Saving by not working & downsizing

[Rex]

We are contemplating ER in 2015.

The plan would be to sell the family home and move to the beach condo (now a break even rental). The "savings" by moving and not w**king is crazy. Am I thinking straight?

Here are the categories and the estimated annual savings by ER & move:

Taxes (Federal, State, SS, Medi): $46,000

To condo in another state: (Property Tax, Home & Flood Insurance): $5,948

Other savings (no 401k contribution, utility savings): $29,600

Total Savings: $81,548/year

It's shocking to me that w**king & living in the family home costs me this much.

I would welcome any comments and shed some light on what I am missing.....

 

[daylatedollarshort]

We are contemplating ER in 2015.

The plan would be to sell the family home and move to the beach condo (now a break even rental). The "savings" by moving and not w**king is crazy. Am I thinking straight?

Here are the categories and the estimated annual savings by ER & move:

Taxes (Federal, State, SS, Medi): $46,000

To condo in another state: (Property Tax, Home & Flood Insurance): $5,948

Other savings (no 401k contribution, utility savings): $29,600

Total Savings: $81,548/year

It's shocking to me that w**king & living in the family home costs me this much.

I would welcome any comments and shed some light on what I am missing.....

If you are crazy, then I am, too. This is actually my favorite topic. We came to some of the same conclusions a few years ago.

We have realized much of DH's salary went to job and commute costs, taxes, life outsourcing, not having time to watch expenses closely and saving for retirement. By cutting our expenses we became FI, and by becoming FI, we could cut life and disability insurance for another $3K a year. With DH not needing a megacorp job, we are free to move any place we want with a lower cost of living, so there is another huge savings.

We currently work part time from home at hobby businesses we could do anywhere with an Internet connection, and we consider our other part time job / hobby to be reducing recurring expenses. The ROI on reducing expenses is actually much higher for us over a 50 year retirement span than the savings we could generate from working full time a few more years. Every $10K we can cut off our annual expenses means needing $500K less over retirement. Plus the expense cuts are after tax money, so they are worth more to us than earning taxable W2 income.

The cool part is we have slashed our business and personal expenses and we haven't even downsized yet. We even have newer cars than we had before - they just have overall better MPG and repairs records so the annual costs are lower than the old cars.

We just had more time to do things like cook from scratch, eat out at lunch when the prices are lower, replace the landline for Ooma, find a cheaper hair stylist, lower our cable bill, switch to LEDs bulbs, get free music from Freegal instead of buying it on iTunes, etc. It has all really added up.

 

[Andre1969]

I bring home about 47 cents on the dollar, once you factor in my 401k, health insurance, SS/Medicare, Fed, and state/local taxes. So, while I'm not ready to downsize just yet, I came to the realization awhile back that my j*o*b isn't as critical as I used to think it was.

The two major things that keep me working now are (1) I plan to move in about 5-6 years, and my guess is that it's easier to get a mortgage while you're still working, and (2) Health insurance.

But, with Obamacare, health insurance through the company isn't as critical as it used to be. And with buying a new place, I'll have proceeds from the old place once it sells to help balance things out, so maybe the j*o*b still isn't as critical as I think it is!

 

[daylatedollarshort]

I bring home about 47 cents on the dollar, once you factor in my 401k, health insurance, SS/Medicare, Fed, and state/local taxes. So, while I'm not ready to downsize just yet, I came to the realization awhile back that my j*o*b isn't as critical as I used to think it was.

The two major things that keep me working now are (1) I plan to move in about 5-6 years, and my guess is that it's easier to get a mortgage while you're still working, and (2) Health insurance.

But, with Obamacare, health insurance through the company isn't as critical as it used to be. And with buying a new place, I'll have proceeds from the old place once it sells to help balance things out, so maybe the j*o*b still isn't as critical as I think it is!

We probably broke even on the health insurance from when DH was working as before we had employer subsidized insurance and now we have government subsidized. We do get some tax breaks and financial aid for the kids for college now that our taxable income is lower.

FYI - We belong to two credit unions and getting a mortgage has not been an issue. One credit union took our savings into account and the other credit union said if we showed two months of transfers from our retirement accounts to an after tax checking account that would count as "income" for qualifying purposes.

 

[RetireAge50]

We see 30% of our income.

The rest currently goes to taxes 23% retirement savings 22% and kids college 25%.

 

[dvalley]

I bring home about 55-60 cents on the dollar by maxing out the 401k and having a mortgage interest deduction. For me the job is still pretty critical since I'm not even at the half way point of my target FI goal yet. However, the plan for most is to lower expenses in retirement by either moving or paying off major debts (mortgage usually) etc so the month-to-month expenses go way down.

I guess it boils down to this. If your retirement funds will allow you to withdraw about 4% every year for the life of your retirement and that 4% can cover your annual expenses (including healthcare, a new roof for the house, emergency hospital stay, a new car etc) then you're fine. Try playing with a calculator like FireCalc.

 

[Andre1969]

We belong to two credit unions and getting a mortgage has not been an issue. One credit union took our savings into account and the other credit union said if we showed two months of transfers from our retirement accounts to an after tax checking account that would count as "income" for qualifying purposes.

Thanks for this information, that's good to know. One thing I had forgotten about too is dividends. I'm sure they'll count dividends as income, so that would help a little.

 

[robnplunder]

Wait. Isn't it like saying I saved money b/c I used coupon? Despite tax & other costs of working, one more year working vs RE is a huge difference for me financially. I add $200k to my RE fund for every year I work (401k, cash savings, investment accumulation instead of spending asset, ....). This is one more reason (and a main one) why I am in OMY syndrome which I am slowly shedding through this forum.

 

[walkinwood]

Your point illustrates the error of the 80% replacement rule.

Dominguez, in Your Money or Your Life talks about this from another angle. He calculates hourly income after taking into account work related costs, commuting time and taxes & shows just how little you make - and therefore, how valuable each dollar is.

I have a hard time calling it "savings" - especially 401K or retirement savings - but that's just splitting hairs.

 

[CaliforniaMan]

Just starting my first month of retirement this April, going over and over the numbers, I too have found that I need much less than when I was working to maintain the same standard of living. For one thing, as a self-employed consultant, I had to pay an extra 15% or so for Self-Employment tax, (SS, both sides, medicare, etc) on top of the normal tax rates.
Kind of surprising to me now that I have taken the time to look at it in more detail what the real situation is. All the years working, I was usually maxing out my 401K, paying taxes, and trying make as much as I reasonably could, pushing me to higher brackets. Now that I really look into it, if I don't retire now, I am just being stupid.

 

[daylatedollarshort]

Wait. Isn't it like saying I saved money b/c I used coupon? Despite tax & other costs of working, one more year working vs RE is a huge difference for me financially. I add $200k to my RE fund for every year I work (401k, cash savings, investment accumulation instead of spending asset, ....). This is one more reason (and a main one) why I am in OMY syndrome which I am slowly shedding through this forum.

If you are spending $100K a year to live currently, but you can figure out how to live well on $50K over a 50 year retirement, which is still quite high on a global scale, that is $2.5 million less (after taxes) you need in retirement funding. Compare that to saving an extra $200K a year but still working full time. How many more years would you have to work full time to break even financially?

Then check out sites like the one below and figure out how much it would cost you to retire and live in the south of France (like a native, not an American on vacation eating out and staying in hotels) -

OECD Better Life Index

 

[spncity]

Great topic! Keep the ideas coming. I think our biggest challenge is downsizing the stuff to get free of the big house.

After that, I think it would be easy. But maybe it's just that I prefer to think it's all easy after that.

Kindest regards.

 

[WhoDaresWins]

I plan to keep my current home when I retire this July, but I think I my income will not suffer at all in retirement. When I run the numbers, it will be more than when I was working when I factor in all my income streams without the working expenses and payroll deductions. When it doesn't pay to work anymore, I figure it is time to retire, unless one's vocation feeds some inner need.

I might possibly end up spending more in retirement as there are some lengthy trips I would like to take as well as a couple of deferred home projects that have been gaining ground in my mind (not stuff that is strictly needed maintenance but rather more "wants"). As I am not at all handy, I will have to hire for these projects. But at least I will have the luxury of being home to get things done and not have to schedule vacation time off.

 

[robnplunder]

If you are spending $100K a year to live currently, but you can figure out how to live well on $50K over a 50 year retirement, which is still quite high on a global scale, that is $2.5 million less (after taxes) you need in retirement funding. Compare that to saving an extra $200K a year but still working full time. How many more years would you have to work full time to break even financially?

I think the math works for many but not for me. Recent splurging aside, I have been LBYM'ng (taking company shuttle, packing my own lunch, not having smartphone, ....) already. Any house downsizing (and moving to less costly neighborhood) I do will be taken up by healthcare cost out of my pocket. A drastic lifestyle change may help but I am not planning for it yet.

 

[daylatedollarshort]

I think the math works for many but not for me. Recent splurging aside, I have been LBYM'ng (taking company shuttle, packing my own lunch, not having smartphone, ....) already. Any house downsizing (and moving to less costly neighborhood) I do will be taken up by healthcare cost out of my pocket. A drastic lifestyle change may help but I am not planning for it yet.

Have you priced health insurance under the ACA? We have a Bronze plan with an HSA. The lower you can get your expenses, often the lower you can get your taxable income / MAGI, which in turn lowers your health care premiums. With the subsidized ACA premiums and the HSA our total medical expenses (premiums, co-pays, etc.) are probably wash with our employer subsidized plan. The out of pocket costs are higher but our portion of the ACA premiums are actually lower than the old employer plan, currently under $200 a month.

If you can live off taxable income or do something like sell your house and rent until Medicare age and live off the up to $500K capital gain tax exempt proceeds, your ACA premiums may be quite low, as long as you keep your O-MAGI low.

If you have the option to live outside the U.S., health care costs just about anywhere else on the planet are not as ludicrous -

21 graphs that show America’s health-care prices are ludicrous

 

[Chuckanut]

When I run the numbers, it will be more than when I was working when I factor in all my income streams without the working expenses and payroll deductions.

This is a credit to your planning and frugal ways while you were in your earning years. Congratulations!

 

[chris66]

This is absolutely our expectation. We sold our primary home in Columbus, Ohio, and moved to our second home in Missouri wine country. We did this last year when hubby and I were both part of a reduction in IT staff at MegaCorp. Columbus has insane property taxes, and we had mortgages when we were working. With the proceeds of the Cols home sale, we were able to pay off the Missouri home mortgage, and buy a truck, and then some...

I got another job, but after running the numbers, and considering how long it's taking us to remodel the current home, I gave my notice a few weeks ago. I agreed to stay on until the end of this month, and then my ACA insurance begins 4/1. It's affordable, even without subsidies (since we've made to much already this year for a reduction in premiums). If it wasn't for ACA, I wouldn't be able to do this (I'm 48).

We live in town, so we can walk to about everything. Lots of cheap entertainment nearby. Room for gardening (which is both entertainment and money saving for us. I'll have time to research to save money, and to do all that frugal living stuff that I actually have fun doing when I have time.

Overall, if I continued working, we'd have even more money -- but, really, we have enough, and not working, we can effectively and enjoyably live on considerably less money.

 

[Hermit]

Yep, I'm living on about half my former income. My expenses have actually gone up some. Sold the house so now I have to pay some rent. The biggest change is that I am no longer contributing ~22k to retirement, but there came a time that my contribution was no longer the gorilla in the retirement fund so it is still growing nicely.

 

[SoClose]

Ahh, this post made me realize - the % of previous numbers quoted by advisors aren't how I figure costs. I was pondering how people reduced to 85% of pre RE, but they are talking income reduction not expense reduction.....DOH!

I know our average living expenses for the last 5 years. To me living expenses do not include taxes, ss, or savings. Our expenses are only 28% of our current income. I then add an additional 15% to cover taxes on the monies withdrawn from 401(k) to meet these expenses in RE and it still puts us at only 43% of current income.

I don't consider it "saving" by RE.

 

[ERD50]

...

I have a hard time calling it "savings" - especially 401K or retirement savings - but that's just splitting hairs.

I don't see any way that the end of 401K contributions can be called 'saving' - no 'hair splitting' about it. In fact, if the OP gets a company match, it is a loss.

You keep the 401K money you contribute, it isn't 'spent', so ending it isn't saving anything. I think the OP is confusing the comparison between annual spending, take home pay, and gross pay. Taxes and other payroll deductions are a hit, 401K contributions or other savings are not.


-ERD50

 

[Andre1969]

I tend to look at my 401k both ways...as an expense, and as an asset. Essentially, I'm paying to fund my retirement. I'll benefit from it down the road when it's time to live off of it, but for the time being, it's still an expense.

I have thought about trying to cut back on my 401k a bit, as it's grown enough that adding more to it doesn't have the effect it once did. However, I'm addicted to the tax savings right now. I'm in the 25% federal bracket, so by the time I tack on state and local taxes, every dollar I put in the 401k only "costs" me about 67 cents. Plus, I get a 4% company match, which is nice.

I would never cut out the 401k completely, though. I'd always make sure to at least get the company match. Most likely, I'll keep maxing it out for the foreseeable future. Even though I'm calling it an "expense", the more I pay, the sooner I can "buy" my early retirement!

 

[aja8888]

SS contributions, while a "hit" as a payroll deduction, are used in building a future income stream. We couldn't be where we are at this point, income wise, if it wasn't for the $45K per year we get back from SS.

 

[sengsational]

... hourly income after taking into account work related costs, commuting time and taxes & shows just how little you make - and therefore, how valuable each dollar is.

This is the logic we used 22 years ago when the first kid arrived; after removing employment taxes, employment related expenses and day care, just the slightest belt tightening got us even.

SS contributions, while a "hit" as a payroll deduction, are used in building a future income stream. We couldn't be where we are at this point, income wise, if it wasn't for the $45K per year we get back from SS.

Good point. My calculations 22 years ago ignored this factor. But then again, everyone has been saying not to depend upon SS to continue in its current form, and I'm not planning on engaging SS for 15 more years.

 

[Andre1969]

SS contributions, while a "hit" as a payroll deduction, are used in building a future income stream. We couldn't be where we are at this point, income wise, if it wasn't for the $45K per year we get back from SS.

That's a good point. The SS that I currently pay out, while an expense right now, also helps out with retirement down the road. Even if I were to quit work right now, what I've earned so far will cover about 30% of my baseline budget, starting at age 62. Provided they don't monkey around with it, that is!

 

[gardenfun]

This is absolutely our expectation. We sold our primary home in Columbus, Ohio, and moved to our second home in Missouri wine country. We did this last year when hubby and I were both part of a reduction in IT staff at MegaCorp. Columbus has insane property taxes, and we had mortgages when we were working. With the proceeds of the Cols home sale, we were able to pay off the Missouri home mortgage, and buy a truck, and then some...

I got another job, but after running the numbers, and considering how long it's taking us to remodel the current home, I gave my notice a few weeks ago. I agreed to stay on until the end of this month, and then my ACA insurance begins 4/1. It's affordable, even without subsidies (since we've made to much already this year for a reduction in premiums). If it wasn't for ACA, I wouldn't be able to do this (I'm 48).

We live in town, so we can walk to about everything. Lots of cheap entertainment nearby. Room for gardening (which is both entertainment and money saving for us. I'll have time to research to save money, and to do all that frugal living stuff that I actually have fun doing when I have time.

Overall, if I continued working, we'd have even more money -- but, really, we have enough, and not working, we can effectively and enjoyably live on considerably less money.

Nice story, Chris. Especially the part about gardening being both entertainment and money saving.

Congratulations on appreciating the true pleasures of life (as opposed to adding to the money pile)!