Early Retirement Extreme Forums

#011 06/05/2013 -- Potential Avenues for Personal Growth in FI
Before I delve into the topic of this journal entry, I would like to say something about the terminology I use. When I use the acronym "FI", as I have done in the title of this journal entry, I mean to say a certain financial state in which we have the option not to work in order to meet our needs. The definition of "our needs" is something that's fairly arbitrary, but as you can guess our needs can be met easily depending on our frugal tolerance and skill. When we're in FI we'll have the option of counting flowers on the wall or punishing ourselves as we have in the accumulation stage of our journey. Some people in the community are bullish on the word retirement, but I am not as fond of the term because of the number of other images it conjures. Communities are not always on the same page with preferred terminology, such as the Star Trek community where there is a huge difference between Trekkie and Trekker.
Anyway, one of the things I may pursue in FI is music or other forms of art. I had a largely chaotic childhood and adolescence. No one (including me) ever gave the thought of exposing me to music or musical instruments in a serious way. I know for sure I am not a good singer, but I wish I had at least become somewhat acquainted with a musical instrument. I can't draw all that well, especially three dimensional renditions, but I know I have some artistic aptitude because I've been known to make some interesting powerpoint slides (that has to count for something!). I want to see where delving into the world of art might take me. I've been doing left brain stuff all of my life, so who know what sort of right brained skills I have.

#012 07/01/2013 -- May Dividend Income Update

The month of June was a strong month for us. We increased our annual passive income by $370 to a total of $10774. Of the $370, $11 came from a company that increased its dividend this month. Although low compared to previous months, I’ll take a $11 increase in passive income any day. The automatic increase in dividend income will give us an organic margin of safety in retirement.



This month we took advantage of a nice market pullback that opened up some buying opportunities. With the prospect of Quantitative Easing getting throttled down, there will likely be more price volatility in the market in the weeks to come. We will try to capitalize on those as much as we can.

We are on pace to achieve 12000 in passive income by year’s end. At that point we will have reached another milestone in our journey. We will have the option of retiring in a very cheap US city and pursue activities that don’t require us to spend the bulk of our waking hours in an office.

I almost forgot to mention that in the month of June we received $1308 in dividends. That’s our biggest monthly total to date. It’s immensely encouraging to see a nice spike like that. I estimate that in about 18 months or so we will average around that amount each month. That’s when we’ll call ourselves FI.

Great work! I like the focus in your journal. I think that most of the journals don't pay much attention to actual FI income - compared to savings rates and money in the bank, so it's refreshing to see something with a different focus.

Thanks for stopping by, m741.

I'm having fun following your journal as well. I'm looking forward to hearing about your adventures in the next few months.

#013 08/03/2013 -- July Dividend Income Update

This month we have surpassed the $11K/year mark! Although 11K is not one of the horizontal lines in the passive income graph I publish every month, it’s still a nice round number worth celebrating. There are plenty of places in the world (central and south America, Thailand, Philippines, the caribbean, etc.) that we can sustainably retire in if we so desired. For the time being, however, we would like to unlock more areas of the Possibility Space I wrote about in entry #001. As many people in this community have pointed out, it’s very easy to get caught up in the “one more year” cycle and put yourself in a perpetually-about-to-retire position, but we don’t like to think of our current position that way. We want to grow our passive income to a point (e.g. 16K/year) where many areas in the US are available for us to live in a sustainable way.

This month we increased our annual passive income by $338 to a total of $11113. Of the $338, $44 came from companies that increased their dividends this month. I will never get tired of watching dividends grow on their own, even if it’s relatively modest amount like $44. Oh, who the hell am I kidding? $44 is not modest! I’ll take that number any day.



The market continues to be richly valued, especially after Uncle Ben assured everyone that the QE sugar high will continue. Thankfully, some great companies have experienced temporary pullbacks that we have taken advantage of. I am confident that we will reach our goal of $12K/year, and if we are lucky we might even reach $13K.

This month we received $480 in dividends, which appears low compared to other months. This is due to an artifact of when dividends appear in our brokerage account. Two companies paid dividends on the 31st that didn’t appear on the account until the 1st of August, which means that next month’s tally will appear higher.

#014 08/31/2013 -- August Dividend Income Update

This was a record month for us. We managed to increase our passive dividend income by $625! This month was exceptionally good because we got some bonuses and the market retreated a bit, opening up some great buying opportunities. Our yearly passive income from dividends now stands at $11738. Lately, we have been increasing our passive income by $1000 every couple of months, which is above our average of about $1000 every three months. It’s progress of this sort that make FI appear close enough to taste.

We also received a handsome $842 in dividends this month, which were promptly reinvested as they came. I should note that, of the $625 increase in income, $28 of that came from companies that increased their annual payouts this month.



A word about portfolio maintenance. This month I decided to pair down our stake in Intel (INTC) because they failed to raise their dividend at the usual time and because they have been experiencing genuine difficulties increasing their earnings. They have been positioning themselves to take a larger share of the mobile market, so their waning earnings might be a temporary and worthwhile setback. INTC has a new CEO now, who might decide a different sort of dividend policy from the one that shareholders have enjoyed for years. INTC is beast to be reckoned with, but I am just adjusting my stakes to fit my risk profile.

We are fast approaching the $12K/year line. That will officially open the “Cheap US City” corner of possibility space. We’ll cross the $12K/year mark in September, so if we assume a $1000/(3 months) rate of increase in our passive income, then we’re set to reach our coveted $16K/year mark in about a year. So close, yet so far...

I have to admit that I think I am beginning to experience “ERE Senioritis”, and I am often tempted to just sell everything and run off somewhere, especially when I have a rough week at work and feel like shit because I can’t get enough sleep at night. Lately I’ve been regarding certain things at work with a certain level of detachment that I’ve never been capable of achieving in the past. I will devote another post sometime about ERE Senioritis because I believe it’s a real force.

I have to admit that I think I am beginning to experience “ERE Senioritis”, and I am often tempted to just sell everything and run off somewhere

LOL, at least I'm not the only one! In all liklihood, DW would probably be very annoyed if I did... on the other hand, if it was due to a really bad day at work, she would also understand and rise to the task.

In the meantime, the countdown continues...

Yeah, I feel that as I get closer to FI it will come down to one really bad day at work that will put me over the edge. I've been getting a few of those lately but have decided to keep on trucking.

#015 09/04/2013 -- ERE Senioritis

As of right now, we have about 10+/-2 months left in our journey to accumulate enough dividend paying assets that will generate over 16K/year in passive income. As I mentioned in my last journal entry, I think I am beginning to feel “ERE Senioritis”. Just like it’s high school counterpart, ERE Senioritis is the palpable feeling that you get when you are about to graduate from a certain stage in your life and very much feel like, well, just getting to the next stage already. Tasks and situations that normally you would have taken seriously suddenly take a backseat and don’t appear as important to you anymore. In other words, you feel like just getting on with it.

These past few weeks I’ve definitely felt symptoms of what I believe to be none other than ERE Senioritis. When I get on the train to go back home at the end of the work day I get this feeling that this may be the last time I leave work and will never come back. I also get a feeling that commuting home is a transient thing that will wither away soon. Another symptom I’ve identified is the loosening of my professional composure, especially when presented with bureaucratic bullshit. I’ve found myself promptly pointing out to the person in front of me how silly that particular rule/process/horseshit is. Basically, I am becoming less concerned with rocking the boat.

Sometimes I feel like a large portion of the people in our company behave like the Vogons in the Hitchhiker's Guide to the Galaxy. They know nothing but procedures, forms filled out in triplicate, and a religious adherence to protocol no matter how ridiculous it is. Sometimes I feel the bureaucratic bullshit is stacked up so high that you need wings to stay above it.

I hope to take advantage of my ERE Senioritis when we approach end-game. As a lot of people in this community are aware of, it is very easy to get caught up in the “one more year” cycle and push retirement too far into the future. I hope that my ERE Senioritis will help counter that other feeling. Why deal with Vogons when you can live frugally and do what you want?

#016 09/06/2013 -- To SEPP or not to SEPP? That is the question

Since I started my corporate job in 2006, I have been making the minimum contribution to my 401(k) in order to meet my employer’s 4% matching contribution. Over the years the balance on the account has reached a nice amount. When I call it quits next year my plan is to roll over the 401(k) into an IRA. I will also deploy the money into a basket of strong dividend paying stocks, with a focus on companies with high dividend growth. I will then have to choose from the following options:

1) Just reinvest the dividends and let the account grow. This is the default option that I always thought I wanted to take. It’s certainly a safe option that will provide me with additional income in old age or also provide cash in case of emergencies.

2) Convert the IRA into a ROTH. The advantage of this route is that once you have the money in a ROTH (after a certain vesting period, which I believe is five years) you can make tax free withdrawals on the contributions. Converting an IRA to a ROTH can be achieved in two ways. One option consists of just converting the whole thing right away and pay some (well, a lot of) taxes. I don’t think I will follow that route. The second option consists of slowly converting IRA to a ROTH by transferring around 9K per year, thereby avoiding paying taxes. This process would take years and relies on the fact that in the first few years of FI our income will be low. The amount that you can transfer penalty-free will depend on your income, which means that the process will slow down as our income increases. I’m seriously thinking of following this option because it will mean making use of the tax advantages of a ROTH IRA. It does require quite a bit of footwork, which I may end up not having the patience for, especially if I need the money.

3) Initiate a SEPP. My understanding is that a SEPP (Substantially Equal Periodic Payments) is an implementation of the 72(t) exception that allows you to take distributions from your IRA penalty free. There are several ways to institute a SEPP, and I’m not going into them here, but basically you promise to take distributions of a certain amount each year in order to avoid paying the early withdrawal penalties that you would normally incur. I’m thinking of taking the option that makes distributions similar to those of an annuity, which would stay the same up until I turn 59.5. I wouldn’t mind if the distributions don’t keep pace with inflation because they will only supplement our income in a meaningful way in our first few years of retirement. I still have to think about the best SEPP option, but regardless of what I end up doing, taking distributions from my IRA without penalty would help us a great deal in our first years. In fact, I could probably call it quits right now if I implemented a SEPP. So, needless to say, I am very much tempted to follow this option.

4) Just take small distributions and pay the 10% penalty. If I keep the distributions to a manageable amount, the penalties may not amount to much. The advantage of this option is that I wouldn’t have to play the accounting gymnastics of a SEPP or a ROTH conversion. I don’t think I’ll follow this route because the penalty (no matter how small) might feel like a crime against nature.
Right now I am leaning toward options 2 or 3. Option 1 no longer appeals to me because I am interested in collecting my money now, not when everyone else thinks I should. I forgot to note that with option 3 the distributions would be entirely funded by the dividends. In addition, if I time things right with the interest rates, the dividends will be greater than the annual distributions, which means that the principal and reinvested (residual) dividends will be allowed to grow. Yes, you heard it right, low interest rates might actually act in my favor.

In any case, it’s good to know that I have some options in front of me.

At your age, with your reasoning, option 3 sounds like a low maintenance way to go.

My personal preference is option 2, but I've never understood how you calculate what qualifies as "contributions" when you do so. Is it a percentage of each conversion or is it all of the first few conversions until you've used up your allotment?

I honestly don't know if the conversion dollars count as regular contributions or if they are somehow considered some other type of contribution. I learned about option 2 from this guy "Mad Fientist". He wrote a very nice post in his blog on the subject:

http://www.madfientist.com/traditional_ira_vs_roth_ira/

If I were to follow through with option 2, I would definitely consult my tax person.

Why not implement a combination of all 3 on an as-needed basis?

Any amount that you can afford to start converting to Roth now will lower your overall tax expenses in the future (and even if your income ends up putting you into the taxable range, your total tax rate on the Roth conversion will be much lower than the income + 10% penalty on the IRA withdrawals). A small amount of planning and effort would significantly extend the value of your assets you've worked so hard to accumulate. Just my 2 cents.

@robotic: True, it's certainly possible to navigate through all possibilities as needed. The only thing one has to watch out for, though, is that if you do decide to implement a SEPP there's no going back (well, according to the rules, I think you can change the sort of SEPP that you implement, but you have to stick with a SEPP nonetheless until you are 59.5).

#017 10/05/2013 -- September Dividend Income Update

The month of September proved to be another great month for us. The big news this month is that we received a record of $1398 in dividends! Yes, it’s a quarterly fluctuation, but an awesome fluctuation nonetheless. This past month dividend growth investors across the land saw record breaking dividend income numbers, we are all rejoicing.

We increased our dividend income by a staggering $624, which is almost as high as our all-time record of $625 last month. We have managed to increase our dividend income by a high amount due to investments in REITs, which are still attractively priced. In addition, Microsoft increased its dividend by a lofty 22%! That added about $100 to the total dividend income increase for the month of September. It was as if we plowed $3000 into our MSFT position. It is this type of organic dividend increase that will make our income grow faster than inflation for decades to come.



Our annual passive income from dividends reached $12,362 in the month of September. We have now officially crossed the $12K line, a very important milestone because it means that from now on we will be getting (on average) over $1000/month in dividend income. With enough frugal skill we can now choose to retire to a cheap US city. We have unlocked large portions of possibility space, namely states in the midwest and the south. My wife and I are very happy with reaching $1000/month in dividend income, and the implied possibilities are quite intoxicating. Three years ago we decided that dividend growth investing is the way to go for us and we are very happy with the results so far. I remember the days when we were making $50/month in dividends, my wife thought it was a depressing amount. The $1000/month seemed like a distant and dreamy goal, but here we are basking in the glow of that accomplishment.

I have to admit that reaching the $12K line has made my ERE senioritis a bit worse. When I commute into work I keep getting this feeling of, well, transientness...as if I am writing the final words of a chapter in my life. I look around and I try to wonder how these memories will appear several years from now when I am well acclimated to my new, non-9-to-5 lifestyle. I will probably wonder, why did I get so angry with that one dumbass at work? Why did those TPS reports depress me so much?

And by the way, it's not so much about reaching retirement as it is about leaving the 9 to 5 mentality. I plan on taking on some cool projects that I've always wanted to do. These new projects may or may not provide an income, but that will be perfectly fine.

Congrats Spoonman on your dividend progress. That is huge.

wrt to breaking up the senioritis.

Can you engage in some of the cool projects now instead of waiting until you relocate or stop FT work?

Can you take a bit of time off work or lessen your overall work commitment?

Great stuff @spoonman!

@sshawn: Thanks for dropping by! I might start delving into a project one of these days. It will be kind of hard starting something at this stage for two main reasons, 1) I will typically too tired after coming home from work to devote quality time to the activity, 2) My wife may complain I'm not spending enough time with her =).

About lessening my work load, well it would mean taking less money home and pushing the FI horizon farther down the line. But the real issue with doing that is that I really don't feel like dealing with all the questions it would raise at work. I'm just gonna keep on trucking full time for another year and then pull the trigger.

I will say, though, that I have been active flexing my frugality muscles lately and that has proved to be a fun exercise. The following are things that I have done or will do soon:

• 1. Ditched my expensive cell phone plan for a pay-as-you-go plan
  2. Canceled cable television for over the air antenna, Netflix and Hulu, a reduction of $80/month
  3. Donated about 50% of our possessions. These past few weeks we have spent a lot of time trying to sell our house and in the decluttering process we have given up a lot of things that we don't need. Another 10% or so we have sold on Craig's list
  4. My contribution to our food expenses is now well below $200/month. I've achieved that by following a simple diet, bringing my lunch to work, and cooking my own dinners. My wife also brings a ton of free produce from work (something like an $80/month value, perks of her office job). Her side of food expenses hovers around $200/month, but it's been reduced thanks to a new diet, and I'm very confident we can drastically reduce that further once she doesn't have to deal with a 1.5 hour commute (each way) in LA traffic
  5. As I pointed out above, we are in the process of selling our house, which is by far our biggest monthly expense. In the near term that may still not make that big of a difference because we are planning to move to a fairly expensive apartment that is closer to where my wife works (the flipside is that we will be close to a grocery store, a library, and parks. Biking and walking will become a viable option to get around). In the long term it will pay off because we will have the flexibility of renting a cheap studio when we decide to leave the 9-5 lifestyle. In other words, we are positioning ourselves to have very low housing expenses
  6. I have been commuting by metro for two years now. When we move to our new place my wife will give the bus a try.
  7. We will donate my wife's car very soon and just use my car

I plan on writing a more detailed account of our experience selling our house. Stay tuned.

#018 11/03/2013 -- The house is sold!

Like many events that motivate me these days, it all started with a bad day at work. Looking back, I can’t quite remember what prompted me to initiate the set of events that have culminated in the selling of our house. I was basically having a shitty day at work and was tired of dealing with all the stupid bureaucracy. The details don’t matter, really. What matters is that I reached a certain critical point, looked around me and asked myself “how can we make all this go away right now?” At that point I realized that there was very little flexibility at our disposal, mainly due to the fact that we were still tied to a mortgage. Four years ago I bought the place because I wanted the tax deduction and because I wanted to build some equity. My wife and I hadn’t yet discovered ERE, so our FI horizon was about 10-15 years down the line. After discovering ERE and the particular way we wanted to enter ERE, I realized that having a house and a high HOA fee simply did not fit into what we wanted to achieve.

These past few years, house values in our immediate community suffered a great deal when a string of foreclosures hit the market. I was pretty much resigned to waiting at least another year before seriously considering selling our house because I didn’t think that the value of our home had yet recovered. We decided to approach our realtor anyway and see if he could gauge the state of the market. We were pleasantly surprised to learn that there was a good chance that we could get all of our principal back. In addition, our realtor indicated that the market was quite hot and that there was a good likelihood of having it sold quickly. He wasn’t just hyping things up, the market analysis and numbers he showed us clearly indicated what he claimed. So we went ahead, sat down with our realtor, and drafted a plan for getting the house sold. We were aware that we were plunging into something serious and that we might be disappointed by a low buyer turnout. I was unsure about proceeding forward, but I figured this is the sort of decision that we have to make if we want to reach freedom. I told myself that if I didn’t have the balls to make this sort of move, how could I have the balls to leave the 9-5 world some day?

The story of selling our house has mainly been a process of expunging a lot of stuff, things that we hardly ever use and just sat there quietly encumbering our lives. The first step in the journey began with decluttering the house to prep for potential buyers. Man-o-man did we get rid of a lot of shit! I estimate we disposed of about 40% of all our possessions in that initial stage. We also carried out a deep cleaning of the house. All this took about a week. We hired a professional stager at the recommendation of our realtor (best $350 we’ve ever spent), and turned out to be an excellent decision because by the time the place was fully staged it looked like something straight out of a home catalog. Our realtor also had a professional photographer take awesome pictures of the place.

The house officially went on the market at the beginning of October. The day after we listed, our realtor hosted a broker’s open house. That same day we got an offer 15K above list price from a person that hadn’t yet seen the place. Two days later the general open house was held and had a great turnout, with something like 20 people showing up. Two days after that we had 5 more offers, and by the end of the week we had a total of 12 offers. At that point we were ecstatic, especially because one of the buyers wanted to buy with cash and was very motivated to get a deal done. So, roughly a week after the place was listed we accepted an offer from the motivated buyer 30K above listing! We could not have been happier with the way things turned out, if you had told me a few months ago that we could get that kind of success I would have laughed in your face.

While waiting out the escrow process, we decided to keep this brisk pace going. We started looking for new places to live in a more happening and bike-friendly city. The apartment hunting period was mired with high hopes and disappointment as we were trying to strike a balance between value and quality. The cheaper apartments were highly competitive and we missed out on one we really liked. (I should note that looking for an apartment in this part of town felt like competing for a damn house. When I was younger I only rented from big property management companies that just gave the place to the first person that showed up with good credit. It seems that the process is trickier when renting from individual property owners.) We ended up securing a place in the middle of our budget, and within close proximity of a grocery store. We went from living in a place with a walk score of 45 to an apartment with a walk score of 85. One thing that struck me as really funny during the application process was the reaction of our landlord when he learned about our combined income. He was utterly baffled as to why we limited ourselves to a specific range for our rental budget when we could clearly afford a more expensive apartment (he owns a few buildings in the area, where prices range depending on location). We didn’t reveal to him our ultimate goal, but just told him that we are happy with his place and that we have other financial commitments.

Meanwhile, we started selling the majority of our house furniture on craigslist since it would be too big to fit in our smaller apartment. We also continued with the decluttering and donating. I was embarrassed by the sheer amount of shit I’ve held onto all these years. My wife and I see this process as a stepping stone to our ultimate goal of just having enough possessions to fit in a couple of carry-on bags. We’ll get there in due time, but in the meantime we are glad to have trimmed the fat to more manageable levels. By the time we moved to our apartment we had gotten rid of most of our junk, but even then we found ourselves throwing out or donating more things. It almost felt like I was coming down from some hard core drug.

We closed escrow a few days ago. So from the time we put the place on the market and the time we were all moved out and closed, only 3 weeks had gone by. We are almost fully settled in our new apartment and are now starting to enjoy the fruits of our labor. The glow of ejecting a house and great deal of shit from our lives feels great. In addition, part of the proceeds from the sale of the house will go toward more dividend stock purchases. The month of November will be a monster month for the growth of our passive income.

There’s a lot more I want to say, but I don’t want to turn this into a super long entry. In my next post I will elaborate on the great amount of Toil associated with selling a house and parting ways with a ton of possessions.

Good work spoon man! Things are looking up!