Lazy Man and Money

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.

Exploring My Downsides of Early Retirement

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Beach RetireA while back an old blogging colleague of mine named ESI Money wrote about 10 downsides of early retirement.

Yesterday, Joe from Retire by 40 shared his biggest downside to early retirement. I won’t give you any spoilers. However, when you finish reading it, you’ll see that last sentence was a bit of a pun.

Joe covered all ten of ESI Money’s downsides before giving his own thoughts. Since there are few original thoughts in the personal finance space nowadays, I’m going to blatantly steal the idea, while giving him great credit. It will help if you click on his article, so he doesn’t get mad at me. Just kidding, he’s too happy and nice to get mad.

Exploring My 10 Downsides to Early Retirement

Well first you have to retire early to have a downside, right? Depending on your definition of retirement I either retired at 30 or I will never retire. I like to say that I’m self-employed, but my life isn’t that much different than Joe’s who views himself as retired. Just to make it more complicated we aren’t sure if we are FIRE, leanFIRE, or FatFIRE . For the purpose of this article, let’s just assume that I’m retired.

Let’s look at each of ESI’s top 10:

1. Loss of Income

That’s a natural one. However, my wife has a military pension. We also have a lot of alternative income, which includes side gigs like dog sitting and blogging, along with rental properties and equities. In fact we should have more than $200,000 in annual retirement income with many of our expenses paid off. We don’t have that now, because we have about 8 years of rental properties to pay off. It’s also hard to get to the money in our retirement accounts at our age (43).

2. Reduced Social Security Income

My wife has been a big earner for a long time. I was for awhile, but not as long. I keep paying into social security with my side gigs. We don’t need this income and don’t plan for it, so it’s not a big deal. Last I looked it could be $50,000 a year combined.

3. Health Insurance

My wife’s military retirement comes with a very generous health plan that we can keep for life. We realize how extremely lucky we are to have this, especially in this day and age. We do have to pay for it and I’m sure it will get more expensive. However, it will surely be much better than what ordinary early retirees could get for the money.

4. Mental Decline

Here’s where it starts to go south. It would take a lot of work to be a good software engineer again (if I even was in the first place). I’ve spent the last 7 years focusing on interactions with babies and toddlers. I’ve spent the last 4 years sitting over 200 different dogs. While I have learned some very valuable skills that I treasure, the intellectual challenges are more about patience and understanding, not intense problem solving.

To help combat this, I’m trying to learn Japanese with Duolingo. I’m looking for more things that I can work in to windows of a few minutes of the day. I don’t get a lot of time to sit down and study anything at length.

5. Physical Decline

I’m getting older and that starts a natural physical decline for most people. I try to keep active with lots of dog walks. If I was full-time computer programmer, that wouldn’t be the case. I need to get back to going to the gym and lifting weights.

6. Loss of Social Interaction

This is a big one. I was never very social with my co-workers, but there were adult conversations. This goes back to my main conversations being about Pokemon and Daniel Tiger… or with a barking dog. There’s not a lot of deep peer friendships in my day-to-day life.

I didn’t lose these because of early retirement though. I feel I lost them through a series of moves, my introvertedness, and my old college friends just moving in different directions.

I’m hoping to build some new friendships with other parents through kids’ activities. So far, it hasn’t been very fruitful.

7. Loss of Identity

I very much feel this. I used to be a software engineer who built search engines. It was easy to explain and people understood it in just a few words. Now I’m unexceptional blogger, dog sitter, landlord, investor, customer support specialist, and corporate blog editor. I don’t know if they make a big enough business card for that.

I’m not even “retired” (except for this exercise) and my primary focus is on the kids.

I have no identity.

8. Boredom

You’d think that with all the above that I wouldn’t be bored. If so, you’d be wrong. There are not a lot of “new” things going on in any of those activities. It’s not like I have a new assignment of a special project that requires me to learn a new skill. I suppose that blogging is always changing, but with all the other activities, I have some difficulty in keeping up with the changes.

I’m planning to buy a wet suit next year and take surfing lessons with the kids. The kids joined the Cub Scouts recently so we’ve got a camping trip planned. There are so many new and exciting things in this world, I just need to find them. Many FIRE bloggers love to travel. I don’t like traveling much. Also, it makes sense to wait until the kids are a little older before going to any distant countries. I would want them to remember it.

9. Spouse Overload

My wife already works from home a lot. However, sometimes we do need our space. She’ll go off on a run. I’ll go blog at the library for a bit. We have some different interests, but we share many too. If she weren’t working from home, it might be different. For now we each do our own thing for most of the day.

10. Lack of Challenge/Purpose

This is a little like the identity question above. I did have a good professional challenge in exposing MLM fraud. Unfortunately, we don’t have the freedom of speech in the US that we are taught in school. It’s only available to those who have 3 or more million dollars that they can blow on lawyers.

After being sued several times (and winnning!), I’ve decided that it simply isn’t worth the stress and potential harm to our family. So one of my passions, helping people avoid financial fraud, was thwarted. There’s a happy ending though. More and more media publishers are taking up the cause and awareness of MLM fraud is at an all-time high.

I haven’t found my next true professional passion project. Of course, I have the passion project of the family and teaching my kids new awesome stuff about life.

That’s a very worthy purpose, but it is different from the glitzy career of search engine software engineer or pyramid scheme activist.

Putting it All Together

Early retirement may not be as easy as you think it is. I imagine that’s even more true if it’s pseudo-retirement like mine. If you won the lottery and can hire out all the help you need, that’s a different story.

I’m still hustling quite a bit with all the jobs I’m doing now. As you can tell, there are gaps in my overall happiness, but that’s normal.

Everyone’s early retirement is going to be different. If you are not financially secure, I can tell you that the grass is certainly greener on this side of the street. However, there are at least 50 shades of green and sometimes it can be difficult to compare two.

An Improptu Early Retirement

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I haven’t been writing much this week because my wife made the decision to take a break from work. It was a sudden decision, but a great one. There’s a narrow window when she doesn’t have students or health plan surveys. Summer moves quick here in Rhode Island… if you blink you’ll miss it.

My wife is having a lot of fun I want to be a part of it… but only a bit. I want to be around, but I also want to give her space. So far it’s working out well.

We’ve put a good amount into the local restaurant economy. It’s certainly not financially ideal, but it’s good for us now.

I’ve often wondered what it would be like if my wife really retired. I could never imagine her doing nothing… it’s just not her personality. Though this week has been different. She’s enjoying reading a book by the ocean. And why not enjoy that?

This is interesting… in a very good way. I’m learning more about what I want out of “retirement”, but also what she might want. And it might all change tomorrow, because, as we say in our house, “There are no rules.” (That’s usually about vacation time. We certainly have rules as the kids can attest to. We just question the value of each rule.)

This is a small sample size. If someone tried to assess my views about things after a couple of days, I’d say they are nuts. But a small sample size is better than no data at all, right?

So I learned a couple of things this week. One of them is that retirement can get expensive IF we continue to feed the local restaurant economy. (We can also game the system due to numerous deals for locals.) The other is that you can (should?!?!) make things up as you go along.

As much as I like to think I can predict the future, no one (even me) knows what tomorrow may bring. And sometimes it’s great to know that you don’t know.

What’s one thing that you didn’t know about retirement? Let me know in the comments.

What’s My Pension Worth?

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The short answer to that question is zero, because I don’t have a pension… however, my wife does. She completed 20 years of military service in March, but continues to work (for now).

Pension - Net Worth

Earlier this month, I asked the question “Should You Include Your Pension in Your Net Worth?” and found that opinions were generally mixed. Most (61% in my small Twitter poll) believed that you should include it. This is consistent with how finance professionals and divorce courts view it.

However, there are still plenty of people who feel that a pension shouldn’t be included in your net worth. They explained that a pension is future money that you don’t have and can’t gift in an estate.

I ended up deciding that I’ll keep two logs. One log will count all the traditional assets and liabilities used in a typical net worth calculation. The other log will include the value of a pension and this website. I don’t know if there’s any great value in keeping two logs, but there’s no harm and it is a little work once you calculate the values. Also it doesn’t matter since net worth numbers don’t drive any of our financial decisions.

The first question in the comments of the article was what I wanted to write about today.

“How do you value the pension?”

If you are going to include a pension in your net worth, you have to have a number to plug in there. Fortunately, there are a couple of different methods that we can compare and contrast. For the purposes of this article, I’ll be presuming a military pension, but your pension circumstances may vary. If you are in the military, you may also be interested in “When should you retire from the military?”

1. Calculating Pension Value using Life Expectancy

The first idea that came to mind is to use the simplest math possible. My wife’s pension will be $[X] when she retires. Her life expectancy will be roughly [Y] years. The number of total pension dollar she’ll be paid is “$X * (Y – [current age])” The Social Security Administration has a life expectancy calculator that’s helpful.

Plugging my wife’s information into the calculator shows she is estimated to live another 41.7 years. That’s just as cold as I expected from the SSA. There are other life expectancy calculators that may be more accurate by factoring health and lifestyle behavior. This is good enough, especially because nothing is guaranteed.

My wife is a fairly high ranking officer (so proud!). If she retired tomorrow, her pension would be $55,462 per year. Simple math gives us: ($55,462 * 41.7) = $2,312,765.40 total pension dollars. (Since military pensions grow with inflation, we don’t have to worry about eating up the buying power.)

If my wife continues to work longer, you might think this method would value her total pension as being worth less. After all, she’ll have fewer expected years to collect. However, the pension will grow with more years of service.

2. Calculating Pension Value with with Annuities

On its most basic level, a pension is an annuity. Thus we could look at how much it would cost to buy an annuity equal to the monthly payout of the pension. I found a couple of calculators online, but they tried to get me to sign up and/or give personal information that I believe would lead to a sales pitch.

One showed that it would cost around $1,200,000 to produce the same $55,462 per year in income. I was surprised that it was so low. However, that $55,462 was not inflation-adjusted, so that $55,462 in 40 years from now is really worth $20,655 (assuming 2.5% inflation).

I next looked for inflation-adjusted annuities. Unfortunately, while they exist, they are harder to find and seemingly impossible without getting caught in the potential sales pitch.

For now, I’ll presume that the 1.2M in annuities without inflation protection would be about the same as the 2.3M number by using life expectancies when inflation protection is factored in. It at least seems plausibe.

3. Calculating Pension Value with Treasury Rates

A third way to look at a pension is by using Treasury Inflation-Protected Securities (TIPS). If someone gave you $1 million dollars and you put it in these, extremely safe investments, how much money would they generate each year. Current treasury rates between the 20-year and 30-year are very low, with an average of around 0.85%.

Thus we could say that hypothetical gift of a million dollars would yield only $8,500, a far cry from the $55,462 number we are aiming for. We need to work it backwards and take the $55,462 number and divide that by the 0.85% yield.

The result is that the pension is worth $6,524,941.18. That seems very wrong! It seems the problem is that interest rates are just too low.

What if we use another metric? The 10-year government bond rates is currently 2.33%. Using is makes the estimated value $2,380,343. Thus, if you invested $2,380,343 and were able to get a relatively safe 2.33% interest rate, you’d get $55,462 in interest.

However, the 10-year government bond rates are not inflation-protected. Twenty years from now, the $55,462 that you get back from that calculation will not have the same buying power.

4. Calculating Pension Value with a Finance Calculator

I found an interesting article on Sapling.com about calculating pension value. It uses a financial calculator, which is something that I’ve never been good at. It looks like this might be worth more value when you are looking at a point somewhere in the future when you get access to the pension. For us, it doesn’t seem to work since that date is not determined.

Final Thoughts on What a Pension is Worth

It’s hard to put a definitive number on what a pension is worth. However, considering that the first, second (after inflation-adjusting), and third calculation all came to about the same $2.3 million number, I will use that for the second net worth log.

That’s a very, very large number. It’s so big that it dwarfs much of our other financial assets – as you would expect. That’s why I’d keep it in a separate net worth log. It’s also a good time to reflect that I created this blog and have written about FIRE for the last 13 years because I knew my wife’s financial contribution wasn’t just her salary, but also a large stream of passive income. In 13 years of time, I haven’t been successful in creating $55K+ of annual passive income to match her. However, our alternative income is getting very close.

I don’t believe there’s a firm right or wrong answer to what a pension is worth. Fortunately, this is one area when a reasonable estimate is usually good enough.

Should You Include Your Pension in Your Net Worth?

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In late March my wife reached 20 years of military service qualifying for half of her basic pay. She hasn’t retired yet and as she continues to work the pension has the potential to rise exponentially.

Pension - Net Worth

Pensions are very rare nowadays. It seems like almost all companies have stopped offering them. Often companies have difficulties fulfilling those pension obligations. Pensions are still a part of many careers such as teaching, law enforcement, and firefighting. Typically those pensions are set by a state formula and each state is different. Sometimes states mismanage the pension fund. It seems that I’m often reading about how some corruption raided the pension fund.

Military pensions are indexed to inflation. They are also backed by the US federal government. As far as pensions go, it doesn’t get much better than that. We are grateful to have this tremendous financial benefit.

However, it does raise some interesting questions. Chief among them is:

Should we include the pension in our net worth?

I’ve been tracking my net worth with a spreadsheet since at least 2006*. What started as a very simple spreadsheet of a couple of bank and retirement accounts has expanded to incorporate my wife’s assets**, two kids assets, 3 rental properties, and a pile of formulas (liquid cash, real estate equity, and debt/net worth ratio, rule of 4%, etc.). I used to update it every quarter, but over the last 5 years, I’ve religiously updated it every month. It’s not a coincidence that I’ve been more motivated with this bull market

It’s been a tremendously helpful tool. However, like most tools, you can choose to use it how you want.

Some people choose are adamant that you can’t include the value of the your home in your net worth. They say that since you can’t use that money, it shouldn’t count. I never bought into that argument because there are options to access that home equity such as downsizing, getting a second mortgage, or a reverse mortgage. However, the biggest reason, I include the value of my home is that, if you own it, you don’t have to pay as much for your largest living expense. It’s mostly insurance, property tax, and maintenance.

But let’s get back to pensions. They are a little trickier. That’s money coming in the future. If you don’t have a pension, you can think of Social Security as something similar. Would you include the value of your Social Security benefit in your net worth? I don’t know anyone who does that. To take it a step further, I know very few of my personal finance blogging peers who factor Social Security into their retirement plans. Almost all would say it’s the cherry on top of the sundae, not the ice cream, hot fudge, nuts, and whip cream.

I decided I’d ask Twitter. My timeline typically consists of personal finance people, so it’s somewhat knowledgeable.

While 44 votes may not be enough, a 61% majority gives a slight edge to “count pension in your net worth.”

I’d put myself in that 61%. A pension can save one from having to directly put as much money into their retirement savings. That can free up hundreds of dollars a month that other people would put into their retirement plans. Also as one lawyer pointed out, pensions are considered assets in divorce court.

As I continued down this rabbit hole, I felt more and more confident about my position in counting it as part of our net worth. However, then I thought about this website. It’s a business that brings in income. It’s an asset. Theoretically, I could sell it. I’m not sure who would want to buy it, but there are some guidelines of how much it would be worth.

Yet, it’s never occurred to me, before now, to count this website in my net worth. I’m not sure many personal finance bloggers do… unless they sell it and unlock that value.

At the end of the day, you can calculate your net worth however you want. It’s simply a number. It doesn’t change the underlying finances.

* I remember using Quicken before that, but I was too Lazy to import and categorize everything and moved to a new system.

** We keep some assets separate, but even if we didn’t, some finances simply can’t be combined like her TSP or Roth IRA.