinking ahead can only help so it’s really hard to get lost in the moment and do the whole YOLO thing…

      I usually don’t air out my insecurities in real life — I think my wife would probably like me to do all that more. I like having this space to express myself anonymously. I’m not trying to hold myself out as some personal finance guru it anything like that.

      • I swear that a mantra will help you. I was also a litigator and my brain often works like yours. You can retrain your brain and learn to chill a little more. Best suggestion ever: Practice focusing on gratitude. Whenever you worry, fret, feel pessimistic – find something to be grateful for and refocus on that. It changes you long-term. Second suggestion: use a mantra. Like “I have enough, I am enough”. Or whatever works for you. Repeat it to yourself often. Repeat it when you’re feeling angst. It works!

  8. We also traveled to Bali. I think Bali itself was OK. There was a lot of cheesy tourist trinket shops, and my husband hated all the taxis. However, we found the Gili islands to be great. We stayed on Gili Air and learned to SCUBA. If you have any interest, it was the best diving we have done to date. I wouldn’t miss that opportunity! We planned to stay for a week. We ended up staying for 3. It may have become more commercial since we left, unfortunately, since there was a lot of construction going on in 2010. He also enjoyed Sumatra, where we did back country hike from Ketambe and saw wild orangutans. Also an idea…

    • The taxis were so annoying! One guy tried to impersonate our Uber driver. We did have a good moment. My wife lost her wallet in an Uber and we were able to get it back.

      We’re heading to the Gili Islands in a few days and I’ve heard great things about them. We’ll probably stick to snorkeling and I’m not the strongest swimmer, but still looking forward to it. I think we’re there for a week and a half. Maybe we’ll have to extend our stay too!

  9. I understand your uneasiness about dropping 400k on a house. I have the same mentality about overthinking everything and assuming worst case scenarios (these are likely the same traits that make us good lawyers).

    However, I would step back and look at your entire NW, not just your taxable account. While it’s true that you won’t be able to access your retirement accounts without a Roth ladder or SEPPs, they are still considered assets for purposes of the 4% rule. Put another way, your retirement accounts will continue to appreciate in the same way as if they were unsold shares in your taxable account. The only time that the retirement account limitations would apply is if: (1) you run out of money in your taxable account before 59.5 AND (2) you cannot access your retirement accounts via any of the strategies that other FIRE folks use.

    For purposes of calculating your spending rate, I would include the 500k you have in retirement accounts. So your really looking at 45k/year plus a 400k house.

    • Thanks Steve. Good points. Just the other day I started compiling the dates and amounts of our Roth IRA contributions to figure out how a ladder might shape up to supplement taxable withdrawals. I can’t say doing so made me feel any better though! 😂

    • I want to second Steve’s point: even without messing arround with a ladder or anything like that, you should consider your retirement savings as part of your assets for the purpose of figuring your 3% rate of withdrawal. Even if your taxable assets fall overtime, if your total net worth is increasing, you’re still FI.

      Put differently, the way you’re planning on doing it—living just on a 3% withdrawal from taxable accounts until 59—will mean that your taxable accounts will stay the same while your “retirement” accounts continue to grow over the next ~20 years. Thus, your net worth goes up significantly every year. But you don’t have anything to save for; it’s not like you’ll be “double retired” at age 60!

      The better option, IMO, is to keep your net worth constant/slightly increasing over time. With large retirement accounts, that means picking a rate of withdrawal that slowly draws down your taxable accounts over time. Sure, the balance in your taxable accounts will fall, but your total net worth will be increasing/stable, so it doesn’t matter. You’re not going to entirely run out of money in your taxable accounts before you get to 60—and, even if that were a risk (it’s not), you have already identified that there are ways to get at some of that money early.

      Bottom line: focus on total net worth, not taxable net worth.

  10. $400K isn’t too bad considering you will have $1M left in your investment. 4% of dividend income from the investment is like $3,500 every month which would be plenty to spend if you exclude mortgage. I think you can easily manage that although I still feel that renting is a better way to go as you will travel a lot!

    • Renting is probably better for now. Maybe we are just looking at too much house or to expensive of an area. I always liked a 90% to 10% ratio for stocks/bonds to home…

      I think the other issue is the widening gap between haves and have nots. Going from Biglaw to FIRE really means going from one extreme to the other… The nice happy medium is vanishing. Probably more sad for the folks who work hard to stay there though. Maybe that just means I need to work a few more years? 😞

  11. If you do wish to return to the U.S. and buy a home, could you start a small law practice (with a friend or two to back each other up)? I’ve found that with a flexible schedule and a light work load/no billable hour pressure, being a lawyer can be quite enjoyable. Just a thought for when/if that eventually sounds like something worth doing again.

    • That’s true. A little hard for my practice area, although there might be some scraps for a solo here and there. That leads me back to the ad hoc counsel idea from before I actually quit. Hmm…

  12. Don’t get discouraged. You are in a position that can only be envied by 99% of the planet. At your relatively young age, you already have saved your ‘nut’ for the long-term. Sure, when you factor housing and possible kids, it may not be enough to sustain you by itself forever. But now you can think in terms of taking only the work/job that you want to do to pay for some or all of your $55k monthly expenses. You have picked up valuable/marketable skills as an attorney, and now you have the freedom (ie. you do not have to pull down $200k + a year) to pick and choose what you really want to do with your life. This – finding work you really want to do even though it may not pay well – may be a more satisfying adventure even than a trip to SE Asia.

    • Thanks for the comment. Totally agree that finding meaningful work is more valuable than just traveling around. Our hope for our travel was to open our eyes to the outside as well as the inside and maybe lead to some more insights as to what we might find meaningful.

      I also agree that we are in an enviable position. But there’s also a lot at stake, which makes it hard to just punt and live for today.

  13. I feel extremely confident that you will make > $0 in earned income in future years. It is not all-or-nothing, BigLaw or unemployment. Even $10k per year in earned income will give you a lot of breathing room, and I think that you can count on being able to bring in a few thousand bucks here and there should you want it.

    By the way, have you ever spoken with Patrick Shields, formerly of Quinn Emanuel, about all of this? He might be a few years ahead of you, on a similar trajectory.

    http://abovethelaw.com/2012/10/musical-chairs-just-walk-away/
    http://warrenlex.com/team/patrick/

    • Thanks for that. Patrick’s name looked really familiar and I realized that we crossed paths many years ago when he was still at QE. I didn’t realize he bailed and went to a smaller firm. I wonder how much time he took off before coming back…

      Yeah I realize it will not be all-or-nothing, but that’s the way I tend to think about things. That extra earned income can just be gravy on top. Either way, talking about it definitely makes me feel more comfortable about the best path to take.

  14. I totally get why you’re having self-doubts. I personally don’t think $1.4M is enough to retire on given at least 40+ more years of life. At least it’s not enough considering you also want to have kids. Kids can be very costly. We’re in our mid-40s and are shooting for about $5M of investable assets by the time we retire. We’re almost at $4M and our youngest is just about to enter middle school. So, we’re targeting quitting work in about 6 years when he goes to college. We will be early 50s then. I say work a few more years, be really solid financially. You won’t have as many work opportunities when you hit your 50s, So strike while the iron’s hot. My 2 cents and good luck in your travels.

    • Thanks for your thoughts, Chi. Your comment reflects the voice of my conservative side. Do you really think you will need $5 million to your lifestyle?

      If you don’t mind me asking, do you live in a high cost of living area? What are your estimated annual expenditures? How much do you spend on your kids each year?

      • We actually don’t live in a high cost area. But we do travel a lot and plan to keep doing so in retirement. Both my kids are involved in multiple academic, sport, and musical activities. Both are in private schools, as well. So between hockey, piano, private schools and advanced reading and math tutoring, we spend about $50k for each kid. Then, we will fund college as well, which will likely cost about $300K per kid for the 4 years in a private university. So, $5M at a 4% withdrawal rate is about $200k per year. That’s pretty much how much we’re spending at this time. And we don’t want to lower our standard of living at retirement.

      • I fully agree with Chi. With private schools and lessons for kids, aging parents who need help, and love for travel one needs a budget of 150-200K to maintain a high standard of life. I live in a country where the cost of living is 40 pct below US, those who are in HCOL areas likely require even more. Kids will indeed need 300K each for college — no chance they will qualify for any aid when their parents have a multimillion investment portfolio.

        As far as the size of the pie is concerned, let us be honest: 4 pct was shown to be a 30year SWR, retiring in mid-30s requires more assets. One needs closer to 33x if you believe the history will repeat itself, or somewhat more if you believe in a prolonged low-return period ahead of us. Putting both together yields a target of 5-6 mil. Personally, I would have been worried of FIRing at 2 mil.

      • Good point. I think if one has to support that many people with a “high” quality of life, then you might as well work for the rest of your life. We wouldn’t do private schools for the kids until college and even then weeks encourage them to get merit scholarships and consider flagship public schools.

        Maximizing quality of life also means managing stress and improving time spent with loved ones as well as making the most of our time here. For us that will mean putting earning money on a lower priority given our current net worth.

      • I have to say, your massive income seems to have seriously diminished your creativity if you think you need $5M to retire with a high quality of living. This is an attitude of fear, and that, my friend, is not living a high quality life.

        Fear of the future, fear of not impressing others, fear of getting bored, fear of needing more entertainment, etc.

        I retired and live on less than $36k and my life is pure luxury. I spend my mornings kayak fishing, my days reading and writing and whatever the hell else I want, and my evenings playing with my kids and helping them with schoolwork (no expensive private school necessary) and playing sports outside. We eat healthy and luxuriously. Meanwhile, all these rich people are running around worrying about their next raise. Slow down, brother, and get some perspective.

    • Thanks for the link. I think GCC is great and I had read that post when it came out. It’s a bit of a cheerleader post for the concept of early retirement — that you trade money you don’t need for freedom. I totally get and appreciate that.

      When FIRE was a distant concept, I was totally gung-ho because I felt burnt out at the time. As I got more senior, I still felt my life was out of balance, but the work was more manageable. I was still enthusiastic about FIRE. Now that things are getting more real, I’m recognizing there is no bright line between FI and not FI. There are too many variables. It’s a balancing act. So while GCC might not feel like he needs the extra million based on what he’s saved (I don’t know how much that is…), others might feel differently.

      So I completely agree with the post, but I need to decide whether I’m over the hump or not yet.

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