Lessons Learned One Year Into Early Retirement

Resilience is accepting your new reality, even if it’s less good than the one you had before. You can fight it, you can do nothing but scream about what you’ve lost, or you can accept that and try to put together something that’s good.
–Elizabeth Edwards

12 1/2 months ago, my wife and I retired. I semi-retired, as I was (and still am) on several boards, but, otherwise, our lives went from the 8-5 grind (and way beyond the 8-5 as a co-founder of a startup private equity group) to the occasional board work and nothing else.

We had planned on doing some trips in 2020, to Poland, Machu Picchu, and China, as well as combining ski trips with one board I was on.

Then, as we all know, coronavirus affected everyone, and most of our plans got put on ice.

We were fortunate enough to be in a position where we could afford to hunker down and do nothing.

In fact, hunkering down and doing nothing was cheaper than normal life; our daily spending was down 51% from 2019. As I said in April, the pandemic was probably going to benefit early retirees, and, for us, that turned out to be financially true.

While I did think that there was a chance that the COVID-19 pandemic could turn into our generation’s Great Depression, for most people (and I realize that the bottom 25% percentile of the U.S. got hammered), this wasn’t true, because a) there was stimulus money (not saying it went to the right place, but it was there), and b) after about April, the markets started looking forward to a post-pandemic world.

We, like most investors, stayed the course in being invested in the market, and even threw moonshot money at some speculative investments, which paid off for us.

However, we thought that, on day one of retirement that we were renters for life. We hadn’t planned on a pandemic making isolation the safest action possible and a jarring change of ownership and management of the L2 Uptown, Dallas apartment complex that we lived in, causing us to decide to move.

Had the ownership and management change occurred outside of the pandemic, we would have moved to a different apartment complex. Had COVID hit and the previous management stayed in place, we would have continued hunkering down where we were.

But, both factors conspired to drive us to break our lease early and buy a house in a suburb of Fort Worth. Fortunately, there are no stairs that our now 14 year old dog has to climb up and down every time we take him out. Instead, he has his own yard to claim as his empire, and we back up to a park, so we have a nice nature area to look at and walk through on our dog walks. It’s nice, except when the coyotes are feeling frisky and decide to vocalize at 3 AM.

We also were less active in rebalancing our real estate portfolio than we normally are, with only 3 transactions in 2020. I suspect that will change in 2021, as we already have one accepted offer under our belts and continue to look at opportunities.

Given that 2020 was a year that was unlike any other, and, hopefully, starting in 2022 (which I hope will see the world vaccinated and COVID-19 relegated to an endemic status rather than a pandemic status), will be like no other in our lifetimes, is it possible to learn any early retirement lessons?

Here are a few.

You need time to decompress.

One of the investors in our private equity group told me, when we were talking about my then pending retirement, that he needed about 3 1/2 years of spending time with his kids, doing outdoor activities, and the like, before he got bored and went back to being more active on boards and something more closely resembling full-time work.

I get the need to decompress. I can still point to many days and wonder, as I’m going to bed, what I did all day.

Sometimes I read.

Sometimes I played games.

Sometimes I wrote.

Sometimes I looked for real estate deals.

Sometimes we watched our Netflix, Hulu, or Amazon Prime (#aff) queues (though, for example, we’re still only in season 3 of Monty Python’s Flying Circus).

Now that we’re starting into year 2, and there’s a vaccine on the horizon, I’m starting to get a little antsy and itchy.

We tentatively have travel planned in the latter half of 2021, assuming that we’re going to be vaccinated and that the data will show that those who are vaccinated are not a risk to spread COVID-19 to others (currently, the data is pretty iffy).

We also have a European trip and our rescheduled China trip on the docket for 2022. We’ll see what happens.

But, we did get a lot of outdoor time in. Since our dog has slowed down significantly as he’s moved from senior dog to geriatric dog, we really tried in the latter half of the year to do some outdoor, socially distanced activities of our own, like hiking and discovering Texas nature.

I’ve also been trying to learn Spanish through Duolingo, as I think that, when we start actively traveling, we’ll probably travel more to Central and South America due to its proximity to Texas. I can say that my 16,171 XP in Spanish so far means that… Yo no hablo Español muy bien, pero entiendo algo del idioma. I was fortunate that I still know enough German to be able to completely test out of Duolingo, but I still do quizzes to try to keep sharp.

That said, while we’re starting to get a little antsy to no longer live our isolated lives going to Costco and getting the occasional Kroger delivery, neither of us is antsy to get back to work, either.

You do need to find things to fill the time.

If you have infinite amounts of money, then you can hire people to do everything except that which truly interests you.

We are not in that position.

Even before the pandemic, we weren’t the type of people who went out to restaurants often. We do have a couple of our favorites (Malai Thai Kitchen, From Across the Pond, and Mariachi’s Dine-In) that we still try to support, but, mostly, since I read Tim Ferriss’s Four Hour Chef (#aff), we’ve cooked at home.

For my birthday, right before lockdown, I got a Ninja Foodi air fryer (#aff) and a SodaStream (#aff). That’s made it much simpler to stay at home and cook.

We have gotten into a rhythm for food: eggs late in the morning, and then a bigger, protein heavy meal in the late afternoon. We have a semi-rotation of what we cook, which makes shopping at Costco and Kroger easy; we’re typically in and out of Costco in under 30 minutes.

Where, in a non-pandemic world, we might be going out to restaurants a couple of times a week, seeing friends, doing brunches, we haven’t done that. The dog walks are much shorter now than they were even this time last year.

So, we have to fill in the time.

Pre-retirement, that was easy. It was work.

Now, particularly since we’re both through, for the most part, the decompression period, 2021 will certainly be about truly discovering ourselves and what else we want to do with our lives.

That’s not to say that I don’t often enjoy taking a moment, sitting there, and relishing the fact that I have absolutely nothing that I have to do. I do.

But, obsessing over COVID, vaccines, politics (from BLM to ludicrous claims of fraudulent elections) only fills up so much time, and those, too, will wane over time (hopefully, BLM because it’s been righted).

In effect, for us, 2020 was like a year on pause.

We didn’t lead the lives we thought that we would.

We didn’t spend like we thought we would.

So, we’re still a little uncertain about what our retirement lives will actually be like.

And we probably won’t know in 2021, either, as I suspect that at least half of 2021 will look a lot like March – December, 2020.

Thus, we will need to start to find other things that provide meaning and enjoyment until we are truly at a point where COVID is behind us.

We also, learned…

Stay the course on the financial plan.

We had a decent gameplan going into retirement on what to do with ourselves. When the markets crashed in March, we didn’t panic, and we didn’t pull out of the markets.

As a result, our patience paid off.

We don’t have crystal balls.

In fact, it’s very much the opposite. Aside from our moonshot, for our public market investments, we’re unabashed index fund ETF investors. We can’t create alpha in investing in the markets, and we hardly try.

It certainly leads to a much calmer approach to finances. We look about once a month, and that’s it.

I am much more active in our real estate investing, and somewhat active in our privately held company investments, but that’s a matter of choice. We’ll eventually get to the point where those investments liquidate and take up zero time.

That said, until we have a “real” year of retirement, likely 2022, we’ll still wonder how the plan will hold up.

For now, though, in a pandemic, we can continue to enjoy our lives and be glad that our spending is down because of these external constraints.

I admit, I don’t know how much I’m going to keep writing here. I think I’ve solved most of the intruguing (to me) questions that I wish to answer. Sure, we’ll come upon some random nugget here and there, and it’ll drive me to write. I actually wrote 83 articles in 2020. Some of them were my own way to work through uncertainty with COVID. Some were ideas that I had in the hopper already. Some where spur of the moment evaluations of questions that intrigued me. But, I cannot imagine that pace of writing on this website in 2021. Plus, if the revenues generated from the ads and affiliate links don’t pay for the hosting, then there’s no point in keeping the lights on. I know what I wrote. I saved it. I can always go back and reread it if I need to reference something.

I’m sure that once we start traveling, I’ll get back to writing, as much to diary as anything else. I love the expat travel blogs, like All Options Considered, Earth Vagabonds, and Senior Nomads (and I’m looking for others if anyone has ideas).

I may even write political things. My views of the world have changed over time, as I’ve gained awareness and perspective. Maybe I won’t. I’d like to keep Thanksgiving dinner cordial!

For those who have read me over the years, thanks for coming along and sharing. I’ve made some blog friends and Twitter friends whose interactions I enjoy and hope to continue. I do occasionally write 280 character or less blurbs on my Twitter account.

Enjoy your own journeys to FIRE!

Should Early Retirees Who Will Depend on Social Security Buy Life Insurance?

People always live forever when there is an annuity to be paid them.
–Jane Austen

When I had clients who wanted to retire before they were eligible for Social Security, I would create models based on claiming Social Security at the appropriate time, giving them a secondary source of income beyond their investments.

In theory, Social Security should replace some amount of income that had been generated by investments, allowing retirees to accumulate less before retiring.

Even the fabled William Bengen 4% safe withdrawal rate study never mentions Social Security as a source of income.

Maybe he was making a political statement.

If the clients were a married couple (which they almost always were), then there was some sort of dependence on both spouses’ Social Security earning power in the future.

The most prudent path is to assume that you won’t receive Social Security when the time comes. That way, it’s all bonus.

However, doing that may alter the balancing act in determining when to retire between safety and the ever diminishing number of days you have left on this earth to do something.

So, what if you’re contemplating early retirement and have enough to safely make it until you can both claim Social Security and bolster your income, but need both sets of Social Security in order to get to the promised land of FIRE?

Life Insurance for Social Security

One possible answer is to purchase a fully paid whole life insurance policy to make up for the loss of that future income when the spouse passes.

Let’s assume that you have a 45 year old couple. She’s going to make $1,500 in Social Security at age 70 and he’s going to make $1,000 in Social Security at age 70 (to learn about Social Security claiming strategies, check out Lesson 14 of my Winning With Money series).

According to immediateannuities.com, the cost for buying an annuity to replace her Social Security income is $138,984 and the cost to replace his income is $83,426. Comparatively, investing that money now in an annuity would generate $442/month for her and $266/month for him.

Why am I quoting a deferred annuity cost now as opposed to the cost of an immediate annuity for a 70 year old?

If the spouse passes the day after the life insurance policy is bound, then the surviving spouse can purchase the annuity now for the payments to kick in then. Of course, there are other options for what to do with the money, but that is the purpose of the life insurance policy.

To get a $100k fully paid life insurance policy on him, the cost, according to Local Life Agents Premium Quote Engine is between $23,572 and $29,486, assuming he is insurable and depending on his health.

For her, the cost to get $150k of life insurance would be between $30,219 and $37,708.50.

If you assume the cheapest insurance, then, for her, she would need an annual average compounded return of 6.31% to be able to pay for the future annuity. For him, the return would need to be 5.18%.

Both of those are under what an expected blended return on invested assets would be, but not terribly far off. If I were a) not retired, and b) advising a client in this situation, I wouldn’t have heartburn if the client wanted to choose this path.

Run your own numbers, or seek the advice of a CFP who specializes in early retirement to see what you think.

Why Whole Life Insurance?

As I discussed in Lesson 6: A Contract on Your Life, I’m a big fan of term life insurance in most situations.

So, why not get a 25 year term life plan here?

The idea behind life insurance, in most instances, is that it needs to match replacing income or paying off debts at some point in time. That’s why I like term life insurance laddering.

Here, you’re trying to protect a future income stream between the time the first spouse passes and the time the second spouse passes.

If spouse A passes 2 days after the 70th birthday, the Social Security payment stream ends. A term life insurance policy is useless at that point, if it expired on the 70th birthday.

Why Single Premium?

This one is more of a preference for preventing mistakes in the future than a financial benefit.

You can probably pay monthly payments and wind up better off financially.

However, it’s also possible that, as you age, you may suffer cognitive decline, and math skills are usually the first ones to decline with age. Simply put, you may start to forget to pay that bill, and then wind up having your policy cancelled.

There are also some permutations to play out with who passes first and estate plans.

Again, this should be a discussion between your CFP and a trusted insurance agent.

We never counted on Social Security in making our decision to FIRE. When you retire in your 40s, Social Security isn’t going to be massive anyway. We have three main buckets of costs that are variable (travel, food, and healthcare) and enough to cover both of us until a ripe old age. Therefore, if one passes, it doesn’t negatively impact income. So, while it was useful to go through this exercise to see how much it would cost us in life insurance, it wasn’t necessary, and we decided not to insure our Social Security payments.

How about you? Have you ever looked at insuring your Social Security payments? Let’s talk about it in the comments below!

Optimizing Your AGI to Maximize Obamacare Credits

When you aim for perfection, you discover it’s a moving target.
–Geoffrey Fisher

It’s coming upon the end of the year, and, if you are on the Affordable Care Act (ACA) healthcare plan, otherwise known as Obamacare, it’s time for you to start doing your end of year tax planning.

Why, you may ask me, must I do tax planning now if I don’t have to file my taxes until April 15?

The answer is that because there are a couple of tax planning moves that you need to make before the end of the year if you’re going to execute them.

Furthermore, there are a couple of MAGI targets that you’re going to want to keep in mind, because missing them can be VERY expensive.

Let’s take a look.

Obamacare and Your Wallet

The purpose of the Affordable Care Act was to make healthcare affordable for lower income Americans.

First, it created a public exchange where health insurance companies were supposed to compete for participants’ business, therefore, in theory, driving costs down. I’ll let it to you, Dear Reader (no TM), to determine the success of this leg of the Act.

The second was that it limited the amount of premiums that people within certain income ranges would have to pay in health insurance.

FPL % Annual Premium Cap
Under 100% No Cap
100% – 133% 2.06%
133% – 150% 3.09% – 4.12%
150% – 200% 4.12% – 6.49%
200% – 250% 6.49% – 8.29%
250% – 300% 8.29% – 9.78%
300% – 400% 9.78%
Over 400% No Cap

Source

In theory, if you make too much in Modified Adjusted Gross Income (MAGI) – which, for the purposes of this analysis, I’m going to assume is the same as AGI – then you don’t need subsidized healthcare. If you make too little in MAGI, then you should be eligible for Medicaid.

However, there are a lot of people, as we previously showed in ACA Subsidy Thresholds, Using Rental Real Estate for FIRE, and Why You May Need a Traditional IRA, sometimes, there’s very little correlation between take-home income, AGI, and net worth. For example, in the state of Texas, where we live, there is an income test as well as recipients needing one of the following categories to qualify:

  • Pregnant, or
  • Be responsible for a child 18 years of age or younger, or
  • Blind, or
  • Have a disability or a family member in your household with a disability.
  • Be 65 years of age or older.

Source

Given that we’re none of the above, if we’re below 100% of the Federal Poverty Level (FPL), we’re paying full freight for our health insurance, whether or not we get it on the healthcare.gov marketplace.

So, how much are FPL limits for a 2 person married filing jointly family?

FPL % $ Threshold
100% $17,240
133% $22,929
138% $23,791
150% $25,860
200% $34,480
250% $43,100
300% $51,720
400% $68,960

Note: these numbers are for the contiguous 48 states and DC. Alaska and Hawaii have different thresholds.

Source

As a married filing jointly couple, we want to make sure that our AGI is at least $17,240 and no more than $68,960.

The Total Costs of ACA and Your Taxes

To evaluate exactly how much the ACA influences your overall financial picture, I did an analysis of net impact to your wallet of different AGIs, ranging from $0 to $70,000 as a MFJ couple.

I also made the following assumptions:

  • The couple maxed out their retirement plan contributions (FIRE, yo) because they had some sort of source of earned income, such as a blog or board work
  • The couple chose the second cheapest Silver ACA plan, since that’s what the subsidy estimates are based off of
  • Aside from the Savers Credit, the couple qualified for no other tax credits, meaning that the tax due from the AGI was only reduced by the Savers Credit where applicable

What were the results?

If the image does not show up in your reader, you can click here to see the 2020 ACA tax analysis chart.

There are some interesting bend points to analyze:

  • 133% of FPL. Here is where the percentage of your income that can pay for premiums increases for the first time. So, now you’re compounding increasing income with higher percentages.
  • Savers Credit cliffs. There are bend points where you get less and less tax credit based on your AGI:

    Credit Rate Married Filing Jointly
    50% of your contribution AGI not more than $39,000
    20% of your contribution $39,001 – $42,500
    10% of your contribution $42,501 – $65,000
    0% of your contribution more than $65,000

    Source

    At first, I thought that the tax credit might be enough to offset the increase in premiums that you paid.

    However, let’s look at the difference between $17,240 and $17,241 in AGI.

    At $17,240 in AGI, you pay $355.14 in premiums and $1,724 in taxes.

    At $17,241 in AGI, you pay $355.16 in premiums and $1,724.10 in taxes – $0.08 more than you paid at $17,240.

    So, while the Savers Credit helps, it doesn’t change your target AGI.

  • 300% of FPL. Here is where you start paying a flat 9.78% of your income in premiums.
  • 400% of FPL. Above this, you no longer get subsidies.

If you’re concerned about doing your taxes correctly, I’ve used
TurboTax Online (#aff)
for several years, and, despite the complicated status of our taxes, have had no problems filing my taxes, saving us almost $1,000 compared to what we were paying our accountant when he prepared our taxes.

Triggers to Pull to Achieve Your Target

As you can see in this analysis, if you can hit it, your target AGI is $17,240. That’s 100% of the Federal Poverty Level, meaning that you maximize the value of the ACA subsidy while minimizing your taxes. This number is the same whether or not you qualify for the Savers Credit. The logic is the same as thinking that a mortgage interest deduction saves you money. It doesn’t. It just reduces the financial impact of the interest you’re paying for your mortgage.

So, assuming you have the ability to do this, how do you p-hack your AGI? Here are a couple of levers to pull:

  • Change Roth IRA/401k contributions to traditional contributions. For every dollar that you move from Roth to traditional, you’re lowering your AGI by a dollar. This is the one move you can make after December 31, but before April 16. If you want to pull one of the other levers on this list, you must do so by December 31.
  • Capital gains harvesting. If you need to raise your AGI, you could sell some winners and take the capital gains. You can immediately buy back the same securities at the same price (hopefully, assuming you’re quick enough and you do not have to pay trading fees), which will raise your basis in the future and your AGI this year.
  • Capital loss harvesting. Sell some losers (and make the L with your fingers and your forehead while you do so) to lower your AGI. Here, though you must be careful of the wash sale rules, which are:

    A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

    1. Buy substantially identical stock or securities,
    2. Acquire substantially identical stock or securities in a fully taxable trade,
    3. Acquire a contract or option to buy substantially identical stock or securities, or
    4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

  • Roth conversion. Take money from your traditional retirement account and convert it to a Roth. The amount that you convert will raise your AGI by the same amount, as it will be treated as ordinary income in that year, and you won’t have to pay taxes on it in the future (don’t forget your conversion 5 year rules.

Obviously, I’m a CFP, not a CPA, so this isn’t tax advice. Numbers provided are 2020 numbers for 2 person married filing jointly families. You will not be made more handsome or beautiful by reading this post. If you feel a lump in your throat upon reading this, it’s not a medical emergency; it’s how moved you’ve been by reading this beautiful prose, much like Ralphie’s teacher in A Christmas Story (#aff) upon reading his theme.

Has anyone tried to hit the magic AGI number to optimize Obamacare? Let’s talk about it in the comments below!

ACA Subsidy Thresholds, Using Rental Real Estate for FIRE, and Why You May Need a Traditional IRA

Creativity is great-but not in accounting.
–Charles Scott

2021 will be the first year that we are using the healthcare marketplace provided by healthcare.gov through the Affordable Care Act (ACA). Previously, we’d used my board work through the private equity fund I co-founded to pay for our healthcare, but given that I am dialing back my board work and I wanted to get the tax benefits, we decided to do it ourselves.

The first go-through in the application, I unknowingly entered an modified adjusted gross income number too low to qualify for anything, which was indicated by my eligibility letter, because, hey, isn’t paying $0 in income taxes the goal?

Your yearly household income (REDACTED) is too low for advance payments of the premium tax credit. Generally, households whose income for the year is between 100% and 400% of the federal poverty level for their family size may be eligible.

I wasn’t actually paying attention to that letter. I just paid our first month’s premium and went about my business, figuring that it would all come out in the wash when doing 2021 taxes.

Then, I read an article by my friends at All Options Considered, which indicated that they were looking into whether or not to take a subsidy advance on their ACA enrollment in 2021.

“A subsidy advance?” I thought to myself. “Is such a thing possible?”

Indeed, it is possible. The ACA has something called a Advanced Premium Tax Credit (APTC) (because the government can’t create something with two words or more without creating an acronym for it), which means that you can apply your ACA tax credit in advance.

As an early retiree, cash flow is king. Why pay for something now and get reimbursed later when you can get the reimbursement up front?

So, I checked out the 2021 federal poverty levels and discovered that we, as a couple filing married filing jointly, needed to have at least $17,240 in modified adjusted gross income (MAGI…there goes the federal acronym machine again) to even qualify for the ACA’s credits and to be able to claim the APTC.

Back to healthcare.gov I went. I adjusted our income numbers to reflect the target, and, suddenly, our eligibility letter changed.

  • Eligible for advance payments of the premium tax credit to help pay for a Marketplace plan. You can use up to this much of the tax credit:
  • $977.00 each month, which is $11,724.00 for the year, for your tax household.
  • This is based on the yearly household income of $17,250.04—the amount that you put on your application, or that came from other recent information sources.

This is the income tax version of p-hacking – picking numbers that get us the results we want.

If you’re concerned about doing your taxes correctly, I’ve used
TurboTax Online (#aff)
for several years, and, despite the complicated status of our taxes, have had no problems filing my taxes, saving us almost $1,000 compared to what we were paying our accountant when he prepared our taxes.

FIRE, Rental Properties, the ACA, and You

However, as we’ve discussed previously, we REFIREd, meaning that we are using rental properties to generate most of the income we need in retirement.

While I am not going to share our specifics, I can create a hypothetical scenario using some generalizations from my friends Josh and Brandon at BiggerPockets to illustrate the potential issue that you face if you’ve REFIREd and want to qualify for the ACA premium subsidies.

Let’s say that you’re a typical family of two who have average spending.

The average annual household budget is $60,060. If you use the BiggerPockets 50% rule, this means that you would need $120,120 in annual rental income, or $10,010 in monthly income.

How much real estate would you need to purchase in order to get that $10,010 in monthly income?

If you’re a real real estate whiz (no pun intended), then you purchase using the BiggerPockets 2% rule, meaning that you should generate at least 2% of your all-in basis costs of buying a rental property in monthly rental income.

We’re not to the Level 50 Real Estate Wizard achievement badge, so our historical rate is about 1.44%.

Therefore, to achieve that $10,010 in monthly income, you’d need to buy $692,996.52 in real estate. I assume you’ve bought these properties in cash because there is no such thing as “good debt” in our retirement plan.

When you make a purchase, though, that purchase is allocated between land and the improvements (e.g. the house that sits on the land). According to the IRS, the improvements have an expected lifespan of 27.5 years, meaning that, in addition to the other expenses associated with your rental property, such as property management and insurance, you also deduct 1/27.5 times the basis on your buildings on your tax returns.

For us, our basis, historically, has been 72.9% improvements and 27.1% land.

Therefore, on any given year, for the first 27.5 years of ownership of rental properties, this hypothetical average American couple will take $18,372.01 in depreciation.

A VERY simplified tax calculation (I’m a CFP, not a CPA) would get you this result:

Net income (using 50% rule) $60,060.00
Depreciation $18,372.01
Standard deduction (2021, MFJ) $25,100.00
AGI $16,587.99
100% FPL $17,240.00
Shortfall $(652.01)

You might think to yourself that the tax burden there isn’t bad: $1,658.80, based on a 10% tax rate.

However, if this were the case, you wouldn’t qualify for the ACA credits, because your MAGI would be below the 100% Federal Poverty Level (FPL…yay government acronyms).

So, by not paying an extra $65.20 in tax by having your AGI at the 100% FPL, you’re foregoing $12,261 per year in subsidies for your health insurance if you want to use the ACA exchange.

That’s a potential $12,195.80 tradeoff not in your favor.

But how do you get that extra $652.01 in income to get the $12,261 in credits?

A Couple of Ideas to p-hack Your Taxes

For us, there are a couple of ways to p-hack our way to tax subsidy happiness.

  1. Roth IRA Conversion. According to the IRS,

    A conversion to a Roth IRA results in taxation of any untaxed amounts in the traditional IRA.

    If you contributed to a traditional IRA back in the days when you had a jobby job, then you got a tax deduction that year, reducing your AGI dollar for dollar for the amount that you contributed to the IRA. Now, by doing a conversion to a Roth IRA (or 401k), you’re going to claim the amount of the conversion as income and pay the tax in the year that you make the conversion, and later, when you reach the penalty free withdrawal age, you will not be taxed on that money. In this hypothetical scenario, a $652.01 Roth IRA (or 401k) conversion does the trick, assuming you have a traditional IRA or 401k as the basis for this conversion.

  2. Expense Shifting. If you’re like us, you usually get a statement from your property manager in the first week or two of the month. So, by the time mid-December rolls around, we should have a really good idea of what our AGI would be. Our biggest line item in expenses in any given year is property taxes (yay Texas!). This is the price we pay for having no state income taxes. Those taxes are due in January, but, being the eager beavers we are, we pay those taxes in December. All we’d have to do in this scenario is wait to pay $652.01 in property taxes until January of next year. Yes, this kicks the can down the road by a year, but given the size of our cumulative property tax bill, we should be able to reach Medicare before the can is too big.
  3. Harvest Capital Gains. As I referenced earlier, we’ve done pretty well with our home run swing from the pandemic. We could just sell $652.01 worth of gains, and immediately rebuy the same securities ($0 trading costs, FTW), since the IRS is happy to take your tax money. This requires you to have investments that a) have gains, and b) are in taxable accounts. The bonus to this is that, since, in this scenario your AGI will be below the $78,750 threshold for capital gains taxes to be at 0%, you won’t be taxed on those capital gains!

As we’ve seen here, the ACA subsidy cliff can be very expensive.

If you’ve used rental properties to REFIRE, or you’re trying to be a $0 income tax targeter, you may not think much about these cliffs, but they can be VERY expensive. I’d rather pay $1,724 in taxes to get $12,261 in ACA subsidies.

It’s very important that you’re watching your P&L like a hawk in the final couple of weeks of December so that you know what your MAGI is going to be and you can adjust your income accordingly to make sure that you reach the 100% FPL or don’t exceed the 400% FPL.

Have any of you p-hacked your income to qualify for the ACA subsidies? Let’s talk about it in the comments below!

The Sure Way to Put Out Your FIRE: Try to Hit Home Runs

“Eat your betting money but don’t bet your eating money.”
–Unknown

Even though we hit our FIRE (financial independence, retire early) target at the beginning of the year, my Apple News feed seems to think that I am still looking for quick ways to make a buck.

I mean…I am…it’s in my blood…

Joking aside, there are all sorts of click bait articles out there which seem designed to convince you that you can make truckloads of money overnight just by investing $1,000.

Such as this one. My feed is full of them, but I don’t want to belabor the point and have you fall asleep at your keyboard and short it out from drooling into it. I promise I don’t speak from personal experience on this one.

Still, the point is that if you’re enticed to believe that you’re going to be the next whiz kid (or whiz adult) who manages to make the miracle investment and turn $1,000 into $1,000,000, you’re going to click on those articles, give those sites ad dollars (hey, no shame there…this site is chock full of Google ads and Amazon affiliate links…gotta pay for the hosting somehow), and, almost certainly, wind up disappointed.

Why will you wind up disappointed?

As of 2012, a study showed that the average investor underperformed the market by 4.3% and that only approximately one in twenty investors actually beat the market.

Remember, by the time you’re taking the advice of whatever Jim Cramer tells you to buy, he and all of his buddies who have access to much better information than you do have already made that investment, and you’re last in line. You’re PT Barnum’s next bigger fool.

Yes, I get it that the Cramer trust doesn’t make investments until a couple of days after he names something, but look at how many talking heads on CNBC or authors at Seeking Alpha are already long/short whatever they recommend you buy/sell.

Furthermore, you’re almost certainly not going to turn $1,000 into $1,000,000. You’d need to double your money almost ten times in order to turn $1,000 into $1,000,000. If you have that sort of crystal ball, you’re Johnny Carson.

Let’s look at this a different way.

Aqua cavat lapidem non vire, sed saepe cadendo. (Water hollows rock, not by force, but by constantly dripping.) – Latin proverb

In 2019, the average household spent approximately $63,036 per year.

Let’s say that you want to FIRE and have a 40 year retirement. That would lead you to need a 3.4% safe withdrawal rate.

To spend that $63,036 per year during a 40 year retirement, you’d need about $1,854,000.

You’d need to double that $1,000 investment nearly eleven times in order to hit that number.

Feeling lucky?

To put that into perspective, let’s say that, POST PANDEMIC, you walked into your favorite casino and plonked down $1,000 on black.

You have a 46.37% chance of doubling your money, which is WAY better than you have in trying to get rich by following gurus’ investment ideas.

So, let’s just say that you decide that if it hits black, you’re going to let it ride and hope that the roulette wheel is super hot and will hit black eleven times in a row so that you can walk out of that casino (assuming the pit boss doesn’t hunt you down and make you sit in a windowless room for several hours explaining how you knew that it was going to hit black eleven straight times) and retire.

What is the probability that you’re going to walk out of that casino and straight into retirement?

0.02%

Two times out of ten thousand.

That is the same odds of any randomly chosen women’s college basketball player getting drafted in the WNBA.

Feel like Sue Bird? Crushing on Megan Rapinoe?

Perhaps a live example will help show that hitting a massive, life-changing home run is really hard.

Long-time readers will know that back in April, 2020, we tried for a moonshot by buying a bunch of LEAPs to take advantage of what we thought were once-in-a-decade(ish) buying opportunities.

How has that turned out so far?

#humblebrag upcoming.

As of the time I started writing this article, that moonshot set of investments was up 144.5%.

Proof!

Note that one of those investments has already, for all intents and purposes, gone to zero.

Also, only one of those investments is currently in the money, and it’s barely in the money. This is almost all still time value in the options, so this is all paper returns for now.

But, for the sake of this discussion, let’s see how it really impacts us.

If our entire net worth aside from this moonshot stayed constant, then our net worth, if this was a 5% of our net worth moonshot, would be at 102.3% of what it previously was.

For that moonshot to double our net worth, we’d need nearly a 20x return.

The chances of that happening are between slim and none.

Let’s say that Fates are kind to us and we double this moonshot again, and are up 300% by the time the options expire.

Now, let’s convert that into the average family’s 40 year FIRE that I discussed above would look like.

They would need $1.834MM to retire and spend $63,036 annually.

If they took 5% and did a moonshot investment that got them a 300% return on investment, they’d add $275,100 to their net worth.

That would mean that they could, theoretically, go from $63,036 in annual spending to $71,709.40 per year.

That’s a couple of very nice vacations, but it’s not time to start singing “I’m on a Boat” as you’re launching your new yacht.

Swinging for the fences with your investments in an attempt to shorten your path to FIRE is almost certainly only going to pour a bucket of water on your FIRE ambitions.

The better approach is to not swing for the fences, but, rather, to increase how much you’re saving. Your much bigger and better lever to get to FIRE is your savings rate, not your rate of return.

The problem with expecting a moonshot to truly light your FIRE (don’t you hate these puns?) is that, even if you do hit a home run with your investment, you’re only using a whiffle ball instead of a giant Zorb ball. You’re not investing enough in the moonshot to truly catapult you there. If you can raise your savings rate from 10% to 20%, you’ve already, effectively, doubled your returns, since your numerator is now much larger. If you decide to push all your money in the middle to try for a moonshot, then the most likely outcome is that your pile of money is going to wind up in someone else’s stack and you’re going to have to start all over again.

When I spoke with my wife about taking our moonshot in LEAPs in April, the discussion revolved around the following tenets:

  • We could afford to have that investment go to $0 and not affect our lifestyle
  • I thought this was an opportunity to get a five bagger (e.g., a 400% ROI)
  • That net gain in net worth, if my investment thesis was correct, would enable us to increase our lifestyle at the margins, e.g., more travel, more dining out, not buy a jet and live a baller lifestyle

All of these click bait “invest $1,000 and get GREAT returns” articles won’t get you to FIRE any faster. Instead, they’ll kill your FIRE dream with a death by a thousand cuts. The better approach is to save more to invest $2,000 instead of $1,000.