Financial Independence Daily FI discussion thread - Saturday, November 20, 2021 |
- Daily FI discussion thread - Saturday, November 20, 2021
- What if the FIRE community created our own pension fund?
- Lessons From Two Years Of Financial Independence
- Potential Retirement Changes in the Build Back Better Act
- A 171% Tax Rate?!? Beware Phantom Taxes in Early Retirement!
| Daily FI discussion thread - Saturday, November 20, 2021 Posted: 20 Nov 2021 02:02 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] |
| What if the FIRE community created our own pension fund? Posted: 20 Nov 2021 08:09 PM PST So an idea hit me as I was reading a post by Karsten ("Big Ern") over on his blog EarlyRetirementNow. I'm not sure if this has been proposed before, but I couldn't find anything from a quick Google search, so here's the idea: In the post, Karsten makes a point that funding a pension fund for one (or two) people is actually more difficult than funding a pension fund of 1000 (on a per capita basis), and that this forms a significant part of what makes early retirement so difficult. I'd recommend you read the post, as he explains it more, but the idea is very simple: you may live a very long time, so when planning for retirement that is a risk you need to prepare for. It's unlikely you'll live to 100, but the fact that you maybe just might, requires that you consider such a possibility. This requires that a safe withdrawal rate for a typical early retiree is very conservative, as one has to plan for time spans potentially on the scale of 50+ years. Taking this into consideration is extremely inefficient though, as you more than likely won't live so long, and so many early retirees will probably end up leaving a sizeable inheritance if they're properly managing their risks because a bias towards over-saving (too much money, but too many years worked) is a much better outcome than a bias towards under-savings (running out of money and thus spending your golden years eating cat food). This reasonable fear and corresponding response, of planning for the tail-end events, is probably not too unfamiliar to anyone who has thought about early retirement. But now the question that comes to my mind is: why are there so many people out there that are all doing what is essentially the exact same thing: creating a personal pension fund -- but in what is the most inefficient way possible -- as individuals? Why not band together, take advantage of the law of large numbers, and manage these tail-end events in the same way that insurance companies and pension plans have done for literally hundreds of years? That being: Sure, I don't know how long any given individual in the plan is going to live, BUT we have actuaries with tables that provide very strong estimates of how many in a given group containing X number of people will be alive in Y years, with increasingly high confidence for larger values of X, and using those figures, you can estimate with high likelihood how much assets will be needed to fund the fixed income stream. As Karsten points out in the post, given a pension plan with 1000 retirees and holdings that track a typical market return rate, the historical safe withdrawal rate is around 6% -- with the worst off cohorts being somewhere in the mid-5% range! That's a pretty significant premium, considering that this figure is coming from a conservative member of the FIRE community, who usually places his personal safe withdrawal rate in the range of 3.25 - 3.5%, below the 4% figure typically prescribed. That's somewhere in the ballpark of 50% - 100% higher of a safe withdrawal rate! This means if everyone banded together, it would be possible to retire at the same level of life quality, while still controlling for longevity risk, with only about half to three-quarters as much in assets! Considering the mix of talent in the FIRE community, from software engineers to financial advisors, it doesn't seem like a stretch that if the right people contributed their expertise, creating such a fund via an open source effort would be feasible. Such a fund could potentially be accomplished with little to no operating expenses -- which by default would make them incredibly effective over the current highly profitable (and arguably predatory) annuities sold by insurance companies who take a large slice off the top in these sorts of operations. Of course, there are some drawbacks that come to mind. For one, the way this fund works wouldn't be magic -- the fundamental mechanism driving its feasibility is the fact that some members won't live so long, and so by contributing to such a fund, not only do they get less money out of it than they in theory should get, but they also lose out on the ability to pass on an inheritance. I really don't think this is a deal breaker though. People who contribute to such a fund obviously wouldn't need to contribute 100% of their money to it, they could simply build an estate separately which could be passed on as an inheritance if they're interested in doing such a thing. And the fact that they would get less money from the fund than they put in isn't all that big of a deal, as this is the same thing that underpins any sort of insurance -- you're controlling for tail-end events by potentially paying for something you may not end up needing, but if you do, is beneficial and massively discounted. Another aspect to consider would relate to how the assets are managed. Again, although this feels like it could be more of an issue since there are ostensibly large variations in the FIRE community as to what assets different people own, the big idea isn't really all that different. It's pretty clear that passive investment returns through owning the market are the winning strategy for your typical FIRE retiree. Although some may push towards small-cap value, others gold, cryptos, or whatever the hell, just sticking with a Boglehead-type portfolio is something I think many people could easily get behind. With some cocktail of Vanguard (or similar low-fee) ETFs capturing a balance of world equities and bond markets forming the core position of the fund, I'm sure that could make everyone relatively happy. There could even be, as a part of the open source effort, a portfolio management system, perhaps with some sort of democratic process, for managing the fund's holdings. It may not be perfect for everyone, but the withdrawal rate provided by the compromise would still easily beat the alternative of the individually managed pension fund. And here we do find an additional benefit for the early retiree, as such a pension plan would largely eliminate the sequence of return risk, since the date one provides assets for the fund would become less significant to the fund's performance the larger the fund is, thus exposure to risk factors for the theoretical pension fund would stay relatively constant throughout its lifetime. I'm sure such a topic could be analyzed to death though. Another issue would have to do with people actually trusting the fund, as well as various legal / business obligations. What is probably the most difficult part of it all would be amassing a significant enough number of people for such a plan to work. An exit strategy would also need to be devised for those who want to take part or all of their assets out of the fund. Measures would need to be taken to allow for complete transparency to all members as to the fund's management. Details of such things would certainly be provided through a charter / prospectus / terms & conditions of some sort. I could also imagine that the typical FIRE community member would live longer than the average Joe because of better health and education, so the actuarial calculations would need to be run quite conservatively and with a consideration for such nuances. There's definitely other details to iron out, but as far as I can tell, none seem all that insurmountable. It may be a moonshot, but I just can't get the idea out of my head given how this hypothetical pension fund could be so incredibly beneficial to the early retirement community. Definitely open to hearing criticism. Any thoughts on the FIRE Fund? TLDR: What if we make a pension fund for the FIRE community to control longevity risk? [link] [comments] |
| Lessons From Two Years Of Financial Independence Posted: 20 Nov 2021 09:24 AM PST I like to joke that I have become a bit of a cyber monk over the past two, almost three years now. I'm the typical programmer getting paid city wages to live at country prices, a profiteer of modern times and old values. I left the city for a small town, small apartment, own less than a thousand bucks worth of furniture and have monthly cost of just about a thousand bucks. I've never been a heavy drinker and since I moved out here I stopped drinking altogether, and my only vice is a bag of beef jerky every now and then. I cook most of my own meals, my phone bill is 6€ a month, it's just hard to find anything I could cut out that I haven't already. Originally my plan was to live like this until I had a better plan, and now I'm having such a great time that this lifestyle has become my plan. So here are some of my experiences and conclusions from a life I thoroughly enjoy these days. When you have social life, you don't need FIREThe Retiring Early part of that, anyway. I always thought that I would work hard and harder, until I could afford a cabin by the lake, away from everyone and never have to work again. That was while I still lived in the city, a workaholic surrounding myself with other workaholics because at least they weren't so lazy and boring like most other coworkers. Nobody does anything in the city, it's either shopping and cafés and „culture" – or nothing at all. I was always disillusioned by the sheer amount of people who do nothing at all with their lives, you don't meet them for a week and they don't have anything new to talk about. I even picked up a side gig next to my full time job so that I could experience life a bit. I ended up magnetfishing from bridges for scrap metal, owned a truck and made scrap art from it – all good fun, but solitary. For how hectic the city is, it's also damn boring. Out here, things are different, pretty much everyone I know lives an actual life, with ups and downs and stories to tell. I live an active social life with friends from all walks of life, help with moves and renovations or just get invited for company and good conversation. Sleepovers and cookouts, garden parties and book swaps, short evening walks and long weekend hikes. Nature is great out here, and so are the people who surround me, obvious exceptions aside. I lived a transient life ever since I turned three years old, moving through ten different towns and cities and apartments and various schools – and I was never much of a people person. But somehow I really vibe with this whole coastal ambiance and I am also close enough to still make the drive to my remaining friends from old times, closing both eyes at the gas station pump. It is weird how much of my FIRE dream life I can live right now, right here, all because of the people around me. I always thought I would get back into volunteering and helping others with my tools and skills, but I can do that every weekend now, something always comes up. I thought I would get really into crafting and building things, and now I have a small little basement workshop and people love my gifts that I weld together from scrap metal. And all of this simply doesn't cost anything, nothing crazy at least. My car is cheap and reliable, my whole set of tools cost maybe a thousand bucks, and social life out here costs less than a single cocktail in the city. It costs nothing to trade books and stories, go on hikes and cookouts, or simply sit on someone's couch talking or watching a movie. It's harder to spend money out here than it was to save money in the city. Opting out is powerfulI realized a few things about my life: I don't care for a great many things that society tries to push on you. I lived in enough places to value the freedom of moving around over the „freedom" of tethering yourself to a house you own, especially with the housing market being what it is. I can live in my current apartment for 42 years (!) before breaking even on the purchase cost of even a cheap house around here, much less the city. And that doesn't even factor in the amount of interest paid, the ongoing costs of owning and maintaining a house, the hours you spend on cleaning a large living space and mowing your lawn. All for the questionable luxury of „owning" a house when really it's the bank who owns it, and your life. I own an old Volvo estate car that is a pure adventure machine. I have slept in it, so have others, it can transport all my tools, help with moves and I can hook a trailer up to in case I need even more space. I could not care less about having a newer, fancier car, especially when most people who end up buying new don't even buy a „cool" car. I can really not see the benefit of spending 20k or more on anything that looks like every other car, doesn't have any special features that I don't have (I even have a parking heater!) and consumes a bit less fuel for thousands more in purchase price. By the time mine becomes impossible to maintain we will likely all be driving electrics anyway, and the market will probably make it possible and feasible to buy the next cheap, used car. I see the F150 Lightning and like it, but doubt it'll be available all that soon and probably too expensive once it gets to Germany. Other than that, I get no extra utility out of a more expensive car than what I have now. Also, I won't have kids, and certainly won't marry. I don't care for any portion of the marriage cycle, least of all the fights and divorce and the slowly fading interest in each other that precedes that. I find this concept is just not for me, from the tens of thousands that go into just the dress and rings and wedding party, to the very idea of still being the same person in the same place, waking up next to the same person every single day in a decade or two. And so, opting out of these means that I now have enough money in the bank to maintain my life for years to come, longer than I am likely to ever be without a job. I find the present scary and the future actually frightens me enough to know that I won't plan ahead for a future generation of my family tree. I'm the last of a dying breed anyway. I don't have Netflix or other streaming services, don't listen to a lot of music, don't need a gym membership because I do pushups, hiking and cycling and try my hands at running every now and then. All of these are things that I could easily spend money on and nobody would mind or even realize, but I honestly don't need them. 10k is all you need to be „independent"Take this with a grain of salt because you can obviously run through 10k quickly, in a day if you really put your mind behind it. That being said: 10k affords you anything and everything you could possibly need in a pinch. I honestly can't even come up with anything that would cost more than that on its own. Car, computer, even a couch or other such expensive pieces of furniture – it's hard to spend more than 3k on that if you shop smart. In fact, I could replace my whole life over night for something between 10-20k, admittedly a simple life. This kind of freedom is very fascinating to me because it never occurred to me how quickly you reach the point of diminishing returns. There is literally no difference between having 10k and 20k in your bank account, and even 100k doesn't really buy you anything that you couldn't afford before. A house, yes, or a fancy car – but someone explain to me what else you can even spend your money on that you couldn't do before. Probably starting capital for a business, but it sounds way more fun to me to have a low-cost popup business. Freedom means nothing if you don't use itNobody forces you to do something with your life, that is all on you. I know people who clearly have more money than I do, and they live boring, uninterested lives. I could be sitting on the couch all the time with all the freedom I have, and I could stop working for years to come just with the money I have saved up. But instead, I feel like I make good use of my time, but also the flexibility that my job offers me. Sometimes I meet up in the early morning hours with a friend of mine coming from her nightshift, other times I'm driving through the night to meet another friend, sleep there, and hightail it back in the morning to sit at my desk before the daily standup. I have adventures during the week, do honest work on most weekends, and have my household chores under control because I can set up the washer in the morning and hang the laundry out to dry during lunch break, or whatever else I need to take care of. But again: Nobody but you can use the freedom you have. [link] [comments] |
| Potential Retirement Changes in the Build Back Better Act Posted: 20 Nov 2021 12:04 PM PST Important Qualification: The Build Back Better (BBB) Act has not yet been signed into law, as it still needs to be passed in the Senate. All of this information is only valid IF it passes in its current form. It might not pass in 2021 or ever, or it might be altered. The Build Back Better (BBB) Act includes 2 significant changes to retirement savings, which may impact your saving strategies. It seems that most folks on reddit are not familiar with these changes, so I wanted to give an overview so everyone has a chance to prepare if needed.
Things to consider for 2022 and beyond If you're not already, consider maxing your HSA contributions and investing the balance. If you're already maxing your 401k and want to save more, consider changing to Roth contributions, as it has the same contribution limit as Traditional, which allows you to effectively save more. Disclaimer: I'm not an expert, I'm just an idiot with a high income that's trying to figure all this shit out. Make sure you do your own due diligence or whatever. [link] [comments] |
| A 171% Tax Rate?!? Beware Phantom Taxes in Early Retirement! Posted: 20 Nov 2021 04:59 PM PST Most of what I have read in the FIRE sphere suggests a person take advantage of early retirement years to move as much pre-tax over to Roth as possible. I'm here to tell you that if you don't consider the effects of "phantom taxes" doing a Roth conversion can be a bad move, a very bad move. First, a bit about myself to add context to this example. I live in New York State and retired this year at age 50. My household has 5 people in it: myself, my wife, and my 3 kids. We paid off our house years ago. Our cars are paid for. We have no debt whatsoever. My wife has decided to keep working part time and earns enough that her income can cover our living expenses without us having to touch our retirement savings; however, because of child tax credits, self-employed deductions, and our standard deduction we will be paying zero income tax in 2022. Ideal time for some Roth conversions, right? WRONG! It IS true we might have a little wiggle room. By my calculations we can convert up to $10,000 without paying Federal income tax. The only impact of the additional $10,000 of reported income will be that it will reduce our Affordable Care Act Premium Tax credits by $1,460 (the ACA premium reduction is a phantom tax that acts as a 14.6% effective tax rate over this $10,000 range). But once we exceed a conversion of $10,000 things start to get quite interesting as I will discuss below. With the possibility my wife will earn in excess of my projections in 2022 or my kids will earn from a job and have to include that in our ACA calculations it might be best to leave this $10,000 as margin of error. Now let's talk about what happens above the $10K conversion mark. Above a $10K conversion we'll start paying income tax in addition to losing ACA premium credits. To make matters worse, the Child Health Plus subsidies paid by New York state go down by $540 per year. As the Roth conversion amount goes from $10K to $26K our costs (taxes + medical) go up by $5,132. This is effectively a 32% tax rate on the additional income reported and we haven't even included state taxes yet! But wait! There's more! Just above the $26K Roth conversion amount we would lose all health care subsidies, both for the ACA plan as well as Child Health Plus. Between $26K and $30K converted (a narrow $4K range) the Federal income tax goes up by $480 (suggesting a 12% tax rate) but the medical costs increase by $6,346! Over this range the impact of the phantom medical cost increase makes the actual tax rate on this converted money 171%. It's very difficult to come up with a scenario that would be favorable for a Roth conversion at 32% much less 171%! Just thought I'd pass along this example as some food for thought. [link] [comments] |
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