Lazy Man and Money

We’ve Stopped Our Retirement Contributions. Here’s Why.

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Today’s update is going to be very quick. We’ve got a storm, so the kids are home from school. My wife has 4.2 zillion Zoom meetings and I have a lot of snow shoveling to do. We haven’t had a storm in a few years, so finally the kids are old enough to pick up a shovel and help a bit too.

It was back in middle of January this year that I asked, Is it okay NOT to save for retirement. Some stuff happened since then*, and now it’s time to announce that we’ve decided not to save for retirement… at least for the next 6-7 months.

My wife won’t add funds to her government TSP plan (like a 401k). I won’t add funds to my solo 401k. We’ll still max out our Roth IRAs, but that is only because we can withdraw those contributions at any time without penalty.

Why the move now?

A lot of it has to do with the way the stock market has gone this year. I’m not referring to the drop in March. Back in January, I had felt like our retirement accounts were getting too high in comparison to the liquid cash we had on hand. It wasn’t like we were each 401k millionaires with 30 cents to our name, but it was lopsided nonetheless.

And here we are in December. I look at our retirement accounts and they are up 27% for the year.

We do have more liquid cash than we did at the start of the year due to less travel, grooming, and eating out. At the end of the day that 27% gain moves the needle even more past the point where I was questioning it before.

There are two other things weighing on the decision:

  1. More liquid cash now means my wife can choose to retire when she wants to. In some ways she can with a great pension already vested. There are some golden handcuff issues to consider. Also, sometimes she seems to be on the fence on whether she wants to retire or not. In any case, having more cash on hand makes that easier.
  2. If we invest some of this money in dividend stocks outside of retirement, we may end up paying fewer taxes down the line. If we take money out of a 401k plan we’ll have to pay taxes at our regular income tax rate. With my wife’s pension, that income tax rate may be fairly high. Well, it wouldn’t be too high, but it would be much higher than what qualified dividends get taxed at. Since our Roth IRAs are not taxed, we can pull out that money without considering tax rates.

There’s more detail in the original article that I linked to above. That’s about all I can do for today.

* Understatement of the year, right?!?!

Predicting Retirement is Tough, but it Gets Easier

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JakeBeachGnarly
Retirement can be a gnarly problem and not the way gnarly is usually used at the beach

It seems like everyone is in the prediction business this week. We’re trying to predict which states will vote one way. We’re trying to predict which way the Supreme Court will vote. I’m trying to predict when the Patriots will have a competitive quarterback again. (Wait, that was supposed to be in my inner monologue. The rest of the country probably had enough of Patriots quarterbacks for a number of years.)

I don’t know about you, but I’ve had enough of those predictions for a little while. Why not take a break from them? What if instead you focused on your personal finance journey and tried to predict what retirement would look like?

I know I’m a strange bird. It takes a “unique personality” to blog about personal finances for 14 years. I continue to update my passive income and net worth statements. It’s a little outdated, but generally our next 45 years of expenses looks steady.

Most people aren’t strange like me. Has it been a while since you calculated your net worth? When was the last time you thought about what your expenses will be when you retire? Regular readers are likely to do these things more often. I wonder how often the Average Joe or Average Jane looks at this financial stuff. For example, I’m always slipping when it comes to getting my car checked. I had been very bad about seeing dentists (but I’m better now). I have to think that money check-ups are the same for some people.

When I started this blog, I could have made some predictions of what retirement would look like. I would have been wildly wrong. I had never left the Boston suburbs before, but we moved out to California for 6 years. We came back to New England and live in the “drive-through” state of Rhode Island. I may have been able to predict the two kids. I wouldn’t have thought that they’d go to private school, because the discount was just barely good enough, but it’s still extremely expensive.

Life has a way of slowly moving you a different direction than you planned. So if you last looked at your financial plan a few years ago, it is a good time to look again and see if adjustments need to be made. For example, we found that with COVID, not being able to spend on travel has helped our bank accounts. (It’s hard to admit that knowing how negative COVID has been for the country overall.)

I like to think of long-term financial planning (for retirement or even college expenses) as being like a hole of golf. You have to take a big shot with your driver to get as close as you can. Then you focus your attention more and more until you are making a manageable putt.

This might be a good time to see if you are using the correct golf club.

Operation “Wife Retire” Activated

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Beach Retire

The plan for my wife to retire was actually set in place long ago. When we met she told me that with the military, she’d be eligible for a pension and able to retire at age 43. That’s one of the main reasons why I started this blog. I didn’t want to work another 22 years after her and start living life at age 65.

That was 2006. We’ve had a great 14 years of financial planning. We’ve seen our net worth growth 4x or 5x. We should be in a great place to begin retirement.

In a lot of ways we are. I have some freelance work, dog sitting, and this blog business that brings in some money. We have some rental properties (from being an accidental landlord) that are losing money but have equity. The mortgages are done in 7 years and should bring in a good income of around $30,000/year after that.

…and yet I’m still very nervous about how to make retirement “happen.”

Now this isn’t a situation where the stay-at-home person, me, is trying to be selfish… or I don’t think I am. To understand why I think I have to explain the unique situation and obstacles.

Obstacle #1: Kids’ Private School

My wife and I treasure the education that the kids get at their private school. It may not be the very best in the country, but it would be above the 90 percentile, maybe even above 95 percentile. We wouldn’t ordinarily consider the expense of sending our kids to this school, but her military discount is exceptional and makes the math work.

However, if she retires, we expect that military discount to go away. Our expenses would go up about 35% at the same time our income drops 40%. That’s not usually a good plan to a successful retirement.

While the school is certainly something that we can eliminate, I think my wife is less willing to do that than I am. They’re in a K-8 school now, and my wife is thinking about private high school (even more expensive), while I’m thinking a combination of public high school and community college.

Do we have to cut a deal with the school? Could we cut a deal with the school? Could we look into another particular (cheaper) school that we’ve some other kids switch to?

These are all on the table. However, approaching the school with these questions takes some tact and timing. I’m often afraid of asking questions when I suspect that I’m going to get an answer that I’m not going like. We don’t know how much of a “what if” this situation even is.

Obstacle #2: Lack of Savings

I’ve always tried to make the smartest financial decision. That’s why I have this blog. In most cases it is to use index funds and retirement accounts to plan for the future. We’ve got a very good nest egg saved up… in retirement accounts that we can’t easily touch.

Many financial bloggers will use Roth IRA Conversion Ladder to get access to retirement money with limited tax consequences. It doesn’t work out as well if you have a pension and if my side hustles are performing.

One answer here may be to take out our Roth IRA contributions over the years. That would give us some savings. Obviously that comes at the risk of retirement growth, but for all the reasons I mentioned at the beginning, we look to be in very good shape down the line.

There are more obstacles, but the previous two are the big and obvious ones that I can see.

My Wife Makes the Call

My wife came up with an idea recently that makes a lot of sense. She wants to have a year of income saved up in cash. That would help cover obstacle #2.

The only problem? It’s been hard for us to save money. Between saving in retirement accounts, paying our house on a 15-year mortgage, private school, travel, restaurants, and the annual surprises, we don’t save a lot of extra cash. We’ve found that in COVID-19 world the lack of travel and restaurants allowed us to save more. My freelance work has also helped. While I still haven’t settled out the month’s bills, I think we’ll be at a quarter of a year’s income saved up.

More Plans to Be Made

On my plate is to do a more comprehensive review of our expenses. I’ve been estimating our necessary expenses for a long time. However, it’s been a while since I even ran one of those estimates. I want to be able to provide an analysis of expected income and expenses, with and without the school. In the end, I expect that will only be a guide… my income numbers fluctuate and our expenses fluctuate as well.

Sabatical or Retirement

My wife isn’t likely to go into permanent retirement. She wants to start her own consulting company using her Pharm. D. and pharmaceutical policy MBA. I don’t know anything about this field. She doesn’t know anything about the private sector. There’s a lot of potential research to be done there. It’s possible she pivots to be an even higher earner than she is now. It’s also possible that she tries to start a boy band with our kids and few of their friends.

It’s great to have those kinds of options, but it’s more uncertainty. Obviously with all this uncertainly, it’s best to plan for the worst-case scenario. There are two problems with planning for the worst-case scenario:

  1. Planning for the worst case of all the above scenarios could mean that there’s no retirement in sight in the short term.
  2. If 2020 has taught us anything, you can plan for one worst-case scenario… but there can always be another one right it.

Final Thoughts

While it seems like we’ve already taken ten thousand steps towards retirement, this feels like the first real step. It’s one thing to increase your options for the future. It’s another to try to formalize the steps and move forward with them.

Reader Question: How to Manage RMDs

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How is it going? Wait, is there any point in asking?

We’re mentally in a difficult place. My kids are turning in schoolwork that literally just says, “School is bad” a bunch of times with a sad face at the top. There friends join the video conference and say how sad they are. Even our dog is sad almost all the time. I know that many of you are sad too. I hope you can find something to make the day a little better.

It’s been a tough time to write blog posts. Finances are either mostly okay for some people or terrible. I don’t know how to write about unemployment during this time. I’ve got nothing to share except for sympathy… and I’m not sure that’s useful. We’re fortunate that money is okay for now. I’m not making much with the blog, and there are no dogs to sit, but our passive income is doing okay. My wife’s job is still paying well. Our spending is down, so that’s helpful.

I had a reader reach out to me the other day with a different topic. This may not be the time to write about this, but the thought exercise made me feel better… almost like I can pretend things are normal for a little while.

How to Manange RMDs

For those that don’t know, RMDs are Required Minimum Distributions. If you are 72 (it used to be 70.5), the government wants you to start getting your money out of tax-advantaged accounts so they can tax you. Thus they require you take the money.

I’ve never thought much about this. It’s still quite a few years in the future for us and it falls into the category of a “good problem” to have.

However, the reader raised some interesting questions. (I’m not going to the share the whole conversation, just the highlights.)

In her case, she’s got a pension, Social Security, and this nest egg of savings. Between all that, she’s making more now than she was working. Most people expect to earn less in retirement and be in a lower tax bracket, but that’s not how it seems to be working out.

To compound the “good problem” to have she has few expenses with the house and car paid off. She has some things like lawn and snow removal, but I got the feeling they aren’t too bad.

She’s getting an excess amount of cash from RMDs that she has to take. Unfortunately, there aren’t a lot of good places to put that money. Banks are paying almost zero interest. CDs aren’t much better. This is a scary time to invest in the stock market. Personally, I feel that it might drop a lot. It doesn’t seem normal for the market to only be down 10-15% when unemployment is going through the roof and corporate profits are in the gutter.

I don’t have a lot of good answers for this reader, but I felt like I should try anyway. Here were some ideas I had:

1. The most important thing, is to have a financial expert look over the situation. A Certified Financial Planner (CFP) is a good start. One of my goals for the year was to do this for our own family. However, it’s hard to do that with businesses closed. If this isn’t possible, that’s not easy.

2. Invest in a bond ETF. My favorite is Vanguard’s BND. It pays a 2.5% dividend. That’s not very high, but it has been very safe during these times so far. It’s still high enough that it can support most people if they have other sources of income like a pension and Social Security.

3. A diverse, high-dividend paying ETF. I personally like iShares HDV ETF. It’s paying a 3.4% yield now, which is a lot better than banks. Of course, the stocks in it can go down (see above warning about the stock market), and companies may stop paying dividends. Without work and profits, it’s hard to imagine them having the cash to pay big dividends.

3a. Dividends are taxed at a favorable rate. This means that the earnings aren’t taxed as income, which would be in a (likely) higher tax bracket. As always, check with your tax professional about this.

4. Look into QLACs. A QLAC is a qualified longevity annuity contract. That’s a mouthful, right? It’s also a good topic for a finance professional. Essentially, as I understand it, QLACs allow people to put 25% or $135K (whichever is lower) of their retirement savings in another account that doesn’t get taxed. I want to stress that I don’t know this very well, so please see someone more qualified.

So that’s what I have. Do you have any more ideas? Most of these don’t really solve the RMD issue itself, but at least it helps manage it a bit.

I’ve been looking at investing more outside of pre-tax retirement accounts because the dividend tax treatment is so much better than regular income. Most of those ideas are on pause for now, as we try to navigate COVID-19.

Is it Okay NOT to Save for Retirement?

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That’s the question I’ve been asking myself many times over the last couple of weeks. For a number of readers that might be a strange question to ask. After all, not all people can afford to save money for retirement. And they certainly can’t be doing it all the time.

For me it’s different. I’ve maxing out my Roth IRA since it was invented. I also maxed out my 401k from all my post-college jobs for years. It was around $10,000 in 1998 then so it may not sound as impressive as it would be today. In the world of flat wages, it’s much harder to max out 401Ks now.

I moved from a standard software engineering career to blogging and side hustles in 2007. I got burned out with the long hours, the changing technology, and I just wanted to spend more time with family. The drop in income made it more difficult to fund retirement accounts, but I was still able to put some money aside.

My wife has been saving in her TSP (the government’s 401k plan) since she started working around 2000. As a pharmacist, she could afford to max out her retirement accounts too.

After so many years of maxing out retirement accounts and an incredible 10-year market run, we have saved up a great retirement nest egg – at least great compared to the average 43 year old person. It’s been a powerful habit that has contributed tremendously to our net worth. We currently have about 45% of it there, and another 45% in real estate (our own home and 3 rental properties) that will be mortgage-free around 2027.

There’s just one problem…

… we often live paycheck to paycheck.

We have some emergency funds, but not a lot. I can usually reach into a business account and shift around some money when we have a rental property renovation. Sometimes we use the HELOC on our home for an expense. We pay that debt back monthly. Obviously this isn’t financially ideal. It would be better if we just used cash on hand.

However, between saving for retirement, four 15-year fixed mortgages, and private school for two kids our “expenses” are high. I put expenses in quotes because saving (for retirement or anything else) is not your typical expense.

Those savings aren’t there when we look at how much cash we have available to use at the end of the month. It’s great for our net worth bottom line. In the case of TSPs and 401ks, that retirement money hasn’t been taxed. One exercise that I need to do (and maybe you do as well) is figure out how much money a 401k is really worth when you start to pay taxes on it upon withdrawal.

Our Retirement Future Looks Bright

When I last published our comprehensive retirement income plan in 2015, it looked like we might have around $200,000 a year in income.

My wife’s military pension forms a strong percentage of that. However, we also have the rental properties, the retirement accounts, Social Security (which will still be around in some form), and income from websites. Since then we’ve added dog sitting and a private equity investment with a high cash yield.

I intend to publish a new update this year, and my expectation is that it will be around $250,000. At the same time, we’ll have a paid off mortgage, and (relatively) cheap military health insurance. We even have my wife’s GI Bill that helps us save less for college. When we look at our future expenses they are relatively small.

We realize we are fortunate in all these areas. It took a lot of planning, but luck always plays a role in the execution.

A Little YOLO Can Be a Good Thing

As you can tell, we’re flying a little too close to the sun in our lives now. Some of it is because we’ve gotten a little “spendy” with restaurants and children STEM toys (my shopping addiction). The rest of it is the funding for the future. I don’t know if there’s such a thing as over-funding the future. However, we aren’t striking that balance.

The strong market performance in 2019 gave us more returns than we would have expected in three years. It seems like the right time to slow down on the future and build up some cash for today.

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