Welcome to my two year’s FIRE follow up, questions that I sourced from readers. What did they want to know about two years into FIRE?
The Health Insurance Question?
The question of FIRE and health insurance. I decided a few years ago that reaching FIRE in the United States would require us to save $400,000 for healthcare. That would cover insurance and spending $6,000/yr out of pocket on medical expenses. This has been higher than our actual costs, but was a conservative number I was comfortable with. I currently purchase a plan on the healthcare exchange, paying $676/mo for a bronze plan (catastrophic insurance). It covers 100% of in-network costs after we’ve spent the first $6,850 per individual. There is no out of network coverage except for emergency services.
Self employed people and small businesses have been buying insurance for years, so eventually I had to be comfortable taking the plunge. The mechanics of going to the doctor are identical to my corporate insurance: I show up, show them the card, they can’t tell me what it’s going to cost, then three weeks after the visit I get the “negotiated rate” and pay the bill. My deductible is about 2x what the corporate insurance was and I no longer have a company contributing a few hundred dollars towards my premium.
Now for the last decade I’ve been hearing about “what if the ACA goes away”, but regardless of all the rhetoric, politicians rarely take away a benefit once granted. I wasn’t going to continue to work just past the fear of “maybe kinda one-day sort-of” this would be changed. If this were to change for the worse, I can alter my plans in the future and have enjoyed one heck of a sabbatical. I could write a long opinion piece on all of this (maybe I should !?), but instead I’ll just leave my conclusion: Health insurance in FIRE is more of a financial decision than anything else.
What are you living off of? Retirement Accounts? What is your order of withdrawal?
We are not leanFIRE by any means. Our target budget was $6,000/mo in the FIRE plan and we’ve been around that amount spent. I make one transfer a month from our taxable brokerage account to our checking account and pay our bills like I was when working. We still use reward credit cards and pay those fully from the checking account. Any active money we earn gets deposited directly into the brokerage account.
To break down exactly where our cash flow comes from, I break it down into three parts which have been roughly one third of our expenses each over the first two years:
- Withdrawals from our taxable investment account: We saved enough financial runway outside of retirement accounts to cover a number of years of living expenses. We keep some cash and bonds along with equities in this account and I’ve made a couple of small stock sales to support the withdrawals.
- Non Qualified Deferred Compensation Plan (the private sector 457): I had access to a deferred compensation plan that pays out monthly over 15 years. This is pay I elected not to take and it was instead invested in stock and bond index funds during the second half of my career. It looks just like any other 401k when I log in, except the title is different and it pushes money to me every month.
- Actively Earned Income: Consulting work, Instacart deliveries, and a little bit of money from months of active work I’m putting into resolving a small estate.
I’m also navigating money out of retirement accounts. In lieu of doing a Roth Conversion Ladder for 2020, 2021, and 2022, I took a CARES ACT Distribution for $100,000 in 2020 and we realize the income on our tax return over a three year period. The immediate access to these funds was more valuable to me than IRA conversion.
Going forward I plan on using Roth conversions up to the end of the 12% marginal tax bracket and continue to spend down the taxable account. I will likely add the 72t distributions with one or both of our pre-tax IRAs once the deferred compensation plan ends at 52. I’m also eligible for a small pension at age 55 if the company doesn’t offer me a lump sum between now and then. If you wonder “why the 72t?”, I don’t know yet. It seems like a nice replacement when the already inflexible payout structure ends.
Was it Worth It?
Was the FIRE journey worth it? Absolutely. I get to wake up and control my day. I had a big moment giving a retirement notice a few days shy of turning 37, even causing the C Suite manager to have a “wtf moment”.
Would I do things differently knowing what I know now? Yes. I looked at the FIRE journey as two distinct phases of life, the hustle/optimize phase and the early retirement phase. Realistically there are three phases, the hustle/optimize phase, the coast phase, and the work optional/retire early phase. I didn’t need to take the last two promotions/moves to get where I am. Once investment dollars get over a certain point, the hustle phase can be dialed back with minimal impact on the work optional phase of life.
Now I realize just how hard it is for people to move into/between the hustle, coast, and FI stages of the journey. It’s difficult to reach FI without the hustle/optimize phase. There are droves of people hanging out on twitter whining about how tough work/savings is while simultaneously claiming a desire to be financially independent. Instead of scrolling their phones, they should be hustling. Those are people who are consciously choosing not to pay the cost of admission for financial independence in their 20s and early 30s. Building career skills, side hustling for money, and optimizing expenses are all required. The first decade of habit forming and investments is what sets you up for the rest of your life.
Once those hustle habits are formed, it’s then difficult to dial it back into the Coast stage. As someone is approaching financial independence, investment returns are doing almost all the work. The aggressive earning/savings aren’t competing investment returns. Working at this level/pace can be unhealthy, especially into the last years of a career. I’m now two years out and can say I only fully recovered from burnout after fifteen months. My ego and continued hustle mentality drove me to that point.
I now firmly define financial independence as a three step journey,I skipped that interim step, and paid a price I wish I hadn’t paid.
What do I wish I knew in advance?
Leveraged long bets in Tesla! Diversify with both stocks and options!
Now for the serious answer…
So much of the focus of FIRE and the math behind FIRE is about what can go wrong instead of what can go right. The 4% rule (or 3.75%, ect) is based on surviving the worst markets and never earning another dollar. Things can go right as well: Our net worth has grown by roughly the same dollar amount it did while working, even though we’ve withdrawn six figures over the last two years. This is courtesy of decent market returns but mainly the power of compounding and overshooting the goal originally
I have written about this part in the past, but I do wish I would have finalized my housing / location before quitting. The current housing shortage and insanity around price is frustrating, it’s being driven by lower and lower mortgage rates. As a retired / minimally employed person, my borrowing capacity is limited and 75% or so of my assets are in qualified accounts. It may take another one to two years before we can get the house we want through some combination of borrowing and using up most of our regular brokerage account.
Tax Diversity and the impact of State Taxes: I wish I switched to the Roth 401k option in my last two years of working. I was earning money in a state without income taxes and now live in a state with a 7% tax rate. If we move to Hawaii, that number goes up to 8.5%. Unless we end up on the coast of Florida, I’m going to be paying a paradise tax in the form of income taxes to live where we want to live.
How much did you plan for the non-financial part?
I didn’t do too much planning for the nonfinancial part of early retirement. My plan was to retire and figure it out. I created a general goal list that I think I’ve done pretty good on. This included getting moved, travel, more time with family, exploring neglected/new hobbies, and hobby entrepreneurship.
The most important part of my plan was telling *everyone* I was taking at least eighteen months away from my career. This easily answered all of the questions I was fielding, whether it was a job opportunity or the constant “is retirement forever?” and “are you saying you’ll never earn another dollar”. Instead of presenting someone with something they don’t understand, responding to everyone that you’re committed to a minimum of eighteen months away was something people respected. This gave me the freedom and coverage to figure things out on my own.
If you have other questions, please feel free to send them my way. I’m always looking for additional topics or questions to write about. I think preparing for early retirement is equal parts financial and psychological and it takes work on both to take that plunge and enjoy a successful life after full time employment.
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Retirement Healthcare: What Are Your Options by Can I Retire Yet
Justin @ Root of Good: Justin does 1-2 hour consulting calls for Financial Independence coaching and is the best I’ve seen at understanding health insurance for early retirees. He makes the case that at 250% of the Federal Poverty Level or below, (which happens to also be the average salary in the European Union), the United States has universal health care with the ACA’s Cost Sharing setup. He’s one of the best at helping people understand the mechanics of this.