Author Topic: No pension or working spouse or side gigs - FIREd w/investment portfolio only?  (Read 23082 times)

Cherry Lane

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But the Roth conversion is taxable, no?

That is why I said do the conversion using any tax-free space you may have.  If your only income is untaxed (because of low tax-bracket) capital gains from your post-tax accounts, you will have $10,400 (2017 federal standard deduction and personal exemption for single filer) of "space" to fill with another sort of income, like Roth conversions.

And yes, this strategy relies on the current tax code.

rpr

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Yeah, you should never pay taxes, you should Roth convert for years while living on taxable, then have free Roth withdrawals.

50k in ER should be 50k, $0 taxes paid.

One must be careful if you intend to become a long-term resident of a different country. While, there may be double taxation avoidance agreement (DTAA) between countries, it is possible that tax advantaged accounts in the US such as IRAs/401k may not be recognized by other countries. The OP needs to check and verify this.

For example, one of the countries I'm interested in has a DTAA with the USA but does not recognize tax advantaged accounts. In this case, once you become a resident of that country, you will have to pay taxes on dividends and any realized capital gains in the 401k/IRAs/Roths even though you may not be making any withdrawals from such accounts. Furthermore, any tax paid there may not be eligible for DTAA as the US does not require taxation of such dividends and capital gains. In this situation it almost seems better to slowly convert all to a taxable account for reasons of simplicity.

ZiziPB

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Good to know, rpr.  I'll check on that.

Also, I'll need to convert more than $10k a year, probably $30k?  I really need to figure it out.  Do you think that a financial adviser could be helpful?  I think I get free financial advice at Fidelity. 

arebelspy

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But the Roth conversion is taxable, no?

And all of that of course assuming no changes in the tax code...

Well sure, but when you're in the low hanging fruit of the fat end of the tax curve, you pay very very little taxes on it.

Have you done the reading on the roth rollover?  The MadFientist article(s)?  The GCC articles stickied in the tax forum on how to pay 0 taxes in retirement (they had ~95k-100k "income" from rollovers, gains harvesting, etc., and paid $0 in taxes.. did it again this year).  There's literally a step-by-step guide with their exact tax forms posted.  :)
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
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Playing with Fire UK

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I have considered the tax situation and am fully expecting to be paying taxes in both the US and Poland, taking any permitted credits (Poland and US have a tax treaty in place designed to prevent double taxation).  I am planning to consult with a tax professional as to the details. 

I have no assets in Euro/Zloty other than investments in international stocks through a US-based international index fund.  I'm considering buying a small investment property in Poland as a partial hedge.  Not sure if I will in the end, but it's a possibility.

As to the expenses in Poland, I have done a lot of research and consulted with my family in detail, and feel comfortable in my estimates.  Actually my brother thinks my estimate is way too high.  He thinks my everyday expenses should not exceed $1K per month (not including travel or any extraordinary expenses).

Cool, the plan looks good. I've only visited Poland but found the cost of living on the low side. Your international stocks will track part of the growth of the Europe area, but not the currency fluctuations. If you are happy to ride it out that's fine. I'd be tempted to have a holding of something in Euros and Zloty to take advantage of currency changes.

ZiziPB

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But the Roth conversion is taxable, no?

And all of that of course assuming no changes in the tax code...

Well sure, but when you're in the low hanging fruit of the fat end of the tax curve, you pay very very little taxes on it.

Have you done the reading on the roth rollover?  The MadFientist article(s)?  The GCC articles stickied in the tax forum on how to pay 0 taxes in retirement (they had ~95k-100k "income" from rollovers, gains harvesting, etc., and paid $0 in taxes.. did it again this year).  There's literally a step-by-step guide with their exact tax forms posted.  :)
Read it a while ago, but need to revisit and apply to my specific situation.  I think the numbers work a lot better for a married couple than for a single person, unfortunately. 

SuperMex

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One recommendation, if you are worried about being priced out of the real-estate market then you should buy a cheap small single family home or duplex where you want to live in the U.S. , work maybe an extra year and pay it off.

At this point you have some rental income and when you decide to come back to the U.S. long term you just give the renters 90 day notice.


arebelspy

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Another potential FIREy business idea for the enterprising rebel:  A matchmaking service that hooks up people with tenuous visa and residency status or a desire to leave the US with passport holders of various nationalities.  Heck, if I end up divorced you'd better believe I'd be considering looking outside the US borders for my next relationship (and better health insurance options...)

Not worries about potential culture conflicts?
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

ZiziPB

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Another potential FIREy business idea for the enterprising rebel:  A matchmaking service that hooks up people with tenuous visa and residency status or a desire to leave the US with passport holders of various nationalities.  Heck, if I end up divorced you'd better believe I'd be considering looking outside the US borders for my next relationship (and better health insurance options...)

Not worries about potential culture conflicts?

Been there, done that --and I'm a Canadian at heart, anyway! We'd just apologize to each other all the time.  It would be lovely, I'm sure.
. Ooohh I wanna sign up for the Ihamo "American mail order brides to foreign countries" dating service.  I have moneys....'Merican moneys (which is like a gazzillion Canadian...for now)...that should buy me one lumberjack ;-).

Me too!!!

jim555

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Another potential FIREy business idea for the enterprising rebel:  A matchmaking service that hooks up people with tenuous visa and residency status or a desire to leave the US with passport holders of various nationalities.  Heck, if I end up divorced you'd better believe I'd be considering looking outside the US borders for my next relationship (and better health insurance options...)
Dual nationals, DISLOYAL, sad!  Deport them!  /DJT mode off

ysette9

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I just had a conversation yesterday with my security at work to see if I could keep my clearance if I got dual citizenship. Surprisingly, the DoD is okay with that but they start giving the stink eye if you get a passport from another country. I imagine this depends a bit on which country is in question, though I didn't ask.

CanuckExpat

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Regarding little to no taxes in RE, this is true, but slightly more complicated under current ACA premium tax subsidy rules (however long any of that lasts) (may not apply to person going to Poland)

At lower income levels, you start getting premium tax credits reduced much sooner that you will start paying taxes.

If you want, there is some room to argue whether you are actually paying more taxes or rather losing a subsidy, some people care a lot about the difference for a variety of reasons (let's call them semantic or ideological for lack of better terms), but in the end it will be mathematically the same for your wallet and bank account..

GCC has a post about Obamacare Optimization vs Tax Minimization
Not the best, but I think it's more the fault of the subject matter than the article. It's a starting place

Metric Mouse

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I just had a conversation yesterday with my security at work to see if I could keep my clearance if I got dual citizenship. Surprisingly, the DoD is okay with that but they start giving the stink eye if you get a passport from another country. I imagine this depends a bit on which country is in question, though I didn't ask.
That had to be a nerve wracking conversation.

ZiziPB

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I ran some numbers through Taxcaster yesterday and concluded that the trick to keeping my US taxes low will be to stay in the 15% tax bracket.  That means being very careful with the Roth conversions and using recharacterization to make sure that I extract the maximum tax benefit.  While it would be nice to be able to convert all of my traditional IRA funds into Roth before I have to take RMDs, that's probably not realistic.  But hopefully I can reduce them enough so that I can stay at 15% after I start taking distributions.  I think I need to sit down with the Fidelity financial advisor and see how helpful they will be in that process - most of my money is at Fidelity so the conversions will need to be done by them.

smoghat

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If your spouse is still working, it's not FIRE.

i have a side gig (part time teaching) so I guess it doesn't count, but I am lucky that they pay my LLC instead of me. I use it to produce a loss. My car, 1/3 my house expenses, my computer, cameras, pretty much anything fun is deducted that way. 

arebelspy

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If your spouse is still working, it's not FIRE.

If you need that income, yes.

But if someone (A) has 10MM saved up, spends 30k/yr, and retires, but their spouse (B) is still working because they enjoy their work, the spouse that quit (A) isn't retired? 

The other spouse (B) quits, and now they (A) are retired?  And then spouse (B) goes back to work, and they're (A) unretired again, even though they (A) still are doing the same stuff before B quit, and after B started working again, none of which was paid employment?

That seems like a silly definition, to me, to hinge someone's retirement on their spouse working, or not.

I would say if they're dependent on the spouse's income they're not FIRE'd, because they're not FI. But otherwise the spouse's working status is irrelevant to their FIRE status.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Metric Mouse

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If your spouse is still working, it's not FIRE.

i have a side gig (part time teaching) so I guess it doesn't count, but I am lucky that they pay my LLC instead of me. I use it to produce a loss. My car, 1/3 my house expenses, my computer, cameras, pretty much anything fun is deducted that way.

Meh. Some people are FIRED and have jobs. It's a pretty loose term around here.

Exflyboy

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Another potential FIREy business idea for the enterprising rebel:  A matchmaking service that hooks up people with tenuous visa and residency status or a desire to leave the US with passport holders of various nationalities.  Heck, if I end up divorced you'd better believe I'd be considering looking outside the US borders for my next relationship (and better health insurance options...)

Not worries about potential culture conflicts?

Been there, done that --and I'm a Canadian at heart, anyway! We'd just apologize to each other all the time.  It would be lovely, I'm sure.
. Ooohh I wanna sign up for the Ihamo "American mail order brides to foreign countries" dating service.  I have moneys....'Merican moneys (which is like a gazzillion Canadian...for now)...that should buy me one lumberjack ;-).

Me too!!!

I think I'll see if some of my single UK guy friends want to pimp themselves out for their free HC bennies?

DW is happy with this situation except the weather in the UK always sucks..:)

Exflyboy

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Regarding little to no taxes in RE, this is true, but slightly more complicated under current ACA premium tax subsidy rules (however long any of that lasts) (may not apply to person going to Poland)

At lower income levels, you start getting premium tax credits reduced much sooner that you will start paying taxes.

If you want, there is some room to argue whether you are actually paying more taxes or rather losing a subsidy, some people care a lot about the difference for a variety of reasons (let's call them semantic or ideological for lack of better terms), but in the end it will be mathematically the same for your wallet and bank account..

GCC has a post about Obamacare Optimization vs Tax Minimization
Not the best, but I think it's more the fault of the subject matter than the article. It's a starting place

Also complicated by which State you live in.. In Oregon there are no tax breaks for ANY income.. that means QDivs or Capital gains appreciation (in after tax accounts) get the same 9 to 9.9% treatment.

I got to move out of this State!.. Sad because its a beautiful place otherwise.

canadian bacon

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I ran some numbers through Taxcaster yesterday and concluded that the trick to keeping my US taxes low will be to stay in the 15% tax bracket.  That means being very careful with the Roth conversions and using recharacterization to make sure that I extract the maximum tax benefit.  While it would be nice to be able to convert all of my traditional IRA funds into Roth before I have to take RMDs, that's probably not realistic.  But hopefully I can reduce them enough so that I can stay at 15% after I start taking distributions.  I think I need to sit down with the Fidelity financial advisor and see how helpful they will be in that process - most of my money is at Fidelity so the conversions will need to be done by them.

ZiziPB,  You are 100% on the right track here.   clap clap clap.  most people do not consider your tax situation (or mine)

Most people here are used to roth conversion with a family of 4.   When the topic comes up of taxes to convert your 401K/IRA to Roth, I hear a simple response that the taxes are 0 or close to 0.   This is not always the case, tax can be significant and a low tax rate is not in the cards for everyone

In situations where you a have a large 401K and are trying to get in front of RMDs (required minimum distributions) or if you simply do not have a large family with many exemptions, tax can be significant.   

As you saw, with taxcaster, for you to pull 50K out of your IRA, your 25% tax rate begins just around 49000 per year.  For obvious reasons as you noticed you want to keep your conversions at a point less than this.    (although even if you are withdrawing a large amount and are well into the 25% tax bracket, the 401K still worked in your tax favour.  ex if you would have been taxed 25% on funds that you put into your 401K and afterwards pull out 100K per year, your tax bill is 18K on that money vs your original 25K)

The one thing that I would suggest that you do is get on top of your 401K and get this reduced as quickly as possible.  For instance, if you have a 401K of 600K and assume 7% yearly growth, you need to pull out 42K per year just to keep the 401K from increasing.  If you wait 10 years, your 401K/IRA could be north of $1250000 and you now need to pull out more than 80K per year to keep it from running away.

So with that being said.  I would get on top of the 401K and maximize withdraws before RMDs force you to take a higher tax rate.  Assume 5K per year in income tax.   

ZiziPB

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Great analysis, canadian bacon.  The problem is twofold as I see it - if I go over the 15% threshold, the Roth conversions get taxed at a higher rate AND I end up paying capital gains taxes what my taxable account generates.  And the 15% threshold doesn't leave much room for Roth conversions so eventually I will be stuck paying higher taxes.  Oh well, I guess it's a good problem to have :-)

canadian bacon

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Yes.   A really good problem to have!  ha ha

I think I will err on the side of lower taxes and expenses for the first 10 years to keep my expense ratio low even if that means that my 401k becomes out of control.    I understand that the portfolio is more sensitive to market fluctuations for the first 10 years so I think I will go this way.

Larsg

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I see a lot of posters who make a decision to FIRE but they often have a spouse who is still working and providing some income and health insurance.  Or they have a generous pension they can rely on.  Or a side gig generating some income that they will continue into retirement.

Is anyone here FIRED and relying on an investment portfolio only?

Quite a few here. ARebelSpy, Spoonman and Dr. Doom are the three that come to mind. I think all three do not have a pension or a working spouse. ARS has a portfolio of rentals, but I guess you could call it an investment portfolio.

When I FIRE, my wife will also quit her job as we plan to move. We do not have pensions, and will solely rely on our investment portfolio.

This will be my family too - no pension, side gig (yet and may figure that out once we're there), rental properties, or inheritance. 100% portfolios. We After we sleep four about a  year to recover from all the years of work trauma :), we will explore fun/creative side gig opportunities.


[Mod Edit: Fixed quote tags.]
« Last Edit: November 05, 2017, 03:47:11 PM by arebelspy »

Roothy

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Quick question:

About a quarter of my taxable investment account is capital gains.  When I retire, say I take out $80,000 to live on, and $20,000 of that is capital gains.  I could take out about $70,000 from a 401(k) and roll it into a Roth IRA, and pay no capital gains on the $20,000 and be in the 15% tax (marginal) for the $70,000, right?

rpr

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Quick question:

About a quarter of my taxable investment account is capital gains.  When I retire, say I take out $80,000 to live on, and $20,000 of that is capital gains.  I could take out about $70,000 from a 401(k) and roll it into a Roth IRA, and pay no capital gains on the $20,000 and be in the 15% tax (marginal) for the $70,000, right?

That sounds right. Play with TaxCaster and you will get a better idea (this is for 2016 year).


Roothy

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Thanks.  And yeah, I know I need to play around with TaxCaster.  I'll certainly do so before pulling the plug on work.

nottoolatetostart

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Yes, but this is for MFJ rates. Throw any dividend income from youe taxable accounts (whether reinvested or not).

Cali Nonya

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PTF

bigote2032

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@ZiziPB > I am also planning FIRE with only index fund investments (no rental, no working spouse, no side jobs, no pension).  It's good to see people that are actually living their lives like this.  Seems to me that not too many people do this on this forum.  The folks that make this work are a testament to the success of the 4% rule.  MMM supported the theory but he never got to the point to exercise it due to rental and huge money from the blog.

Any teams for folks in accumulation phase would be appreciated!

cdnstache

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My wife I quit our jobs 2 and a half years ago when we were 32 years old. We have two kids, no pension, no side gigs. Just living off our investments. My wife is actually going to university full time so that can be an added expense at times but she usually gets scholarships and teaching assistant positions to help cover the cost. Our portfolio is currently at a higher level than it was at when we retired despite living off of it for the past 2 and a half years. This was quite surprising to us and just further shows how conservative people can be in their estimates.

2Birds1Stone

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My wife I quit our jobs 2 and a half years ago when we were 32 years old. We have two kids, no pension, no side gigs. Just living off our investments. My wife is actually going to university full time so that can be an added expense at times but she usually gets scholarships and teaching assistant positions to help cover the cost. Our portfolio is currently at a higher level than it was at when we retired despite living off of it for the past 2 and a half years. This was quite surprising to us and just further shows how conservative people can be in their estimates.

What if the market returns over the past 30 months were -30% instead of +30%?

It's always prudent to look at things without recency bias.

cdnstache

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My wife I quit our jobs 2 and a half years ago when we were 32 years old. We have two kids, no pension, no side gigs. Just living off our investments. My wife is actually going to university full time so that can be an added expense at times but she usually gets scholarships and teaching assistant positions to help cover the cost. Our portfolio is currently at a higher level than it was at when we retired despite living off of it for the past 2 and a half years. This was quite surprising to us and just further shows how conservative people can be in their estimates.

What if the market returns over the past 30 months were -30% instead of +30%?

It's always prudent to look at things without recency bias.

Good Point. The sun won't be shining forever.

Exflyboy

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Actually if you think about it.. When the market is tanking, thats the perfect time to be doing 401k to Roth rollovers..:)

Barring that I think for an early retiree, playing the game to minimise ACA costs makes the most sense. Thus leave the high paying tax years to the RMD's. The idea being we that we don't know what will happen say 20 years from now, but we do know that we can maximise HC subsidies today.

Thus (assuming the ACA is here to stay) one would play to minimise one's HC costs up to age 65, jump on Medicare, then do what Roth conversions we can before 70.5..

Larger (potential) tab bill later in life is better than taking the hit (losing the subsidy) now... Bird in the hand and all that..:)

Besides which if you are spending less on HC, then the money you are not spending is still invested and making more money.

You probably will not have the lowest lifetime costs this way, but it seems to have the lowest risk.




 

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