Author Topic: Financing a Year Off  (Read 2139 times)

danaiks17

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Financing a Year Off
« on: September 03, 2016, 12:11:11 PM »
Planning on taking (at least) a year off starting next June. Typical reasons: more time for cultivating bad habits, like developing an aggressive weight gain strategy vis-a-vis rich New Orleanian cuisine.

I spend <$30,000 a year, so I'll be setting aside $40k. As long as the money lasts, I'll stay "unemployed." My plan is certainly to make some cash -- I have some fairly reliable side action that I enjoy -- but I'm looking for a little insight into how to position my money for a year+ off and how to prep over the next 9 months. Goal is to protect the $40k for as long as possible, assuming biweekly deductions of $1200-$1500 (if that's even the best way to roll). Really just a starting point, but questions include:

  • How should I "pay" myself?
  • Should I separate the $40k from my other accessible (non-IRA/401k) savings (+$225k) or view the $265k holistically? I have $65k in cash at the moment (from recent equity sales), and $200k mostly in index funds (bond + stock), from which I earn ~$5k/year in dividends.
  • Are there tax resources for people intentionally earning little/no income during gap years?
  • Tips on healthcare?
  • Anyone have a personal stories/general advice about just a venture?

Appreciate any help, and I hope to come back and share my experience next year.


Happy to share additional specifics.

Bicycle_B

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Re: Financing a Year Off
« Reply #1 on: September 03, 2016, 02:22:43 PM »
Pay yourself by withdrawing funds in the most tax-efficient way possible.  You can adjust your portfolio slightly towards a short term bias if you want.

Really just posting to mention that if your side income is low enough, it might be a good time to convert a traditional IRA into a Roth.  That wouldn't be money you use now, it would be a tax savings that benefits you later while having little or no current cost.

Spork

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Re: Financing a Year Off
« Reply #2 on: September 03, 2016, 02:46:06 PM »
This is just me (I am really often overly conservative on my finances) but I would definitely set aside the money as cash.  Lots of folks will give good arguments to keep it in the market.  But I would not want a market correction to suddenly make my 1 year off into a panic to find work.  Again: that's just me.  We are FIRE... we keep quite a bit in cash for these reasons.  And if the market DID slide... we'd probably use it to buy as it went down.

I took about 3 years off right around the 2006-2009 time frame.  The good news here was: I had ready money for living when the market tanked in 2008.  The bad news was: I didn't have enough ready money to invest it as it slid.  And I didn't have income other than dividends.  At the time, that was not enough to live on.

The idea to convert tIRA -> Roth seems like a good one.  If you're not earning anything, you'll likely not owe anything in taxes.  Standard deduction is ($6300/single; $12,600 married).  Exemptions for 2016 are $4050 per person.  So if you're single you can earn (through dividends or tIRA conversions) $10,350 without owing any tax.  ($20,700 for married). 

Health care probably means pay your way with ACA.  The subsidies can sometimes be tricky to get approval for.  You WILL get them... but you may get them as a tax refund the following year.  They want to see an IRS tax return from a previous year that substantiates your claim.  Since you will have worked the year before, it can be hard to get that through their heads.  You may have to just pay up front and take your subsidy on the following year with a refund.  So... you might want to add that to your $40k with the idea "you'll get it back later."

MoonLiteNite

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Re: Financing a Year Off
« Reply #3 on: September 03, 2016, 03:00:06 PM »
I think i would do 50% MMA, with a withdraw plan, and 50% 6 month CD.
At least see SOME protection for it

Goldielocks

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Re: Financing a Year Off
« Reply #4 on: September 03, 2016, 03:54:40 PM »
Dont forget to fund your re-entry strategy.  If' you will look for work, it may take a few months, or a low paid part time job for a while.

Spork

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Re: Financing a Year Off
« Reply #5 on: September 03, 2016, 03:58:17 PM »
Dont forget to fund your re-entry strategy.  If' you will look for work, it may take a few months, or a low paid part time job for a while.

True this!

Above when I say I took 3 years off.... I actually meant to take one.  But... I have a niche job and was in an area that had very little opportunity.  YMMV.

danaiks17

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Re: Financing a Year Off
« Reply #6 on: September 04, 2016, 09:24:11 AM »
Pay yourself by withdrawing funds in the most tax-efficient way possible.  You can adjust your portfolio slightly towards a short term bias if you want.

Really just posting to mention that if your side income is low enough, it might be a good time to convert a traditional IRA into a Roth.  That wouldn't be money you use now, it would be a tax savings that benefits you later while having little or no current cost.

Very wise call on the Trad IRA-to-Roth transfer. I think I'll be right around the <$1k a month income sweet spot.

danaiks17

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Re: Financing a Year Off
« Reply #7 on: September 04, 2016, 09:28:00 AM »
This is just me (I am really often overly conservative on my finances) but I would definitely set aside the money as cash.  Lots of folks will give good arguments to keep it in the market.  But I would not want a market correction to suddenly make my 1 year off into a panic to find work.  Again: that's just me.  We are FIRE... we keep quite a bit in cash for these reasons.  And if the market DID slide... we'd probably use it to buy as it went down.

I took about 3 years off right around the 2006-2009 time frame.  The good news here was: I had ready money for living when the market tanked in 2008.  The bad news was: I didn't have enough ready money to invest it as it slid.  And I didn't have income other than dividends.  At the time, that was not enough to live on.

The idea to convert tIRA -> Roth seems like a good one.  If you're not earning anything, you'll likely not owe anything in taxes.  Standard deduction is ($6300/single; $12,600 married).  Exemptions for 2016 are $4050 per person.  So if you're single you can earn (through dividends or tIRA conversions) $10,350 without owing any tax.  ($20,700 for married). 

Health care probably means pay your way with ACA.  The subsidies can sometimes be tricky to get approval for.  You WILL get them... but you may get them as a tax refund the following year.  They want to see an IRS tax return from a previous year that substantiates your claim.  Since you will have worked the year before, it can be hard to get that through their heads.  You may have to just pay up front and take your subsidy on the following year with a refund.  So... you might want to add that to your $40k with the idea "you'll get it back later."

Good to know on the ACA subsidies. Current income is ~$85k, so if I start the sabbatical 5 or 6 months into 2017, I'll have made $40k+ that year. Then, if I re-enter the labor force in earnest in 2018, I may disqualify myself again from the subsidies. 
« Last Edit: September 04, 2016, 09:39:49 AM by danaiks17 »

Bicycle_B

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Re: Financing a Year Off
« Reply #8 on: September 04, 2016, 08:02:13 PM »
This is just me (I am really often overly conservative on my finances) but I would definitely set aside the money as cash.  Lots of folks will give good arguments to keep it in the market.  But I would not want a market correction to suddenly make my 1 year off into a panic to find work.  Again: that's just me.  We are FIRE... we keep quite a bit in cash for these reasons.  And if the market DID slide... we'd probably use it to buy as it went down.

I took about 3 years off right around the 2006-2009 time frame.  The good news here was: I had ready money for living when the market tanked in 2008.  The bad news was: I didn't have enough ready money to invest it as it slid.  And I didn't have income other than dividends.  At the time, that was not enough to live on.

The idea to convert tIRA -> Roth seems like a good one.  If you're not earning anything, you'll likely not owe anything in taxes.  Standard deduction is ($6300/single; $12,600 married).  Exemptions for 2016 are $4050 per person.  So if you're single you can earn (through dividends or tIRA conversions) $10,350 without owing any tax.  ($20,700 for married). 

Health care probably means pay your way with ACA.  The subsidies can sometimes be tricky to get approval for.  You WILL get them... but you may get them as a tax refund the following year.  They want to see an IRS tax return from a previous year that substantiates your claim.  Since you will have worked the year before, it can be hard to get that through their heads.  You may have to just pay up front and take your subsidy on the following year with a refund.  So... you might want to add that to your $40k with the idea "you'll get it back later."

Good to know on the ACA subsidies. Current income is ~$85k, so if I start the sabbatical 5 or 6 months into 2017, I'll have made $40k+ that year. Then, if I re-enter the labor force in earnest in 2018, I may disqualify myself again from the subsidies.

Does that mean you won't be under the tIRA-to-Roth income, then?  The income declaration required for tIRA-to-Roth conversion is part of your annual income, not calculated monthly.