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

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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!

* * *

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…

First, a disclaimer: This exercise is for federal taxes only! That’s good enough for us personally because we live in Washington State, one of the few places without an additional state income tax. If you do have state income taxes, you will probably start owing state income taxes at much lower income levels! Also, all the other disclaimers apply here as well: contact a tax expert before you apply any of this yourself in real life! 🙂   I will also frequently mention capital gains and dividends as tax-advantaged income because long-term capital gains and qualified dividends are taxed at a lower rate. Below, I may sometimes drop the terms “long-term” and “qualified” because it doesn’t always fit into the chart axis labels. But keep in mind that short-term capital gains and non-qualified dividends will fall into the ordinary income bucket, taxed at a higher rate!

Tax-free income limits without Social Security

Just to warm up, here are the income limits for a married couple (both under 65 years old) who file a joint federal tax return. They face a $24,400 standard deduction in 2019 as well as a $78,750 upper limit on the cap-gains no-tax bracket to fill up with long-term capital gains. So, to stay tax-free we need to stay under the blue line in the chart below. That way we’re guaranteed to fill up the standard deduction with either ordinary income or long-term capital gains/qualified dividends and the top off everything with a maximum of $78,750 with capital gains in the first two federal brackets at a 0% marginal rate. Since we have a kid and are eligible for the child tax credit, which could theoretically offset $2,000 in taxes. So, we can push the income limits a little higher:

  • To just under $45k if relying purely on ordinary income, by completely maxing out the 10% brackets and briefly touching the 12% federal bracket,…
  • To over $116k by adding another $13,333 in capital gains/dividends taxed at the 15% rate (provided these are long-term capital gains and/or qualified dividends)
  • Or a combination of ordinary income and tax-advantaged income between the kink points.
Roth Tightrope Chart01
The zero-tax boundaries for a married couple filing jointly in 2019. The $2,000 child tax credit pushes out the boundary even more!

Tax-free income limits with Social Security

What about 25 years down the road, when we no longer claim our daughter as a dependent and we file for Social Security? With Social Security, things become a little bit more complicated. Instead of two, we now have three separate major income categories with their own distinct impact on the federal tax

Taxable Social Security = F1(Social Security , Ordinary Income + Capital Gains)

Tax = F2( Taxable Social Security + Ordinary Income , Capital Gains )

(side note: there’s even a fourth category: Municipal Bond interest income, because that enters the Social Security worksheet formula as well – see last week’s post – but stays tax-free otherwise. But I disregard Muni bond interest for the purpose of today’s post because it’s already messy enough as is)

So, it’s no longer feasible to display the tax-free income limits in a simple one-size-fits-all chart because our tax liability depends on three distinct variables and I can’t easily plot that zero-tax boundary in three dimensions. So, here’s how I propose displaying the boundary.

  • Start with Social Security on the x-axis. I use a range of $0 to $90k, which is probably close to the absolute maximum two spouses can haul home in combined benefits.
  • On the y-axis, plot the maximum of the “other income” to guarantee zero federal taxes. This is the combination of all ordinary income and dividends and capital gains (i.e., Line 3 in the SS worksheet).
  • How much “other income” is sustainable at zero taxes clearly depends on the composition: ordinary income vs. tax-advantaged income (LT CG and Dividends). So, I plot a line for three different cases: 100%/0%, 50%/50%, and 0%/100% in the two income buckets.
  • I also assume that this is for a couple where both spouses are 65 years or older to increase the standard deduction to $27,000 p.a. ($24,400 base plus $1,300 extra per spouse above age 65!)
Roth Tightrope Chart02
Zero-federal-tax contours in the Social Security Income (x-axis) and Other Income (i.e., Line 3 in the Social Security worksheet). The contour depends on the composition of that Line 3 income!

Let’s look at the results in the chart above:

  • The lowest tax-free income allowance prevails if all of the other income is ordinary income. Say, you get $50k in combined Social Security, then you can make around another $20k in other ordinary income. The sustainable amount of income gradually declines because more Social Security income will become taxable and limit the amount of other income you can make before hitting the $27k standard deduction. But you can still haul in a lot of income: $50k in SS and another $20k in ordinary income. Or $90k in Social Security plus another close to $11k in other ordinary income for a total of more than $100k! Not bad!
  • Not surprisingly, that boundary shifts up if part of the “other income” is long-term capital gains. That’s because less of the income pushes against the standard deduction limit. Capital gains and dividends become taxable only if we go beyond the second federal tax bracket! Of course, capital gains still impact the Social Security taxable calculation in the IRS worksheet, see last week’s post.
  • If all of the other income comes from capital gains, we get the slightly peculiar looking green boundary. I had to double-check and triple-check my math here because of that drop at around $31k Social Security income. But it’s legit! For Social Security low enough, even with a lot of capital gains income, 85% of SS is taxable and we simply stay below the standard deduction as long as 0.85*SS<$27,000 and we fill up the rest with capital gains to get to the top of the second federal tax bracket. But once we hit $27,000/0.85=$31,765, we have to instantly and drastically lower the other income to push the taxable portion of SS back to $27k.

Same data, sliced differently

Here’s another way to slice and dice the data: I created a chart with capital gains on the x-axis and other ordinary income on the y-axis for one fixed Social Security level at a time, going from $0 to $90k in $5 steps. The capital gains and other income levels go in steps of $1,000 and I plot the different ranges of tax levels with dots: green = no federal tax at all, blue = average tax rate of 0 to 5% and red dots for 5-10%. If you go beyond the red region, you guessed it, you’ll owe more than 10% on average.

Because I didn’t want to publish 19 different charts here, I just put this all into a gif animation, please see below:

Tax regimes for capital gains/dividends (x-axis) vs. Other Ordinary Income (y-axis) for different Social Security income levels ($0 to $90k). green = 0%, blue=5% average tax and below, red=10% and below.      (gif created by imgflip.com)

So, if you wonder how a math/finance geek like me spends early retirement, this is it! Making gif animations out of Matlab Charts! Never a dull moment in my home office here! 🙂

But anyway, I was positively surprised that in retirement, we should be able to keep taxes quite low. Social Security will likely be taxable at a much lower rate than the 85% maximum. So you can still have a total income in the high-five-figures, potentially even six-figures and still keep federal income taxes low or even at zero! And then on top of that, you got Roth distributions and the tax-free basis in the taxable account withdrawals. Even folks in the FatFIRE community will hardly pay federal income taxes or avoid them altogether!

A Roth Conversion case study

As promised, and as an application of some of the things I’ve learned here, I wanted to do the Roth Conversion plan for the Becky and Stephen case study from two weeks ago.

If you recall, the idea here is that on the one hand, if you do the Roth conversions too aggressively (likely converting into and all the way to the top of the 12% federal marginal rate) and you eliminate all other income in retirement to rely only on Social Security and Roth IRA distributions, you’ll likely leave money on the table because taxable Social Security will stay below the standard deduction and distributions from the Roth are completely tax-free anyway! On the other hand, if you don’t do enough of the Roth conversions, you might have to distribute from the 401k at a marginal tax of around 18.5% to 22.2% when withdrawing and facing the Tax Torpedo.

So, planning the Roth conversions becomes a real tightrope! But how do we find the sweet spot in the middle? Here’s one idea: First, determine how much in additional ordinary income we can generate each year before we hit the standard deduction (and the Tax Torpedo if we go beyond). One additional challenge when mapping out this Roth conversion strategy: the kink points in the Social Security worksheet are apparently not adjusted for inflation, while all of the other relevant tax parameters (standard deductions, tax bracket, etc.) are. Thanks to my blogging buddies Dr. David Graham (FiPhysician.com) and Harry Sit (The Finance Buff) for pointing this out!

In the table below, I factor in the Social Security benefits over time (as recommended by the OpenSocialSecurity.com calculator, see the post from two weeks ago). All numbers are real, CPI-adjusted numbers, so some of the tax parameters (standard deduction, tax brackets, etc.) stay constant in real terms, but the kink points in the Social Security worksheet are deflated by 2% p.a., see lines 9 and 11. I then solve for the amount we can generate in Line 3 (up to the closest $100) to ensure we don’t hit the standard deduction.

Roth Tightrope Table01
Planning the Roth conversions before the large Social Security benefits kick in (2020-2024) and avoiding the Tax Torpedo in years 2025 onward. How much can you withdraw from a 401k and still remain in the 0% tax range?     (all figures real, CPI-adjusted)

We also have to take into account that later in retirement, probably around the year 2040 or so, one of the spouses might die and the survivor will have to file taxes as a single. So, the tax-free ordinary income will be lower in that situation:

Roth Tightrope Table02
Starting in years 2040 and onward we also have to account for the possibility of one spouse passing away and the survivor having to file taxes as a single. This reduces the amount you can withdraw from the 401k!     (all figures real, CPI-adjusted)

So, let’s take the upper bounds of ordinary income we can generate in years 2025 and onward and plug them into an Excel sheet. Let’s assume the portfolio gives you a 1.5% p.a. real return, not a bad assumption for a bond portfolio. Again, as mentioned in the case study, I propose shifting the bond portion into the tax-deferred accounts and it may not be a bad idea to put the equities (high expected return) into the Roth and the bonds (lower expected returns) into the 401k to keep a lid on the growth rate in the 401k, while keeping equities in the Roth IRA where they can grow completely tax-free.

Anyway, the trick here is to work backward! Let’s start at the beginning of the year 2054. We withdraw $4,400 at the beginning of the year which is the maximum anticipated amount we distribute from the 401k before hitting the Tax Torpedo. So if we plan to exhaust the 401k we need exactly that amount at the beginning of the year 2054. That means we need $4,400/1.015+$4,500=$8,835 at the beginning of the previous year. And so on, all the way to 2025 where we get a $259,018 target 401k level.

Roth Tightrope Table03
Planning the path of the 401k over time. It’s best to work backward! Start in the year 2054 with a final zero balance, plan for the maximum withdrawals and capital returns over time and reach a target balance of around $259k at the end of 2024. To reach that target balance, plan for a little over $51k of Roth conversions in the calendar years 2020-2024.   (all figures real, CPI-adjusted)

If we start with $490,000 today we simply use the PMT function in Excel to determine how much we withdraw over the first 5 years of retirement to exactly hit the 259,018 at the end of 2024:

0.015 = rate of return
5 = # of years
490k = today's value
259018 = target future value
1 = for cash flow at the beginning of the year

And this tells us to convert $51,410 over the years 2020-2024. I’m assuming the conversions occur at the beginning of the calendar year. If you want to switch to the end of the year (might be better to be able to respond to other tax events) you’d use the 0 instead of the 1 as the final input in the PMT formula and this will get you to $52,181. Not a huge difference. So, there you go, the ideal Roth strategy would do pretty aggressive conversions, but certainly not all the way to the top of the 12% bracket. Which is great, because you have a slightly lower tax liability for the first few years in retirement before Social Security starts.

Some caveats about this approach:

  • In this particular example, we never got into trouble with the Required Minimum Distributions (RMDs). That may not be true for all retirees! So, when doing this exercise we’d potentially have to also keep those pesky RMDs in check!
  • We don’t know the returns, much less the real returns that far into the future. Luckily, we’re talking about a bond portfolio with a lot less volatility than a stock portfolio. If you believe that 1.5% is too meager for a bond return (recall this is the real return over and above inflation!) and/or you have equities in the 401k with a higher expected return, you’ll probably have to walk up the initial Roth conversions to make a bigger dent in the 401k portfolio! Even at a 5% real return, though, the target Roth conversions go up to only about $74,600 for the first five years. Still manageable if you want to stay in the 12% bracket in the years 2020-2024.
  • There are reasons to believe that taxes will go up in the future both on the Federal and State level. But of course, there’s no telling when and how. As a hedge against that possibility, you probably want to err on the side of caution and do the Roth conversions a bit more aggressively. Becky and Stephen certainly have some extra space in their 12% tax bracket.
  • Related to the above, another reason for more aggressive Roth conversions: estate planning. There is no guarantee that the last survivor will even live until the year 2054. Chances are, the last survivor will pass away well before then and it’s likely better to leave a Roth IRA to your kids than the tax liability of an inherited 401k. Or more precisely, the 12% marginal you pay today for the Roth conversion will very likely be lower than what you kids pay in 2054!
  • So, I’d view the $51k in Roth conversion as the lower bound of what you want to convert per year from 2020 to 2024!

Is it really worth it to go through this whole computation? I had the impression that on the ChooseFI podcast two weeks ago we talked a little too much about the tax planning. I think that getting the safe withdrawal rate calculations right is a lot more important! If you are forced to withdraw some of the funds in retirement and face the tax torpedo (an 18.5% marginal rate vs. a 12% rate you could have gotten during the conversion period) on maybe $10,000 of 401k distributions, that’s not the end of the world. Sitting in a $150k a year nursing home at age 90 and running out of money, now, that’s a bigger concern!


What gets lost sometimes in the whole Safe Withdrawal Rate discussion is that all those calculations are normally based on gross numbers! You still have to account for taxes! But I’m encouraged by today’s exercise! At least on the federal level, there is a large range of income combinations that are absolutely, completely tax-free. And if you’re willing to part with a small portion of your withdrawals, maybe 5%, you expand that range significantly. You almost have to try really, really hard to even reach a 10% average tax rate on your taxable portion. And notice that you can still generate additional retirement cash flow because part of the withdrawals will come from the cost basis in taxable accounts and all of your Roth IRA distributions are tax-free. Same with your Health Savings Account.

So, after spending waaayyyy too much time on taxes in the last few weeks, I’d like to refocus on my favorite topic again: the finance portion of early retirement, the safe withdrawal rates. Most people can actually assume that your gross retirement income is equal to the net income, especially if you’re lucky enough to live in a state without income taxes. And if you do face a state income tax, maybe apply a haircut of a few % to account that. I’m not saying that tax planning is irrelevant. But it’s a lot of effort and even if you get it slightly wrong it’s not the end of the world. Concentrate on what’s really important in retirement: the withdrawal rate math!

So much for today! Thanks for stopping by and please leave your comments and suggestions below!

Title picture credit: BoredPanda.com

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116 days ago
P.S. Don't forget to factor in ACA FPL calculation if relevant.
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★ Siri, Privacy, and Trust

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Three weeks ago, writing for The Guardian, Alex Hern reported:

Apple contractors regularly hear confidential medical information, drug deals, and recordings of couples having sex, as part of their job providing quality control, or “grading”, the company’s Siri voice assistant, the Guardian has learned.

Although Apple does not explicitly disclose it in its consumer-facing privacy documentation, a small proportion of Siri recordings are passed on to contractors working for the company around the world. They are tasked with grading the responses on a variety of factors, including whether the activation of the voice assistant was deliberate or accidental, whether the query was something Siri could be expected to help with and whether Siri’s response was appropriate.

Apple says the data “is used to help Siri and dictation … understand you better and recognise what you say”.

But the company does not explicitly state that that work is undertaken by humans who listen to the pseudonymised recordings.

I pooh-poohed this story at first, mostly on the grounds that I thought we knew about this, and that the recordings were only saved from users who had consented to it. I was mistaken. This is a privacy fiasco, and a betrayal of Siri users’ trust.

A week later, Apple issued statements to TechCrunch and The Verge stating that it was suspending this “grading” program. From Matthew Panzarino’s report at TechCrunch:

Apple says it will review the process that it uses, called grading, to determine whether Siri is hearing queries correctly, or being invoked by mistake.

In addition, it will be issuing a software update in the future that will let Siri users choose whether they participate in the grading process or not.

My reading of this is that until last week, if you used Siri in any way, your recordings might be used in this “grading” process. If I graded Apple on the privacy and trust implications of this, I’d give them an F. I don’t think it’s debatable whether users of any voice assistant should have their recordings listened to or even reviewed (in text form) by human employees without their express consent. But especially users of Siri, given Apple’s prominent position as a privacy focused company. Apple literally advertises on the basis of its user-focused privacy policies — but apparently the billboards should have read “What happens on your iPhone stays on your iPhone, except for some of your Siri recordings, which we listen to.”

From Sam Byford’s report for The Verge:

Apple did not comment on whether, in addition to pausing the program where contractors listen to Siri voice recordings, it would also stop actually saving those recordings on its servers. Currently the company says it keeps recordings for six months before removing identifying information from a copy that it could keep for two years or more.

Until the opt-in process is crystal clear, Apple should delete all existing recordings and confirm that it is no longer saving them. I don’t even know where to start with the fact that until this story broke, they were keeping copies with identifying information for six months. This defies everyone’s expectations of privacy for a voice assistant.

We should expect Apple to lead the industry on this front, but in fact, they’re far behind. Amazon has a FAQ written in plain language that explains how Alexa works, and how to view your voice recordings from Alexa-powered devices. You can review them in the Alexa app in Settings: Alexa Privacy (a pretty obvious location) or on the web. That settings page also has an option: “Use Voice Recordings to Improve Amazon Services and to Develop New Features”. I think Amazon should make clear that with this turned on, some of your recordings may be listened to by Amazon employees, but it’s not too hard to surmise that’s what’s going on.

Apple offers no such setting, and offers absolutely no way to know which, if any, of our Siri commands have been saved for review by employees. This is something we should have explicit, precise control over, but instead it’s a completely black box we have no control over or insight into whatsoever.

From a privacy perspective, there are two fundamental types of Siri interactions: purposeful and accidental. Purposeful interactions are when you press the side button or say “Hey Siri” with the intention of invoking Siri. Accidental interactions occur when your button is pressed too long accidentally, or when a device incorrectly hears “Hey Siri” even though you said no such thing. All recorded Siri interactions should be treated by Apple with extraordinary care, but accidental invocations, when identified, should be deleted immediately unless the user has expressly agreed to allow it — each and every time. Having Apple contractors listen to random conversations or audio is the nightmare scenario for an always-listening voice assistant.

Compare and contrast with iOS’s transcript feature for voicemail. At the bottom of each transcription, iOS asks whether the transcription was “useful” or “not useful”. Tap on either of those and you get a very explicit prompt:

Help Improve Transcriptions?

Would you like to submit this voicemail to Apple to improve transcription accuracy?

Recordings will only be used to improve the quality of speech recognition in Apple products.

Do not submit recordings if you believe the speaker would be uncomfortable with you submitting the content to Apple.

The two buttons at the bottom of the prompt: Cancel and Submit. You must address this same prompt every single time you flag a transcription as useful or not useful. Every time. That’s how you do it.

In addition to being correctly respectful of privacy, the voicemail transcription feature also puts the user in control. So when a voicemail is transcribed poorly, you can flag it and submit it to Apple. That would be a great feature for Siri — when an interaction goes poorly, and we know the interaction was innocuous in terms of revealing anything private, we should be able to flag it and submit it to Apple. I firmly believe that Siri has gotten far more useful and far more accurate in the last few years, but clearly it’s still very far from perfect. I’d be happy to help Apple by submitting failed interactions on a per-interaction basis. Apple needs to stop pretending Siri is perfect.

I’ll give the final word to Steve Jobs, speaking about privacy back in 2010 at Kara Swisher and Walt Mossberg’s D8 conference:

“Privacy means people know what they’re signing up for, in plain English and repeatedly. I believe people are smart and some people want to share more data than other people do. Ask them. Ask them every time. Make them tell you to stop asking them if they get tired of your asking them. Let them know precisely what you’re going to do with their data.”

I can’t say it any better than that.

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224 days ago
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✚ On the Necessity of Rest and Relaxation

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Greg McKeown, from his book, Essentialism:

If you believe being overly busy and overextended is evidence of productivity, then you probably believe that creating space to explore, think, and reflect should be kept to a minimum. Yet these very activities are the antidote to the nonessential busyness that infects so many of us. Rather than trivial diversions, they are critical to distinguishing what is actually a trivial diversion from what is truly essential.

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Super Mario and the Meaning of Life

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It's turns out the true meaning of life is...beer.
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What Everybody Is Getting Wrong About FIRE

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Fig 1: Suze Orman’s opinion of our lifestyle, as captured in a crazy interview on Paula Pant’s Afford Anything podcast.

In case you hadn’t already noticed it in the news, it seems we are hitting a  turning point in how the rest of the world perceives this lifestyle that you and I have been enjoying.

First, we were ignored. Then, there were a few stories that just focused on the strange lives of  Mr. Money Mustache a few other freaky magicians, cataloging our feats of extreme frugality like “spending less than 100% of your money on a car” or “occasionally eating food from one’s own kitchen.”

But time went by, and our numbers kept growing. And we weren’t just thirtysomething white male tech workers anymore, we were women and men of all ages and professions in all different countries, absorbing blogs and podcasts from a thousand different sources.

Vicki Robin, author of Your Money Or Your Life came out of retirement to write a new edition of her foundational book on the subject of financial independence* and some prominent filmmakers have spent the past year making a documentary called Playing with FIRE about all of this too.

And suddenly, instead of just a blogger or a few millennials here and there, the media is starting to call it the Financial Independence Movement. And this is a big deal, because when it comes to cultural traditions, perception pretty much defines reality.

But when you look it up by Googling the FIRE Movement, you still get a pretty mixed bag of arguments.

The New York Times article looks very positive. But there’s another one in there called “Why I Hate the FIRE Movement”, another that complains our ideas are a “Massive fallacy of composition”, and any number of others saying that we have got one aspect or another wrong.

There’s a tricky paradox going on here: the more people you reach, the bigger the range of misconceptions that will come up, potentially cockblocking your movement before it really takes off.

So, with that in mind, let’s clean up the biggest bits of WRONG that are preventing the latest round of several million new arrivals from fully enjoying the fruits of their own labor.

Because as soon as you stop making excuses for why these ideas can’t possibly work for you, you can start actually doing them and seeing the benefits – today.

1: This is ALL WINNING and there are NO DOWNSIDES.

If you think there is even the slightest flaw with the ideas behind FIRE, you’re probably just not understanding it correctly. Because the whole reason for doing any of this is to lead the happiest, most satisfying life you can possibly lead.

Sure, there are a few tricks behind the curtain – I’m going to make you occasionally tackle some moderately difficult stuff instead of the lazy, easy things you are accustomed to doing. But this too is a win, because a lazy life is a sad, depressed, unsatisfying life. We are going to lift you up OUT of that bullshit. So from now, you can assume that any objections can be solved. Zero complaints allowed.

2: It Doesn’t Matter How Much Money you Make

Sure, many of the people most passionate about FIRE tend to be tech workers and doctors who happen to make a lot of money. When people with lower salaries notice this fact, they tune out and assume the ideas won’t work for them. When in fact, they work even better, the further down the income scale you go.

When I tell a Google employee earning $200,000 per year that she should not burn through too many $10.00-plus-tip glassses of wine at happy hour, she can rightfully respond that each one represents only about ten minutes of her after-tax pay. But what about the guy getting by on $20k? A ten-dollar expenditure is ten times more of a blow to his finances, and an even bigger portion of his monthly surplus income, if he has any surplus at all.

I’m not telling low-income people that they can retire in five years. I am telling them that they can make their lives better, RIGHT NOW, by spending less money on certain things that don’t improve any of our lives. Ten dollar drinks are one easy example, but there are dozens of other ones that I’m suggesting.

And dozens of ten-dollar bills start to add up to real money pretty quickly, which is something most people don’t realize. The vast majority of wealthy people are the ones who have figured out that a millionaire is made ten bucks at a time.

At the opposite end of the scale, earning more income will rarely solve your financial problems: most high-income people are still within just a few paychecks of insolvency, because it is possible to blow almost any paycheck, simply by adding or upgrading more cars, houses, and vacations.

A fundamental truth in society is that most people are pretty bad at math. At the core, these FIRE ideas are simply about taking some solid math, combining it with principles of human happiness, and then distilling it down into a list of simple tactics that will get you way ahead in all areas of life. The benefits go way beyond money.

3: FIRE Is Not Really About Early Retirement

Everybody uses the FIRE acronym because it is catchy and “Early Retirement” sounds desirable. But for most people who get there, Financial Independence does not mean the end of your working career.

Instead it means, “Complete freedom to be the best, most powerful, energetic, happiest and most generous version of You that you can possibly be.”

Does this mean you will quit commuting through traffic into a lame corporate office to sit in meetings about products you don’t really care about? Yes.

But does it mean you won’t work hard at things that are important to you, for the rest of your life? NO!

The people who lob this “retirement is bad” complaint against us are often the lucky ones – a professor who loves researching and teaching, or an established doctor who loves saving lives and happens to enjoy the work environment she has created for herself. But in real life, over half of people are in jobs they genuinely do not enjoy, and which they would immediately quit if they didn’t need the money.

Early retirement means quitting any job that you wouldn’t do for free – but then continuing right ahead with work in something that works for you, even when you don’t need the money.

If you’re lucky enough to find a job this good early on in your career, then congratulations, you can have the benefits of early retirement even before you have the huge nest egg. But don’t fool yourself  – having the financial independence side of things is very powerful as well.

And because of this tendency of early retirees to go on through life and keep earning more money – at least occasionally – the issue of running out of money is even more remote. Most of us end up with a higher net worth every single year, even decades after turning in the keys to the cubicle.

4: You Can Be Happy on ANY Level of Spending

As a society, we’ve been trained to assume that having a bigger budget is always better, and cutting back always means some sort of compromise. The Suze Orman interview above is just dripping with that assumption. The amazing news in this department, which will save you millions of dollars, is that this is complete bullshit!

Happiness is your goal in life, and it comes from meeting certain core Human needs. The thing is, that there are many ways to meet each of these needs – some of them free and some of them shockingly expensive.

For example, improving your physical health is one proven way to be happier. But you can accomplish this with a $2500 per month personal trainer or a $100 set of barbells from Craigslist. Same happiness, vastly different cost.

And as it turns out, there is a similar hack for every single one of life’s major expenses. You can meet all your needs at little or zero cost – it just takes a bit of skill. At this level, you would be able to save almost all of your income.

Or, you can substitute a bit more money and a bit less skill to meet those needs in an (only slightly) more efficient lifestyle, like the one I try to lead. This might allow you to save half or two thirds of your income.

Or, you can spray money in every direction randomly, trying to meet an unfiltered list of wants and needs, and end up with a random but very expensive life, while remaining almost broke throughout the entire thing. This is what most people do, and it leads to saving almost none of your income.

All three choices are possible to do with great happiness. But in a bit of a paradox, the last and most expensive choice is the most difficult one in which to find happiness, because you end up with so many distractions and so little free time.

5: It Doesn’t Depend on A Booming Stock Market

I started this blog soon after the crash of 2009. Now we’re in the boom of 2018. Another market crash of epic proportions is coming sometime, probably pretty soon.

Our uninformed opponents think that FIRE-style early retirees are extra vulnerable to this. But in reality, it’s just the opposite: we are on a safe island, far above the choppy seas of the everyday economy. Because here’s how it really works:

  • We have low and easily controlled expenses – remember, we got here precisely by being good at controlling our spending.
  • The stock market always fluctuates, and crashes are an expected and healthy part of the system. Then Human ingenuity continues its magic, we keep on striving and inventing great things, and the market goes back up. Stock market volatility is already built into the math we used to design this plan. Relax.
  • Even in the event of a permanent collapse (for example the end of the US or world economy), the FIRE practitioner would still come out ahead: instead of focusing your energy on leasing BMWs or dressing yourself up fancy, you have learned to live happily and work on your skills, health, and friendships. It’s a package that will make you wealthier in good times and bad.

6: Education, Health Care, or High Cost of Living areas are Comically Tiny Obstacles

FIRE is simply about making smart decisions with your spending so that you waste less money.  This means that you have way more money available to work with.

The potentially costly monsters mentioned above are simply things that cost money. So if you get better at managing your money, do you think these problems will loom larger, or smaller, in your life?

For example, my son will be reaching University age in just five more years. I haven’t bothered to set aside any money for this part of his education, because we already had way more than enough before he was born!

On top of that, financial independence gives us many more options to handle any unexpected expense, whether it’s education, health, or anything else. For example, as a team my son and we parents could easily:

  • shop around to find the most cost-effective way to get any given degree (start with community college for the first two years, compare different schools, etc.)
  • earn more merit scholarships to get through even an ivy league school for free.
  • earn more money to pay for any cost shortage
  • bypass university entirely and simply start a business
  • move to another state or even country in order to qualify for local tuition rates or more reasonable medical rates
  • use personal relationships to get cheaper or free education or medical care in exchange for helping teachers and doctors with something they need from us.

These are just a few ideas. The point is, every problem can be solved, and financial independence simply gives you more mental and money power to solve these problems.

7: The Only Thing To Fear, is Fear Itself

In the interview, Suze Orman goes on and on about what might go wrong, and how you need an incredible amount of money saved to protect you, just in case. But this thinking is completely backwards – money will not cure your fear, as megamillionaire Suze proves so clearly.

If you are afraid of what might happen in the future, you have a mental problem rather than a financial problem. So you should work on that first, by training your mind and body:

  • Start each day with at least a one mile brisk outdoor walk – before you even attempt to work.  This drastically improves your hormonal balance and reduces stress and fear.
  • Read books about managing stress and learn about meditation using something like Headspace or Camp Calm.
  • Completely avoid the daily news cycle, especially on TV or radio. If you insist on being a world events junkie, just read the Economist once per week. Focus on optimistic sources of information – like this blog!
  •  Seek out and hang out with more optimistic friends. Remove negative or gossipy friends from your daily life.

8: Place Your Bets Where The Odds Are In Your Favor

Because my brain has a math side I can’t turn off, I tend to see the world in terms of numbers rather than just emotions. And this is incredibly helpful, because by understanding probability, it helps me set up my life to ensure a much more joyful stream of those happy emotions.

For example: many people avoid cycling because they have heard from friends that it is very dangerous. But by doing so, they replace bike trips with sedentary car or bus trips, which clog their arteries and compound into fat gain and other medical issues which really are dangerous.

A lifetime of bicycling in average conditions might give you a 0.2% chance of untimely death due to accident – which can be slightly higher or lower than car driving depending on where you live. But a lifetime of drinking soda and skipping your cycling and barbell workouts gives you at least 50% higher chance of dying ten years earlier due to medical complications, while cycling reduces those health risks (and costs) considerably. So which activity is really the dangerous one?

With this in mind, which of these activities is more risky?

  • working ten extra years in a job you don’t love so you can have an extra million saved up in case you encounter heath problems later.
  • quitting that job right now and investing those ten years into living a healthier and less stressed life with more exercise, better relationships, and a more diverse range of skills. Focusing on you instead of your bank account.

We’ll skip the spreadsheets for now and just boil this into a list of habits that really do give you the best chance at a good life: more happiness, better health and less negative stress.

  • Physical health FIRST: your brain is a system of meat and tubes, just like the rest of your body. The whole system will only perform well if you place its wellbeing first, before anything else. Salads and barbells every day, no goddamned excuses.
  • Mental health NEXT: feed your mind with happy input and learn to practice mindfulness, educational reading, and meditation daily, which is simply a workout for the brain.
  • Daily hardship and Learning: if you are not sweating and learning and doing something difficult and solving problems, you are not living fully. Find a way to scale back the pampering and achieve more with your own body and mind.
  • Indulge, but only with Moderation and Self-Mockery: this country is rich enough that you can become wealthy even without perfect self-discipline – even on minimum wage. But the moment you think you deserve or need whatever indulgence you are currently treating yourself to, you have lost the game. Luxuries and treats are just short-term pleasurable distractions, like any other drugs. Indulge if you can afford them, but you’re not missing one ounce of happiness if you choose to go without at any given moment.

So that’s the FIRE movement.

It’s a system of living your best life in all ways rather than just the financial, based on our best understanding of human nature, with a bit of math and science behind it. Like science itself, it’s not a dogma or a religion, but more of a self-aware system that invites questions and experiments. It’s always open for modification or improvement, but like science itself, there’s nothing for a rational person to hate. Who hates learning?

The reason it has spread to millions of people is that it works. People try it, they like the results, and so they share it with their friends, and the cycle repeats. There’s no stopping an idea or a movement like that.



*and guess who had the honor of writing the foreword for the new edition?

Note that I use Amazon affiliate links to point to any Amazon products mentioned, which allows this blog to earn money – so many thanks if you use them.




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537 days ago
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Nooses, Rotting Teeth, and Neglect: Inspectors Find Dismal Conditions at For-Profit California Immigration Jail

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Nick Miroff, reporting for The Washington Post:

Homeland Security inspectors who made an unannounced visit to a private, for-profit immigration jail in California in May found major violations of federal detention standards, including cells with nooses dangling from air vents, detainees losing teeth from lack of dental care and one disabled inmate left alone in a wheelchair for nine days. […]

One dentist told inspectors that there was no time for cleanings or fillings, and that it was up to inmates to take care of their own oral hygiene despite a lack of supplies. “The dentist dismissed the necessity of fillings if patients commit to brushing and flossing,” the report said. “Floss is only available through detainee commissary accounts, but the dentist suggested detainees could use string from their socks to floss if they were dedicated to dental hygiene.”

DHS inspectors reviewed all requests for dental fillings since 2014 and found that although the jail’s two dentists identified cavities and placed detainees on a waiting list for fillings, no detainees received them. “One detainee we interviewed reported having multiple teeth fall out while waiting more than 2 years for cavities to be filled,” the report said.

ICE didn’t even exist until after 9/11. They were founded in response to terrorist attacks. Letting these people suffer in jail has nothing to do with fighting terrorism. These conditions would be deplorable anywhere in the world, but to have this going on in the United States of America is just astounding.

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549 days ago
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