Category: Case Studies

How much can we earn in retirement without paying federal income taxes?

Update 11/22/2019: After I published a shorter version of this piece on MarketWatch and the story was picked up by YahooFinance as well I got a lot more readers! Thanks and welcome to my blog! Make sure you subscribe to be notified of future blog posts! Both on Yahoo and MarketWatch I saw the expected assortment of hate comments. They fall into two categories, see below plus my response:

  • “I’m a CPA and this doesn’t make any sense!” My response: You’re either not a CPA at all or you’re a really bad & incompetent one. The standard deduction and the 0% bracket for capital gains are all very well-known in the financial/tax planner community. The same goes for the taxability worksheet for Social Security.
  • “How unfair that you retired already and don’t pay taxes while I’m working so hard and pay a lot of taxes!” My response: I hear ya! I’ve paid a ton of taxes throughout my work life. A seven-figure sum, more than most people pay over their entire lifetime. Keep that in mind if you complain about the unfairness of the U.S. federal tax system!

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The question “how much can we earn without paying federal income taxes” is relatively easy to answer for most people. The standard deduction for a married couple is $24,400 in 2019 (if both are under 65 years old) and the top of the no-tax bracket for capital gains is $78,750. So, we can make a total of $103,150 per year, provided that our ordinary income stays below the standard deduction and the rest (2nd bracket + any leftover from the std. deduction) comes from long-term capital gains and/or qualified dividends. With our daughter, we also qualify for the child tax credit ($2,000 p.a.), so we could actually generate another $13,333 per year in dividends or capital gains, taxed at a 15% so that the tax liability of $2,000 exactly offsets the tax credit for a zero federal tax bill.

Once people file for Social Security benefits, though, things become a bit more complicated. That’s due to the convoluted formula used to determine how much of your Social Security is counted as taxable income, see last week’s blog post! So, calculating and plotting the tax-free income limits is a tad more complicated. Oh, and talking about tax planning in retirement: as promised, I will also go through an update on the Roth Conversion strategy for the Becky and Stephen case study from two weeks ago.

Let’s get started…

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A Safe Withdrawal Rate Case Study for Becky and Stephen

What? A new case study? I know, I had promised myself to wind down the?Case Study Series?I ran in 2017/18 after “only” 10 installments. It was a lot of work and a lot of back and forth via email. It takes forever! I mean F-O-R-E-V-E-R! But then again, there’s always a reason to make an exception to the rule! Jonathan and Brad from the SelectFI?Podcast had a very interesting guest on their?show this week (episode 152). Becky talked about her experience of a late start in getting her and her husband’s finances in order. They started at around age 50 and became Financially Independent (FI) in their early 60s and retired a year ago. I should also mention that Becky recently started her own blog, appropriately labeled Started At 50, writing about her path to FI and RE so make sure you check that out, too.

In any case, Jonathan and Brad asked me to look at Becky’s numbers because I must be some sort of an expert on Safe Withdrawal Strategies in the FIRE community.?I chatted with Jonathan and Brad about my case study results the other day and this conversation should come out as this week’s?Friday Roundup episode. Because there’s only so much time we had on the podcast and I didn’t get to talk about everything I had prepared, I thought I should write up my notes and share them here. Heck,?with all of that effort already spent, I might as well make a blog post out of it, right? That’s what we have on the menu for today… Continue reading “A Safe Withdrawal Rate Case Study for Becky and Stephen” →

Where are they now? A Case Study Update with “Captain Ron”

From 2017 until early 2018 I ran a series of ten case studies for readers who volunteered to open their books and serve a real-world safe withdrawal rate guineapigs. The second case study in July 2017 was for Captain Ron (not his real name) who was planning to FIRE and enjoy early retirement with his wife on a sailboat! That title picture you see up there, that’s their actual boat! Sounds like a great adventure, not just the financial aspects but also the lifestyle changes are daunting! So, how did that all go? Captain Ron just sent me an update on how life has been, so Ron, please take over the wheel…

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We retired in September 2017 as planned and are really enjoying life. Financially things are great and we have adjusted to the sailing life, but that first year of cruising was a surprisingly difficult transition. More on that later.

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A Reader Case Study: Whole Life Insurance

Welcome back! I hope everyone had a great 4th of July Holiday (U.S. Independence Day for non-U.S. readers)!?Today I have a case study about whole life insurance. Not the most popular investment vehicle among the FIRE enthusiasts, see, for example, an excellent summary of the disadvantages of Whole Life by White Coat Investor?(though, for full disclosure, I don’t agree with all of his claims and calculations). But let’s face it: a lot of folks have policies and now wonder what to do about them. Here’s a case study about the tradeoffs when considering either cashing out the policy or keeping it intact. Let’s look at the numbers…

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Ten Lessons From Ten Safe Withdrawal Rate Case Studies

Last week, we published the Tenth Safe Withdrawal Rate Study! Amazing how time flies! I did about one case study every three weeks for the last 6 months! And I could even include another one if I were to count the one I did for the SelectFI podcast back in 2017. In fact, the SelectFI appearance (Episode 23R and Episode 26R) started the idea because our first volunteer reached out to me after he heard me on the podcast. Since then I’ve published 10 posts, worth almost 30,000 words that generated tons of clicks, feedback and encouragement:

  • “John Smith”: Seven-figure net worth, but not quite ready for FIRE yet. Large ERN would recommend a few more years in the workforce!
  • “Captain Ron”: Early retirement on a sailboat. How much can they withdraw from their $3m portfolio to stay afloat (pun intended) in retirement?
  • “Rene”: No need to worry about the recent layoff: You are more than ready for early retirement!
  • “Mrs. Greece”: More than ready to retire due to large portfolio size and moderate living expenses, especially if the husband keeps working!
  • “Mrs. Wish I Could Surf”: Alternative investments (real estate hard money loans). Keep the mortgage or pay it off? Either way, more than ready to retire!
  • “Mr. Corporate”: Geographic Arbitrage by moving to a low-cost European country. Roth Conversions and zero tax liability!
  • “Ms. Almost FI”: Your name is a misnomer. You are ready to retire now even when self-funding substantial long-term care expenses in the future!
  • “Mr. Corporate Refugee”: How to deal with a large portion of the net worth tied up in a house in a high-cost-of-living area?
  • “Mrs. Wanderlust”: Substantial supplemental cash flows due to buying an RV and then selling it later.
  • “Mr. and Mrs. Shirts”: Ready to retire this year, but should Mr. Shirts work for another nine months for some additional big payday?

But, alas, all good things have to come to an end! I have decided to take a break from the case studies, at least for now. I might revive the series again later but for next few weeks and months, I will pursue other topics! Thanks to all volunteers who submitted their data. And thanks to all other folks who didn’t get their case studies published. I’m not even sure I properly responded to everyone whose request was denied. I think I may have some inquiries from October last year that I haven’t responded to. If you submitted a request for a case study and haven’t heard from me back, sorry, I’m just a bit disorganized!

Sooooo, ten case studies: what have I learned from them? Plenty, because that’s the topic for today’s post…

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Ask Large Ern: A Safe Withdrawal Rate Case Study for “Mr. and Mrs. Shirts”

Welcome to the 10th episode of our Case Study Series! Today’s case study is for Mr. and Mrs. Shirts. They run their own blog Stop Ironing Shirts and I encourage everyone to head over and check out their outstanding work. Mr. Shirts and his wife face a dilemma; they have already amassed a pretty impressive nest egg, probably large enough to retire later this year. But the temptation to work a little longer to cash in that next financial milestone around the corner (bonus, vesting date, etc.) is a pretty strong incentive to stay onboard for just a little bit longer. Otherwise known as the One More Year Syndrome. In fact, in the Shirt’s case, it’s only nine months (June 2018 vs. March 2019). So, what are the tradeoffs, what are the pros and cons of retiring in 2018 vs 2019? Let’s look at the details…

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Ask Large Ern: A Safe Withdrawal Rate Case Study for “Mrs. Wanderlust”

It’s time for another Safe Withdrawal Rate case study today! Trust it or not, but this is already the ninth installment of the series! Check out the other case studies here. Today’s volunteer is Mrs. Wanderlust (not her real name), a frequent reader of the ERN blog. She and her husband plan to retire in 2018 (more or less voluntarily) and asked me to run their numbers. One challenge in pinning down a safe withdrawal rate: large additional cash flows because they plan to purchase of an RV and then sell it a few years later. They will also have different budgets during different phases in retirement.?And not to forget, a four-legged family member that’s factored into their planning. So without further ado, let’s start calculating…

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Ask Large Ern: A Safe Withdrawal Rate Case Study for “Mr. Corporate Refugee”

Welcome! It’s time for another Safe Withdrawal Rate case study! Please click here for the other seven installments. Today’s volunteer is “Mr. Corporate Refugee,” not his real name, obviously. But as the name suggests he is ready to pull the plug on the corporate grind. He and his wife did everything right to prepare for early retirement. Pay off the mortgage on their house (as recommended by yours truly) and accumulate a nice nest egg close to seven figures. The only problem: they reside in a high-cost-of-living area in California and more than half of their net worth is tied up in their primary residence. Even a portfolio as large as $1 million will likely not be sufficient to cover expenses in your current location. What to do now? I’ll propose two routes to early retirement. Move to a cheaper location, a “secret” low-income-tax paradise – more on that below, and be able to retire now. Or work for only four more years and retire in the current location. Let’s go through the math…

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Ask Large Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI”

Welcome to a new installment of our “Ask Large Ern” series with case studies on safe withdrawal calculations. This is already the seventh part, see here for the other parts of the series! Today’s volunteer is Ms. Almost FI and that’s not her real name, of course. She’s planning to retire early in 2019 and this causes a lot of anxiety: Performes she have enough money? When should she take her pensions? What about long-term care insurance? All very valid questions, all impossible to answer without a careful customized analysis! Continue reading “Ask Large Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI”” →

Ask Large Ern: A Safe Withdrawal Rate Case Study for “Mr. Corporate”

Welcome to the sixth installment of our “Ask Large Ern” series where I perform case studies in safe withdrawal calculations. See here for the other parts of the series.

Let’s make this Geographic Arbitrage Week because?after Monday’s guest post on “Geographic Arbitrage,” I will now feature a case study with the same theme! Meet Mr. Corporate (not his real name) who reached out a while ago for advice on whether he’s ready to leave the corporate life. Just looking at his numbers I knew immediately that there is no way he and his wife can retire in their current location. But Mr. C found that moving to another country with lower living expenses will cut years off the time it takes to reach FIRE. And we’re talking about a country in Europe (he wouldn’t mention which one), with a high quality of life, nice climate, and a good healthcare system! Can he retire now? Let’s look at Mr. C.’s numbers…

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