Gyroscopic Investing

I've recently made it a goal to retire early...

I've got a lot of money saved, but most of it is in retirement accounts (Roth IRA and the Thrift Savings Plan).
I have 25 years until I can withdraw from my retirement accounts.

Would I be crazy to stop contributing to my Roth and my TSP, and, for the next 5 and years just use a regular brokerage account?  I'm in a high tax bracket. 

Any suggestions?

I would continue using the tax deferred accounts.

You can make a 72(t) election if you want to start receiving distributions early (though there are downsides to this approach).

I too, would like to retire early, although I'm not willing to live in austerity to do so (read: sacrificing my families $5K a month expenses).  My timetable and spreadsheets show that if we keep up our rate of savings we will be able to survive a 4% annual drawdown at the age of 48, about 10 years from now (ie. 4% of my portfolio per year = $5K a month expenses adjusted for inflation).

Because I am not able to keep up this rate of savings in entirely tax-deferred space, and I suspect anyone with ERE in mind is saving much more than the $16,500 annual 401k and $5,000 annual IRA limits, I have a brokerage account.

In early retirement, I plan on having a significant amount in taxable space, and drawing down from that (keeping PP 4x25 in both 401k/IRA and taxable space).  Does anyone see a problem with this?

I guess the one problem I might have is that the taxable account may run dry before I'm able to take contributions from my 401k/IRA.  It needs to last at least until I am 65.  I would appreciate input from anyone that has retired early and had this dilemma.

Storm,

The 72(t) election is something to explore.

The larger problem, in my view, is health care.  COBRA will get you 18 months post-early retirement, but after that there is a dangerous frontier to be crossed before reaching Medicare elgibility.

MediumTex wrote: Storm,

The 72(t) election is something to explore.

The larger problem, in my view, is health care.  COBRA will get you 18 months post-early retirement, but after that there is a dangerous frontier to be crossed before reaching Medicare elgibility.

Very insightful comment, MT.  We have a $3K a year budget for healthcare, considering we have decent insurance from my employer.  If that were to go away, we would most likely be paying 10x that amount for private insurance.

I'm pretty sure a lot of ERE advocates are young, healthy people that haven't taken healthcare costs into account.  It used to be that if you worked until retirement, you got a pension and guaranteed health benefits from your employer.  Now, that is no longer the case.

Living my 50s and early 60s without health insurance is not an option - that's when most people start to have health problems, and insurance is probably through the roof.

How do ERE advocates plan for healthcare in early retirement?

Storm wrote: How do ERE advocates plan for healthcare in early retirement?

I think many of them do the medical tourism thing.

I don't know about that Tex. A lot of us early retirees purchase individual health insurance. It is painfully expensive but we factor it in. Traveling to a foreign country for surgery or other major treatment is not on my "bucket list"! Or anyone I know. It would be a desperate last resort, in fact.

What's scariest to me actually, is not paying for private health insurance and keeping up with the cost, but being forced onto Medicare when I turn 65. My current doctors do not accept Medicare and many people don't it can be hard to find a doctor that does. And there are many things Medicare does not pay for. I'm going through this with my 80 year old mother right now.

Drewskers wrote: I don't know about that Tex. A lot of us early retirees purchase individual health insurance. It is painfully expensive but we factor it in. Traveling to a foreign country for surgery or other major treatment is not on my "bucket list"! Or anyone I know. It would be a desperate last resort, in fact.

What is your age and what do you pay for health insurance?

I don't know what that market looks like for an average person.  I know that I have a couple of very minor conditions (no maintenance meds or treatment) and when I have shopped for individual coverage (I am 40), I found no coverage available at any price from the companies I looked at (they just said that they were not able to offer me coverage).  I have heard similar stories from others.

http://earlyretirementextreme.com/how-t ... -care.html

The prototypical ERE approach to health care is

- healthy diet, lifestyle, exercise, and preventive care to avoid problems
- home remedies for minor problems
- self insurance (cash) for doctor visits
- high deductible health plan / HSA in case of catastrophic problems

KevinW wrote: http://earlyretirementextreme.com/how-t ... -care.html

The prototypical ERE approach to health care is

- healthy diet, lifestyle, exercise, and preventive care to avoid problems
- home remedies for minor problems
- self insurance (cash) for doctor visits
- high deductible health plan / HSA in case of catastrophic problems

That sounds like a pretty good recipe.

The problem comes in when you have a family and you have to wind up buying one HDHP policy for yourself and another for your spouse and children because you couldn't find a company to cover everyone.  This sort of thing is not uncommon.

It's not an insurmountable challenge, but I think that it would be nice if health care reform had simply been to require the private market to offer group coverage based upon age bands on a nondiscriminatory basis and to permit waiting periods for coverage to kick in to prevent waiting until you are sick to buy it.  Something like that might have been a useful bit of reform.

I did a test drive of early retirement five years ago when my financial assets reached a point where a 4% safe withdrawal rate would cover my living expenses.  I got bored after three weeks and went back to doing what I have been doing since the 1990s -- working on contract as an employee of a temporary employment agency.

I consider this work to be a "lifestyle business" where the income covers my living expenses (so that I don't have to draw on my financial investments) and it allows me to contribute to tax-advantaged accounts (such as 401K and IRA).  I get to be choosey about the contracts I work on, but being able to work mostly from home at the hours I decide means I'm away from company politics (which is what usually makes me sour on a particular contract).

I've had my own health care plan since I started doing this kind of work (because the employment agency is small and doesn't offer health care coverage).  My premiums on average have increased about 25% a year and I'm healthy.  I keep finding plans with a higher deductible so that I can reduce my monthly premium payments.

Having a high-deductible health plan allows me to contribute to a Health Savings Account (HSA).  But I pay current medical expenses in cash and let the HSA balance grow (which I'm planning on using eventually to cover long-term care should I ever need it).  I keep my insurance deductible amount in a savings account, but I budget what I expect a check-up will cost in my cashflow spreadsheet.

My priority for using my financial assets to pay living expenses (should my lifestyle business and other "profitable hobbies" fail to generate enough current income to support me) is to use taxable accounts first.  I will also use Social Security when I reach age 70, assuming the program is still around then.  Then I will draw on my Roth IRAs, which have no required minimum distribution.

I have no Traditional IRA anymore because I was able to roll it into a Roth IRA during the financial crisis and pay the income taxes on the reduced market value at that time.

MediumTex wrote: That sounds like a pretty good recipe.

I don't think it's a coincidence that things go smoothly when you treat "insurance" as insurance.  Meaning that you take care of everyday anticipated expenses yourself, and only tap insurance for extremely unlikely and expensive events that would otherwise ruin you.

KevinW wrote:

MediumTex wrote: That sounds like a pretty good recipe.

I don't think it's a coincidence that things go smoothly when you treat "insurance" as insurance.  Meaning that you take care of everyday anticipated expenses yourself, and only tap insurance for extremely unlikely and expensive events that would otherwise ruin you.

A person who is physically active, watches his weight, blood pressure and cholesterol and avoids activities such as smoking and heavy drinking normally has much less to worry about when it comes to health insurance.

OTOH, a person who must take large doses of maintenance medications and has one or more chronic illnesses basically often has no choice except to rely heavily on insurance to prevent financial ruin.

MediumTex wrote:
The larger problem, in my view, is health care.  COBRA will get you 18 months post-early retirement, but after that there is a dangerous frontier to be crossed before reaching Medicare elgibility.

This is the big question. I am  several years from wanting to retire, but will be interested to see how policy changes over the next few years will effect access to insurance and health care in general.

6 Iron wrote:

MediumTex wrote:
The larger problem, in my view, is health care.  COBRA will get you 18 months post-early retirement, but after that there is a dangerous frontier to be crossed before reaching Medicare elgibility.

This is the big question. I am  several years from wanting to retire, but will be interested to see how policy changes over the next few years will effect access to insurance and health care in general.

I predict that more people will have access to a much lower quality of coverage...and it will still cost a lot.

I think having a HDHP, and self-insuring the deductible sounds reasonable - until you get into a situation where it doesn't work, like a sick child with a chronic illness (juvenile diabetes, etc), or one of you has a chronic illness that needs regular medication.

I would hate to retire early with a budget planned in advance, then end up with $2K a month out of pocket medical expenses that were unplanned for and have to re-enter the workforce.

Imagine if you had been "retired" for 10 years and had completely lost or gotten out of date on your skills.  In the industry I'm in (technology) things move so fast that if you don't keep updated, in 10 years you are completely outdated.  I suspect many other jobs, even non-technical are the same way.  Even accountants and lawyers must stay up to date on tax and legal code.

MediumTex wrote:

Drewskers wrote: I don't know about that Tex. A lot of us early retirees purchase individual health insurance. It is painfully expensive but we factor it in. Traveling to a foreign country for surgery or other major treatment is not on my "bucket list"! Or anyone I know. It would be a desperate last resort, in fact.

What is your age and what do you pay for health insurance?

I don't know what that market looks like for an average person.  I know that I have a couple of very minor conditions (no maintenance meds or treatment) and when I have shopped for individual coverage (I am 40), I found no coverage available at any price from the companies I looked at (they just said that they were not able to offer me coverage).  I have heard similar stories from others.

Sorry for the delay in replying.

I am 56 and pay just under $700 a month for a major medical policy ($1000 deductible). I could pay less, with a catastrophic policy and higher deductible, but on average I think I am coming out ahead with this major medical policy, given my individual health circumstances.

I retired at age 47 from a job that provided major medical insurance, and then exhausted my COBRA benefits (18 months worth). According to federal HIPAA regulations, that meant I could not be turned down for individual coverage because of pre-existing conditions (of which I had at least one). And in fact, I did not even have to answer any medical questionnaires. When my COBRA exhausted, I picked the insurance company I liked, the policy I liked, applied, and was accepted (could not be turned down). As long as I pay my premium I can't be  dropped either (this being a WA state provision, but other states have it as well).

Drewskers wrote:
I am 56 and pay just under $700 a month for a major medical policy ($1000 deductible). I could pay less, with a catastrophic policy and higher deductible, but on average I think I am coming out ahead with this major medical policy, given my individual health circumstances.

The fact that a 56 year old (relatively young) male has to pay $700 a month for health insurance is a testament to how screwed up our health care system is. 

There is a huge disconnect between what health care actually costs, and what is billed. 

The calculated insurance premiums are no doubt gigantic because of the small forturnes billed for end of life care and otherwise trivial workups and prescription medications that don't really help that much.  ie, just b/c the hosptial bills your insurance company $20K for the 10 CT scans you had the week before you died (in spite of your expensive workup), doesn't mean that it really cost them near $20K to perform them.

Adam1226 wrote:
There is a huge disconnect between what health care actually costs, and what is billed. 

The calculated insurance premiums are no doubt gigantic because of the small forturnes billed for end of life care and otherwise trivial workups and prescription medications that don't really help that much.  ie, just b/c the hosptial bills your insurance company $20K for the 10 CT scans you had the week before you died (in spite of your expensive workup), doesn't mean that it really cost them near $20K to perform them.

You should see the difference between what the providers bill, and what the insurance company actually pays them (according to the insurance statements I get). Sometimes the providers get paid by my insurance company as little as 25% of what they bill. Lab work gets paid about 10% of the billing for things as basic as a standard blood panel. Without insurance, I'd be paying stupefying amounts for the most basic of care, as opposed to merely egregious amounts. The insurance premium is practically worthwhile just to be able to access the "in-network" pricing system. That is, assuming the whole "in-network" pricing scheme is not designed to hoodwink the insurance consumer - I am not an overly cynical person, but I can just about believe that is exactly the case. But I don't get to make the rules, and I'm not interested in expending my life energy trying to. I just try to optimize the way I play my part of the game, and then I forget about it, and live my life.

I'm no big fan of pharmaceuticals in general, favoring naturopathic methods whenever possible, but I can attest to the fact that some pharmaceuticals do work, and extremely well, with absolutely no competition from naturopathic approaches. One must learn to pick their poison.

FWIW, even with insurance, it costs me less to purchase generics out of pocket from Walmart, Costco or Target, than my insurance copay at a regular pharmacy. And insurance likes to play games, for instance, they don't pay for more than a 30-day supply, and I can't refill more than a few days ahead of time. Makes it real convenient to live a modern life! This is where I start quoting Al Swearengen in Deadwood ... "c*cks*ck*rs!"

Storm wrote: I think having a HDHP, and self-insuring the deductible sounds reasonable - until you get into a situation where it doesn't work, like a sick child with a chronic illness (juvenile diabetes, etc), or one of you has a chronic illness that needs regular medication.

I would hate to retire early with a budget planned in advance, then end up with $2K a month out of pocket medical expenses that were unplanned for and have to re-enter the workforce.

Imagine if you had been "retired" for 10 years and had completely lost or gotten out of date on your skills.  In the industry I'm in (technology) things move so fast that if you don't keep updated, in 10 years you are completely outdated.  I suspect many other jobs, even non-technical are the same way.  Even accountants and lawyers must stay up to date on tax and legal code.

You are quite correct. I don't think it takes 10 years to become outdated in high tech. Probably only 2-3 years unless you are making a concerted effort to keep up. And by the way, unless you are a rocking superstar, don't count on getting re-employed past age 50. I have dozens of buddies that can tell you how hard that is.

Anyone taking early retirement should think long and hard about what could go wrong and what they would do, or be willing to do. Especially if one has dependents. Early retirement has plenty of risks. But working for a corporation and acting as if you've got a secure job is pretty risky, too, as millions have learned.

One thing I should mention though, is some people are so much happier being out of the grips of the corporate beast, their health actually improves. Like me! 

Drewskers wrote: The insurance premium is practically worthwhile just to be able to access the "in-network" pricing system. That is, assuming the whole "in-network" pricing scheme is not designed to hoodwink the insurance consumer.

It's not intentionally designed to work that way, but that's what it incentivises, unfortunately. 

Drewskers wrote:
I'm no big fan of pharmaceuticals in general, favoring naturopathic methods whenever possible, but I can attest to the fact that some pharmaceuticals do work, and extremely well...

I agree that some do indeed work.  The problem is that once something "works" the tendency is to expand its use. 

Penicillin works great for Syphillis, but that doesn't mean that every toddler with a slightly red ear drum needs it.

Lipitor lowers your cholesterol, but how many people do you have to give it to to prevent a heart attack or a stroke? 

http://trusted.md/feed/items/system/200 ... z1O74AUHkv

(you'll be surprised). 

Adam1226 wrote: The fact that a 56 year old (relatively young) male has to pay $700 a month for health insurance is a testament to how screwed up our health care system is.

Actually when I heard the $700 number, that is not so bad.  I had to pay $500 a month or so to be on Cobra for a while when I was contracting.  $8,400 a year is very manageable within a retirement plan.

Two things I would be concerned with:  Family rates could easily be $2000-3000 per month, and the rate of inflation of health insurance seems to defy normal rates of inflation.  Some people are getting increases of 25-30% a year.  At this rate, we will be paying $20,000 per month for a family of 4 in 2020 with no end in sight.  Personally I think the entire system will collapse long before that happens, but who knows?

Storm wrote: Two things I would be concerned with:  Family rates could easily be $2000-3000 per month, and the rate of inflation of health insurance seems to defy normal rates of inflation.  Some people are getting increases of 25-30% a year.  At this rate, we will be paying $20,000 per month for a family of 4 in 2020 with no end in sight.  Personally I think the entire system will collapse long before that happens, but who knows?

When I started at age 47, my COBRA was $200 a month. Those were the days, my friend.

Keep in mind, rates go up with age. The bump at 49 to 50 was not too bad, but I just swallowed the bump for transitioning from 55 to 56, and that was a little but stiffer ($100 a month). The 59 to 60 bump will be positively breathtaking...