Financial Independence Daily FI discussion thread - Tuesday, January 05, 2021 |
- Daily FI discussion thread - Tuesday, January 05, 2021
- The real costs of aging and impact on adult children planning for FIRE
- Long Term Care Insurance and FIRE
- Anyone actually doing coast fire or barrista fire?
- Estimated Taxes - California Annualized Income Tax Method Planning Spreadsheet
- Adapting to changing conditions- Consider Investing in dividend paying stocks as "bubble/volatility proofing" when FIRE
| Daily FI discussion thread - Tuesday, January 05, 2021 Posted: 05 Jan 2021 04:00 AM PST Please use this thread to have discussions which you don't feel warrant a new post to the sub. While the Rules for posting questions on the basics of personal finance/investing topics are relaxed a little bit here, the rules against memes/spam/self-promotion/excessive rudeness/politics still apply! Have a look at the FAQ for this subreddit before posting to see if your question is frequently asked. Since this post does tend to get busy, consider sorting the comments by "new" (instead of "best" or "top") to see the newest posts. [link] [comments]  |
| The real costs of aging and impact on adult children planning for FIRE Posted: 05 Jan 2021 03:25 AM PST I have been experiencing some of the hardest days of my life and wanted to reinforce that conventional FIRE planning does not do a great job of considering the challenges of old age and a child's role in helping their parents. My fathers expenses have more than doubled since my mother died. He has a degenerative disease and has to pay for people to come to his house to help with things like making food and getting dressed. My FIRE budget certainly would not cover these kinds of expenses. In our area, its impossible to find reliable home aids who would be covered under Medicaid after he runs out of money (which will happen this year). So his only other option would be a nursing home. Until he is vaccinated, that is not an option. My family lives in a small home and we have lived a frugal lifestyle. I have no where to put him in my own home and he wouldn't want to move here anyway. My expenses have also increased as I travel often to see my father and help in any way I can. For those who already live a conservative lifestyle, don't fall into the trap of planning a retirement budget of 80-100% of your pre-retirement expenses. I am adjusting my approach and setting 150% as my new target. This is causing me to have to completely rewrite my plans. Most elderly people are not going for a walk in the park one day and dead the next. The process can be ugly, time consuming, and expensive. That mini-retirement I was planning may be spent as a caregiver for a parent. If you successfully apply the FIRE principles, people will know it and will come to you for help. Even if they don't ask, you may feel compelled. Maybe not a parent, but someone close that you care about. Are you prepared for this? (I wasn't) [link] [comments]  |
| Long Term Care Insurance and FIRE Posted: 05 Jan 2021 09:17 AM PST After reading this post by u/WebsterDad, where many people suggested that Long Term Care Insurance (LTCI) should be part of a FIRE plan for those of us in the US, I decided to start a separate thread about it. I am going to condense some of the important points about LTCI from that thread into this one. LONG TERM CARE AND GENERATIONAL POVERY I had not realized how the cost of long term care for parents can wreck someone's plan to use FIRE to escape the cycle of generational poverty. If your parents were low income or did not save for their own retirement, and you are trying to break that cycle of poverty by pursuing FIRE, your plans may be jeopardized because you need to use your nest egg to pay for your parents' care. Similarly, if you need to pay for your own longterm care out of your own nest egg, you won't have as much money to pass down to your own children. MEDICARE AND MEDICAID In the US, people over So, is LTCI the solution? Should LTCI be part of our FIRE plans? PRICE OF LONG TERM CARE Here are national averages according to genworth.com. Care cost is location dependent. You can find averages for your state here https://www.genworth.com/aging-and-you/finances/cost-of-care.html COST OF LONG TERM CARE INSURANCE Long term care insurance usually has a benefit cap of about 160K, with a defined daily or monthly benefit (for example, $180 or $5000 respectively). That means that "Long term care" only last around three years before the benefit is exhausted. Insurance cost is location and age dependent, but here is a guide From https://www.thebalance.com/long-term-care-insurance-cost-4126749. Note that female cost is higher because they live longer and are therefore may be more likely to need long term care. SO IS LONG TERM CARE INSURANCE A GOOD IDEA FOR YOUR FIRE PLANS? You really only need insurance for things you can't pay for yourself. So, is LTCI worthwhile? Let's look at a very simplistic example. Assume I start my policy at age 55, and pay until age 70, then fall ill and die after three years of care. I would have paid about 34K over 15 years (1876 x 10 years + 3081 x 5) for the insurance. So I (or my estate) would come out 144k ahead (minus the opportunity cost of not having that money invested). I have three kids that stand to inherit my estate, so part of my FIRE plan is capital preservation for them, so LTCI seems like a good bet for me. What about you? What have I missed in this discussion? [link] [comments]  |
| Anyone actually doing coast fire or barrista fire? Posted: 05 Jan 2021 06:14 AM PST I'm quite close if not already at a place where I could make less than half my current income and be just fine (I save like 60% of my paychecks now and have zero debt including mortgage). I keep thinking one day I'll get out of the 9-5 world but have a hard time figuring out how and when to do it. I always say "just another year or so, the money is too good to turn down" but I'll be 40 in March (not old I know). While 40 isn't old, I don't want to keep running on autopilot until 50, or 60, and miss my opportunity to work less while young enough to enjoy it. Anyone else dealt with this scenario before? What did you do? FYI I don't have enough 401k to retire and live on it yet, but calculations show I probably have enough to leave it be and then would have enough by the time I'm 65. This the question about coast fire. Thanks. [link] [comments]  |
| Estimated Taxes - California Annualized Income Tax Method Planning Spreadsheet Posted: 05 Jan 2021 11:14 AM PST Link to Federal Estimated Tax Spreadsheet Post California Spreadsheet Link: Please COPY the spreadsheet. After making my Federal estimated tax spreadsheet to spit out the estimated payments I'd need to make, I set work on the California state tax one. To my surprise California's calculations are totally different. Federal taxes requires four equal 25% payments, while California requires the first payment to be 30%, the second payment to be 40%, the third payment is 100% optional ($0 is required), and the fourth payment is 30%. I've parsed out Form FTB-5805 line by line in my spreadsheet and have tested it extensively, using California's Annualized Income Installment Method Schedule. InstructionsMake a copy for each new year from the template. Put in your tax brackets. I have the single tax brackets, if you're married, you'll have some work to do to put in the married tax brackets. Put your YTD date income for each "quarter", the first 3 months of income, the first 5 months of income, the first 8 months of income, then finally in December your total income. You'll do this 15 days before the estimated taxes are due at each quarter and put your ACTUAL income received. Save this spreadsheet and refer to it at tax return time. You'll have to enter the same numbers you estimated in your tax program of choice for the annualized income method. You'll probably want to save this spreadsheet for 7 years with your tax return in case you're ever audited to show that you did the worksheet. My spreadsheet puts every number into the worksheet for you. Enjoy saving money of having to hire a CPA year round to do the busy work by hand and tell you how much estimated taxes you owe. Cheers! LimitationsAMT. I have no friggen clue how California AMT works. I was surprised to learn that California has AMT for their state taxes going through the form. I can't find any documentation for individual tax payer AMT rates, only that corporate rates are 6.65%. It looks like it just possibly disallows deductions for individual tax payers. For all intents and purposes it seems like you're unlikely to owe AMT until you're above $1 million annual income, at that point you probably should hire a CPA. If you figure your AMT adjustment correctly my spreadsheet will use that number. You'll have to enter it in Cell F65 on each quarter spreadsheet to be used. In my testing of the spreadsheet's income/etc it seems like AMT didn't pop up at all in TaxAct up to $1m AGI. AGI > 1,000,000. California has strict rules that you must pay 90% of your CURRENT YEAR total tax due if your AGI ends up being above one million. So if you're lucky and win a $250,000 lottery ticket in the first quarter, well using the annualized method it multiplies that by 4, and expects your annualized income to be $1 million for the year, and it spits out a $28,888 first quarter safe harbor tax payment. If your total income is only $250k for the year then your total tax will be $19,945 and $28,888 will be a over payment. In an abundance of caution, my spreadsheet will spit out the safe harbor number based on the California Annualized AGI for that quarter, which for this example is $28,888. If you didn't pay that $28,888 and say in Q4 had a surprise taxable $750,000 of income come in, you'll be hit with a ton of penalties still with the annualized method. California does not mess around, you'll be hit with 3% on that $28,888 if you didn't pay it, plus 6% APR interest until it's paid calculated by the day. In my testing TaxAct spit out around $2,000 in penalties for not paying that $28,888 on the first CA estimated tax payment on a 2019 return. If you paid that $28,888 then $0 penalties. It's on your own risk if you want to pay a lower amount than the annualized safe harbor amount. If you KNOW you'll be under $1m for the year then you'll be fine. My advice is to just pay the safe harbor amount the spreadsheet says even if you're a bit over-withheld. Also, in my test case, if you have $200k come in Q1 or so, under the $1m AGI annualized threshold, then go over $1m in Q4, despite what California's forms tell you to pay estimated taxes on, I'm still looking at $800-$1k of penalties in Tax Act. My suggestion is to pay over the safe harbor minimum if it's likely you could have surprise income in Q4 that pushes you over $1m. Finally, if you realize all your income in Q4 and pay the minimums my spreadsheet spits out, you're getting hit with really small penalties like $20 on $100k. I'd suggest to just pay at least 90%, if not 100% as you'd have to eventually. DisclaimersI'm not a CPA. I've only tested this for my expected situation of SSDI(which is state tax free :D), ordinary income, dividends, qualified dividends, short term capital gains, and long term capital gains(sadly these are taxed up to 13% in California :(). I've tested this with CA 2019 tax brackets and a 2019 CA Tax Act Return. California is generating a $0 penalty in my cases. I also tested $1m+ AGI test cases extensively and my spreadsheet spits out $0 penalties, but still - I'm not a CPA. How this spreadsheet applies to FIREWe're more likely to retire early, and our income is based off our portfolios, and we may have uneven income in a year (say withdrawing $40k extra from stocks in June to fix a roof.) FIREing doesn't give us much withholding opportunities either - so we're either paying estimated taxes or doing 60-day rollovers of 100% withholding IRA withdrawals. Another poster a few days ago was asking how to estimate such taxes and so I decided to post this today! :) Even if you're employed you still may want to make estimated payments if you have huge wins in the stock market, etc. [link] [comments]  |
| Posted: 05 Jan 2021 10:03 AM PST So the common idea on here is to just go into a broad stock market ETF like VTI and just withdraw a fixed amount each year. Basically, 4% is the magical safe withdrawal rate, so once you hit $1 million, you can withdraw $40,000+ inflation for life. Most of this belief is based on historical data. We then saw a post earlier this week that showed that a 4% withdrawal rate since 2000 from the S&P500 meant that your current NW would be just 23% of the starting amount. This would certainly cause anxiety especially with the market volatility https://www.reddit.com/r/financialindependence/comments/kpodhb/charts_2020_a_good_year_for_people_who_retired_in/ Some people might argue "you cherry picked the worst year", but mathematically, you're most likely to hit your retirement goals when the market boomed to an all time high than after a crash. When the tech bubble crashed, the S&P500 dropped by nearly 50%. If you were invested in tech "growth" stocks, you would've been hit way harder. The Nasdaq fell by 77%! When relying on selling shares to fund retirement, you're vulnerable to whatever price the market dictates. So if unjustified panic results in prices too low, you still have to sell at that price. So if you lose 50% of share value, your 4% withdrawal rate becomes 8% of your portfolio. In the past, bonds were the means of hedging against said volatility risks. But back in 2000 bonds were yielding 6% and were actually a great alternative. Now treasuries yield 1% which won't even beat inflation. I would argue that in the age of low interest rates, dividends should play an important role in protection against excess valuations for retirees. Dividends historically have been less volatile than share prices. For example while the S&P 500 dropped by nearly 50% in 2000, dividend payments hardly budged https://www.multpl.com/s-p-500-dividend/table/by-year The same is true in 2009, when the stock market dropped by 60-70%, but dividends only dropped 20%. As was seen in 2000, Some of the companies most at risk of bubble territory are companies that aren't paying dividends. Companies that don't return capital to shareholders, but are priced highly based on expectations of future growth. Most of the stock market price growth for this year has been from non-dividend payers like Tesla and Amazon. Tesla is currently trading at 34 times their annual revenue, and 1459 times their earnings. So much growth is priced in that the slightest slowdown in growth will decimate their price. As a young investor trying to grow wealth to reach fire, investing in growth opportunities can be a good long term play. Even if you buy into a bubble you have time to recover if you hold. Lower prices are an opportunity to buy more for less. But as someone depending on their stock portfolio for income, a change in prices affects you dramatically. Historically, the dividend yield on the S&P500 was high enough to fund retirement on it's own. Before 1985 the yield was almost always above 3%, and often averaged above 4%. However the dividend yield on the index as a whole has hit record lows this year, as valuations of growth companies surge, and companies look to buybacks and acquisitions rather than dividends to utilize excess capital. With the S&P500 dividend yield being at all time lows(1.5%), overall market dividends don't provide the level protection they have historically. With treasury yields at <1%, they are vulnerable to inflation/interest rate hikes, have little upside, and produce little to no income. Investing in a dividend paying index to provide a baseline level of income can help reduce the need to sell during a downturn while still providing upside. [link] [comments]  |
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