Hey all! It’s Friday, so you know what means: Reader Case time!
This one was an interesting one. Most of our readers are Millennials or Gen X-ers, cause they, you know, understand how this newfangled “technology” works, but every so often I’ll get a *gasp* Baby Boomer asking us to do a reader case, which just confuses the hell out of me. Say what? Aren’t you twice my age? Why would a Boomer ask a lowly Millennial for retirement advice?
Anyway, let the bloodbath–er I mean, reader case–begin.
I first became aware of your website via the “ChooseFI” podcast featuring Jim Collins. Then I listened to podcast #047 which featured you two and was hooked.
I’m a latecomer to FI and you guys have so much information that it makes my head spin.
Oops, my head just spun off. Let me put it back. There. Now my brain fell out onto the floor. Where is it? There it is. Nope, that’s a raisin. There it is. Nope that’s a pea. Finally found it. Chirp, chirp, chirp. Nope, that’s a bird brain (should’ve know as it is larger than I remember it being). Finally found it.
Anyway, after reading so much I feel that I need advice on which of three paths that I’ve outlined for myself, I should choose.
I’m 60 years old (1900 C.E. millennial or thereabouts) and my net worth is $347,000.
My gross income last year was $47,164 and my net was $38,085 after taxes and insurance. Out of that I put $4,950 into my pre-tax 401(k) which left me with $33,135 in take home pay.
My monthly expenses are as follows: House $666, HOA $30, Car $426, Car Insurance $100, Internet $43, Electricity $100, Water $26, Natural Gas $30, Trash $15, Food $220, Gasoline $100, Cell Phone $30, Ooma $4, Landscaper $85 and Amazon Prime $9. Which should total $2,035 per month.
Debts: Mortgage $101,297 at $666 per month, 30 years at 3.99% ending 2044 and Car $12,647 at $426 per month at 1.9% ending August 2020.
The house is worth $240,000 and the car is worth $13,000.
I have $20,000 in savings, $67,504 in my 401(k), I have $68,580 in Roth IRAs ($12,100 in VTSMX, $19,440 in HSTIX, $36,524 in HOVLX and $510 in HSCSX). And I have $37,027 in a traditional IRA invested in VBR.
I also have $1,425 in a regular stock account recently started of which I put 18% of my take home pay into every two weeks.
In January I sold my two DRIPs for $19,000 and decided to live off of that money plus my take home pay this year in order to fully fund my 401(k) this year 60% maximum at work (I’m a dealer in Las Vegas) up to $24,500. I’ve already put $6,500 into my Roth IRA this year. I then noticed that I would receive about another $2,880 in an income tax refund next year due to the 401(k) contributions plus I’ll qualify for an income tax Savers Credit next year of either $500 or $1,000. Then after reading various FI blogs I discovered that I could convert some of my traditional IRA this year into a Roth IRA. I can use the difference between my income this year and $38,700 in order to not pay any Capital Gains tax on the traditional IRA. Another win! Thank you FI community! I was skipping down the lane and whistling a happy tune.
Then, I read your blog post about murdering your mortgage in 5 years. So I did some math shit and discovered that if I paid $2010.35 for the next 60 payments then my mortgage would be paid off. However, I won’t get the large tax refund or the Savers Credit next year or the following years. C’est la vie.
But then, I listened to the Millennial-Revolution interview on the ChooseFI podcast and I thought…”I could sell everything and move to Thailand and retire now.” I had been thinking of checking out Thailand as I saw on You Tube a lot of ex-pats are living there and loving it. And FIRECracker waxing poetically about Thailand in her blog posts.
Finally, my question is, which of the three ways to go would you recommend if this scenario was yours?
Thank you very much, in advance and thank you for helping people reach FI!
OK, there’s a lot of stuff to parse here. Let’s summarize it here:
|Income (after tax)||$38,085 per year, $3,173.75 per month|
|Expenses||$24,420 per year, $2,035 per month|
|Assets||$347,000 total, $194,539 liquid|
First of all, of BoomerTryingToRetire’s $347,000 net worth, only $194,539 is in liquid assets. The rest is stuck in the house and therefore we can’t use it to retire.
Oh and about that house, you’re 60 and you still have a mortgage?!? So housing didn’t make all Boomers rich and Millennials screwed? Shocking!
While it’s a huge mystery to me why you’re not mortgage free at this age, it’s obvious something went horribly wrong, and we’re not going to dwell on it. Let’s just see how we can fix it:
Should He Pay Off The Mortgage Faster?
This was his first question. Should he try to get mortgage free in 5 years. And as much as I like the idea of getting out of debt as fast as possible, in this case it’s a moot point. He can’t do it.
According to him, he can get out of debt in 5 years by increasing his mortgage payment to $2010.35 a month. That would put his monthly expenses at $2,035 – $666 (current mortgage payment) + $2010.35 (new mortgage payment) = $3379.35. That’s $40,552.20 a year, which is more than his after-tax pay. So unfortunately, paying off his mortgage in 5 years isn’t going to happen.
He’s going to have to retire with a mortgage. It sucks, but that’s where we are.
What Do His Retirement Numbers Look Like?
OK so given that he’s got a mortgage he’s going to have to pay in retirement, how do his numbers look as they stand now?
Well, his monthly expenses are $2,035. Per year, that’s $2,035 x 12 = $24,420. As per the 4% rule, that would require a portfolio of $24,420 x 25 = $610,500. He’s got $194,539 right now. So right off the bat I know we’re probably not gonna like this answer.
Right now, his after-tax earnings of $38,085 subtracted by his living expenses of $24,420 means he can save $13,665 a year. How does our projection look with those values?
12 years. That would mean at his current trajectory, he’d be able to retire when he’s…72.
But wait, there’s something we can take into account that might help, which is the fact that he’s paying a car payment (!) as part of his monthly expenses. That will end in 2 years, at which point his living expenses will drop to $2,035 – $426 = $1,609. As per the 4% rule, that means we’ll need a portfolio of $482,700. And, his savings after year 2 increases to $38,085 – $1,609 x 12 = $18,777. What does that do to his numbers?
8 years and a bit. That’s better, but we’re still talking about retiring at 68.
Yeesh. What the heck happened? Normally, the benefit of owning a home comes when the mortgage gets paid off and you get to live in it super-cheap. But for whatever reason, this never happened. So we’re hit here with the double whammy of the high costs of carrying a mortgage into retirement plus locking away nearly half of his net worth in an asset he can’t use to fund his expenses.
What if he retires to Thailand?
OK now here’s where things get interesting. If he sells his house and retires to a low-cost country like Thailand, the lower cost of living affects his number dramatically. According to Numbeo, the cost of living in Bangkok for a single person (and excluding rent) is about 21,300 baht, or $645 USD. Renting a single bedroom apartment in the city centre is listed as 21,600 baht, or $655 USD. So all in, we’re talking about $1299 a month, or $15,588 a year.
And this is in Bangkok. If you were to move out of the city centre, or to another city entirely, you could drop that even further. Hell, if you were to stay in Vietnam or Cambodia, that comes down even more.
If he wants to stay closer to the States for family? He can also retire to Mexico, Panama, Ecuador, and a multitude of other South American countries to reduce his costs, and as we found out this year, even Portugal!
How much do you need to support this lifestyle if you live in Thailand? As per the 4% rule, $15,588 x 25 = $389,700. His total net worth is at $347,000, so he’s almost there now. If he were to save for a year or two, then sell the house and the car and invest it, he’s done!
Read the Workshop!
However, before he pulls the trigger and buys that plane ticket to Thailand/Mexico/SouthAmerica/Portugal, BoomerWhoWantsToRetire is going to need to learn how to invest.
I can’t see his entire portfolio from this email, but of the funds he did mention, they’re all stock ETFs. And rather than a broad-based index, HSTIX is a large-cap fund, HOVLX is a value stock fund, VBR is a small-cap value fund. He’s all over the place, and most importantly, he appears to be 100% equity. That’s nuts. I’m not even 100% equity, and I’m 35. At 60, he shouldn’t be anywhere near that high. 60% or even 50% equity is more appropriate.
And finally, we’re going to mention something I almost never include in a reader case: Social Security. I have absolutely no idea how much in social security taxes he’s paid over the years, but if he’s eligible it could be a game changer.
The average social security payout is around $1,000 a month. If you retire at 62, that becomes around $700 a month.
If BoomerTryingToRetire is eligible for anything around that amount, he would then only retire $179,700 to retire. Theoretically, he’d able to retire now, then in 2 years when he turns 62 apply for his Social Security. Then not only would he be retired, he’d be comfortably retired.
So get thee to the Social Security office and see how much you’d be eligible for post-haste!
Medical Insurance & Visas
One note that if you do decide to retire abroad, note that generally Medicaid does NOT cover you outside the country. You will need some private health insurance, but as we’ve written about before medical insurance is ridiculously cheap outside the US. A 1-year expat insurance policy from IMGlobal for a 62-year old in Thailand cost about $1500 USD for a year.
Also, if you’re serious about retiring abroad, I’d suggest going to a few countries as a tourist for a few months to see if you even like it. Moving to a different country is a big deal, so you want to make sure it’s the right decision for you before you do something drastic like sell your house. Also note that if you intend to stay in a country long-term, you’ll need to look into getting a retirement visa, which many countries offer allowing retirees like yourself to move there for up to a year at a time. Here’s a guide to the one offered by Thailand.
So there you have it. Staying where he is, he’s still 8 years away from retirement. But by retiring to a low-cost location like SE Asia, he could do it in just 2 years. And if he has Social Security, he’d be able to retire there now.
What do you guys think? Let’s here it in the comments below!
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