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Hey all! It’s Friday, so you know what that means…another Reader Case!
Hi FIRECracker & Wanderer,
Thank you so much for all you’ve written. I read your book and then found my way to the blog, and have been learning so much! My fiance and I have been planning our future with all these long pandemic evenings at home, and we are so excited about the possibilities your writing has shown us!
I haven’t been able to find any writing on the blog about Partial FI, so I wanted to ask you about it. We both love the work we do (he’s a TV writer, I produce science entertainment), but we’d love the freedom to work part-time (or just 6 months out of the year), instead of constantly. My sister lives in Thailand, and we’d love to spend half the year there!
After learning about IRA conversion ladders and strategies for withdrawing money to cover living expenses tax-free, I realized this wouldn’t work if we have an income.
So my question is – what should our plan be to manage our withdrawals and living expenses once we save enough for Partial FI, but are still making an income 1/2 the year? AND, since we don’t work for companies that offer 401(k)s, how can we utilize tax-advantaged accounts other than Roth IRAs?
-We are 32 and 33.
-Annual Family Income: $145k pre-tax (this varies a lot year-to-year, as we do a lot of freelance & contract work, normal for our industry, but has been trending up, aside from the pandemic)
-Monthly family spending: We lived in NYC, and just moved to LA.
Rent: $2350 (600 sq foot 1 bed 1 bath, but we have a YARD!)
Insurances: $50 (haven’t gotten car insurance yet). I currently don’t have health insurance, and my fiance is covered by medicaid.
Groceries: $550 (high during the pandemic, we cook a LOT and don’t eat out right now)
Therapy: $510 (necessary for mental health right now, and unfortunately not covered by insurance)
Donations & subscriptions: $100
Student loan payment: $200
Discretionary spending: $1k (includes unexpected expenses, pet supplies for our dog, clothing, entertainment, gas, etc)
-Debt: I have $20k in student loan debt at 2% interest. That’s it for debt, luckily.
-Fixed Assets: We bought a used car (from my fiance’s parents) for $8k. It’s in great shape, and necessary for life in LA. Thats it, aside from our furniture & clothing, which are ok but not big investments or anything, and we downsized a lot during our cross country move.
-Investments & savings:
Roth IRA: $7,500
Traditional IRA (was rolled over from a former 401(k): $9,000
Acorns account: $1000
TD Ameritrade Broker account: $9,000
A few thoughts on ProducersOnFIRE’s spending numbers. Adding up all his itemized spending we get $4990 a month, but some of of his spending numbers jump out at me. Specifically, the line
Insurances: $50 (haven’t gotten car insurance yet). I currently don’t have health insurance, and my fiance is covered by medicaid.
Yikes. No car insurance and no health insurance? In the US of A? Are you nuts?
So priority #1 is fixing this. Plugging some of these numbers into the California ACA exchange, I got a quote of $330 a month for the Silver plan, so let’s use this as an estimate. Similarly, I got an auto insurance quote for $100 a month. This adds $430 a month to our reader’s monthly expenses.
Their grocery bill is quite low, which is good, but their therapy costs almost as much as groceries. That being said, they do live in L.A., so let’s go ahead and consider that expense a must-have rather than a nice-to-have. Cause, you know, L.A.
And finally, they’re in a situation where they still have a student loan balance of $20k yet enough cash to pay this off. However, their interest rate is quite low at 2%, so it’s OK to leave this as is rather than pay it all off. If that interest rate were north of 5%, however, that would be a very different story.
So if we add $430 to our reader’s budget we get a total spend of $4990 + $430 = $5420 a month, or $65,040 a year.
Before we attempt to answer ProducersOnFIRE’s questions on Partial FI, we need to do an analysis to determine where they stand on their journey to Regular FIRE. We can then use these results as a baseline to compare to the Partial FI analysis.
So where does ProducersOnFIRE stand on their “normal” FIRE journey? Let’s MATH SHIT UP to find out!
|Income||$145,000 Gross, $109,465 Net|
|Spending||$5420 per month, $65,040 per year|
|Debts||$20,000 student loans|
Normally, we would calculate the starting balance by taking Assets and minus Debts, which simulates paying off the debt completely. But in this case, because of the debt’s low interest rate, we’re OK with keeping the debt around and paying the minimum off $200 each month. If we run the math on this, we can calculate that this debt (using a debt repayment calculator) will be retired in a little over 9 years, after which point that $200 payment needs to be subtracted off the monthly spending number.
So that means that in the first 9 years of our analysis (after plugging their gross income into a tax calculator), the savings number will be $109,465 – $65,040 = $44,425. And starting in year 10, spending should drop to $65,040 – $200 x 12 = $62,640, which means savings will increase to $109,465 – $62,640 = $46,825 per year.
And because our long term spending projections won’t include student loan repayments, we can use this lower spending number to calculate our FI target, which will be $62,640 x 25 = $1,566,000.
So now that we have our inputs, where do we project our Producer couple hit Full FIRE?
OK so we have our baseline. If ProducersOnFIRE continue on their current trajectory, we can project that they will hit Full FIRE in 18 years.
But, we know that she doesn’t want to wait this long, and is willing to entertain the idea of Partial FIRE, with half the time spent in Thailand and the other half in L.A. Let’s see what effect this will have on her retirement.
The first change this strategy will have is on their income. Obviously, if you are only working half the year, you will only make half the income. But because the tax system is progressive, that means they will also pay less tax. Plugging half of their current gross income of $72,500 into a tax calculator for California, their after-tax income becomes $60,128. So even though their gross income got cut in half, their after-tax income only went down about 45% because of the lower percentage of their income eaten up by taxes.
Their cost of living will also drop dramatically. In my household, FIRECracker holds the esteemed title of “Queen of Coin,” so I thought I’d get her take on how much it will cost to live in Thailand.
When we were living in Chiang Mai, Thailand it cost about $1500 USD to $2100 USD per month for the 2 of us, and that’s with eating out every day and getting massages every other day. For a big city like Bangkok, you can expect to pay 15% to 20% more.FIRECracker
So based on our own experience, while there’s some variation (as with any country) in your living expenses, based on your choice of where to live and the lifestyle you choose, in any case it will be a fraction of the cost of living of L.A. To be conservative, let’s take the upper end of our estimate, and assume they spend it all in a big city like Bangkok, which takes their monthly living expenses to $2100 + 20% = $2520 USD a month. This means that if they spend 6 months in Thailand and 6 months in L.A., we can bring our yearly cost of living down to $2520 x 6 + $5420 x 6 = $47,640.
We also have to factor in flights back and forth from L.A. to Thailand. I would highly highly HIGHLY recommend not being in Thailand during the summer unless you enjoy dying of heat stroke, so if you go during the cooler months of October to March and fly off-peak, a one-way flight will run you about $500 US per person, so if we add $2000 to our annual budget, that beings our spending number to $47,640 + $2,000 = $49,640.
|Income||$72,500 Gross, $60,128 Net|
|Spending||$49,640 per year|
Normally at this part of the analysis, we would calculate a new FI target by taking annual spending, subtracting their Partial FI post-tax salary, and then multiplying the gap by 25. But if we do that here, we actually get a ($49,640 – $60,128) x 25 = a negative number. What the Hell? How is it possible to have a negative FI target number?!?
What this means is actually a very happy surprise for our readers: They can pull the trigger on this plan NOW.
A negative FI target means that our couple’s Partial FI earnings is enough to completely cover their Partial FI spending completely without any withdrawals necessary from their investment portfolio. In fact, their spending is so much lower under this plan that they’re still cash flow positive and able to continue saving. So that means that not only are they able to start doing this now (or at least, once the pandemic is over), they can still afford to keep saving towards full FIRE!
Assuming they continue this half-in-Thailand-half-in-California lifestyle after retirement, their new FI target would be $49,640 x 25 = $1,241,000.
And their new savings rate while Partially FI would be $60,128 – $49,640 = $10,488. We also have to keep in mind that, like in the first analysis, $200 a month will be freed up in year 10 due to their student balance being paid off.
Running the numbers, we get this projection…
30 years, which is pretty much regular retirement age since our reader is 33 right now.
So by moving to Partial FI now, it pushes out their full FIRE target out from 18 years to 30 years, but that comes with a massive upside that they can drop down to part time NOW rather than in 18 years. Whether that makes sense to our reader is up to them, but as they say everything in life is a tradeoff, and personally, this sounds like a pretty sweet tradeoff to me. Like I’ve written about before, time being healthy is worth more than any amount of money, so if you have the option of spending it doing what you love, don’t wait.
Withdrawal Strategies for Partial FI
I’d also like to touch briefly on how ProducerOnFIRE’s Partial FI plan changes their tax planning and withdrawal strategy. If they go for the “Full FIRE” method, work full time and retire in 18 years, they should absolutely use tax deferral accounts to their full advantage because a married couple filing jointly earning at this income level will be paying a combined top tax rate of 22% federal and 9.3% state tax, for a punishing 31.3% marginal tax rate! As a freelancer or contractor, ProducerOnFIRE should open up a Solo 401(k) plan, contribute to it, and then when it comes time to retire withdraw their funds using the Cash-Asset Swap and Roth IRA conversion ladder strategies that we wrote about in our book.
However, if they decide to go down the “Partial FI” path, their tax rate will top out at 12% federal and 6% state, for a total of a much more reasonable 18%. At this marginal rate, I wouldn’t bother with the complexity of managing a 401(k) meltdown and instead just max out your Roth IRA every year and leave it at that.
What Would You Do?
So now we’d like to hear from you. I guess the answer really depends on how much you like/dislike your job, but would you power through for 18 years in order to reach full FIRE or would you pull the Partial FI rip-cord and start enjoying your life now? Let’s hear it in the comments below!
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16 thoughts on “Reader Case: Producers Dreaming of Partial FIRE”
Interesting analysis. Having had to deal with the health care insurance dilemma myself at a time when I made too much this year for government assistance, I don’t see how it’s possible they would pay only $300 living in California and that would have to be per person. So their true number would be closer to $600 even if that amount was spot on. Some states have their own marketplace like NJ and some will be able to go through the Fed. The government will base your premiums on your age (the older you get the more you pay) and the subsidy based on previous years tax returns. In my mind this could be a significant difference in a monthly budget.
I’m just really confused on how they are making this amount of money, and have such small amounts in their savings. Not sure if it’s because they only moved to LA recently (unclear on exactly when). LA is expensive, that is real, although those sort of rents sound like they are in a decently nice area (Westside somewhere?). I usually paid $800-1k a month for a decent sized (studio or 1 bedroom) guesthouse on the Westside from 2011-2015. These were all nice places with yards (West Hollywood, Fairfax, Palms). I think they could do much better there especially with the pandemic making a lot of people on the Westside in entertainment leave.
Where is the extra $40-50k a year going? Also how are they making $150k and on medicaid- is this from being on PUA or something currently? To me something isn’t quite adding up.
Rents have increased substantially with the growth of Silicon beach. A 400 sq studio on the west side is probably more like $1500/month now.
I’d pull the (partial) plug if I were them. I’d take into account their L.A. rent while they’re away in Thailand though, if they want a place to come back to, or at least a rented storage space. And don’t forget the dog hotel fees! 😉
There are some things I think need to be taken into account.
1) Obviously, the elephant in the room is “Can they find 6 months of part time work at the same hourly rate or better?” I have no idea, and they probably do, and they’ve probably already think they can, but — as my cat would say — it never hurts to ask.
2) Do they have bulky gear that’s needed for their work? One’s a writer, but maybe there are specialty reference works that are bulky? I have zero idea about what gear the other needs to do their work and whether they or their employer supplies it. I ask because if it’s bulky or heavy it will cost a lot to take it to Thailand and back. Or they have to have a safe space to store it while they are gone. That may or may not cost money.
3) Can they afford to replace the gear that they need (see #2 above) if it gets lost, stolen, or damaged while in storage by a roof leak? Given they don’t have car or health insurance, there’s simply no reason for me to believe that gear is covered by insurance. If not, job #2 (after getting insurance!!!!) is to build up a stash that would enable them to re-equip themselves.
4) “According to the IRS, if you reside outside of the United States at least 330 days out of 365, you can exempt $101,300 of income from your annual taxes. The beauty of this strategy is that you can leave the US any time you want.” You mentioned the heat of summer, but if they did those 6 months out of the country each year back to back, i.e., they could claim being out of the country for a year. I believe they would pay their taxes in full the first year and then file an amendment once they hit the 330 day mark in country. The year’s worth of no income taxes gets pro-rated between the two tax years.
5) I would look into health insurance as a visitor to the USA instead of as a resident, and see what it would cost to purchase that. Might be cheaper than buying it as a resident. Or not.
6) Personally, I would pad that stash so that they had a full 2 years worth of living expenses before I went half time. People get sick or injured and when they do, they can’t necessarily work for a long time (or ever). At their potential savings rate it wouldn’t take long.
Anyway, best of luck to them.
I worry heavily on the health insurance. That’s a problem and bluntly, pretty stupid. They have $35k cash? Get the health insurance. Don’t be dumbasses.
The working part-time piece does bug me as well. Just my thought but work a few years full time, ensure you have health insurance, and increase the amount in your investment accounts. They already mentioned their income is precarious (and maybe the employment as well) and if that’s the case, they should have a solid financial base so they don’t get whipsawed by an unforeseen event. If they can build up a solid financial base, by all means go part-time. I just suspect these intrepid readers want their cake and eat too.
A little delayed gratification will make a big difference here.
I’d love to do something like this, but unlike the readers (who, with their lack of insurance, are obviously comfortable with risk) I’m way too risk averse! I can’t help but see the holes in this plan:
– once they go part time, will their clients still want to work with them?
– can they find 6 month leases whenever they want to? If not, can they afford to pay the airbnb rate?
– do they have someone willing to store their stuff, or have they looked into storage fees?
– can they get a visa to spend six months a year, every year, in Thailand?
I, with my risk preferences, wouldn’t do this without having saved up at least three years of living expenses as a backup. But since the readers don’t seem to mind risk, I’d recommend that they go for it – this plan has more upside and less downside than other risks they’re taking.
On the subject of partial FI, I think 3-5 years of living expenses saved up is the point at which you can consider yourself partially financially independent – once you’ve got that you won’t be too badly affected by getting fired, so you can say FU to anyone that you **really** want to say that to! I felt really free when I hit that goal, so much so that I started slacking at work, which has not gotten me fired!
The real answer to this situation is (1) self-employed retirement plans and (2) non-California residency for tax purposes, in addition to getting health insurance.
First, If you are going to work for 6 months at a time then you will probably be a contractor (1099-NEC income) or else you should be a contractor. I.e., self employed. You’ll be eligible to deduct a bunch of work expenses and for a 20% deduction against net income. In addition you’ll be eligible to set up a huge variety of self employed retirement plans that will easily allow you to put away up to $58K annually tax-free. Read Physician on Fire for a good but dense layperson analysis of these plans or else just google it. You’ll be able to deduct travel expenses, stash most of your money away tax free, and live cheap on the rest at really low graduated tax rates. Also, because your taxable income will be close to zero after your deductions for retirement contributions, you will get your health care basically paid for through the subsidy under Obamacare (advanced premium tax credit is what it’s called formally). You could convert the self employed retirement plans into post tax money if you ever take a year off work. Working one year on and one year off would be ideal tax wise.
Another idea is to work from home overseas in the year in which you draw down retirement plans. Your work income will be excluded from taxable income under the foreign earned income exclusion, and the only taxable income will be the retirement plans converted. Or just work overseas at a foreign movie if you can’t WFH – those foreign movies get better every year!
Second, if you are going to live somewhere else and just work temporarily potentially in California, you should be able to set up residency overseas or in Nevada or Washington or somewhere without state tax. There’s lots of resources online about this, but this would cut your state tax down to almost zero if it’s not zero already.
Yeah, you’re in a good spot and you have lots of tax planning options, with some thought and planning you should easily be able to achieve your objectives.
All the best! I’m excited for you.
This is an interesting case and a pretty hard decision indeed. 30 years until full FIRE… So that’s a bit like it would be for a lot of the not-FIRE people in that age range. But, they get to have fun 6 months a year in return.
There are some gaps though. First, the dog. Is he going to travel with them? Will he love those long flights twice a year? How will he like Bangkok? Is that a dog friendly place? No idea, but I guess they may not have the nice dog parks LA has. Second, what about their place in LA. Will they give it up and find a new one every 6 months? Or will they keep paying the rent.
Then also, a TV writer. Does that require the presence in LA? I’m going to guess it does. To brainstorm and also just to network and remain top of mind in the industry. That seems to be the biggest downside to me. It may be tied to LA. That’s possibly why they moved there in the first place.
Finally there’s the car. Very needed in LA indeed. Where will he be parked and collecting dust those 6 months? Something to keep in mind as well.
It might be better to not think of this as a decision that will affect 30 years of their lives, but as a test to start off with and then adjust to make it work on the long term. In other words, I would recommend trying out living in Thailand first before they commit to a long-term plan. They could try a Partial FIRE light, where they go to SE Asia for 2 months and get a better idea of how it could work for a 6-month plan.
Let’s review the options:
A) Full Fire
B) Partial Fire
Seems rather black or white to me. How about something in between which sets them up for a less stressful life.
C) Coast-Fi. In 4 years they can set enough away, a sum greater than 229,035 that they’ll be able to comfortably retire at 62 without continuing to worry about retirement contributions. Add one more year to establish an emergency fund under their belt, and then go part-time fire. Contributions should be made to a 401K to keep California’s hands off of the money, and decrease the effective tax rate.
D) Lean-Fi. Save enough that you can fund a ramen soup life in a cheaper location indefinitely. Let’s calculate that as the $2520/mo from Thailand for 30,240 annually. 756,000 or 9 years to reach it.
E) Remote work. Finding positions which allow them to live remote that pay potentially 10-15% less. Then they can be digital nomads and go wherever they feel like, whenever they feel like.
There’s plenty of tax arbitrage strategies to pay less taxes when you early retire. First one being, move out of California to a 0 income tax state and become a digital nomad. And the married filing jointly 12% tax band goes up to 81,050. That’s nearly tax free, and shouldn’t be a major hinderance on the 401K ladder strategy. In fact, I regularly recommend filling up to the 12% tax bracket if possible now, instead of waiting to see how the tax code or your income will change over the coming years. For example, 12% is less than the Long-Term Capital Gains tax beginning at $80,000.
That being said, you won’t catch me ever living in that tax-hungry state!
I don’t understand where people get the idea that California is a “tax-hungry” state. Sure, the top tax bracket is very high, but for a family of three in 2020, you would have had to have almost $50K of income before you owed a single dollar of CA income tax. There are plenty of places in CA where you can lean FIRE on that amount.
The general idea about California’s tax status is in a direct comparison by state of gasoline, income, sales, and property taxes. There are a number of studies on it, as well as other resources available which compare cost of living by city as California is more expensive to live in than most other states. Here’s a few examples, but they’re a dime a dozen.
Every state has to bring in taxes in order to fund their programs and maintain infrastructure. I personally prefer states with lower income taxes and higher sales taxes as I’m frugal by nature and travel regularly. If the goal is to pay 0% income tax as mentioned in the article and be nomadic 6+ months of the year (Thailand as mentioned in the post), you don’t claim a high income tax state as your domicile.
Geo-arbitrage is a major plan for a lot of FIRE followers both during the build of assets, and once retired. As you’ve mentioned, California has a progressive tax strategy which increases based on income. So once retired it becomes a lot more palatable as reported income levels drop! Of course the living expenses are still high, but different strokes for different folks.
How would the mechanics of this work or did I miss it entirely? Would they keep paying rent on their place in La? Do they have to put everything in storage and find a new apartment every 6 months? That would be a big downside to me.
Pursuing partial FI and enjoying life now..ie when they are younger is the best option.
However, they could delay the pursuit of FI by another 5-7 more years…and double down on earning and investing during the 5-7 year period, while also paying down their outstanding debt.
Just the possibility of kao soi every day makes me say yes I’d do it! And Thai massage and sun and great people!