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Lessons from 2022: How I'm Refining My Path to Avocado FIRE
2022 is finally over. It has been one of those years where it feels like you are struggling to keep your head above water. No amount savings could turn those net worth graphs green. Most people under 37 years old are probably looking at the first (post college) year of negative year over year net worth growth.
2022 is going to end up being such an important year for my fellow millennials to look back on.
It will be the year you’ll look back on when deciding how much risk you can actually stomach, how large an emergency fund you actually want, how much company stock to keep holding.
You may have read about risk and diversification before. But the past decade has heavily favored concentrated positions in a handful of tech companies. Sometimes it takes actually feeling your company stock drop 70% in a year before realizing that amount of risk might be more than you are actually comfortable with. A quote within “The Psychology of Money” summed it up well “Some lessons have to be experiences before they can be understood”.
I graduated during the “Great Recession”. But I was starting at $0 at that point. This is the first decline where I actually had a decent amount of money saved and invested.
2022 was the first full year where my plan was put to the test.
I ended the year without making any major changes. I felt good about my approach.
I also feel optimistic about 2023. If anything I have renewed confidence in my financial plans even if things continue to decline.
I believe that having a solid financial plan is crucial, especially when the world feels uncertain. In the coming weeks, I will be sharing the specific steps I am taking in 2023 to stay on track with my financial goals.
Creating a Personalized Financial Plan
Everyone has a unique set of circumstances that will impact their plan. Who you are, what your goals are, what is your timeline for your goals. All of these can impact how you approach your plan. How I approach my plan will be different than how you might approach yours.
My family consists of two adults in their mid- to late-30s who both work in tech (at Meta and Uber). We have a 4.7-year-old daughter who is currently in preschool and will be starting kindergarten in August. We rent in San Francisco and our lease is up in July. I am currently working fully remotely and my partner has the option to work remotely as well. I am constantly thinking about relocating for remote work and FIRE but am still not sure where I want to live (short or long term). Current top options: Smaller City along the California coast with good public schools, Raleigh-Durham-Chapel Hill, or the suburbs of Denver.
My 2023 Financial Plan
Over the next few weeks I will go into detail on each of the following 10 steps that make up my 2023 financial plan. I’ll walk through exactly how I do each step to share what I personally do.
The 10 Steps I’m Taking in 2023
Max out iBonds
Use new contributions to keep my desired asset allocation of 56/34/10 (US/International/Bonds) and preferred asset location
Figure out where to live and build out a “Moving Expense” buffer into my budget
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Thank You! Now let’s jump into Step 1.
Step 1: Revisiting My Mission Statement and Goals
My 2022 long term goals and mission statement:
“I want to be able to Avocado FIRE in the next 5 years after hitting my “Enough” number of $3.3M in index funds, $600k housing fund, and $80k college fund. I want to achieve my goals while also ensuring that I also set up my daughter to have a future where she is able to contemplate ridiculous things like early retirement (if she chooses).”
Are there any changes I want to make going forward to my plan?
I still want to Avocado FIRE in the next 5 years. 2022 wasn’t kind on the progress against top-line goals. That said, at least as of now, I am still on track with my 5 year timeline.
My overall net-worth saw a drop of 9% year over year.
My Avocado FIRE balance* is down 11.5%
Dedicated Housing Fund: $0 currently (all excess is invested)
College Fund: $10k of $80k funded as I iron out our 529 strategies
Liquid Emergency Fund: $60k
*FIRE Balance Tangent:
I have a funny personal accounting method that I use to bucket my investment accounts.
Net Worth: This is the classic and simple look of all my assets - liabilities.
Avocado FIRE Balance: This is the value I use to track my progress against my “Enough” number. It only tracks investments that I will eventually use to rely on in early retirement.
Primary Taxable Brokerage Account
Roth IRA Accounts
It doesn’t include
Vested Company shares
529 or other funds with dedicated non-retirement purposes
Any home equity
The reason I intentionally exclude these from my calculations for FIRE is to focus on funds that I will actively use to live off. in early retirement and reinforce the point that any vested company stock should be diversified into index funds. This is completely arbitrary, but I am consistent with where I am arbitrary.
Is my “Enough” number still enough?
What about my “Enough” number, my housing fund, and college? Has anything changed my plans here?
I originally estimated my planned annual expenses at around $100k per year. I spent nearly double that last year, does that mean I need to go back and double my “enough” number?!
Not so fast. My three largest expenses were Rent, Pre-School, and a Car Purchase.
My “Enough” number doesn’t include housing since there is a separate “paid off house” component.
My daughter starts kindergarten next year, so I can optimize where I live to be in a great public school district.
And that Car Purchase. That is not something that will occur every year. It might not make sense to fully remove it but for now let's exclude it.
This brings me down to ~$80k last year, up from $65k the previous year. You can see a sample of my budget and my approach to tracking my spend from my February Spend Report.
My “Housing Fund”
Here is what I said about my housing fund previously:
“I was originally thinking it would cost me $400k to purchase a house in a MCOL area… but things seem to have been going a little wild and I am bumping this up to $600k. In reality I wouldn’t pay in cash depending on rates. I’ll also highly likely move to a new city and work remote prior to fully retiring early.”
This is currently the part of my plan where I have the most uncertainty. I don’t have an immediate timeline for purchasing a house, so I have been just investing the money that would be used as a downpayment into my taxable brokerage account. My $600k budget, which already was bumped up from $400k, is also starting to feel like it might not be enough. I also don’t have an issue continuing to rent until I have some level of conviction that I will live in the same city for >5 years. If I do move to a new city in July, I’ll likely rent for a year to solidify longer term plans.
What about the $80k education fund?
The original $80k was based on fully funding a dedicated 529 last year. So far I have only contributed $10k.
I had been hesitant to start a 529 plan due to the potential of leaving California, which doesn’t offer a tax break on 529 contributions. However, my top non-California relocation option, North Carolina, also does not offer state tax benefits for contributions. So this excuse for not contributing to a 529 plan is no longer really valid. The key benefit of a 529 plan grows tax-free at the state and federal level, and qualified educational expenses can be paid for with the plan's earnings without incurring taxes on the gains.
Another hesitation I had was around whether my daughter will go to college at all? Who knows what the world will look like in 2037. Having a lot of money that is locked up into a 529 that can only be withdrawn for qualified educational purposes was causing some pause.
I have two new thoughts on this.
New Thought #1: We often treat decisions like this as binary options. Will I fund a 529 or not? However, this is rarely the case. Instead of fully committing to a 529, I can consider splitting the college funds between a 529 and a normal taxable investment account. This way, I can still take advantage of tax-free growth in the 529, but also have the flexibility that comes from having the money in the taxable account. I can even just incorporate college expenses into my budget and save in my primary taxable investment account. This approach can help me overcome any hesitation to start a dedicated college fund.
New Thought #2: It seemed like only last year that we were worried that the US government was going to remove all backdoor roth options including the “Mega Backdoor Roth”. Not only did they not remove any of those options, the most recent “Secure Act” that just passed has another provision that could benefit many in the FAANG FIRE crowd. It essentially creates the ability to roll over $35k worth of 529 funds into the beneficiaries Roth. However there are multiple caveats worth knowing: The money needs to be in the 529 for 15 years and it counts against that years IRA contributions. Still though, this change adds a little more comfort against the fear of over-funding my daughters 529 by giving me an exit hatch penalty free into a Roth (either my daughters or changing the beneficiary to myself). Kitces has a great post on some of the nuances of the Secure Act Roth provisions that I would read before investing in a 529 just for this purpose.
So my plan is still to fund a 529 at least to 50% of the estimated cost for 4 years of in-state tuition and board. I have some concerns that my estimates are not high enough but have enough flex in my planned budget that could overcome the shortfall.
Because I waited an additional year to fund the account, I plan to earmark closer to $90k vs the original $80k.
Setting up my daughter for success
This brings us to the final sentence of my mission statement: “I want to achieve my goals while also ensuring that I also set up my daughter to have a future where she is able to contemplate ridiculous things like early retirement (if she chooses).”
I am not willing to retire early if that means lowering the odds of my daughter having access to the same opportunities I had. Ideally, she would have even more opportunities, but never fewer.
This is especially important for me in 2023. Kindergarten is just around the corner. I have an internal bias towards public schools. Both my partner and I are products of the Texas Public School system. Where we both grew up, if you lived in a more affluent area part of the city, the schools were better. One key contributor to this is how the schools are funded through property taxes (and property taxes regularly increasing overtime as home values increase in Texas).
This is an incredibly complex topic that I would rather not elaborate on in this post. I bring it up to contrast the public schools in San Francisco. Which, in a worthy attempt to reduce the educational disparity across parts of the city, instituted a city wide lottery. Essentially this means that if I want to put my daughter in public schools in San Francisco, I have no idea which school she would even go to.
I did get myself into a little bit of a pickle here though. I thought I was being clever by intentionally modifying my lease to end in July so I could time any moves with the end of Pre-School and the beginning of Kindergarten. In reality, because my lease is only up in July, coupled with my habit of continuously adding “one more year” to my stay in San Francisco, I need to make plans for schooling in San Francisco while also making plans on leaving.
My Final 2023 Goals and Mission Statement
I want to be able to Avocado FIRE in the next 5 years after hitting my “Enough” number of $3.3M in index funds, $600k housing fund, and $90k college fund. I want to achieve my goals while also ensuring that I also set up my daughter to have a future where she is able to contemplate ridiculous things like early retirement (if she chooses). I also really want to be living somewhere that I can see myself staying for the next 3 years.
As you can see, this is largely unchanged outside the added sentence to help me be more explicit in deciding where to live. I may also need to revisit my housing fund based on where I live and whether I think I want to rent prior to any more significant decisions like buying. Mission statements are flexible. They can change overtime as your circumstances change. Don’t feel like you need to nail it the first time, who knows what the world will look like in even 5 years.
In addition to my mission statement I always outline my investment goals. The overall goals are consistent with prior years. The only change is a new line item around adding in a buffer for a “moving fund”.
$66,000 towards maxing out my Meta 401k + After Tax.
$22,500 to Traditional 401k
$11,250 Meta 401k Match. they match 100%, dollar for dollar, up to 50% of the 401k limit (22,500/2= $11,250)
$32,250 After-Tax 401k which gets auto-converted to the Roth 401k in Meta’s plan.
$66,000 towards maxing out my partners Uber 401k + After Tax.
$22,500 to Traditional 401k
$0 Match, Uber does not have a 401k match
$43,500 After-Tax 401k which gets auto-converted to a Roth 401k
$20,000 into iBonds
$13,000 into Backdoor Roth IRA
Any additional excess will then go towards my taxable brokerage, 529 college savings, and moving fund
If you don’t understand what these mean, don’t worry! I’ll go into more detail into each of these in the following weeks as I go through the next 9 steps I am taking to ensure a financially successful 2023.
Has 2022 changed your approach to FIRE?