Early retirement planning. You’d think the closer we get to our FIRE date, the simpler things would become.
I mean really – I’m leaving my job in just a few months so as I continue to train my replacement, my workload should start to diminish over time. Plus, we’re downsizing to an apartment soon (if we could ever sell our house!).
What else could there be, Jim? How much early retirement planning do you really need? Didn’t you already get these plans laid out months or years ago?
I’ll tell you what – I read a lot of personal finance blogs with folks who’ve already left their jobs and it seems like the majority of what I read is:
1) Reach financial independence
2) Quit your job
3) Enjoy life
Maybe I’m doing something wrong, but I feel like I have a lot more on my plate that I need to squeeze in somewhere between steps 1 and 3!
So I thought I’d share some of the strategies we’re using in our early retirement planning that are hot on my mind right now.
Roth IRA Conversion Ladder
This is one of the biggest pieces of our early retirement planning and something I’ve talked about previously.
If you’re new to our situation, here’s the scoop. The majority of our wealth is currently in my 401(k) plan – just over $700,000. We also have a little over $100,000 in a traditional IRA that we rolled over from my wife’s old 401(k).
With tax-deferred retirement accounts like the 401(k) and traditional IRA’s, the idea is that you put your money in with pre-tax dollars. Then you can let it grow tax-free and pay taxes on it when you withdraw the money.
However, although there are a few exceptions, the government really wants to discourage you from pulling your money out of these accounts until you’re 59½ years old.
That presents a small problem for early retirees who, with some solid planning beforehand, need to access that money along the way.
Enter the Roth IRA Conversion Ladder.
In a nutshell, the IRS allows you to convert money from a traditional IRA to a Roth IRA and withdraw it penalty-free after five years.
That one small detail presents the foundation for the Roth IRA Conversion Ladder. Move your money over in chunks from your IRA to your Roth IRA and let it bake for five years.
The reason you don’t move the whole thing at once is that you’ll be taxed on the money you convert. The more you move, the more you’ll pay in taxes and the higher the possibility of hitting another tax bracket.
The plan most folks have (and my original plan) is to move one year’s worth of living expenses the first year. Then do the same the second year except adjust it for inflation. And then continue down that path until the traditional IRA is completely drained and converted.
Once five years have passed, the IRS now looks at your conversion as a contribution. And, if you’re familiar with another important IRS rule, contributions can be withdrawn from your Roth IRA at any point in time without penalty.
In other words, these two rules allow you to create a ladder to start pulling out your money penalty-free every year starting after that five-year bake period.
The tough part of this is that you need to have enough money to live off of for the first five years. That can be a real struggle, but if you can pull it off, you’re golden.
Here’s how this early retirement planning strategy will work for us:
1) Quit my job.
This will happen at the end of 2018. There’s a reason for choosing that time of year – I want to start with a clean slate and keep my tax bracket extremely low for 2019.
Any income we get from our side businesses will likely go right into a Solo 401(k) to help make this possible. Mrs. R2R might also be working a part-time job at that time. If so, we’ll make sure that money goes right into a 401(k) or Health Savings Account (HSA) as well to keep her taxable income next to nothing.
2) Live off our cash-on-hand for the first five years.
This part’s fairly straightforward. We’ll use the money from our savings accounts, taxable investment accounts, and Roth IRA’s. Remember when I mentioned that you can pull out contributions to a Roth IRA penalty-free at any time? Yeah, well, we’ll be doing that with our current Roth IRA’s.
Between those accounts and the money we’ll be banking from selling our current house, we should be able to get through that five years. It’s probably going to be a little tight, but nothing too crazy… maybe skip a vacation for the year, but hell, we’ll be living in Panama starting next summer so I think we’ll survive.
3) Start our Roth IRA conversions.
Initially, I planned to move only one-year’s worth of expenses over at a time every year. However, after talking with my financial advisor, we decided to pull over as much as we possibly can each year without hitting the next tax bracket.
The idea is to get all the money moved over sooner than later while we’re in a lower tax bracket, in case of law changes, etc. So we based our early retirement planning specifically with that premise in mind. This changes things because, the more we convert, the more we have to pay in taxes at that time.
In my head, I figured that we would do this every January, but this is why I hire people smarter than me. Instead of doing it at the beginning of the year, we’ll wait until the end of the year.
Every December, we’ll basically do a mock-up of our tax return to see where we stand. Then we’ll move over the largest amount we can without hitting the next tax bracket. Smart, right? This guy knows what he’s doing!
4) Pull from our Roth accounts as needed.
Once our “bake-in” period of five years is done, we’re now good to start pulling those dollars from our Roth IRAs as needed.
Let’s make one thing clear – just because we have the money available, doesn’t mean we have to spend all of it. Yes, our early retirement planning bears in mind our yearly expenses and we should be good regardless.
However, if we spend less because we just didn’t need it or if it’s intentional because we’re being flexible, that’s Ok. We don’t need to spend every penny we have – we’re fine with letting that money continue to grow in our Roth IRAs.
That’s it – four basic steps involved with our retirement dollars. In the meantime, we do have some rental income coming in and a little bit of money coming in from this site. I also anticipate that as I spend more time growing this site (which I’m excited to do!), the cash flow will continue to grow.
On top of that, I wouldn’t be surprised if some other income finds its way into our pockets from other fun projects along the way. For instance, I’m looking forward to writing a few more books at some point down the line (I’ve written a couple technical books previously). Although the money won’t be the driving factor, it’ll be a little bit of icing on the cake.
Ugh. Thinking about healthcare in the U.S. makes me just shake my head. That said, we’re planning to keep it a little simple for our early retirement planning.
Since I’m leaving my job at the end of this year, we’ll need to have something in place. And for us, this becomes a two-phase deal…
Come January, we’re planning on using a health care sharing ministry until the summer. These seem to be pretty well liked by their members so this makes sense to us.
Assuming we’re accepted (we should be), we’re looking specifically at Liberty HealthShare. I’ve talked to a number of people using them and their feedback was positive.
There are some things to consider though with health care sharing ministries. For instance, they can reject a claim if they disagree with the cause or any other reason. There are also caps on the payouts, so you need to be careful in case you run into something horrible like cancer.
Our goal is just to have something in place until we move out of the country though, so we’re gambling that we don’t run into anything too bad during that seven-month span.
The second part of our healthcare plan is for when we move to Panama. At that point, we don’t necessarily even need to have insurance.
We’ve talked to a number of folks living there who don’t have any coverage. The cost of healthcare is so cheap there, they just choose not to have anything in place.
I don’t like that for us though. It makes me nervous, especially because we’ll to be coming back to the U.S. several times. If we should get into a car accident while here in the States, for instance, that’s a problem.
So we’ll be getting expat insurance once we’re ready to move. This will most likely be through Cigna. The coverage is the same as you get here in the States from normal plans, but it’s tremendously cheaper.
The reason for the cost savings is the stipulation that you can’t be in your home country (the U.S.) for more than 90 days out of the year. This won’t be a problem for us.
Our new home in the U.S.
It’s true that we’re moving to Panama and we’re very excited about our new adventure there!
Nonetheless, we’re not renouncing our U.S. citizenship (at least as far as we know right now). We’re planning to have dual citizenship over the long run.
For the first year though, we’re not going to apply for residency in Panama. This is due to the cost involved – particularly the attorney fees. The costs could run us a good $7,500 for the three of us.
We’re fine with that, but we want to make sure it’s what we really want before we drop that much money. So we’re anticipating that we’ll remain tourists for the first year there.
And as a tourist, they have some rules. One of those rules is that you can’t be in the country for more than 180 days before you need to leave for a 30-day period. Additionally, your U.S. driver’s license is only good for 90 days at a time.
That means we’re going to be leaving the country a lot more that first year than we probably would any other.
And when we come back to the U.S., we’re going to need a place to live. Since we won’t have a house anymore, we’re planning to live with my brother and sister-in-law in Texas.
That keeps us with family and also keeps us out of the snow and horrible winters that I dread here in Ohio.
But why is this important to this post?
Because changing our state residency provides us another fringe benefit as well… there’s no state tax in Texas.
So down the line, as we make distributions from our IRA’s for our Roth IRA Conversion Ladder, we won’t be taxed from the state level. That’s a pretty good perk and it could save us some good money.
It’s important to know that this isn’t our main reason for moving there. Obviously, Ohio wouldn’t like if we were moving down there just to avoid paying state taxes because they would want their piece of the pie.
However, because we’re legitimately moving to Texas to live before we head to Panama and plan to stay there when we come back as well, we’re on the right side of the law.
So, we’ll need to make that change at some point before we head to Panama. We’ll move down to Texas going through the proper channels to establish residency, surrender our Ohio driver’s licenses in exchange for Texas licenses, register to vote, etc.
It’s another physical move that needs to be made (ugh!), but like I said, it’s good for us for a number of reasons.
Move the business overseas
This one’s still just a thought, but could be something a little more solid in our plans down the line.
At some point, it might make sense to move the Route to Retire business to another country. Although I believe in paying our fair share in taxes, it’s also important to be smart with a business.
There are many reasons to consider moving a business abroad such as ease of doing business, fewer regulations, and lower operating costs.
In our case, a lot of those don’t really apply. For us, the tax incentives would really be the big benefit.
We’re just a small fish right now, but as the business continues to grow, this might be something we at least consider. And because the company is not location dependent, this is not a drastic change to make.
Like I said, we have a lot rolling around in our minds for our to-do list and a lot of these are date-sensitive. The good news though is the plan seems to be coming together nicely and there’s nothing too tough to implement.
I’ve recently talked to my financial advisor again and decided to keep him involved on a yearly basis. He’s a CPA and is fantastic at the tax planning for early retirees and expat living so I’m excited to keep him on.
I’ve asked him to plan on doing my taxes for the next couple of years for sure so I can make sure we’re doing this as effectively as possible.
We’re getting closer to our next adventure!!
What kind of strategies have you considered for your early retirement planning?
Thanks for reading!!