Generation-X' Journal

Where are you and where are you going?
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jennypenny
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Re: Generation-X' Journal

Post by jennypenny » Tue Aug 16, 2016 4:38 am

Generation-X wrote:But if you think about this, by having the basic necessities taken care of, the green paper becomes obsolete: Food, Clothing, Shelter, Healthcare and Utilities.
I always love reading when someone else gets that ERE isn't all about the money.


4.011 years isn't long at all :)

Generation-X
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Re: Generation-X' Journal

Post by Generation-X » Mon Nov 14, 2016 1:07 am

Thanks. :) There will always be details to work out but I'm happy to report that it's now down to 3.72 years.

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Re: Generation-X' Journal

Post by Generation-X » Mon Nov 14, 2016 1:50 am

Fox in the henhouse

Will the greed of the rich ever desist? After taking the American public to the cleaners with 2008 housing crisis and trading their own debt for riches with public money, now they're scheming tax cuts to add more riches to themselves by taking money away from medicare and social security, few services that actually benefit the public, and not just seniors.

" Trump has proposed a $6.2 trillion tax cut, according to my colleagues at the Tax Policy Center. That’s bigger than any tax cut in modern US history, expect for Ronald Reagan’s 1981 cuts. Including added interest expense, that plan would increase the national debt by $7 trillion over the next decade. A GOP –controlled Congress will almost surely approve a very large tax cut next year and while it won’t be as big as what Trump has proposed, it will be very large. The question is: How will they pay for it? "

http://www.forbes.com/sites/howardgleck ... ce18d367cb

"He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity..."

Generation-X
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Re: Generation-X' Journal

Post by Generation-X » Sun Nov 27, 2016 4:43 am

Update 11/27/16

A blessing and a curse of retirement income

Image

Image

It appears that future of Obamacare remains uncertain. I've decided to take healthcare in retirement, which will provide healthcare until Medicare.

Fortunately and unfortunately, this means electing to receive pension income in retirement.

Until now, as with most other middle class faithfuls, I've been socking diligently away into tax deferred accounts as much as I was able.

First, it provides pretty rock solid asset protection, especially in 401k (ERISA https://en.wikipedia.org/wiki/Employee_ ... curity_Act), and second, it immediately lowers income and therefore tax.

One of the benefits of retiring early is one's ability to control annual income and tax. In conjunction, Roth conversion ladder would allow transfer of assets from tax deferred accounts such as 401k to tax-free accounts such as Roth IRA at low tax bracket and allow having an annual income without incurring additional tax.

A steady pension income erodes all these benefits. Some flexibility remain if you're married, but it turns into a nightmare if you're single.

Per 2017 tax table, a single individual would have $6350 standard deduction and $4050 personal exemption, so when using standard deduction, first $10,400 of yearly income would be tax free.

This means that for 15% bracket, single individual would pay $5226.25 of tax on $48350 ($37950 (15%) + $10400 (std. deduction + personal exemption) of income. Provided that there is no income for the year, or all income for the year comes from 5+ year old Roth IRA account under basis, $43123.75 of tax deferred funds can be transferred to Roth IRA account on a distribution of $48350 for about $5000 tax - not bad!

Married filing jointly would pay $10452.50 of tax on $96700 ($75900 (15%) + $12700 (std. deduction) + $4050 (personal exemption) + $4050 (personal exemption)) of income. In contrast, a single individual would pay $17313.75 ($5226.25 (15%) + ($96700-$10400)-($37950) (25%)) of tax on $96700 income, almost $7000 more for the same income.

So the rule of thumb is, when there is no income for the year, a single individual would be able distribute roughly about $50,000 and married filing jointly about $100,000, both paying about 10% tax on the distribution, from tax deferred account to tax-free account each year under standard deduction.

However, when single individual doubles the amount of distribution to $100000, the same amount of distribution as married filing jointly each year, single individual pays $17313.75 or almost 3.3x and not $10452.50 or 2x of tax as one would expect. Not good. This means that a single individual would take twice as many years to transfer assets from tax deferred account to tax-free account as married filing jointly while paying the same amount of tax before Required Minimum Distribution (RMD) kicks in at age 70 and 1/2.

Situation become even more dire with addition of pension income. Since pension income is ordinary income that is not earned income, it only reduces the amount of distribution per year while still paying the same amount of tax.

For example, at the earliest retirement, around 350k of deferred savings along with about 31k or yearly gross retirement income is projected (see first graph above). That means only about 17k can be transferred from deferred to tax-free each year while tax ($5226.25 (15%)) is being paid out of retirement income, further reducing net income. Having state income tax would reduce this even further - which is why many Californians move to Nevada after retirement, a state without income tax (and pretty good asset protection laws).

It would take about 20.58 years (350k / 17k) to move all assets to tax-free as single individual while staying in 15% tax bracket. In contrast, it would only take 5.32 years (350k / (96.7k-31k)) for married filing jointly. The price of having same advantage is to pay about 70% more tax each year.

Tax paid by married filing jointly after 5 years: $52262.50
Tax paid by single to convert the same amount as married filing jointly after 5 years: $86568.75

The solution is obvious - get married. It's clearly encouraged by the tax code. It's probably best to stop here for the purposes of retirement. (Tax code also encourages havings kids, with $1000 tax credit for each child and various additional deductions, but the cost of raising kids outweigh tax benefits rather quickly).

But marriage isn't for everybody. The next best step is to find ways to reduce ordinary income. At the risk of increasing chances of an IRS audit, having a legitimate home based small business generating sufficient earned income and operating costs may be the best option.

More thoughts to come.

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Re: Generation-X' Journal

Post by Cornerman » Sun Nov 27, 2016 6:00 am

Insightful update , thanks.

Changing politics can have severe consequences on planning for ERE, it also seems unfair, if you have "modest" savings compared to the ultra rich. You will be taxed for it. But it's also the group of people the government can skim the most out of, since they are the largest group.

If the money went to free healthcare and free education one could live with it, I could at least. Or at the very least sharply reduced costs. But it's going to things where society as a whole gains nothing. For the most part anyway, like spending more than half of every tax dollar on the military, and tax cuts for the ultra rich.

You're journal is inspiring , which I could maintain a pace like this. Good luck on the rest of the journey!

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Re: Generation-X' Journal

Post by Generation-X » Sat Dec 10, 2016 6:29 am

Cornerman wrote:Insightful update , thanks.

Changing politics can have severe consequences on planning for ERE, it also seems unfair, if you have "modest" savings compared to the ultra rich. You will be taxed for it. But it's also the group of people the government can skim the most out of, since they are the largest group.

If the money went to free healthcare and free education one could live with it, I could at least. Or at the very least sharply reduced costs. But it's going to things where society as a whole gains nothing. For the most part anyway, like spending more than half of every tax dollar on the military, and tax cuts for the ultra rich.

You're journal is inspiring , which I could maintain a pace like this. Good luck on the rest of the journey!
Thanks! And to you as well! I couldn't agree more about federal spending and tax cuts.

I suppose as more of us (ERE class?) become self-sufficient, the problem will lessen because more of us will be able to focus our skills and experiences for betterment of our families and communities, without the worry of time, unlike average worker bees of today.

It's a formula that seemed to have worked for generations, when there was time for family leisure, people and communities.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X » Sat Jan 07, 2017 6:20 am

Update 1/7/17

Image

Back in August of 2013, I had pondered a question, was 250k net worth enough or should I wait?

Now in January of 2017, glad I waited. What changes those 3 years have brought!

Added about 150k or so, mostly by savings.

I'm no longer fixated on finances as a mechanism for survival but rather as a challenge for an achievement - a game, if you will. Because I *know* everything will likely be okay.

Entering year 2 of projected net worth.

I've accelerated the savings. Plan is to sock away about 4k per month, pre-tax, for the next couple of years.

Will be on the look out for housing, bonds and stock markets to tumble.

If not, will continue on working and saving and collect interest, to stay ahead of inflation and to slowly increase net worth.

Be the tortoise.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X » Thu Mar 09, 2017 6:00 am

Update 3/9/17

Entered the second phase of retirement savings, and I've begun socking away around $4000/mo. since January.

I've already exceeded 2017 year end savings target. My immediate goal is to reach 500k in savings, hopefully by early next year.

The earliest retirement date is now 3.4 years.

Enrolled in a course at a local university and is currently engaged in a research project using various value investing approaches. (it helps that the professor was a student of Graham)

The knowledge gained here will be applied toward selection of companies to be purchased, hopefully, after a market crash. But this 0% environment definitely has legs as it affects valuation of companies quite a bit.

Another interesting discovery - a realistic inflation rate in the United States is about 5% per year. This really changes things.

Also may have found a way to retire from the system and delay the pension while maintaining healthcare. It will require changing jobs and looking into details and impacts to determine if it's viable.

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Re: Generation-X' Journal

Post by MDFIRE2024 » Thu Mar 09, 2017 8:44 am

Generation-X wrote:Update 3/9/17
Another interesting discovery - a realistic inflation rate in the United States is about 5% per year. This really changes things.
Hi Generation-X. Interesting journal. I'm also a GenX. A late one, I guess. Born in 1982.

Why do you think, that the realistic inflation rate is 5% per year? It's an interesting point. I would really like to know where you have read it, because it influences the retirement plans.

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Re: Generation-X' Journal

Post by Generation-X » Thu Apr 13, 2017 4:26 pm

MDFIRE2024 wrote:
Thu Mar 09, 2017 8:44 am
Generation-X wrote:Update 3/9/17
Another interesting discovery - a realistic inflation rate in the United States is about 5% per year. This really changes things.
Hi Generation-X. Interesting journal. I'm also a GenX. A late one, I guess. Born in 1982.

Why do you think, that the realistic inflation rate is 5% per year? It's an interesting point. I would really like to know where you have read it, because it influences the retirement plans.
Hi NDFIRE2024, great question. Please see following links for your consideration:

http://legacy.sandiegouniontribune.com/ ... flate.html

"John Williams, who spent more than two decades as an economic consultant to Fortune 500 companies, said the government figures understate the true rate of inflation."

"Williams, who runs Shadow Government Statistics in Oakland, which tracks changes in inflation, unemployment, the gross national product and other data, said that over the past 25 years, the government has changed the method of calculating price increases in ways that have lowered the reported inflation rate."

http://www.shadowstats.com/article/no-4 ... easurement


Inflation using pre-1983 method (before Ronald Reagan)
http://www.shadowstats.com/imgs/2013/834/image006.jpg
.
.
.
Inflation using 1990 method (Clinton)
http://www.shadowstats.com/imgs/2013/834/image008.jpg

If we use the original pre-1982 method of calculating inflation, the running inflation rate is probably close to 10%.

If we use the first modified pre-1998 method of calculating inflation, the running inflation rate is probably close to 6%.

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Re: Generation-X' Journal

Post by MDFIRE2024 » Fri Apr 14, 2017 11:10 am

@Generation-X
Thank you for the information. It is eye-opening. Haven't read about that yet. I guess I have to adapt my plans to that. I used to calculate with an inflation rate of about 2%. I think if it is true for the US, it is also applicable for Germany.

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Chad
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Re: Generation-X' Journal

Post by Chad » Fri Apr 14, 2017 11:27 am

Careful of Shadowstats and other sites like it (Zero Hedge, etc.). It's not that they can't be useful, it's that they have their biases, some stronger than the biases of the ones they criticize. Their models also have the same faults as the models they are criticizing:

https://www.bloomberg.com/view/articles ... ent-models

https://www.washingtonpost.com/news/won ... e82b05fb00

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Re: Generation-X' Journal

Post by Generation-X » Fri Apr 14, 2017 7:11 pm

Chad wrote:
Fri Apr 14, 2017 11:27 am
Careful of Shadowstats and other sites like it (Zero Hedge, etc.). It's not that they can't be useful, it's that they have their biases, some stronger than the biases of the ones they criticize. Their models also have the same faults as the models they are criticizing:

https://www.bloomberg.com/view/articles ... ent-models

https://www.washingtonpost.com/news/won ... e82b05fb00
This is a good point as well. I'm pretty sure knowing the exact figure of inflation per given year is a pretty daunting task.

Even aside from these, there are other indicators, such as the price of gold, "big mac index" etc.

Just from personal experience, I know that in the last 7-8 years, price of "2 for 2" at the McDonald's has risen to "2 for 3" and to "2 for 4" as of year ago. (9%, using rule of 72 - 72/8 = 9) The rise in cost of education, healthcare, car insurance, gas and even bridge tolls, all point to RISE in inflation - not to mention recently passed $15/hr. minimum wage by 2022.

So what's the rate? I tend to prefer the way BLS used to calculate them pre-1982 at 10% but being in the middle of the road would indicate 6% after first revision in 1998. I certainly do not believe published average inflation figure of 3.5% - because even I can TELL, by living in the real world that things are getting expensive much faster than at 3.5% per year.

Another good example is that actuaries give 6% interest as even money for money held in defined benefit accounts. If actuaries are willing to give 6% interest for even money, then I would have to say real inflation is probably higher than 6%.

The real solution in staying ahead of inflation, most likely, is to make double digit returns either by working more or though investments.

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Re: Generation-X' Journal

Post by Generation-X » Fri Apr 14, 2017 7:34 pm

April 2017 update

Financial Target graph as of April 2017:

Image

Learning much from the university and currently engaged in evaluation of several companies using multiple analysis models. Also learned several tools and techniques to help with investments. Planning on a market experiment in the next several weeks.

Savings is going as planned and adjusting to new income level has been somewhat challenging but not as bad as originally imagined.

3.34 years to earliest retirement date.

If things go as planned, in 3 1/2 years, I will be able to retire with about $2400 net monthly, 400k in savings and healthcare. Not really enough to live comfortably here but probably could get by by watching the budget and reducing the standard of living.
Last edited by Generation-X on Fri Apr 14, 2017 11:13 pm, edited 6 times in total.

George the original one
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Re: Generation-X' Journal

Post by George the original one » Fri Apr 14, 2017 7:42 pm

Generation-X wrote:
Fri Apr 14, 2017 7:11 pm
Just from personal experience, I know that in the last 7-8 years, price of "2 for 2" at the McDonald's has risen to "2 for 3" and to "2 for 4" as of year ago. (9%, using rule of 72 - 72/8 = 9) The rise in cost of education, healthcare, car insurance, gas and even bridge tolls, all point to RISE in inflation - not to mention recently passed $15/hr. minimum wage by 2022.
As Chad said, you have to be careful with inflation data because the examples you're giving are cherry-picking and ignoring history by selecting a recent starting point (which may or may not be valid). It's why a consistent basket of goods is used by the Feds.

Minimum wage, for instance is only $5.15/hr in Georgia & Wyoming and VERY unlikely to be going to $15/hr by 2022 unless Congress does something(http://www.ncsl.org/research/labor-and- ... chart.aspx).

McDonald's held their $1 price menu for a decade or more, so averaging out over 15-20 years gives a different inflation number; odds are it will stabilize if corporate profits hold (or go down if there's another burger war). Healthcare & car insurance have an applicant age & risk component that is handily forgotten. Gas has a volatile price, which is one reason energy is usually excluded from inflation figures. Then you can look at technology purchases and easily show how there is anti-inflation (care to price a 50" HDTV plasma screen from 2005 against a 50" LCD 4k screen today?).

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Re: Generation-X' Journal

Post by Generation-X » Fri Apr 14, 2017 8:37 pm

George the original one wrote:
Fri Apr 14, 2017 7:42 pm
Generation-X wrote:
Fri Apr 14, 2017 7:11 pm
Just from personal experience, I know that in the last 7-8 years, price of "2 for 2" at the McDonald's has risen to "2 for 3" and to "2 for 4" as of year ago. (9%, using rule of 72 - 72/8 = 9) The rise in cost of education, healthcare, car insurance, gas and even bridge tolls, all point to RISE in inflation - not to mention recently passed $15/hr. minimum wage by 2022.
As Chad said, you have to be careful with inflation data because the examples you're giving are cherry-picking and ignoring history by selecting a recent starting point (which may or may not be valid). It's why a consistent basket of goods is used by the Feds.

Minimum wage, for instance is only $5.15/hr in Georgia & Wyoming and VERY unlikely to be going to $15/hr by 2022 unless Congress does something(http://www.ncsl.org/research/labor-and- ... chart.aspx).

McDonald's held their $1 price menu for a decade or more, so averaging out over 15-20 years gives a different inflation number; odds are it will stabilize if corporate profits hold (or go down if there's another burger war). Healthcare & car insurance have an applicant age & risk component that is handily forgotten. Gas has a volatile price, which is one reason energy is usually excluded from inflation figures. Then you can look at technology purchases and easily show how there is anti-inflation (care to price a 50" HDTV plasma screen from 2005 against a 50" LCD 4k screen today?).
I think where inflation is important are in the areas of basic necessities. Such as energy and food - which CPI doesn't even account for in the calculation. Cost of healthcare is clearly a basic necessity. And minimum wage of area where you live, because minimum wage affects cost of everything. Education for children, for many families, is an important financial consideration. The points being made in your case has more to do with purchasing power parity than inflation, imho. A true epidemic throughout US right now is the poor babyboomers who can not support themselves and are left forgotten because the money they retired with in savings, couldn't keep up with the inflation. And they are barely subsisting. If inflation wasn't a factor, then we shouldn't be seeing such social epidemic even just for basic necessities, and yet here we are.

Perhaps $1 burgers can be explained as loss leaders, I don't think I have to explain rising cost of health insurance and car insurance to anybody, last saw $1 a gallon in gas price, top gun was playing in the theaters and haven't seen $1 a gallon since then, and I don't need a television to survive.

I think 5-6% return is the bare minimum when shooting for even money. To stay ahead of inflation, I would seek double digit returns. That would be the threshold I would be comfortable with.

PPP and lowering standard of living are ways to COPE with inflation (and definitely should be considered). If I truly wanted freedom above all else, I would sell everything I have right now and move to parts of South America, Africa, Asia or Eastern Europe (and hope that inflation in time will not catch up to my savings).

Inflation is truly evil and the way it takes away a person's dignity and freedom - undetected by masses and not knowing why their money doesn't go far as it used to - I'd rather not trust the figures by those who created it.

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Re: Generation-X' Journal

Post by George the original one » Sun Apr 16, 2017 4:00 pm

Generation-X wrote:
Fri Apr 14, 2017 7:11 pm
If actuaries are willing to give 6% interest for even money, then I would have to say real inflation is probably higher than 6%.
If you really believe this, then you should act on it by taking the largest fixed rate loan long term you can possibly find (e.g. 4% 30-yr mortgage) and pay it back with cheaper money in the future.

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Re: Generation-X' Journal

Post by Generation-X » Sun Apr 16, 2017 7:56 pm

George the original one wrote:
Sun Apr 16, 2017 4:00 pm
Generation-X wrote:
Fri Apr 14, 2017 7:11 pm
If actuaries are willing to give 6% interest for even money, then I would have to say real inflation is probably higher than 6%.
If you really believe this, then you should act on it by taking the largest fixed rate loan long term you can possibly find (e.g. 4% 30-yr mortgage) and pay it back with cheaper money in the future.
I believe that's exactly what many people do. A single family home, by the time all the costs are added up, has been pretty much EVEN MONEY in many people's experience from different walks of life - it gives you a place to live, and in the end it gives back even money IF YOU TIME YOUR SELL CORRECTLY but it's NOT AN INVESTMENT.

Buy a house as an inflation hedge?

https://www.bogleheads.org/forum/viewtopic.php?t=34781

How to Afford Anything

http://www.kenrockwell.com/tech/how-to- ... ything.htm

If there was no cost of upkeep nor insurnace nor property tax, then a single family home would probably net a decent small positive yield but then again that would be too easy.

HOWEVER, if your income level was high enough to support a million dollar mortgage, an interesting thought exercise using mortgage as a tax deduction may work - especially now in California, where typical mortgage for a new single family home is anywhere from 450k - 900k and if both spouse can bring in about 250k/yr. :

The Maximum Mortgage Tax Deduction Depends On Income

http://www.financialsamurai.com/maximum ... on-income/

** And this is one of the reasons for keep looking at the numbers for retirement and weighing against inflation. My six figure income will not get very far in time especially if the income dropped significantly or stopped growing. And in retiring, I will experience both. I do plan on using a fixed long term mortgage as an inflation hedge, in the right area for the future, upon retirement - because we have seen and experienced this in our area in the last 50 years or more. My case is special however, because both the mortgage and income are very likely, perpetual. So in an event of catastrophic real estate crash, the worst possible outcome would be that I have a place to live. The best outcome would be, that real estate would outperform the market. (and in some areas of California, they have). In the current environment, rents have gone up so much that it's better to own, given the mortgage rate (and let's just say inflation is 3.5% - mortgage rate is 4.5%. If inflation is higher than 3.5%, well then I can't lose now, can I? :) ). The calculation that I am focusing on are the allotment percentages for mortgage and cost of living and matching the date of retirement accordingly. If the basic necessities are covered by pension - a place to live, healthcare, utilities and food, then rest of savings can be used for living life - and for other personal ambitions or interests.

*** Another thing to consider is the tax rate at retirement. I believe it will be higher for many people, those with pension and savings that are in tax deferred accounts. Many wait until their kids graduate from college, house is almost paid off and pension is almost equal to net income before they retire. They're in early to mid 60's and soon will collect social security on top of pension income. Not soon after, RMD kicks in. So they have their regular income from pension, add social security income and add RMD on top of that - and nothing to write off against and there goes your tax rate.

My thought is to retire early with enough pension income to cover a fixed mortgage and basic necessities, take the tax deduction, delay the social security until 70 as an inflation hedge and transfer accrued savings gradually from tax deferred to tax free at a lower tax rate before RMD kicks in while generating investment returns in tax deferred accounts. The target investment return will be minimum double digit return and I honestly believe this is very much attainable because I'm not seeking a double digit return on a billion dollars. :) - AND because I'm retiring earlier, my investment horizon will be at least 20 years. And the worst case here, again, is that most likely, I will not have to work after I retire.

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Re: Generation-X' Journal

Post by George the original one » Mon Apr 17, 2017 10:32 am

You're thinking home ownership and I'm really suggesting rental property when it comes to the investment. There's no reason for you to pay the mortgage when other people will pay it for you in the form of rent.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X » Mon Apr 17, 2017 7:18 pm

George the original one wrote:
Mon Apr 17, 2017 10:32 am
You're thinking home ownership and I'm really suggesting rental property when it comes to the investment. There's no reason for you to pay the mortgage when other people will pay it for you in the form of rent.
I think we're beating this horse to death, but generally, if the renter is covering the mortgage payment on a cash flow positive rental then neither the interest rate nor the inflation would matter.

Anyway you cut it, you can not get away from inflation. We can COPE with inflation by utilizing purchasing power parity or reducing standard of living or having real wealth like a vegetable garden or fruit trees. The other way is to work more or invest and hope for a good return.

How much more should we work? (i.e. what's the rate of inflation? or how much should I have before I retire?) Well, for the purpose of your retirement, that's a personal choice as it's not quite straight forward. I certainly will not be using 3.5% for my retirement, as a mistake here, can mean much suffering later on.

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Re: Generation-X' Journal

Post by Generation-X » Sun Apr 23, 2017 12:43 am

The 15% tax bracket - the best tax bracket to be in after retirement for me! (as of 2017)

The more I find out about the 15% tax bracket, the more I fall in love with it!

The 15% tax bracket provides the following benefits:

* 0% tax on qualified dividends (https://en.wikipedia.org/wiki/Capital_g ... ted_States)
* 0% tax on LONG TERM capital gains ( https://en.wikipedia.org/wiki/Capital_ ... ed_States )

2017 tax bracket: https://en.wikipedia.org/wiki/Income_ta ... ted_States

By staying in the 15% tax bracket and using tax deductions and the two rules above, I can (am planning to):

1. generate some non-taxable after-tax income via qualified dividends and -
2. with market willing, lower the cost basis of after-tax investments or -
3. boost the non-taxable income by selling shares with long term capital gains and -
4. In addition, 15% tax bracket will ensure a reasonable amount of tax paid per amount converted from tax deferred to tax free.

For singles, using standard deduction in 2017, there is no tax up to $10,400 (6350 std. deduction + 4050 personal exemption) of ordinary income. Alternatively, this means I can stay in the 15% tax bracket as a single filer up to $48,350 (37950+10400) using standard deduction. There are $5226.25 in federal tax and $1214 in state tax (estimated based on state tax calculator) for an income of $48,350. After taxes, that comes to about $3400 per month (round $90 down). Wow. If the house is already free and clear, then 3400*12 = 40800 - (yearly property tax) is the amount that can be transferred from tax deferred savings to tax free. For a 300k home here in California, 1% property tax is 3000/yr. so 40800-3000=37800 is the amount that can be transferred to tax free. In my opinion, the downside to owning a home free and clear in California is the asset protection - only 75000 of equity can be claimed (under option 1. 26800 for option 2) under homestead exemption in bankruptcy. That means, if the value of equity of home exceeds 75000, then the house is fair game for creditors in bankruptcy. In addition, California has weak asset protection laws for Roth IRA's. I would have to file bankruptcy to protect IRA assets under federal bankruptcy protection, up to 1.2 mil or so, adjusted for inflation. The other solution is to move to states like WA or TX with strong state laws protecting IRA's without having to file bankruptcy.

Let's add mortgage in here. Rule of thumb is $725 per every 100k. For 300K home, that's about 2200/mo.
Interest is about 1200/mo. or 14400/yr. and property tax is 1% or 3000/yr. for a total of about 17000 in deduction.

To make the mortgage payment, I have to make 2200/mo. and to fully utilize 15% tax bracket, I have to make 7300/yr. for federal and state income tax. And to pay the property tax, I have to make 3000/yr. - that's a total of 36700/yr. Now, per earlier calculation, I can stay in the 15% tax bracket making up to $48,350 using the standard deduction, but if I'm taking mortgage deduction then I lose the 6350 standard deduction but then gain 17000 in itemized deduction. This means I can make up to 48350 - 6350 + 17000 = $59,000 and stay in the 15% tax bracket. The difference between 59000 - 36700 = or $22,300 is the amount that I can now transfer from tax deferred savings to tax free. Clearly having a mortgage is not the best, but it does provide a shelter and a small side benefit is that as long as the equity in the house is below 75000, the house is protected from creditors.

By staying in the 15% tax bracket, income can be generated tax free in the after-tax savings by utilizing qualified dividends and long term capital gains. Income can be generated at modest tax rate (15%) by investing and converting gains to tax-free in the tax-deferred savings.

Generation-X
Posts: 89
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Sun Apr 23, 2017 1:52 pm

Some information regarding how different types of retirement accounts are protected differently in CA: (i.e. 401k - good protection. IRA- poor protection.)

http://www.nolo.com/legal-encyclopedia/ ... ornia.html

http://www.nolo.com/legal-encyclopedia/ ... ssets.html

http://www.courts.ca.gov/documents/ej155.pdf

http://www.harleyfeinstein.com/keeping- ... y-in-bank/

http://www.bankruptcysoapbox.com/secret ... xemptions/

and for the completeness and the joy of reading - here's the CA bankruptcy court manual:

http://www.cacb.uscourts.gov/sites/cacb ... mplete.pdf

Why read about bankruptcy? It's about protecting your assets. Just as tax laws and investing go hand-in-hand, bankruptcy laws and asset protection go together, imho.

Saving and investing is clearly important for retirement. And knowing how to protect what you've saved is just as important. The ire for me is that it takes money to protect money to avoid bankruptcy - such as an umbrella insurance. But the cost of protection is fairly reasonable for what it protects (within limits), so I will probably continue to use umbrella insurance.

But ultimately, the best way to protect the savings, is knowing what the creditors (other people) can and can not touch prior to and after the bankruptcy, as dictated by law. And because I live in California and the way our bankruptcy laws are structured, to fully utilize the benefits offered by Roth IRA and to protect it, I will have to be knowledgeable about bankruptcy and be prepared to use it if necessary.

Generation-X
Posts: 89
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Mon Apr 24, 2017 12:24 am

IRS Rollover Chart
https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

Required Minimum Distribution worksheet
https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

RMD
AGE / DISTRIBUTION PERIOD / PERCENT TO WITHDRAW
70 / 27.4 / 3.65%
71 / 26.5 / 3.77%
72 / 25.6 / 3.91%
73 / 24.7 / 4.05%
74 / 23.8 / 4.20%
75 / 22.9 / 4.37%
76 / 22.0 / 4.55%
77 / 21.2 / 4.72%
78 / 20.3 / 4.93%
79 / 19.5 / 5.13%
80 / 18.7 / 5.35%
81 / 17.9 / 5.59%

** NOTE: In the worst case, you get to keep 60 cents on the dollar after taxes.

Generation-X
Posts: 89
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Sat May 06, 2017 9:19 pm

Status Update May 2017

* It looks like I will be reaching the 500k cash mark sooner than I thought. Instead of year end, I will be reaching this short term goal in approximately 4 months.

* The more I examine things in detail in preparation of retirement, the more I realize that I made the right choice by staying put and working longer:
- Saved a big sum of money in healthcare costs by staying put and working longer. Not relying on Obamacare was a smart choice.
- The pace of inflation is much higher than previously thought. By working longer, I can prepare for true, higher cost of inflation.
- I will shift focus away from net worth and build and strengthen a more robust annual cash flow by leveraging pension, income types and tax laws. The biggest asset in this regard is the pension. I plan to augment and strengthen the annual cash flow income using pension income as the base and the pillar.
- I will strive for zero income tax in retirement and will structure income sources around this concept.

In 3 years, I will have my first chance at retirement with 2400/mo in after tax pension income with 500k in cash. This is after 20 years of working and though I didn't know this consciously, I was somewhat of a saver, just not a hardcore saver. Looking back, this habitual act of 'savings something' has truly helped me.

I will detail some of the steps that I have taken recently to leverage savings in future posts. I will also start the research and detail building of annual cash flow income around zero income tax that makes sense for my particular situation.

MDFIRE2024
Posts: 278
Joined: Fri Jan 06, 2017 5:09 pm
Location: Germany

Re: Generation-X' Journal

Post by MDFIRE2024 » Sun May 07, 2017 12:42 am

That is a great status update.

Your progress is fastern than you thought it would be. Why is that so? You save more than expected?

I'm curious about the details which you mentioned.

I guess the tax initatives from Trump could help you, don't they. Unluckily, here in Good Ol Germany, taxes are quite high. That makes it a bit more difficult to retire earlier for me. Anyway, I interested in your change from employee to retiree.

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