Reader Case Study: Mr. Cricket
When I get emails from readers, I try to answer all the question I receive. Usually I keep the contents of those emails confidential, but occasionally the individuals allow me to share their “case” as long as I keep their identity secret.
Today’s post is going to be one of those case studies from my mail bag…we shall call this gentleman “Mr. Cricket”.
The Situation
Mr. Cricket writes to me with the following situation (edited for brevity and clarity):
I’d like to be where you are in a few years as a stay at home dad, but I’m having a hard time determining if I’m close to having enough or not.
I’m a 48 yr old male, recently married(2nd time). My wife is 35 and just finished getting her PHD in Child Development. She got through school without any student loans, but has no 401k, IRA or brokerage account.
We are about to have our first child and I’d love to do what you’re doing, staying home with your children. Since my wife has just gotten her PHD, she’s actually looking forward to getting a job perhaps in a few years after staying home for a few years. I don’t want to be a pessimist, but she is likely to end up in academia, research or a school system, which means she won’t have a high salary.
Assets:
401k(maxed every year) – $196k
Roth IRA(maxed every year) – $152k
Rollover(Traditional) IRA – $169k
Brokerage Account – $106
Checking – $10k
HSA – (just started this year)-$1.2k
House estimate – $600k (160k owed)
Total assets: $1,074,000
Debt – None (Other than house).
Monthly expenses – $4000
It looks like Mr. Cricket is doing great financially! He’s got roughly 1 million in assets and no debt other than the mortgage!
He’s killing it! Right? What could he possibly be worried about? Let’s dig-in!
The 401k
Mr. Cricket has been saving lots, and piling up money in his retirement accounts like a madman. Nice job Mr. Cricket! Now that he’s got a nice bit of money saved up, he’s wondering if he should really have it all stashed there…
Should I switch over from maxing out my 401k and only contributing to get my employer match at 4% of salary? Then start piling up money in normal after tax brokerage account?”
I’m going to assume Mr. Cricket wants to avoid paying early withdrawal penalties while living off his portfolio income. That’s usually the case.
Frankly, if he needs to start drawing down his pre-tax accounts immediately, there’s no great way to do this.
There is the Roth IRA Conversion Ladder, but it will take 5 years to get a proper ladder setup and going. Mr. Cricket does not want to start the conversions when he’s still working…the taxes would be a killer!
So what’s going to bridge the gap for those 5 years? He currently has $275k in brokerage and Roth IRA accounts. Using the standard 4% rule (which I think is too high anyway), that’s only $11k per year to live off. That’s a low annual income. Probably lower than I would be comfortable with.
Now, we if we consider that Mrs. Cricket will start working soon, won’t that make up the difference?
Her salary could help bridge the 5 year gap, but it would also limit how much he can convert into his Roth IRA Conversion ladder (assuming he wants very low tax rates for the pre -> post tax conversion). I don’t think he wants to do this while she’s still working.
My suggestion? Keep saving into the post-tax account, but definitely take the 401k match.
Save up enough so they can live off either his wife’s salary or his post-tax investment accounts. While Mr. Cricket’s wife is working, he can keep banking his investment returns and grow the portfolio. If she loses her job, nobody is going to go hungry or sleep in a box, because they’ll have his post-tax investment income to live off.
When Mrs. Cricket does officially quit working, that’s a good time to start the conversion ladder to free-up those 401k dollars at low tax rates.
The Mortgage
Mr. Cricket further inquires…
Would you be comfortable with the numbers I presented? I know a lot of people don’t agree due to the low interest rates on mortgages, but I feel if I can somehow get the house paid off, I’d be comfortable with the numbers.
In this situation, over half of his net worth is in his house. Many in the early retirement community want to pay off their mortgages, but I think this is a poor idea. You can’t eat a house. It doesn’t put food on the table. Unless he turns his home into a rental it’s going to consume cash, not generate it.
An early retiree needs income, and the ability to grow his cash flow over time to beat inflation. He needs to choose to allocate capital to the best return available, not a big wood box.
The Dividends
Mr. Cricket is no fool. He’s also worried about generating income after he quits working. He asks if he should change his investment strategy…
I don’t have enough dividends to sustain our expenses. I always concentrated on capital appreciation stocks, but have been converting over to dividend yielding assets for stability and income. In your opinion, if I decide to quit my job in a couple years, would you continue converting over capital appreciation to dividend yielding?
This is actually a very interesting question about investment strategy!
At his age, I wouldn’t focus on just generating dividend income. He’s got lots of life left ahead of him. He’s going to want portfolio growth over the coming decades of his life.
If Mr. Cricket switches out to a portfolio of high-dividend payers, he’ll be sacrificing growth for a larger current income.
Quite simply, if a company pays out a large percentage of net income as a dividends that means less cash for investing in growth. Remember that post about Return On Capital? Less capital around = less compounding!
If you want your money to grow AND you want dividends, stick with companies that have a high ROIC. They should also grow faster than inflation, have a dividend payout ratio under 50%, and a yield near the target withdrawal rate (2% to 4%).
Investing in this “balanced” way will ensure compounding growth of assets over time, AND derive optimal current dividend income without the fees associated with selling shares for a capital-appreciation strategy.
The Mental Factor
As a stay at home parent, I have to remind Mr. Cricket it’s no cake-walk.
Before you take the leap, make sure you’re mentally and physically ready for it. I actually think I work harder now as a stay-at-home parent.
Can you handle your kids all-day every-day, and still stay sane? I seriously doubt my sanity some days!
There’s also social factors to consider – Certain individuals in society still think a man has to be The Provider, and a woman should be The Homemaker. It’s sad, but true.
When people ask me what I do, I usually say “I’m a stay-at-home dad”. Unsurprisingly, I get a lot of funny looks, and not a lot of encouragement.
People think I should be working, not “hanging out” with the kids. This kind of thinking is sexist, outdated, and backwards. Many people are just not comfortable with non-traditional family roles.
Mr. Cricket needs to be certain he can deal with these outdated modes of thinking before taking the leap to stay home with the kids!
Fin
That wraps-up our first reader case study. Thanks to Mr. Cricket for allowing me to post his questions and financial details. Good luck to you Mr. Cricket!
Until next time…
[Image Credit: Flickr]
Hello Mr Tako!
I enjoyed this post but have one question: why don’t you include his tax-advantaged accounts in the 4% rule? He only has 10.5 years until he can access them, so his brokerage account only has to last that long.
If you include those, he’d have $623K, or $25K/yr at 4%. It wouldn’t be enough to meet spending needs, but might bridge the gap between their spend and her income.
Yes, quite simply he wants to quit his job very soon. He doesn’t want to wait 10.5 years, so any withdrawals from tax advantage accounts would have penalties. As early retirees, we want to avoid this. Money should be moved out of tax advantaged accounts as efficiently as possible!
I’m with Holly on this one and I don’t think you answered her question. Mr Cricket could withdraw from his taxable accounts first, while the 401K keeps growing. Once the 10.5 years are done, he can start withdraw from the 401K if he wants.
So, technically, he has 1,074,000 (total assets) – 600,000 (house) = 474K that he can withdraw from. That’s 19’000 with the 4% rule.
Sure, he’ll have to withdraw from the “taxable” part of the bucket for the first 10 years, but does it matter?
Hey Mr. Tako, great post! Thanks Mr. Cricket for sharing your experience.
Faced with similar circumstances, I have come to the conclusion that for purposes of calculating safe withdrawal rate, I do not include equity in my house as part of my net worth. Counting a house as part of net worth leads to over-inflation of my financial status, at least in my head.
I reason that I will always have to live somewhere, and the money that is tied up in the house is always going to be dedicated to that role. It is probably just semantics, but it helps me to make rational choices by putting the cost of a home in a separate bucket from living expenses and net worth. As you said Mr. T, you cannot eat a house. (I would also point out that you cannot live in a tortilla.)
Best wishes. Ap.
You can’t live in a tortilla – that’s awesome! Can I borrow that?
Too bad he isn’t Mr Termite!
The mental factor is a good one. I fully support the comment you make.
My wife is on a 4 day trip with friend and I take care of the kids. I will be happy to go back to the office on Monday! Don’t get me wrong, I love them, I love to hang out with them. And yet, sometime they can be really high maintenance!
Great analysis! I think your last part about being mentally and physically ready to take care of a baby is key. We have a toddler and they are active and fun!
The Green Swan
A nice analysis, and all very good points.
It’s a common problem, we all push money into tax advantaged accounts-as we should, but this somewhat ties us to traditional retirement age. We have been focusing recently on bulking up our taxable accounts to carry us happily into the early years of early retirement. We think of our 401ks etc as ‘part 2’ money. Sitting waiting for us when we need it.
That’s a really great comment Mrs. Pie! That’s how we think about it too! Our taxable accounts will get us through ‘Part 1’ and our tax advantaged accounts will get us through ‘Part 2’
Ah, the mental factor… When Mr. Tako and I were talking about him retiring while me still continuing to work for a while, I wondered how I would feel about the situation once we actually make the change. I wondered if I would feel stressed because I have to be the only one working. I wondered if Mr. Tako would do a decent job keeping the house in order. I wasn’t worried about Mr. Tako taking care of Tako Jr #2. I knew he is a good daddy and will take a good care of his little buddy.
But I wasn’t sure what this was going to be like. I knew a few people with their husband staying at home with kids while they work full time. And I remember thinking “wow…I don’t know if I can handle that or if I would like that…”.
Well, fast-forward 6 months from Mr. Tako’s retirement, I’m actually enjoying our arrangement. Lots of good things, actually.
1. Tako Jr. #2 gets to spend LOTS of time with his daddy — Tako Jr. #1 didn’t have that privilege (he’s was in full time daycare program)
2. Mr. Tako realized how hard and exhausting taking care of a kid would be — I don’t think he would have ever understood that without this experience. Back when I was in maternity leave with Jr. #1 or #2, Mr. Tako was working full time. I bet he didn’t think staying at home with a baby takes this much energy. 🙂 Now he knows.
3. Mr. Tako gets to spend some time on his projects (if Jr. #2 lets him, of course). — This is really good for Mr. Tako since he enjoys working on projects, and great for our boys to spend fun times with their daddy for years to come.
4. Mr. Tako cooks great dinner! When Jr. #1 and I come home from daycare/work, Mr. Tako has dinner almost ready for us. I’m so glad he likes cooking, and he can cook good eats. He’s also been trying out different foods (Thai, Japanese, etc.) which the family gets to enjoy.
5. More time as a family. I can’t imagine how much busier our schedule would be if Mr. Tako and I both work, have to take both our kids to different daycare, cook meals and take care of other house keeping work, etc. I know a lot of people do it. But we wouldn’t be able to have this nice pre-dinner/post-dinner family playtime that we have. I so cherish this time.
All in all, things are working great for us. I would probably be more stressed if Mr. Tako and I both worked. Kids get to spend more time with us. We have more flexibility. I know it’s a lot of work for Mr. Tako taking care of Jr. #2, and it’s definitely not easy. But it’s certainly more rewarding and valuable time to spend than having to work for a boss doing the work to benefit the company. I also prefer to have a husband who complains about how poopy our kid was that day than a husband who’s super exhausted and stressed about work all week long, 24/7.
Awesome reply Mrs. Tako! I ‘allowed’ my wife to go from part time to SAH when the second child arrived. Actually, it was fairly straightforward from an income and ‘breadwinner-expectation’ perspective, but still challenging. Fast-forward 8 years – she felt that the family began taking for granted all of the work she did. And I’ll plead guilty to not thanking her enough for all of the effort I had been taking for granted! Mostly, she felt as though the kids didn’t need her as much and still had too much youth to sit around. So she has gone back to work in their school system and couldn’t be happier. It’s not for the money (hah!), but it’s much better than volunteering. So, from our one-off perspective, once you have FI, the world is a smorgasbord to choose from! Not that it’s ever easy or simple, but having options is a luxury.
It’s great that the new arrangement is working out for you. Life has been much better with me being a stay at home dad also. Taking care of the kids are a lot harder than I imagined. I’d never have appreciate that if I was still working full time. I didn’t like being a stressed out dad either. I got mad easily and wasn’t very pleasant to be around.
I think Cricket should take a sabbatical to see how he like being a SAHD. 🙂
Great idea!
Those are all great points! We plan to shift our investments from high growth type funds into income generating dividend funds when we shift in our FIRE mode in a few years. The main thought is similar to what you pointed out – it’s too slow growth for us to want to be in now, but if we get income from it and have to draw down less, then we will be fine with the slower growth rate. Also, it just has to last through the “gap years” between 40 and 60.
I like the point about being mentally ready for being SAH parent. I’ll likely be the main SAH first, going solo while Mrs. SSC still teaches, and I expect it to be a bit rough to transition into. Like any job, I’ll just have to work out a good schedule for me and the kiddos and treat parts of it like a job so that I don’t get overwhelmed and think, “My God, what have I done?!” lol Even knowing it will be a lot ahrder work than my current nice paying job, I’m looking forward to it!
I loved this analysis! Especially the part about not only relying on dividend paying stocks. I am building a foundation of index funds for my taxable account that I will add dividend strocks/ETFs to help support it with income generation in the future. This way I can have a steady stream of income coming in but still get to capitalize on capital appreciation as well.
Great case study, always interesting to see what a third party would say. Agree you can’t eat your house, many people have an over inflated view of their true net worth.
And the emotional / mental part is so important. I had 2.5 years off with our kids and then part time, it is not a walk in the park. And I wonder if his wife is happy to be the breadwinner?