ERE - early retirement extreme or not :-)

[frugal]

Hello,

I know that many of you that want to ER or ERE use or will use HBPP.

I would like to know what are your plans for the future in terms of occupation and so on...


Very best regards.

[Greg]

I hope to make enough in the earlier years (I'm 25) and live significantly below my means so that I'd have the option for more flexibility in what I do for income in the future. Ideally, I'd be able to start my own small robotics business while not having to worry about income from it for a whiles.

[Pointedstick]

ERE is much more about your savings rate than your investment style, but I happen to think that the PP provides the ideal vehicle for those investments due to its reliably capital preservation, low volatility, and real return in the range of the safe withdrawal rates you'll be using.

My plans are to retire from my day job at some point, purchase a small house in cash and live off the profit from my 3D printing business until I'm truly financially independent (which I've calculated will require a 300k PP and a paid-off house).

Then at that point, I'll only need to earn money when I want to make a large luxury purchase (e.g. a nice new hunting rifle, airfare for a trip, expensive activities for the kids, etc). If I'm not doing the 3D printing thing anymore, repairing people's computers is always lucrative since people everywhere have broken computers, and I hope to be an accomplished enough woodworker in the future that I can sell my wooden creations.

I also plan to build myself a workshop in the backyard out of earthbags, to practice for the whole house I want to build later. Early retirement in no way means "sitting on my butt watching Wheel of Fortune all day" 

[Pointedstick]

PS, I like your post ER plans.  Do I understand correctly that you plan to live on the investment returns of a $300K PP, assuming a paid-off house?

Correct.  I've calculated that will give me a safe income of 12k/yr, which I can supplement with additional work whenever I feel like it. The paid-off house lets me keep the expenses that low, and ensuring that the house itself is small keeps related expenses like property taxes and heating bills low. We're shooting for under 1000 square feet, with a big backyard.

[k9]

ERE is much more about your savings rate than your investment style, but I happen to think that the PP provides the ideal vehicle for those investments due to its reliably capital preservation, low volatility, and real return in the range of the safe withdrawal rates you'll be using.

That's very true ! Interests have no time to compound for the very few years you are working to grow your portfolio, so what you invest in have very little influence in the overall result. Compare what, over 10 years, produce a usual 15% savings with a 10% real return (which is huge) and an ERE 50% savings at 0% real return, you'll be amazed.
And then, since you have a lot of decades to live on this portfolio, you better have it not to risky but rather inflation-proof, at the same time, so I think the PP is a very good strategy for EREs, maybe more than for anybody else, because you can't think "I don't care if I face a recession since I have decades of savings before I consume my PF" or "I don't care about a little inflation as it won't consume my capital fast enough for the 20 years I'll spend in retirement".

My plans are to retire from my day job at some point, purchase a small house in cash and live off the profit from my 3D printing business until I'm truly financially independent (which I've calculated will require a 300k PP and a paid-off house).

Is this for you alone or does this also include a spouse &/or children ? (I think it is, since you're talk about a "we" in your next post).

[Pointedstick]

My plans are to retire from my day job at some point, purchase a small house in cash and live off the profit from my 3D printing business until I'm truly financially independent (which I've calculated will require a 300k PP and a paid-off house).

Is this for you alone or does this also include a spouse &/or children ? (I think it is, since you're talk about a "we" in your next post).
[/quote]

Yup, right now it's me, my wife, and our son. We're planning to have another kid or two as well. Right now we live on a little less than 1k/mo after rent, which is why I'm anticipating needing a paid-off house. With no rent in the monthly bills, we'll basically be paying for food, health insurance, property tax, utilities, internet, call phones, and a little for shopping and luxuries. It all seems very doable.

[TripleB]

Fingers crossed Obamacare stays in place. The government will pay for 80% of your healthcare if you're "poor" which is represented by your AGI, which is easy to keep down in ERE even with $300k in your PP.

I don't know the specifics but it's somewhere between the poverty line and 400% of the poverty line - so basically just keep your taxable income down to $15k per year if single, and you get 80% subsidy on insurance.

Or just don't buy insurance at all, you won't be penalized if income at around the poverty line, and you can always buy a policy when you get sick and have it retroactively cover everything.

The socialists in power actually makes ERE very feasible... in the short term at least, assuming there's still people who find working under heavy taxation worthwhile.

[Pointedstick]

Yeah, I've started to look at things like Medicaid eligibility. No sense in paying $250/mo for private insurance if I can get the government to pay most of it for me.

With children and one or more planned pregnancies in the future, some kind of medical coverage is necessary. But the government plans might be a better deal than an expensive family plan HDHP.

Can anyone explain to me the whole "bronze plan, silver plan, gold plan" part of Obamacare? That's different from state-level Medicaid, right?

[TripleB]

I wouldn't waste too much time going into details. It's likely going to change by 2014.

[Pointedstick]

$1K per month after rent is excellent. 

By the way, when I calculate monthly expenses I include either a "reserve" or depreciation for things like cars and computers that will need to be replaced.  Our total expenses are nowhere near $1K per month though.  I'd love to see a breakdown of that, but I understand if you'd rather not share it.

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=2

the TL;DR version:

$350 Food
$250 Health insurance
$100 Car
$70 Laundry
$52 Internet
$52 Electricity
$41 Misc shopping
$30 Misc baby stuff
$17 Renter's insurance
$15 Dog food
$15 Misc home supplies
$10 Cell phone
$8 Netflix

[Tyler]

I'm also on the ER path, planning to retire from a full time job in the next few years before I'm 40.  I agree that your (reasonable) investment style really doesn't matter so much for the ER type in the accumulation phase compared to your savings rate.  But I can't think of a better portfolio than the PP for early retirement, as stability and peace of mind is critical for weathering the markets and enjoying yourself rather than constantly stressing about money (which defeats the point of ER entirely).

I'm nowhere near Pointedstick's admirable level of spending, but my wife and I are pretty thrifty and have taken major steps over the last year to bring our expenses down even further and we have a shot at saving 80% of our (after tax) income in 2013.  At that rate we should hit our larger goals pretty quickly.

Once we pull the ripcord, I'll probably still do a bit of contract consulting work for a little while just for fun and a little extra income (cherry-picking the projects that I find the most interesting).  But I'd like to spend my time learning skills that will both save and perhaps make me money in the future -- carpentry, electrical repair, bike repair, etc.  And with more time to draw/paint I can maybe get to the point where I can make a little fun money selling my work as well.

[frugal]

hi,

you have good saving rates and your aims are all about the same to do several things by yourself...

Do you know any inspiral video to show to my wife? I would like to do it, but she doesn't.

By the way, Portugal is a good country for your ER(E) :-)

Regards

[Pointedstick]

Think about it from her perspective: what's in it for her if you/both of you bust your butt(s) to save a high percentage of your income?

I'm fortunate because my wife is naturally very frugal and not in the least bit high-maintenance, but what I think is really important is that my end goal of not having to be out of the house for 9-11 hours a day is shared by her because she wants to be able to see me more often, especially with our infant son now. So even though she doesn't work, she understands that if she contributes to my ERE goals by spending very little and facilitating a household that requires less money to run, it brings her closer to goals of her own: being able to see more of me during the day, and being able to delegate more of the housework and parenting duties to me.

P.S. I agree that Portugal is a good place to retire. I've visited several times, and my father, a writer, loves how the Portuguese appreciate literature. He even wrote a book about his experiences living there for a year!

[RuralEngineer]

Having a paid off home/property seems like winning 90% of the battle for ER.  I live on just over 11 acres, and if I didn't have to work I imagine I could get our monthly food bill down to less than $50.  I could make a substantial dent in it now if I could convince my wife to eat venison.  With planning to start a family, I don't expect that I'll be able to retire in my 40's, but if I can get things pulled together and am retired in my early 50's, that's still a huge win.

[TripleB]

I used to think owning a home straight out was the first step to ERE.

I realized that you never actually own a home. Stop paying taxes? The government sends men with guns to take your house from you. Stop paying insurance? "God" will send a tornado to take your house from you. Live in your house? Pay 1% of your house value in repairs each year.

On top of this is the massive opportunity cost of owning your home. That's money that could be in your PP earning growth.

What's better? Owning a $100k to $150k home and having $200k in your PP, while paying $4k/year in Property tax/insurance/repairs... or

Having $300k to $350k in your PP and paying $7k per year in rent?

Big counter argument: "But if your house is paid off you don't have to worry about inflation. If you rent, your rent will go up forever."

That's true, but if you own a home, the property taxes, insurance, and repairs will go up forever as well. If "inflation" hits, your house is worth more money nominally. And property taxes/insurance which are based on assessed value will rise. Repairs will rise is cost as well because they involve materials. A roof in 2012 costs more than a roof in 1960.

Also, if your money is in the PP, it goes up with inflation as well. So while it's true your rent will go up each year, your PP is going up to inflation as well. In fact, you could put some REITs in the PP (or VP) if housing inflation is a concern.

It's nice to own a house and grow your own food, but it's also equally nice, in a different way, to live in an apartment forever, have significantly greater investment income, and have less to worry about. If your state, county or city government starts doing something stupid, you can't easily get up and leave if an ERE lifestyle. If you're renting it's trivial to move. It's not impossible to move/leave if you own a home, but it's easily a $10k to $20k expense to sell a house/rebuy a new one/move your stuff, etc. When you're living on an annual budget of $10k per year, then a $20k surprise expense to move is large.

[Pointedstick]

You raise a lot of good points, TripleB, and I wrestled with many of them myself before deciding to buy a house (haven't actually pulled the trigger yet, but have decided to). What I eventually settled on was that that the emotional math comes out differently if your rent is 15k rather than 7k, your house is 70k rather than 150k, and your property taxes, insurance, and maintenance are 2k rather than 4k.

We've settled on buying a modest < 900 square foot house for 65-75k in an area with depressed real estate prices and in need of some repairs that we can easily do ourselves. It will cost only five times our current annual rent and be barely any bigger than our current apartment, preventing lifestyle inflation.

I don't think moving is any more of a pain with a house than when renting--unless your house is significantly larger than your old apartment was. You can always rent out the house rather than selling it, and in fact, you could even leave all the furniture and rent it for more as a fully-furnished house, taking the opportunity to go without furniture and assess how much stuff you really need.

[Tyler]

The rent vs. buy decision is always an interesting argument.  It largely comes down to where you live and to some extent your personality.

For ER purposes, I prefer minimizing the known monthly expenses.  Having no rent or mortgage payment is far more valuable for cashflow security than a little more money in my portfolio (assuming the value of your paid-off home is small-ish relative to your total assets).  If the investments have a bad year, the fact that I'm not touching them for shelter (other than property tax/insurance) is great.

Property taxes are also somewhat in your control -- you can get a smaller house in a state with lower tax rates.  And if you're retired, you have the option (and time) to learn to do many types of home repair yourself to keep costs down.  BTW -- high-dollar things like roofs are what those insurance payments are for.  None of my neighbors have ever paid for a new roof, as periodic hailstorms take care of that for them.

That said, I appreciate the renters lifestyle.  At some point it comes down to what is important to you.  Would you rather spend your new free time decorating your home and landscaping just the way you like it, or traveling the world without caring about how the lawn will be watered?

[Coffee]

All due respect, but why would you want to spend the rest of your life living in a shitty $600 apartment, eating rice and beans?  You know you're gonna have to move every couple of years every time the landlord raises your rent or you get a crummy "$600 a month" neighbor who plays drums all night.

Do you know what kind of psychic damage you're going to inflict on your family by moving them every year or so?

Time to grow up:  Everything costs money.  Stop spending money on your wife and kid and you'll lose them, too. 

Here's my (admittedly) unsolicited advice:

Work hard for a couple of years, live frugal and pay cash for a nice $200k house in an area that has yearly property tax of $1300.

Instead of spending so much time and energy trying to figure out how not to work, why not invest that energy into starting your own business doing something you love-- and in a couple of years you can have your employees run the business while you go fishing all day.

And then go home to a nice house that's paid for, in a nice neighborhood.  With nice, thick walls that have great sound insulation and that you can paint whatever color you like.  Because you own it. 

[TripleB]

All due respect, but why would you want to spend the rest of your life living in a shitty $600 apartment, eating rice and beans?  You know you're gonna have to move every couple of years every time the landlord raises your rent or you get a crummy "$600 a month" neighbor who plays drums all night.

Do you know what kind of psychic damage you're going to inflict on your family by moving them every year or so?

I live very nicely in a $600/month apartment right now and my neighbors are very nice professionals. I'm extremely happy and the most I could see myself spending is $800/month and getting something a little nicer that's at the peak of what I could enjoy.

Single, no kids, and I haven't lived in the same city as any family members for 15 years.

As far as eating rice and beans, it's not quite that dismal. I do eat a lot of rice and beans but I do so not for frugality, but for health. I could argue, "so what are you going to do? Keep waking up to an alarm clock every morning at 6am to sit in 1 hour of traffic to get to work and eat fast food Egg McMuffins for breakfast and fast food hamburgers everyday for lunch?"

Of course the truth is in the middle. I can live extremely well on $200/month food that I prepare all meals myself, using ingredients that I selected, using spices that I prefer, with the convenience of not having to leave the house. If I wanted to be really cheap, I could squeeze $100 to $150 per month, but at $200/month I can eat just about anything I want, as long I buy it on sale and cook it myself. Fortunately, something I like is on sale everyday, due to how they rotate sales. So basically, there's always a sale on something I want to eat and I just eat based around that.

Would I rather base my life eating around the supermarket's schedule of sales, or base my life on my manager telling me I have to come into work on Saturday to help out at no extra pay because I'm salaried?

If you get $300k to $400k in the PP, don't have kids, and be reasonably frugal (not even super frugal, just reasonably frugal), you can live extremely well.

[TripleB]

What I eventually settled on was that that the emotional math comes out differently if your rent is 15k rather than 7k, your house is 70k rather than 150k, and your property taxes, insurance, and maintenance are 2k rather than 4k.

I find it hard to believe that you can buy a house that has a sub 5:1 ratio of house price to rent. (i.e. $70k house that rents for $15k).

In order for your math to work, you're going to make some huge transition. A $15k/year rental home/apartment should cost over $200k in most parts of the country using traditional real estate multiples. At the very least, $150k.

If you're currently living in a $15k/year rental and found a $70k fixer-upper that's equivalent, then absolutely jump on that!

For my situation, my annual rents are in the $8k range and any small home that I'd want to live in would be $150k on the very low end. In my current area, I'd need to spend $200k to buy a place equivalent to my $8k/year apartment, however the "multiple" in my area is a bit out of the wack in the higher direction (which means it makes a lot more sense to rent than to buy for me).

The problem with property taxes is that you can try to keep them low by choosing a low property tax state and living in a small modest house right now, but you don't know what property taxes will do in 10, 20, 30, 40 years. And if your city decides to raise them considerably over that time period, you're going to have a large expense to sell your home and move, especially since the home value will decline relative to the new higher taxes, because any buyers will factor in taxes when determining whether they can afford the mortgage payment to buy your home.

There's absolutely nothing wrong with buying a small home in a low cost of living area for ERE. I was on the fence for a long period of time about it, and I may change my mind going forward. I think it comes down to how much money you need. I think one can have $400k in the PP and be an ERE renter and live an equivalent lifestyle as someone with $350k PP plus a $100k house... which is to say I believe you need more money to live in a house. (one can retire sooner into ERE if they are willing to rent).

[Pointedstick]

I hear what you're saying, Coffee, but it's never so simple. Right now I'm already doing damage to my wife and kid by being gone in the morning when they wake up, and not returning until 6 PM. It feels like we barely see each other. We haven't moved in three years (blessedly), but during that time, our rent has been raised from $1,200/mo to $1,500/mo. We live on much more than rice and beans too.

Starting a business is a great idea, and I did just that a year ago. Living off an income stream from the business is the goal!

My wife and I honestly don't feel the need for a large, expensive house. That's not me being stingy and pushing her away, that's both of us wanting to avoid paying for more house than we need. If we were prepared to pay 200k in cash on a house, our preference would be to buy the land and build the house ourself. For half the price, we'd get a hell of a house. My experience has been that most conventionally-built houses are money sinks due to the systems and materials chosen, regardless of how much they cost. Doesn't matter how much you pay for dimensional lumber on a concrete foundation with a shingle roof; it's still going to be just as vulnerable to flooding, fire, rot, and mold.

I find it hard to believe that you can buy a house that has a sub 5:1 ratio of house price to rent. (i.e. $70k house that rents for $15k).

Different locations. 15k rental is in the high-cost location where we currently live; the 75k house in in a normal part of the country.

[MachineGhost]

Can anyone explain to me the whole "bronze plan, silver plan, gold plan" part of Obamacare? That's different from state-level Medicaid, right?

The colors are fancy ways of saying how much co-share you will have to pay, starting at 60% for Bronze.  They will be offered by private insureres on the state insurance exchanges. 

Medicaid, SNAP and SSI are means-tested; you have to be really income poor (<$1.1K a month) and really asset poor to qualify (<$2K in assets).  Getting SNAP also requires mandatory participation in welfare-to-work (CalWorks) unless you meet disability or other limited exclusions.

http://www.benefits.gov/ is your friend!

[MachineGhost]

$52 Internet
$8 Netflix

Speaking of cable, I just ordered a refurbished Roku 2 XD and am going to see if it is practical and cost effective to cut the cord once and for all via Netflix, Amazon Instant Video and Hulu Plus.  I've sent back two BluRay players (Panasonic and LG) already because they are still not ready for prime time for one reason or another and I realized I don't care about my nonexistent BluRay discs that the library has no plans to stock when I can stream in 1080p.  I spend $176 a month including all fees, taxes and service for Triple Play with a HD DVR and a HD tuner.  It is just ridiculous!

[TripleB]

MG: I think cord-cutting has gotten more and more feasible over the years. Just be prepared to wait longer to watch certain shows and you'll be fine.

Also, feel free to supplement with paid iTunes purchases through "Season Pass" - for example, you might be able to spend $30 on iTunes for a "Season Pass" of every episode that comes out, and you can download it the next morning after it comes out, as opposed to waiting 6 months to 1 year for Netflix to have it available.

If there's 1 to 2 shows that you absolutely must watch as they come out, iTunes Season Pass might work for you as an addon to NF/Hulu, etc.

[Tyler]

Just cut the cable myself and don't regret it for a second.

I bought a Tivo Premiere and an HD antenna.  The Tivo charges $15 a month, but it's a great DVR and I can set a series recording for all of the network shows you'd get on Hulu (as well as the sports that aren't on Hulu).