Early Retirement: The "What Abouts"

As you go through your journey to reach FI (financial independence), you will inevitably have conversations with family / friends / co-workers who are concerned (some extremely concerned) about the “What Abouts” that could happen (example: What About ... running out of money!?).  (And many are just curious / don't really understand).  We want to go through the Top 5 “What About” questions that we have come across and answer them.  

Let’s dive in!

What About ... the freedom of time in our calendar?  The ability to see public art anywhere in the world?  (Location: Houston's East End).

Top 5 What Abouts 

1) What About: A Job??!  Boredom?

2) What About: Running Out of Money?  What About: When The Stock Market Crashes?  (I'll lump these two together).

3) What About: Health Insurance?

Abroad

United States

4) What About: Being Away From Family / Friends?

5) What About: Education?

What About: A Job

Often times when people hear that we plan to be financially independent and retire early they still ask about our jobs.  What about work?  What do you mean you don't need to work?  Okay, I get it.  The concept is non-traditional and does take some time to sink in, but the beauty of FIRE is you have the financial independence to not rely on full-time work (if that is what you choose to do).

So yes, we plan to move to Spain (at least to try it out for a school year ... maybe more), and no we do not plan to have full-time traditional jobs in our near future (in fact, we plan to apply for Non-Lucrative Visas so that means we can't work even if we wanted to).

So once people get a handle on, okay ... you actually plan to retire early ... well, won't you be bored?  For me (Tara), the strong answer is no.  We are going to focus on our kids and travel (time for naps?  reading?  making art?).  Even if I was bored (unlikely), my answer wouldn't be working full-time again in a traditional sense.

What About: Running Out of Money?

This question is simply a lack of understanding of how our investment strategy works.  We invest in VTSAX which covers the entire US Stock Market.  Historically the data shows that this will net us about a 7% return on investment after adjusting for inflation (10% return without adjusting for inflation).  We only plan to take between 3 - 3.5% from our investments each year to live off of (and we all know the safe withdrawal rate is actually 4%).  Being that we are withdrawing less than the safe withdrawal rate each year, we have a built-in safety margin to our plan.  This is absolutely overkill and extremely conservative, but it helps me sleep better at night.  

Let's look at a spreadsheet to see what $1,000,000 will do over time assuming 7% returns and then withdrawing 3.5% per year over 50 years.  

As you can see, we start with $1,000,000.  We earn a rate of return that has historically proven to be as good an indicator as any as to what to expect our future returns to be, and we have withdrawn 3.5% per year.  After 50 years, our account has grown to over $5,500,000!  If I’m being honest, I think this is actually on the low end of what our account will end up being because we will have part-time income of some sort (eventually) that will lower our withdrawal rates even more during some years (not to mention the possibility of Social Security in our future).  

What About: A Stock Market Crash?

This is a great one because it’s not IF the market will crash but WHEN.  I anticipate at least 3 - 4 more really major stock market crashes in my lifetime (I’m not talking about what happened in the 4^th Qtr of 2018, I’m talking about 2008 level legit crashes).  

This is when you tap into your safety margins, and as we already discussed above, our 3 – 3.5% withdrawal is like having a safety margin already in our plan.  Some other things we will consider when the market crashes, is to pick up extra income through part-time work / side hustles, move to a cheaper part of the country / world, spend less (cheaper vacations, less eating out, etc.).  If we have managed our funds well up to this point, we aren’t going to one day be irresponsible and blow it all down the drain.  

What About: Health Insurance in Spain?

This is one of the most common concerns from US Citizens and rightfully so because a medical emergency in the US could set you back quite a bit if you don’t have the right insurance coverage.  Since we plan to live in Spain our first year in retirement, we aren’t nearly as concerned about this because health care in pretty much every other developed country in the world (other than the US) is affordable!  Go figure.  (And we have to have health insurance to qualify for our Non-Lucrative Visa).  We mention one health insurance option we are considering in this post.

What About: Health Insurance in the US?

We don’t plan to stay in Spain forever (I guess anything is possible though) ... so what about when we come back to the US? 

Keeping in mind that our income will probably be around $40k or less in retirement (and depending on what state we settle in), we will qualify for huge subsidies that allow us to pay $200 per month or less for health insurance in the US.  It’s almost like living on less in FI is a loophole for affordable health insurance (hence the Affordable Care Act).  That said, it is also very likely that one or both of us will eventually pick up some part-time work, and so it’s possible that we end up working for a company that offers health insurance as well.  Justin from Root of Good has a great post on how subsidies cover 88% of health insurance for his family of 5. 

What About: Being Away From Family / Friends?

This one will be tough for everyone involved no doubt, but even though we won’t be able to see our loved ones as often as we do now (the ones that live close by at least), when we do see them we will have the freedom to stay for a month or two or more if we so choose.  Rather than rushing in town for 5-7 days, we can visit and stay 30 - 60 days.  Not to mention that loved ones and friends could come and visit us as well and stay as long as they please.  

Honestly, I think our family / friends will end up kicking us out because they see us too much in FI.

(And another thing to keep in mind is our 5 - 7 Year Window.  We think this is the ideal time to give our children the gift of travel despite the cons, but again as mentioned above ... we will have the flexibility to visit family longer (not tied down to FT jobs)).

What About: Education: K - 12?

For our first year of FIRE (financial independence retire early), we plan to enroll the kids in school in Granada, Spain.  Part of the reason for going to Spain is to immerse them fully in the language and culture and being in school will help with that (yes, we plan to do !00% Spanish immersion for school).

But what about after that?  That is definitely up in the air at this point, but we are not at all concerned about their education.  As we mentioned in this post, we do have some ideas (that may or may not change) for our 5 - 7 year window before our oldest hits high school age.  Our one year in Spain may turn into two years in public school.  We would like to do possibly one year (World School) in NYC, and then we plan to do two years of World School while traveling.

But what about traditional American public school?  Honestly, I (Tara) have so many concerns about traditional public school (at least in the US), that I am not concerned about them possibly missing this time for up to 5 - 7 years (or more?!).  And I am a public school teacher!  (With that said, yes, there are many things we love about their teachers / school).  But I won't go into those concerns in this post.

And what about high school?  That is up in the air, but still on my mind.  I can definitely see staying put in one area as being a possibility.  Will that be the US?  Maybe.  Another country?  Also maybe.

What About: Education College?

One of the greatest perks I believe we will gain from living in different parts of the world during FI is the number of opportunities it will open up for our children's higher education.  For example, if we live in Spain for a year or two and then do some World Schooling in parts of Italy, Germany, and Croatia (for example), then it would not be out of the question for our kids to eventually go to college in one of these countries which would be SIGNIFICANTLY cheaper than going in the US.  Take a look at this article from CNN Money. 

We could make college in the US work as well by applying for scholarships and choosing a school in the state that we reside in.  Being that we more than likely won’t be tied down to a job, if we were currently living in Oregon, and our kids wanted to attend college in Colorado (or wherever), we could simply move to that state in order to get the in-state discount (if a public school).  We wouldn’t want to cramp their style though, so they might make us put a 50 mile radius around the campus of their choice that Mom and Dad can't live in.

But honestly, why would you pay $50,000 - $100,000 plus for a college degree in let’s say Texas, when you could get a degree in Germany for almost nothing?

Am I worried about paying for college?  Not in the least.

To Sum It Up

I’m not trying to sound like emergencies won’t happen in life, but I’m also not going to keep myself up at night worried about what might happen as life goes passing by.  All we (or anyone) can do is have a plan in place so that we can handle the curveballs that life will certainly throw at us over the years.  One thing I know for sure is that I don’t want to wake up one day and realize that I missed seeing the waterfall because I was too scared to look over the edge.  Step out of your comfort zone, hold on tight to something, and go look over the edge!

What do you think?  What are your questions or What Abouts?

-Erik (and some parts by Tara)

You Can Access Your 401k Early (What Steps Does It Take?) (Part II)

In July we brought you ... You Can Access Your 401k Early (Part I), and now it is time for another option to access your 401k early (Part II).  So now we bring you ...

Shortcut To Penalty-Free Early Withdrawals From Your 401K (Part II) (The version that might give you a headache (but will be worth it)).

Tara and our youngest got more travel shoes (Vivobarefoot).  What the shoes say fits in well with our plans.  Read on for the steps to access your 401k early. 

In Part I of this post we talked about accessing your 401k early (before you turn 59.5) by using the Roth IRA Conversion Ladder.  

In Part II we are going to discuss what is known as the SEPP 72t.  This strategy is slightly more involved (in my opinion) than simply setting up a conversion ladder and waiting 5 years to pull it penalty free; however, it does have some perks.

What is a SEPP 72t?

SEPP stands for Substantially Equal Periodic Payments.  This option is a little trickier to set up than a Roth IRA Conversion Ladder, but it could prove to be worth the extra effort if your goal is to get the most bang for your buck from your retirement funds (and honestly, who doesn't have that goal?).

If you choose to use SEPP 72t as your early withdrawal strategy, you will have 3 methods of withdrawal to choose from: 

1) The Required Minimum Distribution Method or

2) The Amortization Method or

3) The Annuitization Method

On top of choosing which method is right for you, you will also have to choose a life expectancy table (aka – how much longer do you plan to live?), and you may have to choose an acceptable interest rate as well (if you choose method 2 or 3 from above list). 

Sound confusing?  That’s because it is!  But don’t write off this strategy just yet.  If you are interested in learning more about this from the experts, check out this link from our good friends at the IRS.  It will go into detail about each method. 

Can you give me a quick overview?

Honestly, this method is still confusing to me at times, but here goes.

Step 1: Retire early, and immediately roll over your 401k into a traditional IRA. 

Step 2: Determine the withdrawal rate you want to take from your retirement accounts.  This could be anything, but typically this is where the 4% withdrawal rate would come in to play.

Step 3: Get in touch with a tax professional at the firm that holds your IRA (for us this would be Vanguard) and have them walk you through each of the 3 methods mentioned above.  You can then choose the method that comes as close as possible to the withdrawal that you determined in Step 2. 

As an aside, I have spoken with an accountant who has worked with many early retirees and has experience with the SEPP 72t.  He highly recommends Vanguard and their tax professionals when dealing with a SEPP 72t.  His exact quote when he found out I would be working with Vanguard when the time came to potentially set up an SEPP 72t was, “Oh!  You didn’t say it was Vanguard.  You are going to love those people.  They have an awesome staff dealing with this stuff.”  I tend to agree.

Each method above also has different rules, so depending on which one you choose you may need to adjust your withdrawal amount every year.  Your tax professional (aka Vanguard) will be able to explain this to you.

You will also have the option to change the method you choose one time, so be sure you are happy with what you pick. 

Step 4: Withdraw your desired amount every year.  This will also be included as taxable income in the year that you withdrawal it (whereas with the conversion ladder, you get taxed 5 years early).

Step 5: Continue with your withdrawals for 5 years or until you reach 59.5, whichever is longer (for us, assuming we retire around the age of 40 and start a SEPP 72t, we would need to continue with our withdrawals until the age of 59.5).

You are subject to major penalties if you stop withdrawals or withdrawal the incorrect amount (please don’t do this).  

Pros

You can access your retirement funds now, so you don’t have to wait for five years like in Part I of this series.  

You are taxed on the withdrawal the same year that you withdrawal it, thus allowing your money to grow tax free for as long as possible.  

You can have a tax professional help you set everything up! (Ahem, Vanguard!)

Cons

You must continue the withdrawals until you reach 59.5 whether you need the money or not.  (Note, this doesn’t say you have to spend the money).

If you mess up on your withdrawals you could face some penalties (again, please don’t do this).

You have to have a tax professional help you set everything up!  I know, I have this one listed twice, but that’s only because a lot of people loathe the idea of asking for help (especially when dealing with money) so this may seem unappealing to some (not to me though).

What do we plan to do?

We have another year or so before we have to decide this, but as of now I am strongly leaning in favor of using the SEPP 72t and having it set up to withdrawal around 3.5% per year.  This would mean that we choose the Amortization Method (option 2 above).  This will largely be determined on how easy it is to have everything set up with Vanguard.  We won't know for sure until the time comes.  

The main reason we are leaning towards the SEPP 72t over the Roth IRA Conversion Ladder is because I like the idea of having access to the funds right away (whereas with the conversion ladder we would need to tap into our cash account (or have side income) for the first 5 years of retirement).  Personally, I have other plans for our cash account.  I also like the long-term tax implications of being taxed in the same year that you withdrawal the money.  

So what do you think?  Do you have a headache yet?  Is this strategy something you would consider?

-Erik

Travel: Paradise (Anguilla)

Anguilla - Zemi Beach House Hotel & Spa 

Ahh, paradise.

Before we get to paradise ... a few things.

This blog isn't only about our journey to FI (financial independence) and achieving / living FI, but it is (and will be) also about travel, family, the arts, education (and more?!).

The idea of being frugal is a big topic in the FI community, but also some have the perception (in and out of the community) that being FI is about being as cheap as possible (in order to save as much as possible).  That is not the case (at least not for us!).  Yes, being frugal about certain things is important to us in order to achieve and sustain FI ... but it is also about spending on things that matter (for us family and travel is a big part of that).

With that said, my most recent trip with our youngest child was a treat for us in return for watching our nephews.  And if spending on a luxury resort on a beautiful island is on your list, I would highly recommend saving and splurging on Anguilla and Zemi Beach House Hotel & Spa.

Anguilla - Zemi Beach House Hotel & Spa (Our suite's private pool).

During and after our most recent trip some things have been on my mind ...

You Are Doing What?!

As we get closer in our journey to FI, more people are hearing about our plans ... and maybe even believing our plans more.  Like we have mentioned, at this point ... we plan to move to Spain for at least a school year (but most likely more).  I think the 1) idea of FIRE (retiring early) is foreign to many ... and the 2) the idea of leaving the United States is just as "out there" for many people.

(Honestly the idea of FIRE was crazy to me at first too.  So, I get it.)

I've heard many similar (and not surprising comments) ... some negative and some positive.  And I think people are generally curious and well-meaning ... anything from "what about work?"... "won't you get bored?" ... "so awesome!  and brave!" ... "great experience for both of you and the kids!"

But now I am to the point of ... the idea of FIRE and traveling the world with the kids is THE MOST normal idea for me / us right now ... and anything else (for us!) seems crazy to me.

Paradise

Back to paradise ... my youngest and I took a recent trip to Anguilla (British West Indies) for 5 days (to help my sister and her family with my young nephews as they went to many wedding events for friends).

She made special Anguilla shirts for the cousins that my sister had printed.

If you are looking for a trip to paradise in the Caribbean, we highly recommend Anguilla.  Anguilla's beaches are often rated some of the top in the world.  If you are also seeking a luxury hotel and spa, we also highly recommend where we stayed - Zemi Beach House Hotel & Spa.

Really there is no reason to leave the resort area unless you want to enjoy an excursion or two (which I would recommend at least one!).

Anguilla - Zemi Beach House Hotel & Spa (Our suite's private pool).

Anguilla - Zemi Beach House Hotel & Spa (Our suite's private pool).

Anguilla - Zemi Beach House Hotel & Spa (Where we ate many of our meals).

Angulla - Zemi Beach House Hotel & Spa (Main Pool)

Anguilla - Zemi Beach House Hotel & Spa (Main Pool)

Beautiful beach with white sand and clear blue waters?  Check.

Pool time?  Check.

Great food and beverages ... from casual to fine dining?  Check.

These are the main three we enjoyed, but they definitely had more to offer from Kids Club to a Spa ... and more.

Our excursion ... Jr's Glass Bottom Boat ... 

Anguilla - Little Bay

Anguilla - Little Bay

We did enjoy one excursion with the whole family which was perfect for the kids (ages 6, 3, and 1 years) - a private tour with Jr's Glass Bottom Boat.  Junior was great, and he stopped at two places including Little Bay.  The kids were able to play on the beach / shallow waters (and snorkeling is also available).  At the second stop my child tried snorkeling for the first time with her Uncle!  And of course we all got to enjoy the deep blue sea from the glass bottom boat window (the sea turtles were definitely a highlight).

Travel Gear: How Do You Travel?

We spied Britto's art / shop at the Miami airport (I did a lesson on Britto in art class this year for Feb / Valentine's Day).

My youngest and I enjoyed our recent travel adventure.

We loved the journey there and back and of course our time in Anguilla with family.

Our journey there included two planes (layover in Miami before we landed in St. Maarten) ... a van, a boat, and then another van.  Exhausting day of planes, trains, and automobiles?  Yes, but we had the mindset it was all a part of the adventure!  Things got more interesting as we made a friend once our final plane landed, and he joined us on the final journey (he was going to the same location / wedding).  He was entertaining (turns out an actor so I guess being entertaining would be a strength!), from the UK originally, and great with kids (which helped me!).

Boat Ride Transportation (St. Maarten to Anguilla).  She got a very RARE Coca-Cola treat.   Tortuga bag beside her.

And the same thing happened for us on the way home ...

The trip home was even MORE of an adventure (and a longer day).  Golf cart, van ... to a small private plane (Anguilla to St. Maarten).  St. Maarten to Charlotte ... (ran to our next flight after Immigration / Customs) ... and then finally landed late that night in Houston.  Our last flight we made another friend (a nice lady from South Carolina who was traveling to Houston for work) that I talked to the entire flight while the little one slept.  I'm not normally into talking to people on planes, but our conversation worked out nicely and made the trip go by more quickly.

Who have you met on your travels?

It also helped that we traveled light, and we plan to do the same on our way to Spain.

We brought one Tortuga Backpack (Setout Divide) for both of us that I wore / carried on the plane.  We own two, and we plan to buy two more for Spain for the kids (or slightly smaller ones).

Wearing her Tortuga Setout Packable Daypack.

My youngest and I also brought our Tortuga Setout Packable Daypack for easy access of items under our plane seat (and for daily use).  (We own two and plan to buy two more before Spain and other travels).

What are your necessities in your carry on?  Do you try to travel light?  One of my newest accessories is this Bag-All pouch for Passports and Travel Stuff (thanks, sister!).  Not only is it useful ... great simple design, and it's created by a small business in NYC (Bag-All).  I first discovered this store while walking in NYC (it's on Mott Street in Lower Manhattan).

What are your favorite travel necessities?

... so there you have it.  Paradise.  My thoughts on travel.  And some travel ideas / gear.

Anguilla

Anguilla - Zemi Beach House Hotel & Spa

Where is paradise for you?  Would you leave life as you know it to travel?  What things or strategies make traveling easier for you?

-Tara