- Will the Delta Variant Cause a New Recession? - July 26, 2021
- Reader Case: Can Costa Rica Save Their Retirement? - July 12, 2021
- Have The Roaring Twenties Begun? - June 28, 2021
It’s been two years since we released our book, and it still amazes me whenever someone writes in to us to let us know that we’ve changed their lives. It’s a gratifying and humbling feeling, and you’d think I would have gotten used to it by now, but nope. Blows my mind each time.
Today’s readers are wondering whether some Travel FIRE is in the cards for them, and who can blame them? Here in Canada, border restrictions are starting to finally ease up, and you can bet we’ve been eyeing Google Flights for places to go, as FIRECracker wrote about here. So let’s see where the math leads, shall we?
Hello Kristy and Bryce! We recently found your book and it has blown both of our minds! Neither of us could put it down! We never thought it could be possible to be financially independent before the typical retirement age. We met on a blind date and have been married for 21 years. We worked hard to raise our kids and kill off the debt that came during our early adulthood. Now, Mr.C is 46 and works full time while Mrs.B is 53, semi-retired and working part time. In 2019 the breaking point came for us and B quit due to the dumpster fire her job had become. We’ve raised two great kids along the way. We put our wonderful daughter through college and now at 25 she’s got a good paying career of her own started. Our son is still in college, with one more year left , and are currently supporting him. We both wish we had discovered FIRE, and specifically YOU years ago! Had we known years ago that this was a possibility, we probably would have made different investment choices (Mrs.B’s IRA was through work so it wasn’t a choice). We realize that we are a little late to the game, but desperate and determined to make it work for us. We are so tired of working and not enjoying life as it should be enjoyed!
We want to be ‘FI’ next year (Summer 2022) and move to Costa Rica. Our annual spending budget at that time would be about $35,000. Since we would be moving out of the country, we would be selling our home and vehicles, and pretty much everything we own. As you can see, most of our investments are IRA’s which can’t be touched without penalty until April 2027 when Mrs.B is 59.5 years old. While we would also LOVE to ‘RE’ when we make the move, Mrs. B’s job is remote, so she can keep working if need be, and Mr. C might be able to stay at his company but work remotely part time (or will find another part time remote job). We will do whatever it takes in order to make this dream of ours come true.Here are our financials:
Combined gross income $156,000
Combined net income: $106,800 *out of Mr. C’s paycheck we have deductions for health insurance ($750 monthly for the family plan), $250 monthly HSA contribution, and $275 monthly IRA contributions
Monthly spending is $6,500
Debt: We recently updated our kitchen cabinets and took out a Home Depot credit card to pay for it instead of using our savings as they had a 0% interest for 2 years promotion. The balance on the account is $12,800 and the minimum payment is $129. However we pay $625 in order to get it paid within the 2 years. This is included in the $6,500 spending above.
Home – currently worth $405,000 and we owe $337,000
Cars – we have 2 cars, both paid off. They are worth approximately $15,000 each.
H.S.A accounts $5,800. Currently contributing $250 per month
IRA accounts – one in Mrs. B’s name worth $468,785, and one in Mr. C’s name worth $59,863
Roth IRA in Mr. C’s name, worth 13,739
Municipal bonds – current value of $33,628, earning 4%
Thank you for reviewing our information and we look forward to hearing back from you!
The best time to learn about this FIRE stuff is as soon as possible in your working career, because the power of compounding and time really is the greatest force in the financial world. Unfortunately, try as we might, we can’t reach everybody in their twenties. CostaRicaRetirement are in their late 40’s/early 50’s. They are, in their words, a bit late to the game, but you know what? Better late than never.
At a glance, CostaRicaRetirement earn decent enough money, but their net worth isn’t as high as it could be given their age and earning power. This is pretty typical of your “normal” middle-class American family. While they might not have spent recklessly, they didn’t drive towards FIRE with the intensity that they could have, because they didn’t know FIRE was a possibility until now.
Their one big ace in their sleeve is their willingness to move to Costa Rica. Costa Rica is a beautiful country, and we loved our time there when we visited back in 2017. But can Costa Rica save their retirement? Let’s Math That Shit Up and find out!
Base Case Analysis
To start, let’s summarize their financial situation as it stands right now. But first, there’s a few oddities in how they’ve provided their numbers that we have to fix.
First of all, the difference between gross and net income is that net income takes into account taxes, union dues, and other expenses that get subtracted off your paycheque. But if those deductions then get transferred to another account that you control, that’s not really an expense as it is a transfer. So while health insurance premiums should be deducted, HSA and IRA contributions should not. We need to fix that.
Secondly, debt payments normally should be included as part of your monthly expenses, but the $12,800 Home Depot debt is a 0% interest rate, and will be paid off in 2 years. Because it won’t be a long term part of their budget, it shouldn’t be included in the ongoing expenses that we use to calculate our FI target. However, for the 2 years that they’re still paying it off, we still need to make sure it’s accounted for in our savings table.
So making these two fixes, here are their starting numbers.
|Income||$156,000 (gross), $113,100 (net)|
|Expenses||$6500 monthly/$78,000 annual for first 2 years, $5875 monthly/$70,500 annual afterwards|
|Debt||$337,000 mortgage, $12,800 credit card|
|Assets||$43,000 (Cash) + $5,800 (HSA) + $468,785 (IRA) + $59,863 (IRA) + $13,739 (Roth) + $33,628 (bonds) = $624,815|
Note that in our base case analysis, we’re assuming they’re staying put and continuing to live in their house, so we wouldn’t include the house or the car in their investable assets.
So given this starting point, how far are they from retirement? First of all, after they pay off the credit card debt, their annual living expenses would be $70,500, and by applying the 4% rule that gives us an FI target of $70,500 x 25 = $1,762,500.
Their net earnings are $113,100, and with an annual spend of $70,500 a year, that gives them a savings rate of $113,100 – $70,500 = $42,600, or $42,600 / $113,100 = 38%.
How long will they take to hit FIRE?
|Year||Balance||Savings||CC Debt Payment||ROI||Total|
Now that might seem OK at first, but keep in mind that CostaRicaRetirement are currently 46 and 53, so this would put their retirement date at 57 and 64. So they’re on track for a “regular” retirement if they stay where they are. But as we mentioned before, they’re willing to relocate to Costa Rica. How does this affect the math?
Travelling FIRE Analysis
When we were in Costa Rica, we actually found it to be one of the more expensive countries in Central America. But even an expensive country in Central America will pale in comparison to the cost of living in much of the USA.
If our couple were to move to Costa Rica, they would sell their house and their cars. Their house would net, after real estate commissions, $405,000 x 0.95 = $384,750. After paying off the mortgage, they would pocket $384,750 – 337,000 = $47,750. Selling the two cars would also give them additional $30,000. Both these numbers can be added to their net worth when they move.
Additionally, their living expenses would drop to $35,000. This is the factor that will most dramatically alter their retirement date, because their FI target would plummet from $1,762,500 all the way down to $35,000 x 25 = $875,000.
So in order to see how this move would affect their retirement, we take the previous table which models their current situation, and we add a new column to the left “Total After Selling House/Cars”, which is simply the “Total” column plus the proceeds from the house ($47,750) and the cars ($30,000). When this number crosses our FI target of $875,000, that’s when CostaRicaRetirement can pull the trigger on selling these assets and move to Costa Rica, confident that they will have enough afterwards to fully fund their retirement. And this trigger point comes in…
|Year||Balance||Savings||CC Debt Payment||ROI||Total||Total After Selling House/Cars|
…Just a little over 2 years.
So here, we can see the power of Travelling FIRE. Even if you currently live in a high cost city, if you’re willing to relocate into a lower cost city, or even better a lower cost country, you can dramatically slash the time it takes to retire.
What to Do with the IRA?
They also asked what they should do with their IRA. Normally, we’d advise using the 5-year Roth IRA conversion ladder strategy to pull money out after retirement without paying any taxes or penalties, but Mrs. B will be 55/56 by the time their retire. That’s not that far off from the “normal” retirement age of 59 1/2, so this might not be worth the trouble for her.
That being said, if they fully retire at that point and their earned income drops to 0, Mrs. B can still use the Roth IRA conversion ladder to get a head start on converting to take advantage of the 0% tax bracket provided by a married couple’s standard deduction of $24,800. She would need to keep track of the fact that she can’t move it out of her Roth for 5 years, and she would only need to do these conversions for 3 years. After she hits 59 1/2, she can switch to normal withdrawals.
Mr. C, on the other hand, should definitely use the Roth IRA conversion strategy, since he’s pretty far from his normal withdrawal age.
Time may be your greatest weapon when it comes to retirement planning, but as we’ve discovered, if you don’t have time, you have the next best thing: Travel!
By being willing to relocate to Costa Rica, which again is pretty expensive by Central American standards, CostaRicaRetirement can hit their retirement goals in just over 2 years! And having been there, I have to say that Costa Rica is an excellent choice. Beautiful weather, gorgeous nature, and all the cocoa you could ever hope to eat! Plus, there’s an expat community already living there that they could embed themselves into. That being said, whenever you plan to move abroad, take a sabbatical or work remotely (if possible) for a few months to try it out. Every place has pros and cons, so make sure you don’t get blindsided.
How about you? Would you be willing to move to Costa Rica to retire? Let’s hear it in the comments below!
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