Tag Archives: FIRE

How to Safely Spend Savings in Retirement

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It can be complicated to determine what is a safe level of spending in retirement. There are many thoughts on this problem which can be useful but also make it complicated to figure out what is sensible.

Partially determining the safe amount to spend is a complicated problem so when we try to find simple solutions there are problems. For those in the USA the past results provide fairly reassuring starting points. Historical investment returns in the USA have been substantially better than elsewhere; this results in historically safe spending plans in the USA not necessarily safe elsewhere. It also does point out the risk that if the USA doesn’t maintain historically excellent investing returns that may make seemingly safe plans turn out to be less safe. Those are some of the complications that make retirement planning annoying.

recliners and palm trees on the beach

Photo by John Hunter in Langkawi, Malaysia. Prepare so you can retire to a relaxing life on the beach.

There are easy rules, like spending 4% of savings. That has worked pretty well but has potential issues with risk so people worry about using it. Also it is so simple that it isn’t surprising it has issues.

There are no super simple answers in my opinion. But ideas like 4% (or 3.5% or …) do get you at least in the right ballpark for what has worked historically in the USA with specific portfolios… The idea of adjusting spending based on results seems like a very sensible idea to me though many don’t like the complexity this ads to the plan. To me a plan to adjust spending just is a sensible way to deal with the complications that a long retirement (whether that is 20, 30, 40 or more years) brings.

No one blog post is going to provide an answer to the question of How to Safely Spend Savings in Retirement. There are some very good posts, articles and studies on the topic, here are a few:

USA Treasury Inflation Protected Securities (TIPS) do not always offer this return but today you can purchase a 30 years portfolio of TIPS that allow for a 4.6% inflation adjusted “withdrawal rate” (so above the 4% idea) – this link (from the Tips Ladder website) provides what the rater would be when you are reading this. You are limited to 30 years so if you need a longer plan this can’t be your entire portfolio but it certainly provides a good potential investment for some of your portfolio. I have been buying TIPS for the last year, as they have been providing such a favorable safe investing option.

Retirement spending calculators

Related: Using Annuities as Part of a Retirement Plan – Save Some of Each Raise

USA Retirement Savings Contributions Tax Credit

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The USA offers a retirement savings contributions credit for those earning $63,000 or less in 2018 (in 2017 the maximum earning were $62,000). The retirement savings tax credit is not as widely know as it should be.

The income level is based on Adjusted Gross Income (AGI). So some deductions from your gross income are allowed; earnings would reduced for contributions to a Healthcare Savings Account or traditional IRA to calculate the AGI). It is also reduced by the deductible for the self employment (social security tax) and for investment losses (up to a maximum of $3,000). The AGI is the value on the bottom of the first page of the 1040.

The Credit can be taken for contributions to a traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans.

The amount of the credit is 50%, 20% or 10% of your retirement contributions up to $2,000 ($4,000 if married filing jointly). Learn more on the IRS website.

Chart of Retirement Savings Contributions Credit (2018)

From the IRS website.

Related: IRAs and 401(k)s are a Great Way to Save for Retirement – Financial Independence Retire Early (FIRE) and Location Independent Working – Save What You Can, Increase Savings as You Can Do So – Using Annuities as Part of a Retirement Plan – 401(k) Options, Seek Low Expenses

ACA Healthcare Subsidy – Why Earning $100 More Could Cost You $5,000 or More

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The USA healthcare system is a mess. This mess has been created by those we have elected for decades. It isn’t a short term problem, simple problem or small problem. Healthcare costs are a huge burden on the USA economy and the financial costs and extreme burdens (worry, fighting with insurance companies, forgoing needed healthcare…) are huge burdens on all those stuck with the system that is in place.

Update 2021: in 2021 the Biden administration updated the law so that this extreme drop-off no longer occurs. Now it is a much more sensible gradual reduction in the subsidy as you earn more money. The previous subsidy rules, discussed in this post, may return in 2023 (the current changes to the more sensible subsidy amounts only cover 2021 and 2022).

One of the benefits of the Affordable Healthcare Act (ACA) is that health insurance costs are subsidized for those earning less than 400% of poverty level income. The way that this has been designed you could get $5,000 (or more, or less) in subsidies if you earn just below the 400% level and $0 if you earn just above. Most such income limits are phased in so that there is nothing like the huge faced by those earning just a few more dollars.

If you are close to the 400% poverty level income and are paying for an ACA healthcare plan (self employed, retired, entrepreneur…) then it is wise to pay close attention to what your reported income will be.

Here are several examples, using the Kasier Family Foundations’s subsidy tool:

  • 60 year old in Virginia earning $48,200 would receive $7,073 in subsidies (60% of the cost*). Earning $48,300 would mean receiving $0 in subsidies (for this and also examples, the examples shown are for a single individual, you can use the tool to try different scenarios).
  • 60 year old in Virginia earning $38,000 would receive $8,029 in subsidies (69% of the cost).
  • 34 year old in Virginia earning $48,200 would receive $608 in subsidies (12% of the cost).
  • 50 year old in California earning $48,200 would receive $4,255 in subsidies (48% of the cost).
  • 34 year old in North Carolina earning $48,200 would receive $1,636 in subsidies (26% of the cost).
  • 64 year old in Virginia earning $48,200 would receive $8,283 in subsidies (64% of the cost*).
  • Family of 4 (ages 46, 42, 12 and 10) earning $40,000 in Colorado would receive $13,799 in subsidies. I do not believe the subsidy calculator (in the link) is properly calculating the income limits for families. It is showing the same limits for single people when I try it now. I believe for a family of 4 the income level that no longer qualifies for subsidy would be $98,400 (400% of poverty level – the poverty level would be $24,600 according to that link). But I may be wrong about this?

* The subsidy is calculated using the average silver plan costs (this results in a $ subsidy amount for you – based on your income and the silver plan costs in your area). But you can select whatever plan you want. So if you selected a bronze plan it could be your subsidy percentage is higher, or you could select a gold plan and your subsidy percentage would be lower. The subsidy values will differ in the state depending on what health plans are available specifically in your location.

As you can see the subsidy is based on the hardship the health care premiums would place on the individual. If you have a fairly low cost plan and earn $48,200 your subsidy will be low. Since the costs are largely based on age (smokers also face an increased cost) this means that the subsidy increases a great deal as the costs skyrocket for those aged 50 to 64 (at 65 you can qualify for medicare and escape the huge costs of health insurance at that age.

I think many people would be surprised at how high your income can be and yet you still qualify for a subsidy, especially if you are a family.

The subsidy levels for those with very high health insurance costs (especially those over 50 years old, or with a family) are very large. If you are close to the subsidy cutoff level the costs of going over can be huge, costing you $5,000 or even over $10,000 just by making an extra $100.

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Use FI/RE to Create a Better Life Not To Build a Nest Egg as Quickly as Possible

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To me FI/RE is about creating conditions that allow you to focus on what you value. Some people do focus too much on saving money quickly as though the goal is to save as much as quickly as possible. But that isn’t what FI/RE means. FI/RE doesn’t mean make yourself a slave to saving quickly in order to remove yourself from being a slave to a job until you are 65.

Any concept can be misapplied. Two posts on related ideas:

The aim should be the best life, not work v. life balance

“I achieved my goal by not my aim. That happens a lot, we honestly translate aims to goals. And then we do stupid things in the name of the goal get it the way of the aim. We forget the aim sometimes and put the goal in its place.” Mike Tveite

FI/RE should be about figuring out what you value and examining the tradeoffs between working, spending and what you really want to get out of life. For some people getting a large investment portfolio quickly is more important than time off, taking expensive vacations, having a job they really like… For some they are happy to have a job they really like even though it pays less and it will take 8 more years to reach FI and be able to retire. FIRE is a process to examine what you value and really think about savings versus spending (largely important because of all the emphasis in our culture to spend and worry about the consequences of debt you took out to spend later).

If you turn FI/RE into an accelerated treadmill of working and not living that isn’t of much value in my opinion (it does have a little bit of value in that you are likely to reach a point where you are free but this is not a good path). You should think about tradeoffs of what you value (healthy living, family, learning, fun…) and what short term versus long term tradeoffs you make. You don’t have to go to the extremes some people do in order to adopt FI/RE principles and create a better life for yourself.

For some people the tradeoffs for achieving financial independence and the ability to retire at 40 are worth great sacrifices up until 40. That is fine if that is what they want. Others would rather make choices from 25 to 40 (lower paying jobs, splurging occasionally…) that mean they won’t reach financial independence until 48. That is also fine.

To me what is most important about FI/RE is examining the choices you make and taking control of the decisions instead of just floating along as so many people do without considering the choices they make. Frankly, doing that and deciding to not even retire early is fine with me (though I do agree it is a bit at odds with the name). Essentially what I mean is even in that case you can apply FI/RE principles, you just do it is a way that make it FI/RR. Where you Retire Realistically instead of as the majority of people do today don’t even come close to adequately considering and planning for their retirement (even at 65 or 70).

Related: ACA Healthcare Subsidy – Why Earning $100 More Could Cost You $5,000 or More – Getting Started Early on FI/RE– USA Retirement Savings Contributions Tax Credit

6 Tips To Help You Achieve A Better Retirement

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Many people are already planning on working for a longer time because they don’t have enough money for retirement. Those reading the blog and focused on taking a different approach from the common one (either FI/RE or digital nomad or something else) already understand the traditional mindset of working hard and buying what you want (even if you go into debt) is more and more difficult. Some specifics of this post use terms that make sense in the USA (like IRA) but the ideas are universal.

The economy is no longer as robust after the financial crisis in 2007. While the recession is over, the cost of living has gone up. What’s more, there aren’t as many options to earn a high income unless you work in the technology sector. There is so much competition for even high skill jobs that it’s easy for employers to pay less than they used to in the past.

Those focused on FI/RE do consider retirement (obviously) but digital nomads for all the other ways I think this lifestyle is appealing often don’t consider the long term at all. And this is a serious problem.

For traditional employees and digital nomad and other freelance type employees one of the biggest challenges with planning for retirement is not the economy. While the economy certainly is a significant factor, it’s not the only one. You also have to take a look at your money management skills. There may be many ways that you are paying too much and saving too little. If this is the case, then it’s vital that you learn new ways of making your money go farther.

recliners and palm trees on the beach

Photo by John Hunter in Langkawi, Malaysia. Prepare so you can retire to this, or even combine FI/RE and digital nomad ideas and work here (with lower expenses) while working toward retirement.

With that in mind, here are 6 ways to save your dreams of retiring at age 65 or even earlier.

  1. Are You Adding to Your Retirement Savings With Each Paycheck?
    Direct some of your paycheck to a 401(k) or IRA and you will soon be above average in preparing for your retirement.
    One of my favorite tips to nearly painlessly greatly improve your retirement life is to put some of every raise you get toward retirement savings. For example, if you get a new job (or a raise) that gives you an extra $5,000 a year in income set aside $2,000 into a retirement account (every year). As you get further raises do the same thing.
  2. Where are you spending your money?
    You may have more control of your money than you think. Take a look at your recurring expenses. Can you spend less on cable? Cable companies make millions because of the fascination people have for entertainment. Is it possible that you could spend the same amount of time sitting in front of the TV doing something else — like starting a new hobby that will be more personally enriching?
  3. Do you need to upgrade your car, phone, TV, laptop so often?
    In the past, buying a car every three years made fiscal sense because you would save on repair costs. However, cars are now made much better and will run well for many years. By buying a car less often and looking after it better, you could save tens of thousands of dollars because every time you drive a new car off the lot, it depreciates in value. Computers used to become painful to use (as the new software took advantage of and thus required the big gains made in hardware to work well – this is much less true today). This money could go toward your retirement.
  4. Do you have money leaks?
    It doesn’t take much to spend money on small inconsequential things. An evening with friends, a latte when you’re tired, an extra few boxes of your favorite snacks when grocery shopping… all these things can add up quickly. You can also save thousands every year by skipping the convenience of eating out and learning how to cook nutritious meals at home. While it isn’t necessary to become a tightwad overnight, wincing when things are a few dollars above your comfort level, increasing your awareness of how you’re spending your money will help you realize that many of the things you buy aren’t giving you that much satisfaction in the first place.
  5. Do you use your credit card almost reflexively?
    Paying with your credit card is convenient, but you do have to remember that even if you keep up with your monthly balance, you are still paying more for the things you bought because you’re being charged interest, perhaps even high interest. Since it’s so easy to whip out a credit card then to carry cash or try to figure out if you have enough money to use your debit card to make a purchase, it’s only too easy to buy more things than you intended. I pay for nearly everything that I don’t buy online in cash.
  6. Do you postpone money management?
    Since you are busy most of the time, it’s easy to shrug off the basics of money management—keeping a budget, living within the budget, and saving a little every month. You use excuses like promising yourself that you’ll start your retirement savings when you earn a little more or pay off your credit cards. Unfortunately, life doesn’t stop long enough to give you enough time to plan everything perfectly. Even if you have started to budget, are you sticking with it? And if you have stashed away some cash, are you now looking for ways to keep that money active?

Changing Habits is Challenging
While these six ideas are easy enough to grasp and won’t require any financial wizardry to put into action, the challenge is breaking bad habits and replacing them with good ones. It’s uncomfortable, of course, but if you do, it will be rewarding in the long run. The earlier you get started, the better your retirement options will be.

Getting Started Early on FI/RE

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image of the cover of Daredevil #181

I started adopting the mindset that set me on the path for FI/RE (Financial Independence/Retire Early) when I was very young. I collected baseball cards when I was a kid and added comic collections when I was a bit older kid.

Early on I was paying attention to the investment potential. I enjoyed not just the collecting but also the idea of making money by buying something and then selling it later for more money (which is the fundamental idea of investing). It came naturally to me.

I never much liked spending money on something that lost its value. For some things, like ice cream, I could happily spend my money even though I would soon have nothing to show for it. But more often I would rather buy something I could enjoy and also believe I would be able to sell later at a higher price.

image of Watchmen comic cover

When I started actually trying to sell baseball cards for money I learned about he difference between reported “value” and the ability to get cash for what you owned. Not only can’t you sell items to a store at the “value” reported in pricing guides you often couldn’t sell them at all (they didn’t want the items at all).

In high school I started renting space to sell at shows. There you were selling to the public (or other dealers). I learned vivid examples of the challenges of turning assets into cash. And I also learned about the weaknesses in the economic ideals such as the market being efficient. I saw how often the very same product (the same baseball card) for sale in the same hall would have very different prices (over 100% more was not uncommon) and the sales were often not close to the best buys. The friction in this situation was much smaller than the typical purchase (all the items were in the same room, just a little bit of walking created the friction).

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Golden Rules for Making Money

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P. T. Barnum wrote the Golden Rules for Making Money in 1880. He provides a few paragraphs on each of the 20 golden rules:

1. Don’t mistake your vocation
2. Select the right location
3. Avoid debt

Money is in some respects like fire; it is a very excellent servant but a terrible master. When you have it mastering you; when interest is constantly piling up against you, it will keep you down in the worst kind of slavery. But let money work for you, and you have the most devoted servant in the world. It is no “eye-servant.” There is nothing animate or inanimate that will work so faithfully as money when placed at interest, well secured. It works night and day, and in wet or dry weather.

4. Persevere
5. Whatever you do, do it with all your might
6. Depend upon your own personal exertions
7. Use the best tools
8. Don’t get above your business
9. Learn something useful
10. Let hope predominate but be not too visionary
11. Do not scatter your powers
12. Be systematic
13. Read the newspapers
14. Beware of “outside operations”
15. Don’t indorse without security
16. Advertise your business
17. Be polite and kind to your customers
18. Be charitable
19. Don’t blab
20. Preserve your integrity

From the introduction,

Those who really desire to attain an independence, have only to set their minds upon it, and adopt the proper means, as they do in regard to any other object which they wish to accomplish, and the thing is easily done. But however easy it may be found to make money, I have no doubt many of my hearers will agree it is the most difficult thing in the world to keep it. The road to wealth is, as Dr. Franklin truly says, “as plain as the road to the mill.” It consists simply in expending less than we earn; that seems to be a very simple problem.

The thoughts are worth reading today. You can update things a bit, from read the newspapers, to read the websites, but mainly it is sensible advice today.

"A customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so." - Mahatma Gandhi

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Financial Independence Retire Early (FIRE) and Location Independent Working

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My plans were similar to the now popular (within a small but committed group of people) Financial Independence Retire Early (FIRE) movement. I was more focused on lifestyle and increasing my financial independence (as apposed to striving for complete financial independence in order to retire very early).

My thoughts were more along the line of being able to avoid a full time job and possibly do some consulting, run my own business (with a lifestyle goal rather than a make millions goal) and have investments that supplement that income. I also wanted to be able to have that possible from wherever I chose to live. Often you are quite limited on where you can live (especially cheaply) if you require a high paying job.

I also understood by living more frugally I gave myself lifestyle options. Living frugally allows you to save money. But it also lets you experience what living on less is like and you know if that is what you want. It is for me. I would much rather have freedom from having to earn a bunch of money to allow me to spend lots of money.

John Hunter with lake and mountains in the background

John Hunter, Bear Hump trail, Glacier Waterton International Peace Park.

I think Financial Independence Retire Early (FIRE) concepts fit very well with a subset of digital nomads. Those focused on FIRE don’t have to be digital nomads (in fact a very small percentage is) and digital nomads don’t have to be concerned with FIRE (in fact, few are). But they are both, at the core, about putting your life first and not letting your life on the 9 to 5 job hamster wheel drive your major life decisions.

Combining FIRE and location independent work provides some valuable benefits. If you have some investments saved up that can be tapped as you travel that can meet some of your living costs, this aids on of the bigger challenges – how to earn money while you travel. And if you travel frugally you can reduce your costs (below what you speed where you used to live).

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Should I Sell or Keep My House When I Become a Nomad?

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My friend Andrew published a post: So You Want to Travel The World But You Own a House (Or Apartment) which prompted me to add a comment and I figured I would share and expand on that comment here.

Owning rental property can be a wonderful way to help support your nomad, location independent lifestyle. Rental property can provide a source of regular income to supplement your earnings. Of course, getting a rental property into that state is usually something that takes time, or a huge downpayment.

I have found dealing with property management folks to be extremely annoying. First they charge ludicrous amounts (in my opinion), especially for places that have high rents (they normally charge a % of rent + huge amount to rent the place out). These costs greatly reduce the investment appeal of renting out your property. On top of paying them a huge amount they are not very customer focused (to me paying them, or to those seeking to find a place to live).

15 years ago I started renting out my first house and obviously created a web page for it. Nearly none of the expensive professionals did that back then. Only years later they finally were dragged into catching up. And still today, they post not nearly enough useful information.

Still it can be that even with these costs and frustration it makes sense as an investment (especially in the last few years when investment climate is so challenging).

Often the decision to rent out your home (versus selling it when you leave) is impacted by your long range plans. If you want to move back into your house in a year or two or five that limits your options. You may have to accept a bad investment to keep that option open. Especially if you are just going to go give the nomad idea a try for a year, selling may not be wise (unless you don’t want to return to your house even if the nomad idea doesn’t appeal to you once you try it).

photo of a house

Another consideration, even if you don’t care about moving back into the same house, but plan on moving back to the same city, is that if you sell and real estate values climb you could find yourself priced out of the market.

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