Breaking Early Retirement

Google X takes a rather ingenious approach to failure. The spin-off of Google, headed by the aptly-named Astro Teller, is in the business of moonshots. It is pioneering such innovations as Google Glass, Project Loon, contact lenses that measure glucose levels, and the driverless car. With such aspirations, failure is inevitable. But, that’s okay.

Google X, in a way, seeks failure. Sergey Brin, co-founder of Google and Director of Special Projects at Google X, gives a talk that covers this mentality. In summary, Brin believes that failure is a reflection of pursuit. If you aren’t failing, then your goals aren’t lofty enough. At Google X, the primary method to test the efficacy of an idea is to try to make it fail. Put your best people to task at “breaking” an idea, and by doing this, you waste the least possible amount of time on ventures that are destined for failure, because you’ve identified all potential weaknesses at the outset.

Despite my manager’s daily assertions to the contrary, I don’t think I’m an idiot. I feel like I’ve just about covered the bases with how retirement at age 34 could fail. However, I don’t have a monopoly on intelligence, and there may be things I haven’t thought of. There are times when I’m thinking, what should I do if I retire at 34? Do I just need to sit and play online casinos like 666 Casino? Or should I do something more useful?

When I speak to people about early retirement, and once I get past their initial skepticism, they start telling me about all the ways it could never work. In essence, they are “Google X-ing” my early retirement idea. So, let’s run it through the gauntlet. Is my early retirement plan destined to fail? Well, below are a few of the popular reasons I’m given for failure, and how I’m addressing them.

Failure Assertion: “You say you want to have 3-5 kids?! Do you know how expensive kids are?!”

Yes, I do, actually. Currently, our daughter has cost us somewhere in the ballpark of $0. In this post, which I wrote right after her first birthday, I discovered she had (to that point) made us money. The U.S. tax code, unlike China, is structured in a way that encourages children. And not only do we get a sweet child tax credit and exemption at both state and federal levels, but our spending levels on so many other areas drops as a result of the kid. No more movies. Much less dining out and much more home cooking. “Entertainment” is essentially removed as a category of spending. We drink less alcohol and we haven’t fired up the hookah since the start of pregnancy—all savings!

Additionally, the marginal cost of each successive child drops. For our next child, we’ll need a bed for big sister, but otherwise the nursery is already done. We already have a swing, a baby monitor, a bathtub, tons of infant/baby clothing, and even a couple hundred unused diapers. We have drawers full of new or lightly-used baby supplies and products. Granted, I don’t foresee it always being this way. As kids grow up, I fully expect there to be some greater costs: school, activities, uniforms, clothes, going to the zoo, the list is endless. Parenting.com believes we should have already spent $12,000 in our first year of parenthood, and we actually spent more like $0. Given that, I conclude that the USDA estimate of $245,000 for the full 18 years will also be grossly overstated.

In this article on CNNMoney, parents talk about the most surprising costs of raising children. Among them, Teresa Sellinger from New Jersey tells of her birthday party woes:

Wait a minute? She’s spending $25 for a 9-year-old’s birthday present that will assuredly be lost within days? And that’s for the kids that are not “close friends or family?” What are they getting, then, for the close friends? A new car? Give that kid a $10 bill, if you must. My late Grandmother still sent me $10 for each of my birthdays up until she passed away two years ago, and it was a thoroughly meaningful gift each time.

Or look at Denise Martin from Oregon. Who tells of video game horror:

You gotta be kidding me. My wife and I still play our gray Nintendo. You know the one; where you gotta blow into the cartridge until you’re light-headed from trying to clear the dust. The blowing is part of the fun. Games like Contra, Mario Bros., and Super Mario are 25 years old and still goin’ strong. Spending $2k on something so your kids can get chubby and pale during the summer? Not this family. I’m not religiously anti-game. Games are fun, but keep it within reason. One new-to-them game for their birthday, a second-hand system from another kid who’s keeping up with the Joneses, and anything more and it’s comin from their chore money.

Then there’s Kate from Colorado, who was dumbstruck with how much “spending money” she had to provide to her 10-year-old (!). Kate says:

I would love to show Kate the “recreation center” from my childhood. It very much resembled a park, a grassed-over baseball field, my backyard, a swingset, a cul-de-sac, our driveway, and my bike. My brother and I spent approximately fourteen years in our driveway playing basketball and tennis–as far as I remember, there were no association fees. Oh, and we also ice-skated, but that was in Minnesota, so no fees. And “eating lunch with a friend?!” You can’t be serious, Kate. Your kid is 10 and she’s already a Real Housewife. Have a picnic.

When my wife and I talk about having more kids, we imagine doing things like going to the Smithsonian (free), the National Zoo (free +snacks), going for bike rides (free), playing around the house (free), movie nights (essentially free). If you want to know how much your kids will cost, look no further than your own spending and lifestyle. Currently, one of our favorite family activities on these warm spring/summer nights is to pile the wife and baby in the stroller while daddy pushes them around the neighborhood for two hours. The wife and baby bond, the baby nurses, Mommy gets to look inside people’s houses, and Daddy gets exercise. Cost: Priceless.

Failure Assertion: “How will you pay for your kids’ college?”

I prefer that my children graduate debt free. Student loan debt is just terrible, not only because it kills your options after graduation–forcing you almost immediately into the workforce–but also because most student loan debt is not dischargeable in bankruptcy. It’s with you for life, and that sounds pretty bad to me.

I want my kids to be able to attend college and not worry about a huge looming bill upon graduation. I imagine that would be stressful. As such, I fully intend on paying for their college. Any insinuation that I’d retire at 34 in lieu of paying for their education is ridiculous–even a little insulting.

College can be expensive. In the 2014-5 school year, the annual tuition was $31,231 at private colleges, $9,139 for state residents at public colleges, and $22,958 for out-of-state residents attending public universities. Thankfully, I have this little secret on my side: 18 years to prepare (shhh.)

Give me 18 years of runway, and I can save for pretty much anything. Just $200/mo over 18 years at 8% interest will net you over $200k. That would be enough for four years at a private school, assuming no scholarships or grants–which is ludicrous, especially given that our kids are half African-American, which (is that an elephant in the room?) is an undeniable plus when it comes to scholarships. And, just $19/mo at that same rate would pay for year at the University of Virginia. $19 bucks!

What is nary a’mentioned in most talk of college is the ease of which college costs can be reduced. Take AP classes, CLEP tests, or attend a community college that has a four-year matriculation agreement. Nothing is lost by taking shortcuts in the pursuit of a degree. What do they call the guy who graduates Med School but did his undergrad at a state school? Answer: “Doctor.” Finding a way to attend school at a reduced cost is admirable, and the diploma on the wall of the kid who did two years at community college and did a work study program as a junior and senior is the exact same as the diploma of the kid who took a balloon loan out for the whole caboodle.

Failure Assertion: “All your money is in tax-deferred accounts.”

Most retirement accounts, like IRAs and 401(k)’s, tend to make withdrawing funds difficult if you’re under the age of 59 1/2. Last I checked, 34 is less than 59 1/2. So, will I have to pay some ridiculous penalties and taxes as a result of the overnight liquidation of my entire IRA balances??? Hardly.

The plan is simple (in my head), but it probably deserves its own post at some point. (Update: Here’s that post!)Upon retirement, I’ll need approximately $3,000/mo in income.

1. My brokerage account and annuities will yield about $1,000/mo. No tax implications.
2. Writing and rental of primary home is projected to yield around $800/mo. No tax implications. In fact, I’ll actually be writing off other income on this due to costs and depreciation.
3. Upon retirement, roll over my entire 401(k) balance into my Traditional IRA (which is where my dividend growth investing account is). No tax implications.
4. I’ll transfer ~$30,000 each year from my Traditional IRA to my Roth IRA (the classic “Backdoor Roth”). I pay income tax on the transferred amount. However, after deductions and credits, I estimate the tax owed will be roughly zero.
5. After five “tax years” (which is more like four calendar years as I’ll apply my first transfer to my last year of working) after Step 4, I can with withdraw the transferred amount from Step 4 penalty-free and tax-free from my Roth IRA (since I already paid the tax in step 4).

This means that those first four years of retirement (before I can use the funds made available from my 401(k) & Traditional IRA), I’ll have a bit of gap. But, this is solved as I’ll withdraw ~$15,000 from my current Roth IRA contributions each year to make up remainder of income needed. No tax implications.

It’s not an exact science, of course, there will be bookkeeping and such to get it all to work out. Basically, every dollar eventually routes through the Roth IRA, where it sits for a few years before I take it out tax-free and penalty-free. However, to simply give in to the idea that money is locked up until 59 1/2 is foolish–there are tax loopholes for everything.

Failure Assertion: “You’ll be bored out of your mind!”

Not hardly. I’ve already spoken about my retirementality. There are countless things I’d love to do that I’d never be able to do while working full time. I’d love to go to culinary school, to make a documentary, or to learn to play the piano and acoustic guitar. Mostly, though, I want to be able to write more, and to create on my own terms.

The end of a career is far different than the end of working. I reckon that once I’m free of the shackles of traditional work, I can flourish in those fields where I am truly happy.

Of course, everybody is different. Many people love their job and want to work forever. I say, “go for it,” so long as your job has meaning, pays you adequately, allows you freedom to pursue other interests, and is fun every day. For most, that isn’t where they find themselves today. For those that are that lucky–congratulations, but I highly doubt you’re the kind of person reading this blog.

Failure Assertion: “What about health insurance?”

Health insurance is so absolutely important, that I named it one of my four horsemen of personal financial apocalypse. I, quite literally, wouldn’t be caught dead without health insurance. A catastrophic injury during retirement, if I were uninsured, could throw the whole thing off the rails. Thankfully, though, that will never happen, as I’ll always be insured.

Insurance can be expensive, depending on the type of coverage, your state, whether or not you have dependents, and the level of your subsidy. Did you get that last part? The subsidies paid by the federal government for private healthcare plans purchased through an exchange have totally changed the game of early retirement health insurance. You see, “Obamacare” subsidies are not asset-tested; they are based only on federal taxable income. During retirement, my level of federal taxable income will be far lower than 4x the poverty level–which is the point at which you can qualify for subsidies. That doesn’t mean that we’ll be living impoverished, it only means that we’ll be living off of assets for which I’ve already paid taxes.

I looked it up last week on Healthcare.gov (I would encourage every early retiree to do this before they pull the trigger on retirement). I put it all our information as if we were retiring next month. I entered our expected annual taxable income of $30k. $30k is an absolute top-end figure, given that much of our income in retirement won’t be taxable, and that much of my blogging/writing/rental income will be offset by depreciation and expenses before the net business income is factored into my gross income. We should also have more dependents which will increase our subsidy even more than what is reflected, but, given that isn’t a guarantee, we’ll stick with a family of three for now. Below is a screenshot that shows our results:

We aren’t the high-deductible health plan type of family. Most early retirees are, and that’s awesome–their insurance (if their situation is similar to ours) would be just about free. We’ve gone the HDHP route, and I just don’t have the stomach for it, and I’m happy to pay a few hundred more per month extra for that small peace of mind. We prefer HMO-style plans, so we’d be looking at a Silver or Gold plan with a low deductible and low co-payment. That is the style of plan I have right now through my employer, and we love it. In fact, I found our current plan on the exchange. It is listed as a “gold” plan and the cost would be $278/mo for our family. That’s $130 less per month than what I’m paying now. Without a subsidy, this plan would’ve been a little less than 3x that amount, so thank goodness for that Obamacare subsidy.

The absolute worst case scenario is that the Affordable Care Act subsidies fall by the wayside. The Supreme Court has already ruled in favor of the constitutionality of the individual mandate, so my expectation is that the whole law will stand for a long time. However, should subsidies go away, for whatever reason, we would find a plan with comparable services to what we have now, as well as a low deductible, and pay the unsubsidized amount. This would require that I come up with $200-400 in additional passive income. Which would mean roughly another year of working, or working part-time for a day or two per month during the first couple years of retirement. I stress, though, that this is highly unlikely, given the gridlock in Congress.

Failure Assertion: “What if you run out of money?”

So this is really the ultimate question. But as it were, I always knew my MS in Finance would come in handy. You see, in one of our last classes, we learned about this concept of “falling account balances.” It’s really a neat concept as it applies to early retirement. I see it like this. Let’s say that I’m retired and I didn’t quite account for every possible scenario. Something happens which causes me to need more money than what my passive income provides. It could be anything. Emergency room visit that somehow isn’t covered by insurance. The kid breaks three sets of braces. I get sued. Who the heck knows. The point is, something happens which causes my account balances to start falling. My numbers were wrong and real life didn’t match the projections.

My mind is triggered by this “falling balances” phenomena, and I immediately realize that “hey Eric, if this account balance continues to fall every month, then it will eventually go to zero.” My brain triggers my body into action.

My solution? I go and earn some more money. You see, early retirement is not a permanent condition. I can always go back to full-time work if I have to. More likely, though, is that I’ll just up the ante on freelance writing or part-time work. I’m in the process of getting my CPA, and so maybe I could plug myself into some temporary accounting work. If things got really bad, then we do have this thing called a “second adult” in our household that, if need be, could do some work of her own. Of course, we aren’t projecting to need to do any of these things, but if the case arises, then we can surely accommodate.

In Conclusion

This article turned out to be pretty long, so I hope you might consider sharing it with friends or family that might be looking into early retirement, as well.

Reaching back to Google X, Sergey Brin stresses the tremendous benefits of failure, and I echo that. Let’s assume, for a moment, that this early retirement experiment doesn’t work out–perhaps for one of the reasons stated above. What is the effect? Well, I’ll have a few thousand bucks in passive income flowing my way each month. I’ll have a blog that will hopefully be touching hundreds of folks. I’ll have a mindset toward happiness and reduced consumerism. And I’ll have the knowledge of how I can readjust and make it work–maybe just a little further in the future. Hey, if I fail at retirement at 34, well, 35 ain’t so bad, either.

xoxo,

Eric