ERE Challenge: Could You Retire on $300k?

[Spartan_Warrior]

Here's a little thought experiment as a challenge (or maybe not!?).

The goal is to survive without a day job (aka "retire") with assets totaling a little under $300k, distributed as follows:

Current Assets:
---
105,000 - 401k
15,000 - Health Savings Account
35,000 - Roth IRA
35,000 - Individual IRA producing about $150/mo (6-month moving average) in dividends
15,000 - Liquid assets
85,000 - Home equity (*)
5,000 - Personal property including beater car
---
Net worth: 295,000

Current Monthly Income (6-month moving averages):
---
150 - Dividends from Individual IRA
200 - Side hustle (**)
750 - "Safe" withdrawal rate (***)
---
Total: 1100


* More about the house:
- 3BD/2BA 1200 sq ft SFH, Zillow value at 255k, 170k left on 15yr, 3.0% APR mortgage at $1700/mo.
- In nice-ish Maryland small town with many services/amenities (groceries, retail, etc) in walking/biking distance, but...
- Few high paying job opportunities without a longish (>30 min) car commute.
- Small, ~10k sq ft yard with shade, clay, and other suboptimal gardening conditions.
- Could be refinanced to a 30-year mortgage at 3.5%, payment on remaining $170k balance would become ~$1050/mo.
- House could also be rented for ~1700/mo, per Zillow.

** The side hustle has brought in upwards of $1k in good months and it is conceivable that income from this could increase with more effort. It could also be completely decimated overnight at the whim of the distributor, a much larger business over which you have no influence. Also note that internet access (and electricity) are required for the side hustle (as well as for general sanity).

*** Of course, not all of the money is easily accessible or liquid, and selling assets will start to reduce dividend income, etc, but for simplicity's sake by the 3% rule, 300k at 3% is 9000/yr, or $750/mo.


Given these circumstances and resources, what would YOU do? Could you retire today? Where would you live? What would your expenses look like? How would you use these assets in setting up your lifestyle?

The cleverest solutions get a prize! Well... if admiration and/or gratitude counts as a prize.

[stand@desk]

Sure you could retire but would you want to? It seems like most people on this board think they like to drink the ERE wine, but in reality they prefer the RE wine. Analogous to people saying they like dry wine but in reality prefer the taste of sweeter wine.

Very few people end up choosing to retire early with very little buffers. More (it appears to me) prefer to get FI, then continue working for numerous years and then eventually are early retirees, not early retirees extreme.

For those who like security (and if you are wanting to be FI you probably like security) are probably willing to add to your buffer before you cross the line of quitting your day job.

[enigmaT120]

I would want the house paid off, or sold to downsize or move somewhere much cheaper.

And I think stand@desks accusation is mostly accurate. For me, anyway. As a fed, much of my retirement income is tied up in a pension which I can get right now but only if I get fired (not FIRE but actually removed from my job). Otherwise it's age 56, in 3 years 3 months. I can't do much with my Thrift Savings Plan until I retire but I can withdraw from it before 59.5. I hope they add more withdrawal options before I retire, right now they're pretty limited.

[sky]

Given those circumstances, I would not be able to pay my $1,700 mortgage with income of $1,100 per month. So I would not quit my day job.

[IlliniDave]

Me? No. Maybe more accurately, I wouldn't want to. I'm a one-E ERE-er.

[jacob]

The biggest issue is the distribution. Networth makes for a nice summary of one's financial status, but not all dollars are equal; some are more equal than others. In terms of ready-money, yours aren't the best. You have very little (only 15k) of "the good stuff" i.e. unlocked/non-deferred liquidity. Converting everything to "good money" and you'd have less than 295k.

There's an immediate cashflow problem wrt the house. Either sell it or turn it into a rental (rooms, the garage, the drive-way, airbnb, or the whole house). The rental deal insofar you can make it cash flow positive (accounting for vacancy) seems like your best option?! At 15 years, it'd be cash neutral/negative as you'd probably still need to pay out of pocket for maintenance---money you need for living. Refinancing, you would get a flow of $600/month or $7k/year ... which could be eaten up by 4 months of vacancy or a major repair (new furnace).

I think this decision depends on how geographically flexible YOU want to be. I've found that I prefer relocation flexibility in order to take on serendipitous opportunities. I've been turning down too many of them since anchoring myself with bricks.

The next problem is being overweight in retirement accounts. If you do an even split, you have 30 years worth 5+15+~85 = 105k in taxable income (until 59.5), while the rest is locked up. Remember, you can only use the 3% rule in theory. In practice, you need house and you can't withdraw 3% of your bricks on a consistent basis outside of a reverse mortgage (yikes!). This means either relying on side-incomes or messing around with 72(t). I don't know the exact particulars of starting to withdraw retirement accounts early on but I suspect it's messy and potentially irreversible?! If you do the split and live off of the 105k until 59.5yo, then you really only have $250/month from SWR---that's after selling the house.

So what we really have is $250+side-hustle money. $250 alone is beyond my skill level (unless I can get free rent ... but such free rent usually comes with caveats). For ME generating needed money with a volatile side-income would be quite stress full. If the average is 200 and the max is 1000, it implies some 0 months(?) ... So this really depends on the marginal value of more effort. How robust is the side-income as a function of factors you control? E.g. my copy-editing gig was quite predictable (hourly compensated) but there was only so many hours to work, so even if I worked round the clock and took everything the publishing company had, I would not be able to swing more than an estimated 80 hours/month---which would have been plenty for me.

So it comes down to a choice between the potential/desirability for rental income, side-income, and future income prospects.

[Spartan_Warrior]

@Jacob: Agreed on the bad distributions. I have heard rumors of tricks involving things like 72(t) rule, Roth conversion ladders, and tax-free withdrawal of Roth IRA contributions that would make the "bad money" more accessible (or cost less to access). Hoped someone here might have knowledge of such wizardry.

From the limited research I've done on 72(t), I've previously estimated that I could take a maximum of $200-250/mo from the 401k account, and yes, this would be irrevocable until I reach full retirement age or the account runs dry, whichever comes first.

I lean more toward selling the house and unlocking the liquidity than renting, partly for reasons of geographic freedom and personal temperament, but also because I feel like I'd break even at best after maintenance and vacancies, even after the refi (which would seem a given in any scenario involving keeping the house).

Even if I had to "brute force" convert the bad money to good, I believe the penalty for early access on a 401k is 10%? I would think we could more or less ignore income tax losses on that given the income levels being discussed(?). Could probably assume a loss of about 10% of the home equity in the sale as well (agent fees, transfer tax?). So, just applying 10% adjustment to the whole net worth figure for convenience/safety would come out to $270,000. By 3% rule, that's at least $675/mo... right?

If that is the case, then it would seem to be a matter of figuring out how to crack open the bad money as cheaply as possible, and then figuring out how/where to live on $675/mo + side income.

@enigmaT120: "As a fed, much of my retirement income is tied up in a pension which I can get right now but only if I get fired (not FIRE but actually removed from my job)."

Wait, I haven't heard of such foolery. Are you saying if I get fired from a civilian fed job, I get my paltry pension back? Go on, I'm listening...

[TopHatFox]

I could do it certainly. At a 4% SWR that would be about 12k, 2x my bare-bones number (7k/yr); at a 3% SWR, it'd be 9k, a little over.

What I would do is pour all assets--minus 6 months expenses, ~4k, in a checking account--into 70% Vanguard's VTSAX and 30% in Vanguard's bond index fund. I'd want most of the money to be invested, not sitting on a consumption item like a house (unless if said house is rented in part, or fully as I travel). I might even do 100% VTSAX because 300k is almost twice 7k and the stock market has historically had higher returns than bonds, even if it had more volatility. Of course, by then I might be doing value investing a la Jacob, but I still don't know enough to try, and The Efficient Market Hypothesis sure is...convenient.

I would probably keep working until 500k though, for the extra security if the stock market decided to tank 50%. W/ 500k, the 2% dividends from ~100% VTSAX would pay for my 7k/yr lifestyle haha. After that, I doubt I'll never make income again, and I would rather like to be a millionaire for the silliness of the title. I don't know what I'd do with 30k/yr at a 3% SWR, maybe burn it for warmth by the fire on an icy mountaintop?

Thankfully, I'll be spending at least the next few years of my post ERE life running around the backwoods of the AT and PCT, or cycling across the world. I know of one guy that cycled the world on 10k for FIVE YEARS (mostly food, bike and equipment already bought).

-------------------------

Oh, and I'd get all the money out of retirement accounts via a Roth Conversation Ladder or similar. Geographic arbitrage is also excellent to make your US DOLLARS go farther. Take advantage of the US's hegemony over the rest of the world. $1 US dollar is worth quite a bit in nice places, such as Norway (as the recent millionaire post noted).

[Dragline]

I'd keep working, but if I were to retire on that I would probably move to a different country with a lower cost of living. I am eligible to obtain a passport in Belize and have some family there, so that would be a possibility for me. I definitely would sell the house.

[enigmaT120]

@enigmaT120: "As a fed, much of my retirement income is tied up in a pension which I can get right now but only if I get fired (not FIRE but actually removed from my job)."

Wait, I haven't heard of such foolery. Are you saying if I get fired from a civilian fed job, I get my paltry pension back? Go on, I'm listening...

You have to have over 25 years in. I'm at 30.

[George the original one]

Off topic...

@enigmaT120 - Can't you bridge the gap between now and your pension benefits? Or do the Feds require you do something with the retirement account ASAP even though you're vested?

[George the original one]

Back on topic...

If I were a single man, hmmm... no, I would not retire on $300k unless you choose medicare (in a state that supports it) because your reliable income would likely not be high enough to qualify for Obamacare(*). At $400k, you have a potential winner.

(*) I've not investigated the responsibilities and complications for ex-pats in this regard.

****
Cheapest studio apartments are in Astoria, $625/mo & $675/mo. Seaside has some 1 bedrooms & studios at $800/mo. You'd also be on the hook for electric baseboard heat in these units (needed 6 months of the year), so, in some ways, ownership of a more suitable residence might be less expensive. You'd have to get creative to get housing costs lower in this area. The advantage of Seaside & Astoria is seafood protein from clams & crabs at very low cost ($7 annual license plus occasional expense for gear).

[BRUTE]

Geographic arbitrage is also excellent to make your US DOLLARS go farther. Take advantage of the US's hegemony over the rest of the world. $1 US dollar is worth quite a bit in nice places, such as Norway (as the recent millionaire post noted).

moving to Norway for geographical arbitrage? brute found Norway to be very expensive.

[Laura Ingalls]

Check the pension stuff. You dont need to work 25 years to get a pension only five. Please dont quit just shy of the five year mark.

[Ego]

The goal is to survive without a day job (aka "retire") with assets totaling a little under $300k, distributed as follows:

The cleverest solutions get a prize!

You are looking for a solution. That implies a problem. But you haven't outlined the problem other than to say you want to "retire" within the confines of your current situation. To formulate a good solution we would need to know more about the underlying problem.

You are considering drastic change. Your finances suggest that you were on the traditional career-home-save-for-retirement path. Now you are considering changing horses midstream. There will be very high costs involved in making that change if you do so rapidly. You can mitigate some of those costs by spreading them out over a few years.

C40 may be a good template to follow. Set goals. Move slowly and deliberately. Calculate the pros and cons of each step and move with steady resolve. Be mindful of the fact that a bad week at work can make you want to chuck it all, cash in your 401K and set up shop in a hammock on a beach.... consequences be damned.

Rule #1 should be to avoid emotional reactions.

[Chris]

I have heard rumors of tricks involving things like 72(t) rule, Roth conversion ladders, and tax-free withdrawal of Roth IRA contributions that would make the "bad money" more accessible (or cost less to access). Hoped someone here might have knowledge of such wizardry.

To go the Roth conversion route, you're going to seen some cash to live off of that doesn't count as ordinary income (wages, interest, rent...). Funds converted during the year will count as ordinary income, so you'd want to apply your personal exemption and deductions against the conversion to zero out any federal income tax. Qualified dividends and long-term capital gains have special tax treatment, and you can pull down those at 0% as long as you stay in the lower tax brackets.

Basically, if you have dividends, LTCG, and/or cash to live off of, you can convert your traditional IRAs into a Roth over a number of years. The conversions are considered contributions, so you'd then have "early" access to that money.

You could still keep the side hustle, it's just that the conversion will take longer (assuming you want to do it tax-free).

[wood]

Geographic arbitrage is also excellent to make your US DOLLARS go farther. Take advantage of the US's hegemony over the rest of the world. $1 US dollar is worth quite a bit in nice places, such as Norway (as the recent millionaire post noted).

moving to Norway for geographical arbitrage? brute found Norway to be very expensive.

Spending your dollars in Norway would make you about as rich/poor as if you bought the same things in USA.

Generally, if you want to take advantage of currency differences and cost of living, I've found that the cheaper places are the ones with more poverty/security issues. It can still be totally worth it, and a country with security issues doesn't mean the whole country is bad, usually its just a part of it you should stay away from. I think mobility is key here.

If I convert the $300k good/bad money into $200k worth of good money, it'd be enough for me to be able to retire in a LCOL area. I'd still want to work and invest some more though, and make sure that my passive cash flow covers all necessary expenses when living in my home country. This would probably translate into about $400k of good money, and adding the last $200k would take about 5 years of work. I'd invest 70% of it in real estate (personal preferance) with cash flow that covers my needs, keep 10% in easily accessible cash and the last 20% as a startup stock portfolio with the intention of adding to it over time. Then I'd buy myself a plane ticket and travel to Africa, withdraw a pile of cash and try hustle my way to the top.

[Kriegsspiel]

It's possible. You could sell your house, take the proceeds, and buy one or two rentals in the midwest. It's possible to buy houses for $20,000-$30,000 that rent for $700, or you could buy more expensive ones with a mortgage. While you're doing that, keep working and save up another few thousand. Sell all your other property (dishes, furniture, TV, car, etc) if you can to unlock another $5,000-ish.

Income
$700- Rent @ 50% rule
$100- Liquid investments (4%/ $30,000)
$200- Side Hustle

So that might get you about $1,000 a month. Live in LCOL areas, foreign or in the US. Or live in one of the houses. Something like what MikeBOS did.

[BPA]

Are you willing to have roommates?

In order to keep my current house, I need them. Otherwise I'd have to relocate.

I retired on a net worth of just under $400k in a medium cost of living area. I do live in Canada and have less worry about health care expenses.

Edited to fix typo.

[EdithKeeler]

As has been pointed out, since you're factoring in home equity, you don't really have $300K to retire on. I think if it was all actual cash--that you can access without penalty--and you've got your living situation lined up, then it might be doable, depending on where you live. Also, you can't buy an insurance policy with your health savings account, so I assume your plan involves a very cheap, very high deductible plan, and then you'd use your HSA for deductible, etc. Your HSA money is locked into use for health costs only, so if I were calculating, I'd exclude that from "live on" calculations. You've also factored in your "beater car" value--you can't live on a car, so I assume you're planning to sell it for $5K and have access to other transportation.

Given your numbers, you really only have $190k to "live on," and that's not taking into account penalties for accessing your retirement accounts early.

I keep a spreadsheet of my net worth, but I back out home equity, etc. when calculating my "retire on" number.