Lazy Man and Money

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.

Your Bedroom or Your Life

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A couple of weeks ago, I wrote an article Rich Chicken, Poor Chicken, which was very loosely modeled after a popular book. I’m not a fan of the author since he seems to promote pyramid schemes. (And unfortunately, Dave Ramsey seems to as well.)

I apologize for the Debbie Downer lede. I got a little off-track there. Let’s start over.

Today’s title is inspired by Your Money or Your Life. It’s a book that all my favorite and like-minded bloggers recommend as a definitive personal finance “bible.” (Disclosure: I’ve never read it. From what I’ve heard it covers the basics very, very well. After 10 years of personal finance finance blogging (and 25 years studying personal finance), I’m not sure I’d gain too much from it.)

The bedroom part needs a little explaining. Yesterday Zillow released a study that moving from a home with 2 bedrooms to 3 costs $450 more a month. That’s an average. Bozeman, Montana will differ greatly from New York City. (Zillow has a lot more information at that link.)

The key takeaway for me is that mortgages were 50% more a month for an extra bedroom. For most people, housing is the biggest expense. You can cut lattes here and there, but they are proverbial drops in the bucket. A 50% change in your biggest expense is life changing…

… life changing in either direction. If you have a 3 bedroom home that you don’t need, you could reduce it and put the savings to good use. If you were thinking of super-sizing from your 2 bedroom home, it’s worth thinking twice whether you really need that 3rd bedroom.

What would do with an extra $450? Decisions, decisions. A-ha there’s the light-bulb above my head.

It turns out that $450 a month is $5400 a year. That’s almost exactly what it takes to max out a Roth IRA. Maybe I should have titled this article your money or your retirement?

Normally, I’d walk you through the math of what $450 more a month means. Today, I’m going to live up to my moniker. Everything I’d say is here: Compound Interest is a River.

Looking to Expand the Real Estate Empire

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That was a difficult title to type. It was just Friday that I mentioned how my tenants won’t leave and it’s leading to a lawsuit. It looks like it is going to get very messy. Anyone else thinking about the State skit, Get a Job: “What am I nuts?!?!” (was that reference too obscure?)

I’ve given full details on our our Real Estate “Empire” previously. It is an accidental empire. We bought properties in places that we expected to live in (and have lived in) and then moved on for one reason or another.

I’ve got a fever and the only prescription is more real estate (there, that’s a more well known reference). And that means a visit to my real-estate lawyer George Megaloudis.

Why more real estate?

It always starts with the numbers. The place that I’ve been looking at seems to be a bargain with purchase prices around $100,000 and rents around $1250. This is an extremely good price to rent ratio. For those new to the game (and I’m with you there) the price to rent ratio is the purchase price divided by the annual rent. Doing the math ($100,000 / 15,000) and the ratio is 6.53. As a potential buyer, you’d want that number as low as possible… cheaper purchase price and more rental income are what you are looking for. According to this article the long-term average in the US is 9.56. At the height of the market it was over 18.

To put that 6.53 ratio in perspective, here are a couple of real world examples. When I rented in Silicon Valley last year our rent was $3200, but the purchase price of the home would be around $888,000 (this number would repeatedly come up in our community. I heard that “8” is lucky in some Asian cultures. True?) That ratio would be an extremely high 23.13! If it hadn’t already been paid off, my landlord would have been losing thousands each month with the mortgage.

Even with a 15-year mortgage, tax, insurance, and condo fees this property would generate around ~250 a month in income. That’s a great thing because that money is going to be needed for usual costs such as maintenance, rental agent fees, etc. If it’s break-even after those expenses, we would own the property outright in 15 years. That would be $11,000 ($15,000 minus condo fees and taxes) of income a year in today’s dollars. Hopefully rents will keep up with inflation and that will stay the same. Also, the property hopefully will appreciate to 2006 levels where it would be worth nearly $150,000. That would help keep rents high and/or give us an opportunity to sell and get out at a big gain.

I know most conventional wisdom says to buy stock and bonds to fund a secure retirement. However, the older I get (I’m 37 now), the more that I start to view things through a cashflow looking glass. I want to build up businesses and assets that are going to bring income. (Some) stocks do through off dividends, but typically the percentages are really small. With real estate, I get to leverage some of my money, a lot of the bank’s money, and tenants’ money to own an asset that I believe is uniquely undervalued right now.

That’s worth the risk of a few bad tenants.

SEP IRA: Self-Employed Retirement Plans

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Are you self-employed and looking to retire someday? I am. Since this website brings in a little income, it qualifies as a small business. Additionally, I contract for some other companies, which also counts as small business income. The life of a contractor is often one without a 401k. Despite my Devil’s Advocate post of throw away your 401k, having the option for automatic savings is great when you are as Lazy as I am. Well I’m not going to sit around crying about lacking a 401k plan. Instead it’s time to alternatives. There are a few of them out there (and I expect to cover them in the coming weeks), but today I’d like to start with Self-Employed Retirement Plans: SEP IRA.

Before I start, I should give a few caveats. I’m not a tax-advisor. I’m not even a financial planner. This is just one person’s opinion based on some research. If you have knowledge in this area and I’m off, please let me know. In the upcoming weeks, I’ll talk with my tax advisor about what do for real. My theory is that it can’t hurt to come in prepared. If I know the pros and cons of each plan, the meeting will go that much quicker.

SEP IRA: Self-Employed Retirement Plan Benefits and Basics

In looking at retirement programs, I found 5 areas that I should focus on:

  1. Contributions are tax-deductible – My tax rate this upcoming year with the full-time consulting looks to be fairly high. I can avoid that high rate now and take a chance that I’ll have a lower rate at age 59 1/2 (or later). Usually that’s a good bet since income and hence your tax rate typically drops in the retirement years (right?). Still it’s something to consider that it might not be the case.
  2. Low administration costs – A little like keeping the expense ratio down on a mutual fund, low administration costs automatically save you money off the top.
  3. Choose your own investments – SEP IRAs are like other IRAs, so you can invest in the same way as you would anything else. For instance, I could get a brokerage account at Fidelity
  4. SEP IRA contribution limits – The contribution limit isn’t as straight-forward as you might expect. According to Wikipedia the contribution the limit is 18.587045% of your net profit. That 18.580745% may sound like a crazy number, but it’s actually derived from accounting FICA tax and other limits that are over my head. It seems like there’s an top level maximum of $49,000 in 2009. This complexity is exactly why I have tax people to help. For me this 18.58% number is looking like it might be a good thing. I could potentially be able to squirrel away more tax-deferred money with the SEP IRA than I could with a 401K plan.
  5. SEP IRA contribution deadlines – The deadlines seem the same as other IRAs, so I should be able to simply wait until I have my taxes done in March next year and write a big check. However, in general, I probably want to be contributing a little every month and then just finish up with a bigger check to the limit as opposed to having request an IRS extension form and filling your taxes late.

Caveats of SEP IRA

SEP IRA’s aren’t all rainbows and puppy dogs… and it’s certain not a pot of gold. Here are some of the things I’d have to think about before jumping in:

  • All employees must receive the same benefits – Since I’m the only employee this is an insignificant factor for me.
  • 18.587045% of net profit – I’m trying to invest back in my business with web sites so I’ve been thinking about intentionally keeping my profit low. However, my full-time consulting is essentially all profit, so that could be a significant amount.
  • SEP IRAs are not a free lunch – By going with a SEP IRA, I’d only be deferring paying taxes. It’s not like I get out of paying tax altogether. Then again, when looking at retirement vehicles, nothing is a free lunch, so this is to be expected.
  • 10% early withdrawal penalty – If I try to access the money before age 59 1/2, I’ll pay a 10% penalty on the money. Do I really want to lose access to this money for the next 26 years?

In the end, I’m thinking that a SEP IRA may be a strong contender as a place where I should put my money. The fact that it’s relatively easy get up and going is a huge plus for someone as Lazy as I am.

Sacrificing the Little Things for Early Retirement?

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This is a guest post by Andy over at Retire at 40. His plan is to get out of the rat race by the time he turns 40, which is now less than seven years away. He does use the British spellings and terminology. I thought it added to the character of the post and left them as is. So grab some crisps (potato chips to us US folk) and have a read. Check out his great blog and subscribe to his RSS feed.

I heard a phrase the other day on Twitter (my new plaything) and just thought I would share it with you since I think it is relevant in the Personal Finance world.

“Entrepreneurship is living a few years of your life like most people won’t, so you can spend the rest of your life like most people can’t.”

It’s an interesting quote and one which bit me almost immediately. I could see straight away how it was relevant not just to entrepreneurship but to my new frugal and simple life. I had already figured out that I have to give certain things up (for example, selling my car) in the short term but in the long term I knew that I would eventually come out on top.

But wait, let me just backtrack a little.

seafoam green is in.

You remember when you were young and time didn’t ever last for something as long as 10 minutes. If you wanted something, you wanted it NOW! There was no such thing as waiting and there was certainly no such moment in time such as your Mother would describe as “You can have it later“. Everything had to be now and nothing could wait. But you know what, that was a long time ago and things have changed.

Looking Around You

Well, okay, things haven’t changed for everyone. Some people still want everything and they still want it now.

That SUV that lives down the road, guzzles lots of gas and most probably bought on hire purchase [Editor’s note: Those in the US, can substitute the phrase “on credit”]. The owner of that car wanted it all and they wanted it now.

That person just coming out of the supermarket groping through their plastic bags for sweets and ready to pop in that microwave meal as soon as they get home. They couldn’t wait just 15 more minutes to prepare some nice, healthy and cheap food and instead had to pay more for convenience (both in monetary and dietary value).

Or how about those who say they don’t have time to review their monthly outgoings, prepare a budget or try to save money. They want to live life as fast as possible, yet ultimately they’ll be the ones who end up with the least time to enjoy life because they’ll have to work years longer due to the fact that they’re not careful with their money.

The Sacrifices – or are they?

One thing I realised when I first started being more careful with my money was that the things I was giving up, weren’t really sacrifices at all. In fact it was quite the opposite, I was inching closer to freedom from a lot of the things I used to think were important. During work hours I would be buying a coffee or two everyday, going out for lunchtime and snacking on afternoon chocolate. Thinking that I was treating myself because “I worked hard, so why shouldn’t I have this” was one of my ongoing thoughts.

Since then however, I have realised that all I was doing was spending the exact same money I was there to actually earn! How silly. And it wasn’t long after that that I also realised that if I gave all those things up, I could actually go down to a four
day work week and I wouldn’t actually be any worse off money-wise. Granted, I didn’t just give up those things but quite a few other things too, like evening take-away meals, an over-the-top internet plan, some DVDs/CDs and movies and a few other small items too.

But what did I get in return?

I got a whole extra day of the week all to myself! And this is where one definition of ‘sacrifice‘ comes in:

“Forfeiture of something highly valued for the sake of one considered to have a greater value or claim.”

Yes, I gave up all those little things but when you add them all up, they still didn’t come anywhere close to actually having three days of every seven all to myself. No matter how much I add those things up, just knowing that I will only ever work two days on the run (and then have either Wednesday or the weekend off) is just a feeling that puts you on a high the whole week.

No coffee, no chocolate, no pizza, no speedy internet connection, no movie, no car and no fizzy drink can put me on such a high for so long as having an extra day off work. And that’s the secret for me and should be for you too. Each time you think that giving something up, not doing something or forfeiting something is hard, just think of this.

Even though you might be “living a few years of your life like most people won’t” so that you can “spend the rest of you life like most people can’t”, you should still get the feeling that “your current life is still better than most other people’s anyway“.

Photo Credit: floodbeast