Friday, September 20, 2019
Questing for FIRE part 3...
Try not to get burned out.
Editor's note: Blogger has an unfortunate habit of saving the instant something is typed, or when you hit a strange combo of keys that erases all of the work you've been putting together over the space of several weeks. Because of this, the nearly-finished post went poof, and I've been trying to rebuild it to middling success. I feel I covered what I wanted to cover, but it's not as good as what I has already written. All apologies, and on with the show...
Before I begin the post, a little housecleaning is in order. I spoke to Scott about the wisdom of turning my retirement fund into an annuity, and he was lukewarm to the idea. He's much more informed on this topic than I, and he explained I'd be turning over my assets to TIAA, and the bank would be paying me a set amount every month at a fixed return not indexed for inflation. So long as the market rose, it would take the profits, but also the risk. If the 6% return is still available, but the S&P reaches the average return of 10% (minus 2% for inflation ), then the bank makes money. No wonder I can't escape the ads for this everywhere I look.
Does this mean it's a bad idea? Not automatically. First, this is the only way to access my collegiate retirement savings prior to 59 1/2, and that alone makes the choice worthy of consideration. The question becomes more about when I make the change, rather than if. Do I choose safety, making the switch right now, settling for whatever TIAA pays me, or do I keep my holdings as they are, heavily invested in the market? To illustrate the point, I'll use three separate calculators: two from TIAA and Dave Ramsey's. The numbers are as follows: present age: 48, starting amount of $375,000, monthly contributions of $4,500 (including what the college pays), retirement age of 56, and in the case of the Dave Ramsey page, a return of 7.7%. This is higher than FIRE advocates would suggest using, but I want to illustrate the gains I'd be losing. For the annuity, I would get $4,606 per month, or $55,272 per year. This is sufficient to pay my bills, at least initially. The Dave Ramsey calculator gave me a total fund value of $1,290,763. Using a different TIAA calculator, turning over that $1,290,763 at 56, I would get $5042 per month or $60,504 per year. This is certainly better, though not the 6% I was told prior. I also want to save more than $4,500 per month, but the TIAA calculator won't allow a higher figure. With all this in mind, I am letting my money ride the ups and downs of the market, risks be damned. Regardless, the best way to consider the annuity isn't as retirement per se, but as building a floor under whatever I do after the college until I'm able to collect Social Security.
This dovetails nicely with the topic of income generation. My side gigs are not really part of the discussion, as nothing moves the needle, with the possible exception of EMT work and preparing taxes. Even though the FIRE movement is all about not being forced to work, successful practitioners almost always find themselves using their newfound extra time in a productive manner, and this often turns into making money. Also, once your financial needs are met passively, you have freedom in a way you didn't have prior, and are willing to take risks you otherwise wouldn't have.
If it's not a new job, or simply working in the same field or job when reaching FIRE, people make more money in one of two ways, both of which I've spent plenty of time and money learning as much as I could, but to little effect: entrepreneurship or real estate. I consider my extra jobs, while not entrepreneurial (or even effective), at least evidence I'm willing to hustle to move myself closer to where I want to be financially. That hustle could eventually include my starting an Internet store, and many people achieve FIRE in just that way. For those who start a business after FIRE, it generally arises when one spends time on long-ignored passions. Eventually this turns into a money-making venture, where in the income is almost an afterthought. For others, starting a business began with a blog, detailing their work towards FIRE, which then became or source of income due to ads, book sales, or affiliate marketing. Podcasts, of which there are many, follow a similar, if longer, path. Some of these ventures make so much money that FIRE purists consider the creators as betraying the movement. I understand the criticism. The extra income belies the notion that through frugality and investing, you really can stop working. On the other hand, why would anyone give up money for something they're already doing?
Real estate investing works a little differently, and often bridges the gap between one's pre and post FIRE dates. Usually it begins with house-hacking (translation for those of us older than 35: having roommates or renting out a room or two, but with a focus on frugality as well), using the rent paid to you to subsidize your house payment. You then buy a new home, but instead of selling the old one, you keep the roommates, the extra income, and the tax breaks as well. Others buy a duplex or multifamily home with similar results. There's no real opportunity for me to do this right now, since I'm paying off debt as quickly as possible. Once the debts are eliminated, there is one slightly oddball strategy I could consider.
Since I'm not really retiring early, just making the painful sacrifices needed to be able to retire at all, I'm forced to ask myself a question: where do I want to live once I'm done with the college? Neither Carolyn nor I want to live in New York any longer than is necessary, so if we can figure out where we want to live, which will involve some serious discussion I'm sure, then we could investigate the following tactic. Once we decide (either Florida or North Carolina, and you can guess which one I want...) we would look homes with the intention of renting one until we were ready to move. We'd use a management company to run the place, and recycle any profit from rent and tax breaks into paying down the mortgage. It looks good on paper, but I won't be able to test the model for some time. Another blog post will cover why my timeline may be too pessimistic.
While there's much more to say about income generation, I lost so much material that I'll revisit the topic later. Also, this post was supposed to cover some of the criticisms of both the FIRE concept and the FIRE movement, but at this point it deserves its own post.
Editor's note: Blogger has an unfortunate habit of saving the instant something is typed, or when you hit a strange combo of keys that erases all of the work you've been putting together over the space of several weeks. Because of this, the nearly-finished post went poof, and I've been trying to rebuild it to middling success. I feel I covered what I wanted to cover, but it's not as good as what I has already written. All apologies, and on with the show...
Before I begin the post, a little housecleaning is in order. I spoke to Scott about the wisdom of turning my retirement fund into an annuity, and he was lukewarm to the idea. He's much more informed on this topic than I, and he explained I'd be turning over my assets to TIAA, and the bank would be paying me a set amount every month at a fixed return not indexed for inflation. So long as the market rose, it would take the profits, but also the risk. If the 6% return is still available, but the S&P reaches the average return of 10% (minus 2% for inflation ), then the bank makes money. No wonder I can't escape the ads for this everywhere I look.
Does this mean it's a bad idea? Not automatically. First, this is the only way to access my collegiate retirement savings prior to 59 1/2, and that alone makes the choice worthy of consideration. The question becomes more about when I make the change, rather than if. Do I choose safety, making the switch right now, settling for whatever TIAA pays me, or do I keep my holdings as they are, heavily invested in the market? To illustrate the point, I'll use three separate calculators: two from TIAA and Dave Ramsey's. The numbers are as follows: present age: 48, starting amount of $375,000, monthly contributions of $4,500 (including what the college pays), retirement age of 56, and in the case of the Dave Ramsey page, a return of 7.7%. This is higher than FIRE advocates would suggest using, but I want to illustrate the gains I'd be losing. For the annuity, I would get $4,606 per month, or $55,272 per year. This is sufficient to pay my bills, at least initially. The Dave Ramsey calculator gave me a total fund value of $1,290,763. Using a different TIAA calculator, turning over that $1,290,763 at 56, I would get $5042 per month or $60,504 per year. This is certainly better, though not the 6% I was told prior. I also want to save more than $4,500 per month, but the TIAA calculator won't allow a higher figure. With all this in mind, I am letting my money ride the ups and downs of the market, risks be damned. Regardless, the best way to consider the annuity isn't as retirement per se, but as building a floor under whatever I do after the college until I'm able to collect Social Security.
This dovetails nicely with the topic of income generation. My side gigs are not really part of the discussion, as nothing moves the needle, with the possible exception of EMT work and preparing taxes. Even though the FIRE movement is all about not being forced to work, successful practitioners almost always find themselves using their newfound extra time in a productive manner, and this often turns into making money. Also, once your financial needs are met passively, you have freedom in a way you didn't have prior, and are willing to take risks you otherwise wouldn't have.
If it's not a new job, or simply working in the same field or job when reaching FIRE, people make more money in one of two ways, both of which I've spent plenty of time and money learning as much as I could, but to little effect: entrepreneurship or real estate. I consider my extra jobs, while not entrepreneurial (or even effective), at least evidence I'm willing to hustle to move myself closer to where I want to be financially. That hustle could eventually include my starting an Internet store, and many people achieve FIRE in just that way. For those who start a business after FIRE, it generally arises when one spends time on long-ignored passions. Eventually this turns into a money-making venture, where in the income is almost an afterthought. For others, starting a business began with a blog, detailing their work towards FIRE, which then became or source of income due to ads, book sales, or affiliate marketing. Podcasts, of which there are many, follow a similar, if longer, path. Some of these ventures make so much money that FIRE purists consider the creators as betraying the movement. I understand the criticism. The extra income belies the notion that through frugality and investing, you really can stop working. On the other hand, why would anyone give up money for something they're already doing?
Real estate investing works a little differently, and often bridges the gap between one's pre and post FIRE dates. Usually it begins with house-hacking (translation for those of us older than 35: having roommates or renting out a room or two, but with a focus on frugality as well), using the rent paid to you to subsidize your house payment. You then buy a new home, but instead of selling the old one, you keep the roommates, the extra income, and the tax breaks as well. Others buy a duplex or multifamily home with similar results. There's no real opportunity for me to do this right now, since I'm paying off debt as quickly as possible. Once the debts are eliminated, there is one slightly oddball strategy I could consider.
Since I'm not really retiring early, just making the painful sacrifices needed to be able to retire at all, I'm forced to ask myself a question: where do I want to live once I'm done with the college? Neither Carolyn nor I want to live in New York any longer than is necessary, so if we can figure out where we want to live, which will involve some serious discussion I'm sure, then we could investigate the following tactic. Once we decide (either Florida or North Carolina, and you can guess which one I want...) we would look homes with the intention of renting one until we were ready to move. We'd use a management company to run the place, and recycle any profit from rent and tax breaks into paying down the mortgage. It looks good on paper, but I won't be able to test the model for some time. Another blog post will cover why my timeline may be too pessimistic.
While there's much more to say about income generation, I lost so much material that I'll revisit the topic later. Also, this post was supposed to cover some of the criticisms of both the FIRE concept and the FIRE movement, but at this point it deserves its own post.
