Early Retirement Extreme Forums

@George the original one: I expect to meet the PNW goal by the end of April. We're gonna keep on investing and allocating money toward our "escape fund" (a side stash of money that will serve as an emergency fund and also as a bit of a crutch in the first few months as we acclimate ourselves to the new lifestyle) through at least the end of August. We may keep working through Q1 of next year, depending on certain details which I will cover in a future post.

@jacob: Thanks for stopping by! The other thing that I’m trying to watch out for is “survivorship bias”. The 2008 meltdown served as a filter that weeded out a lot of companies that only looked great on paper. But there’s no guarantee whatsoever that the companies left standing will stay relevant in the decades to come.

spoonman wrote:The 2008 meltdown served as a filter that weeded out a lot of companies that only looked great on paper. But there’s no guarantee whatsoever that the companies left standing will stay relevant in the decades to come.

The typical dividend growth portfolio that was rudderless (e.g. blindly hung onto GE & banks) lost about 10% of their income in 2008 and have more than regained that 10% after 3 years. This seems to be a reasonable expectation for future decades, that 10-15% of mature companies will cease being viable dividend growth companies within that decade.

spoonman wrote:@George the original one: I expect to meet the PNW goal by the end of April. We're gonna keep on investing and allocating money toward our "escape fund" (a side stash of money that will serve as an emergency fund and also as a bit of a crutch in the first few months as we acclimate ourselves to the new lifestyle) through at least the end of August. We may keep working through Q1 of next year, depending on certain details which I will cover in a future post.

You're going to ensure you'll have a runaway portfolio

Very nice way to go into retirement!

George, you live in Oregon, right? Boy, have I got some questions for ya!

Well, just one big question regarding income taxes in Oregon. If I am not mistaken, unlike the federal tax code, I think that Oregon taxes dividend income (oregon.gov:"Oregon taxes all dividends you received while an Oregon resident that are included on your federal return."). A couple making over $16K/year in dividends will get taxed at something like 9%, am I right? We don't fall under any of the exception categories, so I think I am right about the 9%.

Sort of... there's a graduated tax bracket and personal exemptions, so you won't be paying 9% on all of it. Heck, with the personal exemptions, you might not even reach the 9% bracket.

See http://www.tax-brackets.org/oregontaxtable and the calculator powered by tax-rates.org.

With $16k income for a married couple filing jointly, you'd owe tax on:
$6,300 income @5% and $5,269 income @7% = $683.83 tax owed

So 4.2% effective rate and nope, doesn't hit the 9% bracket

Thank you, George! That's precisely the sort of page I've been trying to find. This is very helpful.

I guess I'll have to see how $683/year weighs in against everything else. Rentals in Oregon tend to be cheaper than Washington, so maybe over the course of a year my tax liability will be counter-balanced by a lower rent.

How are you planning on dealing with Obamacare?

Will you pay out of pocket? Will you pick a state with expanded medicare to establish residency? Or are you going to try hitting the approximately $22k annual income (married couple filing joint) threshold for the subsidy?

@George the original one: We haven't decided yet, but I'd rather not recieve medicaid. I hope we can hit the $22K threshold so we can pay for a high deductible plan, but I don't yet know what our exact income level will be. If we initiate a SEPP with our retirement accounts, then we might reach the $22K threshold right away, otherwise it will take a year or two before we reach it (assuming we don't pick up a little income generating side gig).

I just can't shake the feeling of guilt that would come with recieving medicaid. I mean, we've paid a shitload of taxes these past 10 years, and we probably won't be a burden on the system at all, but still...

I've got a question for you: If we were to move to Oregon or Washington from California (we're probably sticking to the PNW, as I'll elaborate in my next post), would we have to use the exchange in California or can we just use the one in our new state?

This is an unknown in our plans, but whatever we decide to do it will not be a huge fraction of our budget.

#029 02/07/2014 -- Where to Live after FI, Revisited

Anyone following this journal will notice that I don’t report our monthly expenses. I don’t report our expenses because a) they are embarrassingly high, b) they are not representative of our true expenses in retirement because we plan to live in a low COL area, c) and most importantly: my wife won’t let me =). Instead, in my monthly reports what I’ve drawn is a series of spending levels (i.e., corners of possibility space) that we could potentially have depending on our frugal skills and desire for certain comfort levels.

Once we say Adios to the fast lane and rely on our dividend income for our living expenses, I plan to report our monthly expenses. Yes, our lack of expense reporting at this point does not yet give us “ERE street cred,” but I am confident that we we’ll be able to stay within budget or come close to it. Since we are in our mid-thirties and don’t have kids, I believe the key to staying within a tight budget is to find a cheap place to rent, which brings me to the topic of this journal entry.

Back in entry #026, I reported that we had selected San Miguel de Allende (SMA) as the best choice for a city where we would spend our first months after leaving the 9-5 grind. If your monthly rent is only $300/month, then it would be straightforward to stay within budget given reasonable frugal skills. I am not seeing the $300/mo deals in SMA around this time of the year, which is the time of the year (give or take two months) when we plan to leave work. In fact, it’s difficult to find rentals going for less than $600/mo. I am therefore not as excited about SMA, it isn’t the slam dunk I thought it was.

The lack of excitement with SMA has prompted us to rethink our near term strategy. What we would like to do now is spend a full year in a cheap US city, possibly a city in the PNW. We feel that spending our first year in a PNW city will allow us to tone our frugal muscles. After that first year we will be able to live abroad and have full confidence that we’ll be able to stay within budget.

But why the PNW? Well, a city like Tucson is insanely cheap, but it gets too darn hot in the summer (ditto for Texas). A state like Oklahoma is very cheap, but it lacks the charm of cities in the PNW. The super bitter winter that the North East and much of the country is experiencing right now rules out those places from serious consideration. I am acquainted with the Florida panhandle, but I’m not ready to go back there just yet. The PNW is constantly getting hit by rain, but we feel that’s the lesser of many evils (besides, most of the time is not real rain but just a constant drizzle).

We’re probably gonna end up in a city close to a major metro area, such as Portland or Seattle. That means that rentals will be above our projected rental budget of $500. That’s where the escape fund comes in.

Before we pull the trigger we plan to set aside $15-20K (the escape fund) that we will use to help us cover an extra $100-200/month in rent and other unforeseen expenses. I call it the escape fund because it will allow us to leave work before the dividend growth component of our portfolio takes our annual passive income to a higher level. The escape fund will effectively provide us with a synthetic stream of income. Think of it as a temporary crutch until our frugal muscles are strong enough and our passive income is a little higher. It’s possible that we’ll dispose of the crutch right away, or maybe depend on it longer than we would have liked.

Needless to say, we will continue to assess our options. The goal is to ease our way into a whole new lifestyle where we’ll be in full command of our time.

Moving to another state is a "qualifying life event", so you'd use the exchange for your new state of residence outside of the standard enrollment period.

Oregon managed to really screw up the online exchange, so EVERYBODY had to telephone. I was privileged to have a front row seat as I saw the state and telco adding T-1 lines by dozens to handle the call volume... in the first few days of the new year, the telco couldn't add the lines fast enough and actually reached their own call-carrying capacity. A couple years ago, my cousin swore her epitaph will be "Mistakes were made" and I think the same can be said of Oregon's online effort <ahem>.

Hah! That's a really funny epitah. Thanks for answering my question.

The whole unrolling of the exchanges and healthcare.gov felt a lot to me like the release of a Massively Multiplayer Online (MMO) game where the first day (and the first week) is always an epic disaster.

Spoonman - I enjoy reading your journey. How did you decide to invest in dividend growth stocks vs index funds, or other investments. I ask, because I am now invested in real estate, but I would like to change the way I invest to make it more location independent. Jason

Hi Jason, I’m glad you are enjoying the journal.

It took me months to converge on dividend growth stocks as my investment vehicle of choice. Before that, I was seriously considering index investing, which is a very viable investment technique that many people have success with. But what got me about dividend growth investing was the idea of getting consistently rewarded with dividends each month. In addition to that, quality companies consistently raise their dividends each year...and all I have to do is hold on to my shares and occasionally monitor my companies!

I thought I about getting into real estate, but after the real estate bust I lost a lot of interest. Rental income is not as passive as dividend income, even if you hire a management company. I mean, if you get great tenants you are golden, but there’s never a guarantee that’ll happen. Maybe in the future we may get into real estate, but right now dividend growth investing is our preferred path to financial independence.

#030 02/17/2014 -- And then What?

One of the challenges that early retirees face is the question of what to do with themselves in retirement. I touched upon this subject in entry #008 and had concluded that it would be impossible for me to predict how I will come to terms with leaving my job of 8 years. However, I’ve been doing some thinking lately and I believe it isn’t so much about what I will do as much as the framework I decide to work under.

The current framework consists of the 9-5 job. I wake up at the crack of dawn and have to head to work even if I haven’t gotten enough hours of sleep (I go to bed early enough to allow at least 8 hours of sleep each night, but sometimes I still don’t get enough sleep for one reason or another). When I get to work I have to take questionable orders from people who think they always know what’s best and don’t know how to take “No” for an answer. Yes, command and control is alive and well where I work. Then I have to power through the afternoon even if I desperately need a nap. Where I work they haven’t caught on to the idea that it might be good for employees to go to a nap room and recharge, but I digress. Then I have to make my way home spend a few hours of leisure, which I hardly enjoy because by the end of the day I am just totally tired and pooped out.

The current framework has some great advantages, namely that the company as a whole assumes most of the business risk. I just show up, receive marching orders, keep my mouth shut, and then get compensated twice a month. Since I don’t really need the high compensation, I’ve decided that this sort of framework ain’t for me. Now, don't get me wrong, I actually enjoy the problem solving I get to do at work, it’s just that everything else that’s wrapped around it is silly and unhealthy.

I’m hoping that achieving FI will allow me to pursue interests that the rigid 9-5 framework could never allow. In the FI-enabled framework, I may decide to become a freelancer, a writer, a blogger, a volunteer, reacquaint myself with nuclear physics, or just enjoy hobbies. All of this would be possible without the usual indignities associated with the 9-5 framework.

I don’t believe I will miss the old framework because, honestly, I don’t need someone else to hand me down tasks just so I can keep myself “busy” (as if keeping busy is a holy state of being). Sometimes not-doing is better than doing silly tasks just for the sake of staying busy.

spoonman wrote:I’m hoping that achieving FI will allow me to pursue interests that the rigid 9-5 framework could never allow

I am leaving my desk in about an year, and this is a concern for me. I have enjoyed working in technology realm which is a good middle ground between academia/research and tech support

Some of the projects/experiences were only possible due to mix of large scale funding, past work experience and a bit of luck. It is not about job title/money at all, but about the engagement that happens at work. While I have hobbies that can keep me busy, I am not clear if it keeps me engaged to the level I am right now in the overall scheme of things.

Anyways, I plan to give this sabbatical a try for at least two years to see if ERE is for me.

Good luck with your post-ERE plans!

Thanks for stopping by, mxlr650. There are certain types of activities and projects that are only possible with large scale funding, as you point out. That is definitely something I will not be able to replicate easily on my own. I will miss some of the adventures I engaged in these past few years as well as some exotic challenges.

There are ways of getting funding for some fun projects by directly applying to government SBIRs (I don't know if I got the acronym right). A colleague of mine at work used to make a living by winning small research awards from government research agencies. There might also be opportunities to work on mid-level projects by becoming a freelancer. I think lots of people are making a living by becoming freelancers and I've heard/read that companies have taken notice.

In any case, I think that giving up projects backed by large scale funding is something worth giving up for me. I wish you good luck in your two-year sabbatical.

In terms of exciting projects (and I know that this could be counted as work) might something like this appeal https://www.sharein.com/pitches So exotic projects may not be out of reach and the pitching could be more fun than applying for government grants. A reality check which is akin to trying to sell crafts on Etsy.

@saving-10-years: Thanks for stopping by. That's a really cool idea, thanks for the suggestion! That's the sort of thing that I'm hoping to discover and pursue in FI.

I'm also thinking about activities that don't require large capital expenditures, like just exploring mathematics, theoretical physics, and algorithms. There's also some cool table-top experiments I can setup that might not require expensive components.

THx enjoyed reading your journal. I really want to learn more about divivdend investing soon!

@Vonhismean: I suggest you visit dividenmantra.com and dividendgrowthinvestor.com, they have excellent articles on dividend growth investing. There's also the income section of Seeking Alpha.