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When we started writing Quit Like a Millionaire, we never expected the sheer impact it would have on the lives of real people. It’s one thing to have blog readers write in and say “I love your blog! I sent it to my friend!” but a whole new level to get e-mails saying “your book changed my life.”
And as wonderful as these e-mails are, I sometimes wonder if our message is received quite the way we intended, especially when we get e-mails like this:
Dear Kristy and Bryce,
I just finished reading “Quit Like a Millionaire“. And I feel radiant, knowing that I’m closer to FI than I thought. I can’t thank you enough for putting the effort into writing this book!
I had toyed with the idea of moving from the US to Colombia in 10+ years from now and after reading your book, I’m convinced that’s what I’ll do but probably sooner!
I have questions about the strategies you talk about in the book: Cash Cushion, Yield Shield, and the Roth conversion ladder.
ABOUT MY SITUATION:
According to my calculations, only looking at my new estimated spending when I leave the US, it seems that I can retire in 5 more years. As of now, my gross income is 80k USD. At this point, I spend about $35,000, once I move it will drop to about $15,000 USD.
And I don’t have any fixed assets, the biggest debt I have are my student loans which are 79k right now, the interest rate is 5.7%, I have 8 more years to pay off the loan. But I plan to continue paying this down through the Public Service Loan Forgiveness (PSLF) program, even while living in Colombia, working an additional 3 more years for an NGO.
So I believe that in those three years that I’m in Colombia paying my loan, I’ll probably make around 30k being conservative.
This brings my retirement a lot sooner than I thought. After I’m done paying my student loans, I plan to do a side hustle and make about 10k a year or more. Whatever extra I make I plan to continue investing it.
Could you help me figure out when I should begin implementing the yield shield, cash cushion strategy, and if I should do a Roth conversion ladder?
So far I only have $32,425 in assets (just including my 401k and Traditional IRA), and I’m saving about $25,500 a year (cash savings, Traditional IRA, 401K) with an ROI of 6%. Here are my calculations:
Year Balance Savings ROI Total
1 $ 32,425 $ 25,499 $ 1,946 $ 59,869
2 $ 59,869 $ 25,499 $ 3,592 $ 88,960
3 $ 88,960 $ 25,499 $ 5,338 $ 119,797
4 $ 119,797 $ 25,499 $ 7,188 $ 152,483
5 $ 152,483 $ 25,499 $ 9,149 $ 187,131
6 $ 187,131 $ 25,499 $ 11,228 $ 223,858
7 $ 223,858 $ 25,499 $ 13,431 $ 262,788
8 $ 262,788 $ 25,499 $ 15,767 $ 304,054
9 $ 304,054 $ 25,499 $ 18,243 $ 347,796
10 $ 347,796 $ 25,499 $ 20,868 $ 394,163
And I think my FI number is 125k, so that puts me between year 3 or 4. But I’m guessing it would probably be better to move down to Colombia in 5 years, to be on the safe side.
Here’s why I think that it will take me 5 years, and I hope you can guide me.
In your book, you write about implementing a cash cushion and yield shield when you’re ready to retire.
But should I aim to have enough cash and yield when I’m ready to retire? By the time I retire, I’d like to have 75k in cash and dividends and then set up my yield shield for 5 years. Am I thinking about this the right way?
As of now, I don’t have any yield or enough cash. I started contributing to a 401k 3 years ago, and recently to a Traditional IRA, so that’s probably why I have little in dividends.
I have a 401k where I currently own 80% in iShares SP500 Index, and 20% in bonds (Columbia US Treasury Index), I picked the stocks and bonds with the lowest fees. But I noticed that my dividends are not doing so well under this selection. And I was told by CUNA, the management company, that all the dividends in my 401k just get reinvested back and that the SP500 doesn’t accrue many dividends.
I also have a Vanguard Traditional IRA, that I just opened, and I’m hopeful that my dividends will grow faster here. I have 70% in Vanguard Total Stock Market (VTI), with a yield of 7%, and 30% Vanguard Total Bond Market (BND), with a yield of 4%.
Do you think I should wait until I have 75k in dividends and cash, to retire?
And lastly, since I potentially have 5 more years to retire should I begin my Roth Ladder conversion now? The way I see it if I remove the little amount of money that I have in my portfolio now, I would have less money growing passively in the 5 years that I have left to retire. So I’m not sure if a Roth conversion ladder is the best approach for my case.
I’m wondering if it would make more sense in my situation to take the 10% penalty and pay the taxes, I was reading about that on Mad Fientist
If I go this route, do you recommend that I take out more than what I need in a year, or only take out what I need for the year and pay the penalty and taxes?
Anyway, reading your book was an eye-opener for me, I’m spreading the gospel of FIRE, with my friends and family.
I really appreciate your time and I’d be so grateful if you’re able to take on my case!
Hoo boy, this one’s a doozy. We get a LOT of emails like this from bright-eyed bushy-tailed people relative newcomers to the FIRE space who think they’re only a few years away from retirement despite having relatively little money. And part of this is that we make retirement and nomadic travel look a little too easy and carefree .
Make no mistake: We are probably the most conservative, risk-averse and cautious FIRE bloggers out there. We don’t do anything haphazardly, and there’s a lot of RetireInColombia’s email that makes me cringe. Lines like “I have 70% in Vanguard Total Stock Market (VTI), with a yield of 7%” indicate a fundamental misunderstanding of how stock market investing work, so we’re going to have be very careful in picking through this reader case because there’s a lot of dangerous misconceptions in here.
You can’t retire if you are dependent on the PSLF
“I have 8 more years to pay off the loan”
Okay, so what’s wrong with this statement? To be eligible for the PSLF (or Public Service Loan Forgiveness program), she’ll need to work for a non-profit or the government, making 10 years of eligible payments for her loan to be forgiven. Big emphasis on ELIGIBLE. Which means she needs to be working FULL-TIME. Which means, no, you can’t be working part time for an NGO making $30K/year or relying on a side-hustle.
If she plans on moving to Colombia in 5 years, she’ll need to find a full-time job working for an NGO. So partial FI or partial retirement in just 5 years is out of the question. At minimum, you have to keep working full-time for 8 years.
You can choose whether you want to re-invest your dividends or not
“I was told by CUNA, the management company, that all the dividends in my 401k just get reinvested back and that the SP500 doesn’t accrue many dividends. “
Seems like this management company is as confused as she is. You should be able to choose whether you re-invest the dividends are not. What we’re talking about here is the DRIP (Dividend ReInvestment Plan) and she can opt out of it to live off the dividends in retirement. So no, they don’t “just get re-invested”. They do what you tell them to.
You’re Confusing Dividends/Yields with Capital Gains
“I have 70% in Vanguard Total Stock Market (VTI), with a yield of 7%, and 30% Vanguard Total Bond Market (BND), with a yield of 4%.”
Where do I even begin? She’s confusing yield with long term capital gains here, and that makes me so nervous all I want to say is: “please step away from your Vanguard account!” Don’t invest until you figure this out.
Yield is the dividend that a stock pays out to an investor. The long term capital gain is the increase in the stock’s value over time. You get paid the yield regardless of what the share price does, but in order to realize the capital gain, you need to sell.
The average return of VTI over 10+ years is 7%/year, but the yield is only 1.78% per year. BND pays an interest rate of 2.74% per year.
When RetireToColombia says she’s not seeing the yield she’s expecting, she’s actually talking about total return, which is a combination of both dividends and capital gains. Again, please don’t invest until you understand the fundamentals.
You need to recalculate your Cash Cushion
“Do you think I should wait until I have 75k in dividends and cash, to retire?”
To hedge for sequence-of-returns risk, we recommend having a combination of yield and cash cushion to cover your expenses for 5 years.
Well, given that RiC’s planning to live on 15K in retirement, let’s see how much she’ll need to survive the first 5 years.
After building up a Yield Shield and getting her portfolio yield up to 3%, she’ll need:
Cash Cushion = (Annual Spending – Annual Yield) * Number of Years = ($15,000 – 3%*$125,000) x 5 = $56,250.
In this case, for extra protection against sequence-of-returns risk, she should save an extra $56,250 in cash.
So $75K is actually more than she needs.
That’s Not How a Roth IRA Conversion Ladder Works
“Since I potentially have 5 more years to retire should I begin my Roth Ladder conversion now? The way I see it if I remove the little amount of money that I have in my portfolio now, I would have less money growing passively in the 5 years that I have left to retire. So I’m not sure if a Roth conversion ladder is the best approach for my case.
I’m wondering if it would make more sense in my situation to take the 10% penalty and pay the taxes, I was reading about that on Mad Fientist “
Oh God no. The whole point of the Roth IRA Conversion Ladder is to convert money from your traditional IRA into your Roth using the standard deduction limit, AFTER retirement, since your income will drop to zero at that point. That way you can get the money out tax free. If you do it while you’re working, your income is taking up that tax bracket, thus defeating the whole purpose.
Why would you take the 10% penalty? Do you like paying extra money to the government for no reason? If you end up making some money with side hustles in retirement, get your tax deferred money out with the standard deduction, and then pay some additional taxes on your side hustle. If you don’t use the ladder, you’ll get hit with 10% penalty, plus additional taxes on your after-retirement income. That makes no sense.
Now I know my reaction to her e-mail might sound a bit harsh, but as I said in Quit Like a Millionaire, I’m not here to tell you what you want to hear. I’m here to tell you the truth. And the truth is, you have to understand what you’re doing before you do it. Better to get all the kinks in your plan worked out now than to be caught with your pants down later.
Is Her Plan Even Plausible?
Okay, so with all the misconceptions out of the way, let’s see if her overall retire-to-Colombia plan is even plausible.
First, we’ll summarize her finances:
In order to support a $35K/year spending in the US, she’ll need $35,000 *25 = $875,000 by the 4% rule.
This means, it would take her:
|Year||Starting Balance||Annual Contribution||Return (6%)||Total|
(Note: for simplicity sake, we are assuming that inflation is balanced out by a yearly 2% raise at work.)
18 years. Now that might sound like a long time, but given that most people take 30 or more years to retire, it’s not bad. Plus, given that RiC is able to save 42% of her salary, that’s way better than the average US savings rate of 8%.
RiC also says she wants to move to Colombia and drop her cost of living to $15K.
Well, I’ve never been to Colombia before, but according to Numbeo , it is possible to live there on $700/person/month including rent, and having been to low cost places in the world like Thailand, Poland, and Vietnam, I can see how you can use the power of geographic arbitrage to significantly lower your cost of living while increasing your quality of life.
That being said, I’m a bit skeptical of this plan because I don’t actually know if RiC has ever tried to live in Colombia, or what the Visa situation is for the country. If she has family or roots in Colombia, then this could be quite easy. But if not, she’ll have to go through immigration, which is a whole other can of worms.
Plus, her yearly expense is $35K USD, which is on the high side for an individual (considering how we spend 30K USD/year or $40K CAD/year for the two of us travelling the world), so I’m not confident she’ll be able to drop her expenses by more than half if she’s never had to live on $15K before.
Reservations aside, let’s see how the math would work out if she made such a move.
By dropping her expenses down to $15K/year in Colombia, she will then need only $15,000 x 25 = $375,000, which would take her:
|Year||Starting Balance||Annual Contribution||Return (6%)||Total|
She also mentioned she’d like to start a side hustle earning $10K/year. That would drop her living expenses down to only $5000/year. Which means she would only need $5000 *25 = $125,000.
To build that portfolio, she would need:
|Year||Starting Balance||Annual Contribution||Return (6%)||Total|
But since we mentioned she should have 5 years of cash cushion earlier, she should add another $56K, which at her savings rate, would take another 2 years to save up, so 6 years total.
However, we have to take into account that it will take 8 years for the PSLF program to kill off her student loan. So even though the math suggests she can retire in 6 years, the PSLF is her limiting factor which will push her retirement date out to 8 years.
So my recommendation is to stay in her current job for the full 8 years until her student debt gets forgiven. It’s just not worth the risk trying to move down to Colombia before that date and finding another full-time job with a US-based NGO. Then and ONLY then, will she be able to ramp down her work hours and go all-in on her side hustle.
And finally, there’s that big assumption that our reader will be able to pull off a $15k/year lifestyle in Colombia that she will enjoy. Test this lifestyle out first by travelling there for a few weeks and living like a local. This will tell her whether she can realistically live on $15K year after being accustomed to living on $35K/year.
What do think? What would you do if you were RiC?
Some of you have asked about recommendations for tools to track your travel expenses. My friends and fellow world travellers, Mr & Mrs. NomadNumbers, have created a nifty Travel Tool, which helps you track your expenses while travelling and breaking it into categories (similar to the table I use in the “Let’s go Exploring” travel series). It’s free and currently in Beta. We would love to hear your thoughts on it!
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70 thoughts on “Reader Case: Can I Retire to Colombia in 5 Years?”
Oh mylanta. Good job telling it like it is and going through these misconceptions one by one. I didn’t know you received reader cases like this and it’s making me realize I should be more thorough with my investing explanations on my own blog.
I completely agree with your recommendations – stick to the current job for 8 years until the student loans are forgiven and then test how much is needed to live the life they want in Columbia before pulling the trigger. Maybe visit for 6 months or something and then recalculate what they can live on and if a part time job and/or side hustle is needed to get where they want to be.
“oh my lanta”, I’ve heard that saying before 🙂 It makes me think of Koh Lanta, Thailand, but pretty sure that’s not where it originated from.
How are you doing, APL? Are you excited to be FIRE-ring soon?
Haha – I thought it was a southern thing, but it would be much cooler if it’s based on a Thai city! I’m good!! Super excited to pull the trigger in about 9 months and in the meantime trying to enjoy my last winter…hopefully ever 🙂 .
Awesome! What’s the plan after pulling the trigger? Travel? Eat all the things?
Exactly that – how did you know lol? Kicking off retirement with FinCon 2020, then a month exploring New Zealand and Australia, then a month in Argentina to visit my college roommate, a few months being near family for the holidays and then I’m off to Thailand for a month in February 2021. That’s as far ahead as I’ve planned.
That’s funny, I thought it was based on an antacid product. 8^) https://www.webmd.com/drugs/2/drug-15586-5123/mylanta-oral/aluminum-magnesium-antacid-oral/details
Gosh so many misconceptions in her email. I wonder how many people out there have the same misconceptions, try FIRE out and it doesn’t work then go bad-mouth FIRE on sites like marketwatch (they’re loving to do that).
I recommend these people to start from scratch, read and research a lot more. Use FI laboratory at madfientist, use the cFireCal, read stock series and The Simple Path to Wealth and many other tools before pulling the trigger on it. You’ve got to plan this out guys very carefully…it should be for the rest of your life so….plans A to Z are necessary.
Good luck to her in Colombia, it’s a great country !
Yeah, it worries me. Hopefully showing the misconceptions will help other readers understand and clear up their own confusions.
I’ve heard a lot of good things about retiring in Colombia. Have you been?
It actually is possible that the 401k dividends are re-invested automatically, without any option to do otherwise. It depends on the plan. In my own 401k, all of the regular fund options automatically reinvest all dividends, and not only can you not change that, I just looked at my transaction history, and they don’t even show the dividend reinvestments as transactions. Evidently they’re just compounded into the NAVs of the funds as they accrue.
Yep…my 401K is the same way.. no option to take distributions as cash.
Yes, that’s how my plan is, too. I thought they were all that way, but I guess not.
That’s odd. Good to know and thanks for sharing. On the plus side, while she’s in the accumulation phase she’ll want to drip it. Once she leaves and transfers it to an traditional IRA, she can choose not to.
Yikes !! Definitely cringe-worthy !!…although much deserved kudos to this young woman for starting to think about FIRE ! …she’s starting on the correct path.
I think this young woman should spend a few months educating herself about the basics of investing, mutual funds, etc. More importantly, she should do a deep dive into the subtle nuances of SLFP and learn EXACTLY how this program works. Is it even possible to do an SLFP while out of the country ? For the record, I know absolutely nothing about SLFP stuff, but I do know several people who got mired in the minutia of pulling off an SLFP, but for various reasons it never worked out and they throw up their hands, throw in the towel, and end up in forbearance.
I’m hoping this young woman does spend time learning. Maybe she can ask FireCracker the question again, only this time armed with a good understanding of investing….I’m betting FireCracker would have a much happier answer for this young woman !
You mean PSLF, not SLFP right? My research shows that if you work for a NGO abroad, you are eligible, even if you’re not in the country, but probably it’s probably safer to keep working until it’s forgiven before considering the move to Colombia.
Am I reading correctly that this person wants to call herself financially independent at a net worth of roughly $100k or less (including the student loan debt)? That seems… optimistic, no matter where she plans on moving to.
There’s nothing wrong with planning to build a cash cushion and move somewhere with a lower cost of living to continue to work in order to be able to pay the bills, but it sure doesn’t fit any definition of “financially independent” that I’ve ever seen. You’re FI when “going to work for a paycheck” becomes optional, or a Plan B.
That said, you don’t necessarily need to be FI to be happy.
Yes, exactly. Let’s commend here for being off to a great start! But 5 years and 125k or 150k just isn’t realistic, unless she’s really sure she can earn that side income. If that’s the case, she should start doing that NOW!
Off to a great start, but really needs to learn more of the mechanics of investing and needs to have more realistic expectations. Things go wrong. 125K or 150k in savings makes you very vulnerable, even in a cheaper country. Just as Jason Feiber at mrfreeat33.com. He’s leaving Thailand because the visa restrictions are making it difficult for long term foreigners to stay there. Fortunately for him, he has several online side gigs that pay a livable amount in a place like Thailand plus a dividend stock portfolio valued at over 400k. He’ll be all right.
Thailand is getting pickier about visas. The good news is that there are plenty of cheap SE Asia countries to choose from (like Malaysia and their 6 month tourist visa). Not sure how it is in Colombia.
It’s partial FI. If she plans to make money in retirement or ramp down her hours to part time, it’s do-able. Especially considering there are digital nomads working overseas with no safety net and no portfolio subsidizing their expenses. Partial FI is a way better option. I would recommend that she start building the side income while working.
Yes, I agree, it’s partial FI…but it’s the low end of partial FI at that (and I’m not one for high living, I promise). I’m in complete agreement that she should start earning that side income now, to test how feasible it really is, and to add to her nest egg.
Thanks, Firecracker for analyzing my case! And thanks to everyone who has commented, it’s not every day that the internet shows concern for a random stranger!
That being said, I didn’t do a good job of presenting my case, and I hope I can start a conversation about ways to take out your money early and what to do when most of your dividends are reinvested in your 401k.
More about my case: I’ll be brief, but I wanted to share a couple of more details about my case. I have lived in Colombia before and I know that 15k a year in living expenses is more than enough for one person. I am desperate to retire from the 9-5 grind and from living in the US. So I’m looking for jobs with US NGOs, 501 (C) (3)s, or US gov., in Colombia, and I’m willing to take a pay cut. But I know I should probably work as long as I can and save as much, but if I find a good job down there that boosts my savings rate while paying off my loan, I will take it.
Of course, my partial FI plan is dependent on the existence of a functioning PSLF program, and I know I need a plan B. I’ll have to work on that!
Anyway, on to my 1st question about ways to access your retirement funds early. The Roth conversion ladder doesn’t appeal to me, especially after learning that paying the 10% penalty might not be a bad deal. See the Madfientist article below, that I had shared with Firecracker in my original email:
If I make below the minimum taxable income as married filing jointly and chose to pay the 10% penalty, then I don’t think I’ll have to pay taxes twice as Firecracker stated. Plus, I won’t have to wait 5 years after I retire to enjoy my money.
According to the Madfientist, if you chose the 10% early withdrawal penalty to access your funds, then the outcome could be the same or even better than other options. Has anyone thought about this?
I’m not sure if this a good option for me since I won’t have much when I reach partial FI. However, I also plan to keep growing my nest egg through geographic arbitrage.
2nd Question: Although my 401k doesn’t let me reinvest my dividends, most of my money is going there now since my employer match is pretty good. But I’m not sure how much to put in my traditional IRA to build a cash cushion of 56k in 8 years, and which ETFs and bonds to buy in this current market. Any thoughts on that?
Her ‘numbers’ may work out initially, but what happens when she’s older and no longer capable of earning any side money? Her nest egg needs to be large enough such that it can support her no matter what her future earnings may (or may not) be. With out that she has no real security.
I think it is very risky to assume that she will move to Colombia forever and live for 15K. What about if she does not like it even if she is originally from Colombia. I am Colombian myself and I think that living there after living in USA can be hard. It may be good for a couple of years, but the honeymoon phase can pass. Colombia is a beautiful country but there is still violence, crimes, corruption, etc.
And getting a job there is very hard, salaries are usually very low as well.
Yeah, I think so, too. It’s great to hear it from a Colombian, though. That way the rest of us don’t come off as spoiled worrywarts from rich countries assuming the worst about poorer countries.
That’s why it’s good to try it out first.
I really appreciate your conservative approach to investing and retirement.
I sometimes cringe at blogs recommending an agressive portfolio for novice investors. Portfolio performance has a great deal to do with understanding how a portfolio works, and how YOU behave when it goes down. Great advice!
Thanks. Everyone loves to cowboy/cowgirl it up when the markets are rampaging. Different story when it goes the other way. Better to have too many backup plans than not enough.
I love it that you are so frank. I think her plan is dangerous especially with the student loan debt. I think people should be planning retirement unless they are debt free, mainly because you really can’t forecast how much debt you will off over time. Then, I think the figures she’s giving is just way too low to think of true retirement. It is so dangerous that people can think in this wya.
Yes, get rid of the debt. Kill that monster first.
Hi Firecracker (and anyone else who travels full-time),
Not related to this scenario at all (sorry) but I’d love some more information on how much you think you’d spend on flights and other travel if you weren’t able to access fantastic credit card rewards? Kiwi credit cards just don’t provide these goodies so I would appreciate an estimate of how much extra you would factor on to your $30kUSD annual budget if you had to.
I would say if you can’t rely on travel hacking with credit cards, go with Norwegian Airlines for long haul flights and Ryanair and Easy jet for short haul within Europe.
We’ve flown from Bangkok to Oslo, Stockholm to Bangkok for $265 USD each (that’s a 10 hour flight!). We also look at Westjet, Air Transat, and TAP for cheap flights from Toronto to London or Lisbon.
I’m not sure what your options are from New Zealand so check google.com/flights to track price dips during week days. You may need to budget an extra $3000-$6000/year per person if you can’t use budget airlines or points. It all depends on where you want to go and how often you want to change locations.
Thanks Firecracker. Living in NZ has many benefits but credit card rewards are definitely not one of them.
This makes me both happy and a little frustrated. I think all of us who have reached FI and are now sharing our stories find joy in seeing newbies to the FIRE world come up with creative ways to escape their current situation. But, you MUST know investing strategies and withdrawal strategies that make the most sense for you and your situation. How? Read read read read read. Now that the FIRE community has grown so much, there are tons of amazing blogs, books, and podcasts to immerse yourself into. That all being said, I want to give kudos for thinking outside the box and coming up with a plan to move to a low cost of living country. I’m not going to bash your $15/year annual expenses as we are a family of 3 living in Canada on $25,000/year. My 2 major thoughts/concerns are: 1. Do you plan to live on $15k/year for the rest of your life? And 2. Do you want to be dependent on a $10k side hustle for the rest of your life? If yes to both, go for it once you have all debt paid off and a $125k NW. If not, I’d urge you to build up your next egg above $125,000. To me, that number reads “I saved up enough to go live in a low cost of living country and still need a part time side hustle” not “I reached FIRE”. My suggestion is to keep working until you have a NW of at least $375,000 and then reassess. Or, if you are unhappy with your current set up, save up to $125,000 and kill off your student loans then go try the whole move to Columbia and get a $10k/year side hustle like you mentioned. You never know what your next steps may be. You may love it and live like that for 50+ years. Or you may decide you want to change your lifestyle which requires you to come back to the corporate world. You had a nice sabbatical which probably allowed you to clear some thoughts and figure out the life you really want to live. Even if it means you have to go back to work 10 years from now, so be it. Just realize that going back to work at some point in the future may be necessary if $15k isn’t enough. So I’d say go for it once those student loans are paid off and you have a sufficient best egg to try it out. But I’m the meantime please keep reading all the FIRE content out there 🙂
I’m sorry, I got distracted by this “I’m not going to bash your $15/year annual expenses as we are a family of 3 living in Canada on $25,000/year.”
Holy shit. Well done! Would you mind sharing your expenses? I’d love to share your tips with readers on how to optimize your expenses as a family.
Hahaha, thank you. We wrote a blog post on our monthly expenses. And we’d be more than happy to come on as a guest post if you’re interested to explain our lifestyle/values and how we’re able to keep our expenses so low – just shoot me a message if it’s something you’d like to chat further about.
Thanks, I’ll take a look.
Warning, don’t cringe, we house hacked.
Why would I cringe? As long as you mathshitup, that’s a legit way to get to FI. I did a guest interview with my friend Craig who wrote a book on House Hacking remember? Congrats on making it work for you 🙂
Haha yea I was being sarcastic (I know it’s hard to show that over the internet lol). And yes I remember that guest post 🙂 I also know where you’re coming from in the past as a potential home owner in TO and that making NO sense. We were “lucky” to be in the right place at the right time for house hacking to work wonderfully for us. Paid off the mortgage in 2.5 years.
I actually have a similar issue, I am wondering how PAYE plays into retirement planning. The interest % on my loans is definitely lower than average market returns. I have been doing better than the market, because I use a couple thousand $ of my savings each year to get bank signup bonuses (which are also FDIC insured). My cost of living is very low, I had a tiny bit of lifestyle creep and feel like I’m living like a queen in a major east coast city, my own place, on about $18000 a year (including couple short vacations- visit family, hiking, or cheap countries- goin to Colombia myself next week)
Everything I see says pay off debts first but it doesn’t make sense to me- the interest says differently. So then the issue is which account to put money in- Roth or trad IRA? (I am self-employed, don’t have 401k match option) My loans will be forgiven in 15 years, at which point I’ll have to pay taxes on the amount forgiven. I expect to be in 12% bracket excepting that year.
Impressive that you’re able to live like a queen on $18K/year! This debunks the myth that you have to spend tons of money to live well in North America.
As for your debt, it depends on your interest rate. Generally, my rule of thumb is to pay it off if it’s more than 4%. And if you’re already in a low tax bracket, Roth makes more sense since you’re not in the situation of earning in a high tax bracket and then withdrawing when you’re in a low tax bracket. Do you mean your current tax bracket is 12%? Or You will be in that tax bracket in 15 years?
Both- my current is 12%, and there is no reason for me to expect to be doing much more than that. If anything I’ll be saving more but in same bracket (good chance my housing expenses will be going down due to living with partner- either half this, or free depending whose place we pick)
Not to mention that recent reports show that the Education Department has rejected 99% applicants in the PSLF program. (https://www.npr.org/2019/09/05/754656294/congress-promised-student-borrowers-a-break-then-ed-dept-rejected-99-of-them) Now I believe the government should change its processes to reduce the rejection rate and provide the loan forgiveness that was promised, but this scenario also depends on successful approval from this program. With that high of a rejection rate, it’s a risky decision to rely on the program. To reduce that risk, I encourage the reader to become familiar with the PSLF requirements and document everything to improve her success in future loan forgiveness. Hopefully the government will get it’s act together by then, but there’s no guarantees.
Definitely a good idea to document everything and make sure she’s eligible.
The country’s name is Colombia. Not Columbia. Good information aside from that!
I was wondering about that ?. Kudos to RiC for pulling her head up out of the sand to see the many alternate possibilities she may pursue – other than work-spend-work-spend or whatever it is most people do.
I love hearing from people who have just newly discovered the whole FIRE world. It’s a game-changer, no matter your objectives.
To follow on this great post, my advice is: Starting with your dream idea, read *everything* you can get your hands on. Lifelong learning, right? Including other seminal books from the library (i.e. JL Collins The Simple Path To Wealth , Vicki Robin’s Your Money Or Your Life – you already read Quit Like A Millionaire- quickly becoming a seminal book of its own ? – read it again, twice).
Try out Colombia if you haven’t already. Do not rely on the loan forgiveness- just pay it off and be done. Keep working on higher paying work, and at minimum you can be confident that you’re working and saving toward a big goal. That is light years ahead of most!
Thanks for your 2 cents, ChrisB. Agree that she is light years ahead of most. Her 42% savings rate and salary is great. Just need to iron out the other details.
Thanks, had a couple of typos 😉 They’re fixed now.
No problem! I love these Reader Cases! I feel like a learn a lot better from going through real-life exercises. I will send you my numbers once I am closer to FI to have an experienced second set of eyes look at it. 🙂
There is a special place in hell for people spelling Colombia with a U :).
My wife is Colombian and we plan on living 3-6 months there when we’ll be Fired. Still another few years though.
Colombia is also becoming expensive, especially in big cities (Bogotá, Medellin and Cali, let alone Cartagena being ridiculously expensive) so it’s important to budget correctly, my wife and I plan to live on 35-40k / year. We currently live in China (supposed to be cheap) but already spend 30k (due to traveling a lot).
Very ethical and thorough analysis of a very confuse FI case FireCracker!
FI does not have to be very complicated – KIS, keep it simple!
If you want to experience Columbia in 10 years:
1. Live on $20K per year
2. Pay off the entire $79K in the next 2 years with every dollars left from the $20K annual expenses
3. Starting with the 2nd and 3rd years, invest all the saving into any low cost index funds
4. Day dream Columbia until the 10th year or the account has compounded $500K in value.
If you wan to experience Columbia in 8 years:
1. Live on $17K per year
2. Pay off the entire $79K in the next 2 years with every dollars left from the $20K annual expenses
3. Starting with the 2nd and 3rd years, invest all the saving into any low cost index funds
4. Day dream Columbia until the 10th year or the account has compounded $500K in value.
Both plan will condition you to live on an income that is closer to the 15K in Columbia. This is very critical to any FI plan.
If you adopt one of this KIS plan – you will have 30 years of FI at 88% probability of success!
Thanks, TE! KIS is right. Love your pragmatic engineer’s take on it.
Wow, it is scary to think of how lost some people are and they are potentially spreading this misinformation to friends and family too. My dad is an accountant so I was fortunate enough to be able to tell him my plan before we made the big life changes we made and at first he reacted angry/scared like he didn’t think I knew what I was talking about either but as I explained more he realized that I did know what I was doing. He wasn’t super supportive but I wasn’t expecting him to be and he wasn’t unsupportive either. I just wanted to tell him what we were up to in order to confirm that I did know what I was doing and in case he saw any glaring red flags in my logic that would end up screwing us over in the end.
Hopefully this reader case can serve as a warning to the others you mentioned who don’t seem do understand all of the different aspects of FIRE and make them realize that they need to do more research. Though I’m sure that there are a lot of lost people who would still read this and think they knew what they were doing and it was just “those other people” who are lost. Good luck to the person from this case, it’s probably not the response she wanted to hear but it is certainly the one she needed.
It’s a learning process. It took us 9 years of learning to get here, so I don’t fault her for not getting it right away.
Your dad’s initial reaction is similar to my dad’s. It took him 3 years to understand what we were doing and to trust it. So yeah, it takes time.
The whole PSLF debacle makes me so grateful to have paid off my student loans shortly after graduating. I can’t imagine living with that kind of debt for so long, and being restricted to work for certain types of employers. That sounds like a prison sentence.
How much student debt did you have and how long did it take, if you don’t mind me asking?
$21,000 ($8,000 from undergrad, $13,000 from grad school). Starting salary $50,000.
I think your analysis here is overall on the mark, but I do want to quibble a bit with your horror over paying the 10% early withdrawal penalty. The Mad Fientist article your case study references (https://www.madfientist.com/how-to-access-retirement-funds-early/) does the math on SEPP 72(t) versus Roth ladder versus 10% penalty versus taxable-account, and surprisingly finds little difference between the first 3 (investing/withdrawing only from taxable account is the loser).
Obviously this all depends on your own particular savings/earnings/withdrawal scenario, but for those too disorganized (no excuse!) to set up a SEPP 72(t) or Roth ladder, dipping into your IRA and paying the 10% penalty does not appear to be an apocalyptically bad choice. Basically, getting the money now and paying the penalty partially offsets the 5 years of lost earnings on those taxes you pay now with a Roth ladder.
That being said, it’ll be a Roth ladder all the way for me when I finally convince my SO that we’re FI already 🙂
I agree with you that it’s not apocalyptically bad, but at the end of the 60 years in the MadFientist scenario, the Roth ladder still wins over paying the penalty. It won’t be the end of the world if it ends up being too confusing for her to set up, but I would still do it if I were her.
As for convincing your SO, have you tried showing her the “Playing with FIRE” movie? 😀 Scott did a great job getting his wife Taylor on board the FIRE train. It wasn’t easy though, so best of luck to ya!
Great job dissecting this case! I’d have to admit that I got a bit lost at the beginning. It took me a while to realize that the person had some misconceptions about the basics. She should definitely do the eight years before even contemplating on her exit, which is a whole other (emotional) animal. About to give notice tomorrow (after eight years in the planning). See you on the other side.
“About to give notice tomorrow (after eight years in the planning)”
Whoa! Congrats on FIRE-ring. Let us know how it goes!
There are so many assumptions embedded into FIRE b/c of the long timeframes, and given that Retire to Colombia has almost no margin for error, I agree with the tough love answer. I don’t think, however, that Retire to Colombia needs to necessarily work full-time and therefore wait 5 or 10 years to try out her plan. She might consider a sabbatical from work if that’s an option and going out to Colombia to experiment with her desired retired life. At the very least, she gets some excellent on the ground data. She can also tweak her plan as needed. My husband and I consider ourselves early retired b/c we’re both out of the 9-5 office job, but we’re still working on various passion projects and tweaking our portfolio along the way. Waiting for a specific number in your portfolio is only one route to FIRE.
Sabbatical is definitely a good idea to test out retirement and living in Colombia. Hopefully that’s an option for her.
Mylanta is a heartburn/upset stomach medication, like milk of magnesia. So, when something bad happens, “Oh Mylanta!” or “Calgon, take me away!”
LOL. I had no idea that’s where it came from. Learned something new today, thanks!
It must be an American thing, lol
My two cents: contribute only enough to your 401k to get the match, then put everything else toward your student loan. Maybe max a Roth IRA too if you are really Jonesing to invest more (but really, at stock market highs, using excess funds to de-lever is never a bad plan). You can knock that big loan out way more quickly than waiting for the PSLF to kick in (assuming it even does…Google depressing news about that program). And then be free to move to Colombia and live your life however you want without waiting nearly a decade to get your loans forgiven. At that point you can super-save (your income will have risen plus you’ll have no debt to pay each month) and you can accumulate a lot in a few years. A lot of life can change in your 20s though, so who knows what your dreams will end up being – but either way you’ll be debt free with a great retirement account and income and ready to tackle whatever goal you want!
Has she even looked at the percentage of those who actually have gotten their students loans forgiven? It is abysmal. She shouldn’t be “banking” on the government forgiving her loans when the vast majority of people that even qualify don’t get them forgiven.
You are an absolute saint for devoting the time to dissect /digest /discern everything in that reader email
I’m not sure if anyone will happen across this comment, but I’d really look in to the taxation situation in Colombia. Especially for someone planning to live/work in country full time while receiving income from the United States.
I adore Colombia and had seriously considered it in my FI plans, but the high tax rates and double taxation on expats really isn’t ideal.
See info below..
“ Colombia Income Taxes
Expats who are in Colombia for less than six months out of the year are considered nonresidents. They will only be taxed on income that comes from Colombia, at a flat tax rate of 35%. Expats who reside in Colombia for more than six months out of the year are taxed on all their income, but will be taxed based on their income range. For these residents, the progressive tax rate ranges from 0% to 33%.
An individual who spends more than 183 days in Colombia will be considered to be a resident in Colombia. However, they may end up subject to double taxation. America does not have any exemption for double taxation with Colombia, which means that you may be a tax resident of both Colombia and America at the same time”