My family and I could have been set for life. Instead, due to my inability to beat back real estate FOMO, I blew up our passive income. And because our passive income is now much lower, we are no longer financially independent.
Desire is the cause of all suffering. Due to my desire to own a nicer home, I sold stocks and bonds. By doing so, I lost about $150,000 a year in passive income for the foreseeable future.
In 2023, my passive income was tracking to generate about $380,000. However, by buying a real forever home this time, my passive income is estimated to decline to about $240,000 in 2024. Sadly, $240,000 is not enough to cover my family’s living expenses.
Due to purchasing a new house, I lost about five years of progress while taking on more financial responsibilities. Ugh, writing this hurts.
Alas, since starting Financial Samurai in 2009, I’ve always shared the ups and downs. Whatever you expect to happen in the future will likely be different. So stay on your toes!
Thought Long And Hard Before Losing My Financial Independence
If you subscribe to the Financial Samurai podcast (Apple or Spotify), you know I’ve thought long and hard about whether it was the right move to buy this house. At first, my wife was against it since we were happy in our old house. But over time, she came around to the idea.
Ultimately, I decided to blow up my passive income due to the following reasons:
- The house rocks partly because it is on a more than triple-wide lot with a view
- I believe the best time to own the nicest house you can afford is when there are the most number of heartbeats at home
- As a father, I want to give my family the best life possible
- I’m bullish on artificial intelligence driving San Francisco real estate prices higher
- We’re near or past the bottom of the latest real estate downturn
- I have a plan to return to work and want motivation to fulfill the plan
Household Expenses Going Up
Starting in September 2024, when our daughter attends preschool full-time, I estimate our monthly expenses will grow to $24,033 a month, or $288,396 a year. Until then, our expenses are closer to $22,000 a month, or $264,000 a year.
To generate $288,396 a year after tax requires a gross household W2 income of about $400,000 using a 28% effective tax rate. Or if we want to stay unemployed, we need to earn about $379,000 in gross investment income using a 24% effective tax rate given investment income is taxed lower.
If we hadn’t bought a new house, we were all set to have our $380,000 passive income pay for all our expenses this year and next. But now we’ve got a gaping hole.
Our once $380,000 in passive income at a 24% effective tax rate would have generated $288,800 in net income. That was enough to cover our $264,000 – $288,000 in annual expenses and save.
However, now that our passive income has been reduced to about $240,000, using a 24% effective tax rate, I’m left with only $182,400 in net income. $182,400 is $81,600 short of my existing annual expenses and $106,000 short of my Fall 2024 future expenses.
As a result, after twelve years of financial independence, I’m sad to say I am no longer financially independent. And you know what? It’s a little depressing.
My strict definition of financial independence is when your passive income covers your desired living expenses. Being financially independent doesn’t include having a working spouse, making side income, or running a business.
Below is my estimated 2024 passive income streams by investment type. Every line item should be pretty accurate +/- 10% except for my venture debt and private real estate funds. I’m hopefully conservative with their income and distribution estimates.
Paying The Price With More Stress and Anxiety
Given the difficulty of finding a job after being retired for years, I’ve felt more anxiety about my new lower level of passive investment income.
The first month after my home purchase was particularly stressful as I second-guessed whether I had made the right financial move. My kids had been happy in the old house.
Interestingly, the first month after the house purchase felt eerily similar to the first month after I had negotiated my severance. I was full of uncertainty and trepidation about blowing up my career for freedom. When the final paycheck arrived, I felt like I was floating in the middle of an ocean with a defective life vest.
What have I done?! I thought to myself.
Eventually, after three months, I got accustomed to no longer having a steady paycheck. Thankfully, after four months in our new home, I have also gotten used to no longer getting a nice monthly or quarterly credit from my Treasury bond income and dividend-paying stocks.
Household Budget For A $420,000 Household Income
Now that we’re no longer financially independent, one thought process is for one or both of us get day jobs or consult again.
To cover $288,396 a year in household expenses, I calculate my wife and I would actually need to earn roughly $420,000 a year from W2 income. Because if we go back to work, we’re also going to want to contribute to two 401(k) plans at $20,000 each or more. I treat all my investments as expenses, which is one of my tricks for investing more money.
Making $420,000 a year from one job is unlikely for us anymore since we’ve been out of the work force for so long. But both of us making $210,000 each is feasible, but also unlikely.
Below is how I’d think we’d spend our $420,000 gross W2 income. The budget is based off my ideal lifestyle for a family of four in a big city. Of course, there are areas to cut. But overall, it is a realistic and comfortable lifestyle.
Time To Go Back To Work Or Consult
Given the self-inflicted $81,000 – $106,000 shortfall, I’ve now got to find a way to make up to $106,000 in after-tax income. Using an effective 25% tax rate, I would need to earn $141,333 in gross income from a day job or consulting.
Now you understand more clearly why I’m giving up on early retirement. I can no longer afford not to work.
Once my daughter begins school full-time in Fall 2024, I will have two more days of free time. As a result, I feel it is prudent to do some consulting then to fill the void and earn.
Finding a job or consulting work that pays $141,333 in gross income is more feasible than earning $210,000, let alone $420,000. As a result, I’m hopeful I will find the right fit.
Three Ways To Feel More Financially Independent
Although I’m no longer financially independent after 12 years, there are three ways to feel better about my regression. The first two ways takes action. The second way takes a mental shift.
1) Sell my previous home or rent it out for cash flow.
If I rent out the previous home, I might be able to generate between $90,000 – $100,000 in gross rental income a year. If I sell instead, I might be able to net $1,300,000 after taxes, commissions, and transfer fees. The entire $1,300,000 could be reinvested in a 5% Treasury bond yielding $65,000 a year gross, or $52,000 net for one year.
The problem with selling now is that I would be selling in a still weak market with still high commission rates. It will take several years after the real estate collusion lawsuit for commission rates to come down meaningfully.
Due to a bull market in tech stocks, the emergence of artificial intelligence, and a gradual decline in mortgage rates, it’s only a matter of time before the SF real estate market recovers. The amount of wealth creation in the area is as high as it’s ever been.
Hence, I’m inclined to rent out the property for a couple of years despite earning a low yield. If I rent out the property, I’ll be able to save a majority of my consulting income, if I get one.
2) Do a cash-out refinance
If and when mortgage rates decline further, I could do a cash-out refinance to feel more secure. However, taking on debt after paying cash for a home feels like financial regression. I also don’t want to pay refinance fees. Hence, I’d rather rebuild my liquidity by working and saving over time.
3) Realize my net worth doesn’t change much
Despite no longer being financially independent, my net worth is roughly the same. Paying cash for a property by selling stocks and bonds is simply a net worth asset rebalance. My net worth doesn’t change much, except for any capital gains taxes and fees involved with the rebalance.
If I need to earn more passive income, I can sell more growth stocks for higher-yielding bonds. Or I could sell my lowest-yielding rental property if my tenants ever move out and reinvest the proceeds. However, again, I’d rather work to make more money and regrow my depleted stock and bond portfolios.
New Target For Re-Achieving Financial Independence!
I estimate it will take at least three years, but more likely five years to achieve financial independence again. As a result, the next three-to-five years will be spent earning and saving more aggressively.
In a positive way, I feel invigorated! It’s as if I’ve gone back in time as a 32-year-old who realizes there’s no way I can last in banking until age 40. I started writing about FIRE in 2009, and three years later in 2012, I left my finance job for good.
Ideally, with the help of a bull market or some unexpected opportunity, I’d like to reach FIRE again in three years because I’ll turn 50 in mid-2027. By then my children will be 9.5 and 7.
My challenge will be making sure I allocate enough time and energy to them during this journey. The last thing I want is to spend so much time making money that I miss my kids growing up.
Let the new financial independence journey commence!
Reader Questions And Suggestions
What type of sacrifices have you made for your family? Have you ever given up your financial independence for your loved ones? Do you think your children and partner will ever fully appreciate your efforts to take care of them and provide the best life possible?