Monday, August 17, 2020

One Year Out: Are We On Track for Financial Independence?

I turned forty last week. It felt weird.

But my birthdays always do. I've never been a big fan of the day. The attention, the singing, the taking stock of the past that is supposed to happen: all of it feels odd to me. I appreciate the sentiment that I am loved and that people care enough to let me know it. But the bad feelings tend to outweigh the good. I'd just as soon pretend it was a normal Wednesday, have a beer or two, and call it a night.

To add to the pressure, there's this whole financial independence goal that thirty-two year old Brian thought would be a good idea to write about, you know, before actually doing any math to see if it was possible. As the date gets closer, my pessimism grows. And the goal is public, which just adds to my anxiety.

We're a year out from the deadline. Will we be financially independent by then? And even if we are, will we feel confident enough to leave work by then?

Let's take a peek at the numbers and see what's what.

A little over a year ago, we decided to take whatever cash we could find, sell a big pile of stocks, pay some capital gains taxes, and pay off our mortgage. Eliminating our biggest monthly expense obviously changed our monthly spending, but it's a bit of a shell game: we also took a big chunk out of our assets at the same time. Still, by our math, paying off the mortgage actually accelerated our progress to financial independence and, at least according to the 4% Rule, made us technically financially independent at the time, based on what we thought we'd save by eliminating the mortgage.

Life had other plans for our spending, as Mrs. Done by Forty started a new job after getting her PhD, and Baby AF enrolled in the most expensive daycare his baby ass could find.

So how did we do over the past year? Here's what the Mad Fientist's laboratory says about our situation according to the 4% Rule, if we take the last twelve months of mortgage-free spending ($43,250) as our baseline.

Are We On Track for Financial Independence
Click for bigness

Six months to FI! That'll do.

But Mrs. Done by Forty and I are too conservative to actually run with the 4% Rule, thanks primarily to the excellent safe withdrawal series at Early Retirement Now. Instead, we want to aim for a 3.5% withdrawal rate, which unfortunately extends our path to financial independence by one metric fuckton.

Here's what the Mad Fientist's lab predicts for us using a 3.5% SWR:

Click for bigness

Well, that's less exciting. That extra half a percent of safety pushes the anticipated date out to December 2021, missing the goal by four months. Not the end of the world but, you know, still a shameful failure that I should beat myself up about endlessly.

The catch with any of these projections is that the last twelve months were anything but typical. For one, we paid for daycare for only five of those months (November - March) and then pulled Baby AF of there when COVID hit. 

And then there's that whole pandemic thing. We haven't spent a dime on restaurant food or a pint at a bar since the first week of March, while our spending on groceries has ballooned.

Should we assume that we're going to go back to normal date nights & restaurant spending?

And what about daycare? After Mrs. Done by Forty and I leave work, we can somehow both see us taking care of Baby AF on our own, and also see us sending him to pre-school or part time daycare, just to keep our sanity. We don't really know what 'normal' is going to look like in the future, especially until we figure out what's happening long term with this pandemic.

Basically, the last twelve months have not been average, so it's tricky using them as a spending baseline for the next fifty years. Still, the problem with assuming that our future spending will be lower because this year isn't average is, well, no year is really average.

So, let's look at this a different way. Our spending the past year, sans mortgage, was about $43,250. (Rounded to nearest $50.)

What if we ignored those five months of full time daycare? If we assume that Mrs. Done by Forty and I will take care of Baby AF full time and don't incur other daycare-like expenses, then we drop down to $37,350.

We also had a few thousand in unexpected dental bills. Take that out, and we're around what we expected to be at this time last year: below a $35,000 budget.

At this point, I'm tempted to run the numbers with that lower figure, $35,000 and the 3.5% SWR. (Spoiler, it estimates we'd hit financial independence next month under those assumptions.) I'd get to put up a graph showing we're going to hit the goal in September, pat myself on the back, and could wrap up the post talking about how I'm lucky and privileged and all that.

But then I remember that we'll no longer have employer-subsidized health insurance once we tell our employers to suck it. While we could purchase insurance through the ACA exchanges, who knows if Republicans will be successful in their never-ending quest to destroy the program and fulfill their goal of taking away healthcare from as many citizens as possible? They are inept imbeciles, sure, but they are determined. One day they might succeed.

A safer play might be to just assume our daycare costs would shift to insurance premiums. Is the daycare expense enough to cover our insurance costs? 

Who knows.

Eight years into our financial independence journey, I still don't have an accurate way to predict what our healthcare costs will be for our family in early retirement. 

No one ever said I knew what I was doing.

So I headed over to Healthcare.gov to at least estimate what we could expect to pay. And, yikes, it looks like the cheapest Bronze plans are about $1,000 a month, just for catastrophic coverage.

On the plus side, under the current ACA rules, we would only have to pay the full coverage price for one year: after one year of early retirement, our income (& MAGI) would be a lot lower, and we should qualify for some level of ACA subsidies in open enrollment the following year.

According to the ACA subsidy calculator on Go Curry Cracker, if our MAGI dropped to $40,000 in early retirement (i.e. - from investment income and moving 401k money to Roth IRAs), then subsidies would cap our maximum contribution at 4.36% of income, meaning we'd pay an annual insurance premium of $1,742 for the second lowest cost Silver Plan: $145 a month. This subsidy represents an amazing 85% discount over what we'd pay for a Bronze Plan the prior year.

This is both preposterously good for our early retirement plan and totally guilt inducing, because it means we'd be paying far less for for the same plan, as millionaires, than most American working families would. We'd be paying less for that "2nd Lowest Cost Silver Plan" than every family with a modified gross income of more than $40,000.

I don't know what to do with this information. A part of me thinks we should just refuse the subsidies on principle, though I don't know how possible that is. Our MAGI in early retirement is going to be whatever it is: we're not going to have any control over whatever dividends the mutual funds happen to give out every quarter. Once that figure is entered into our healthcare.gov application, I believe your modified monthly premium is set based on the established formula, and that's that. You just get charged the lower figure.

There's also a part of me that thinks this preemptive guilt I'm feeling is just a bi-product of our American system. Only in this country are we supposed to feel ashamed about healthcare being subsidized by the government. In just about every other country in the world, this would not be a moral dilemma, any more than getting a public education or driving on public roads would be a dilemma. Healthcare is something (at least outside this country) that taxes pay for, for all citizens, and that's that.

So that's one way I can look at it. Governments can, should, and usually do, provide some sort of subsidized healthcare to their citizens. That's the way it should be.

Then there's the way it is, at least in this country and at this time. And in America, either your employer subsidizes your health coverage, or you pay full freight, or in some circumstances the government helps out...if your family doesn't earn enough.

And there's the rub. Sure, on paper we would not earn enough. But our "so wealthy we don't even need to earn income anymore" family clearly wasn't who lawmakers had in mind when they were devising this system of subsidies. For us, in this current reality, taking the subsidy seems...not great.

And yet, if I'm being honest with myself, we might do it anyway. The same way we take the tax deductions available to us. If the system's going to be based on income & ask nothing about our wealth, I'm not sure we'll actually pass up a five figure subsidy that the system says we're entitled to. Maybe that means we're not great people. We can at least try to be honest ones.

Mrs. Done by Forty and I talked about this subsidy this weekend, and the thing we keep coming back to is that she might want to keep working regardless of when we hit financial independence. If that turns out to be the case, we'll both earn too much to qualify for much of a subsidy in the first place, and we'll have great healthcare available through her employer. 

That would end up fulfilling her career aspirations while also saving us from dealing with a potential moral dilemma. If not, well, I guess we'll see how future us decides to handle it: taking the subsidy & running, or working longer to take the high road.

Those are problems for another day. For now, it looks like we have a rough plan. Save an additional $12,000 more than we planned for, so we can cover the full cost of insurance for a year, and then decide whether financial independence also means an early retirement or not. By our latest estimates, we have until the end of next year to figure it out.

Here's to hoping some wisdom comes in my forty first year. As always, thanks for reading.

*Photo is from twbuckner at Flickr Creative Commons.
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18 comments:

  1. SavvyFinancialLatinaSeptember 9, 2020 at 8:35 PM

    Happy Birthday Done by 40!!! I don't actually know your real life name :)
    40 is a tough goal! If you make it at 41, it won't really be a big deal and you should not feel ashamed or embarrassed. This pandemic is, also, wreaking havoc. So the last thing you want to do is walk away during a recession or depression if it happens.

    I have, also, made a goal to be FI by 40. I turned 30 in May. So the end goal is Dec 2030. I have mapped out how much we need to invest every year. I can tell you that as much as planning provides calming, it, also, makes me incredibly anxious for some reason. Calm and anxiety. We are doing well but at the same time it never seems like enough...

    ReplyDelete
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    1. has left a new comment on your post "One Year Out: Are We On Track for Financial Indepe...":

      Thanks, SFL! My name is Brian. :)

      I know what you mean about vascillating between calm & anxiety. I feel calm on the day to day, but then the enormity of the goal sometimes takes me to the other extreme: do I have enough, is this plan even feasible, etc etc.

      I'm hopeful that 40 is somehow still possible but I need to be forgiving of myself. When I set out on the goal, I thought the 4% rule was fine. I also didn't know we'd have a kid or two. Things change...I should be willing to let the plans change, too.

      Thanks again for commenting!

      Delete
  2. I think you'll have to take some chances if you retire early. There are many years ahead and things will change. We might get lucky and get healthcare for all or some version of that. That really should be the baseline. Everyone should have access to basic healthcare. If you're rich, you can pay more for better care in a private hospital. That's the system in Thailand and I think it works better than here.
    Don't stress out about meeting the deadline. You can modify your timeline if necessary, right?

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    1. The statement about risk is a good one, but one I'll always need to be reminded of, Joe.

      I agree wholeheartedly that basic healthcare should be provided to all Americans. Until that happens, I have some guilt getting this kind of subsidy while being so well off.

      Good point about modifying the timeline as needed. More changes are likely coming: got to stay flexible.

      Delete
  3. Revanche @ A Gai Shan LifeSeptember 9, 2020 at 8:36 PM

    Happy 40th, Brian!! It's a big one!

    I honestly hope that you find your calm around your self-imposed deadline. Or perhaps we can call it "donebyforties" and loosen up the restriction a little bit?

    I haven't even begun to look at ACA since we're still so far away. Is this kind of a limited resource situation where if you're on the subsidy, you might be taking the spot of someone who needs it more?

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    1. Hi, friend! So with the subsidies, it's not a limited amount so I wouldn't be taking anyone's spot, per se, the way we would if we went and qualified for something like Medicaid.

      My guilt is more a philosophical one: where we'd be getting a subsidy larger than the one received by a family with a MAGI of $50,000, even though we are almost assuredly better off than them.

      Delete
    2. Revanche @ A Gai Shan LifeSeptember 9, 2020 at 8:48 PM

      Ok that makes sense! My thinking on that is the same as the tax deduction - the more money I get to keep for myself, that's more money that I can choose give back in a directed way. At this moment in time, I trust me a lot more than our government for that. But if I were to trust our government more, I think there's also an option to pay in more, isn't there?

      Delete
  4. Happy Birthday Day, Brian. Big 4-0. I agree with you on not being a fan of celebrating birthdays. It's like celebrating still being alive, rather than an accomplishment put effort into. But this is 2020 and maybe being alive is worth celebrating.
    I also just turned 40 and took this year off to travel (pre-COVID idea) but instead been mostly at home without gainful employment. Still pretty nice though. :) Biggest lesson is you want to bump up that safety margin and then add bit more. My desire to add hobby "stuff" definitely has increased.

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    1. Hi there, Adam! Congratulations on the year off and I hope it's treating you well.

      We may indeed bump up the safety margin: a lot depends on work stress as we head into the final stretch.

      Delete
  5. Why do you have Penelope Trunk on your blogroll? She's trying to get four more years of trump. Nobody needs to be subjected to that.

    ReplyDelete
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    1. I mean, because I read her blog? (When I can carve out time to read blogs.)

      I read her latest one and I disagree entirely with it. Her final call to action is dangerous.

      It warrants mentioning that she's attacking Biden from the left and, while I totally disagree with her conclusions I do think Biden's pretty problematic as a standard bearer for the party. I'm voting, donating, and will be phone banking for him regardless.

      Still, I didn't find the post so problematic that I would stop reading anything she wrote over it.

      Delete
    2. What benefit do you get from her blog? I mostly only see her headlines and only notice when they're cringeworthy, which is entirely too often (not just about politics, but also health, feminism, learning disabilities etc. etc. etc.) She seems to still be in the old-fashioned get views and clicks via controversial headlines camp. Which...now doesn't seem to be a safe time for that.

      I'm genuinely curious-- what does she write that is worth reading? (But not curious enough to actually read, given that everything I've tried has been cringeworthy.) Does she do personal finance well? Do you care about her personal life? Does she have intelligent commentary on anything specific?

      What was the last post of hers you've read that you would recommend to someone else?

      Because I swear every post of hers that I've read seems entirely off-brand for this blog. Which, it's your blog, I just don't get it.

      Delete
    3. Rather than answer all those questions, I'm just going to check out of this back and forth.

      Going back to the first time you've made a reply here, at least as far as I can recall, every comment you've written has been weirdly antagonistic and challenging, seemingly for no reason. I just don't have time for that sort of thing these days.

      Best of luck, nicoleandmaggie.

      Delete
  6. I realized after you liked another one of my Twitter posts that I'd never actually stopped by your blog. It turns out we have birthdays around the same time and I guess similar feelings towards early retirement. I started my ER journey after you did and haven't quite gotten as far along. But have had similar conundrums about health insurance and whether or not we'd actually do it.

    I calculated that if I retired one day early, I'd lose over a million dollars in federal retirement benefits. And right now I'm loving my job. I'm excited about hitting FI, more for security than actually leaving. It keeps evolving.

    And IDK about the 4% rule. It always seemed kind of academic to me since I wasn't at the precipice. I've read the Early Retirement Now series and Tanja's book and think people are splitting hairs about tails on a Gausian curve and it immediately raises my blood pressure. On the other hand I know I'll have a large government pension waiting for my when I reach 62 no matter what happens in between, so it's not the difference between a 97 and 99% confidence interval.

    Anyway- I'll try to check back more now that I've actually been here.

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    1. Hey there, GovWorkerFI. Glad to see you here on the blog -- I'll have to stop by yours as well.

      I can imagine having a government pension might change how one approaches financial independence & things like the 4% rule quite a lot. The pension system has its flaws but, at least for workers, they're a far, far better deal than the 401ks that replaced them. I wish more employers offered them.

      I'm biased, of course, but I found Big ERN's series to be an insightful & data-driven critique of one of FIRE's sacred cows. Though I also feel like you might know a lot more about the math than I do: I had to google what a Gausian curve is. :)

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  7. In my view setting an end goal is more about trajectory and less about arriving. It provides direction, structure and purpose. I think you and my dear sister have already arrived at your goal just by being so close to it, and as marked by your incredible success at following your decided direction these past years. The choices and sacrifices you two have made are remarkable and you should be proud.

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    1. Thanks, T! It's always a good reminder to take stock and feel a little gratitude & appreciation for the things we've been able to do. Appreciate the good thoughts!

      Delete
  8. I read this comment on your post, but I have a question about it: "on the plus side, under the current ACA rules, we would only have to pay the full coverage price for one year: after one year of early retirement, our income (& MAGI) would be a lot lower, and we should qualify for some level of ACA subsidies in open enrollment the following year"

    From previous reading on this, I thought the premium was based on your expected income for the year for which you're buying coverage, not the previous year's income.

    https://ournextlife.com/2018/01/08/early-retirement-health-insurance/
    https://rootofgood.com/affordable-care-act-coverage-subsidies-pitfalls/

    "Marketplace savings are based on your expected household income for the year you want coverage, not last year’s income." - https://www.healthcare.gov/income-and-household-information/how-to-report/

    I'm a few years behind you and will face the same question eventually. What am I missing?

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