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Revisiting Fuego's IBR FIRE idea
Old 11-13-2010, 11:27 AM   #1
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Revisiting Fuego's IBR FIRE idea

Hi,
I'm a new member who joined after reading Fuego's idea on using income-based repayment as part of a FIRE strategy. This has been a plan B of mine for a couple years. Good to see someone else has a similar idea. Some of you may know me from Bogleheads. I'd like to keep this thread from devolving into politics. The government makes the rules, and it is our job simply to comply with them.

An unintented consequence of income-based repayment is that some HENRYs with six-figure debt will decide to switch to a slower paced life with less pay, less debt, and more free time. Society has gradually adapted to harness the work ethic and intelligence of HENRYs, typically an urban professional in the upper middle class. There are several factors that combine to decimate the HENRY's buying power. Consider the costs facing a typical mid-career, single professional in NYC earning $200K:

(1) Progressive tax code: 33% tax rate, perhaps rising to 36% in 2011
(2) State and city income taxes: around 11-12%
(3) FICA: 2.9% Medicare + $6324/year Social Security, both likely rising
(4) Sales taxes: 8.875%
(5) Inflated property values: meaning people have the option either to buy a $1M property (with $1800/month property taxes) or rent at $2500/month
(6) Inflated cost of services due to higher rents
(7) "Clustering" costs -- by which I mean the cost of having to do business/travel during peak times: can translate into 100% higher costs for airfare than those with scheduling flexibility

Now, let's add $150K in student loan debt into the mix. On a 10-year repayment schedule at 5% interest, that is another $1600/month payment.

Clearly, there are ways to reduce the tax burden and save on expenses by adopting a LBYM lifestyle. This is what I've done. By rejecting the high costs associated with NYC, I'm quickly accumulating enough savings to become FIRE. While I think most of us HENRYs are pretty happy and fortunate to have good jobs, IBR offers a great plan B in case of job loss.

So, while not part of my immediate future, I'd like to consider jobs that qualify for PSLF, so as not to be caught doe-eyed if there is another financial crisis. Perhaps that means even taking steps now as insurance. Here are the characteristics that I would find most appealing:

(1) High benefits-to-pay ratio: only pay is included in AGI, so benefits like free housing, health insurance, a pension, and international travel would be ideal
(2) Minimal work week, flexible schedule: technically, 30 hours per week is the minimum for full-time
(3) Position that increases one's skill set for a second career: for example, a government job that leads to a private sector consulting position
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Old 11-13-2010, 11:30 AM   #2
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Hi,
Here are the characteristics that I would find most appealing:

(1) High benefits-to-pay ratio: only pay is included in AGI, so benefits like free housing, health insurance, a pension, and international travel would be ideal
(2) Minimal work week, flexible schedule: technically, 30 hours per week is the minimum for full-time
(3) Position that increases one's skill set for a second career: for example, a government job that leads to a private sector consulting position
No brainier - join the military, preferably the branch with the best golf courses (USAF).
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Old 11-13-2010, 11:45 AM   #3
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No brainier - join the military, preferably the branch with the best golf courses (USAF).
Interesting suggestion. I've never considered military work, but it does seem to meet most of the criteria. Doesn't it take 20 years for the pension benefits? The ideal time frame would be 10 years.
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Old 11-13-2010, 12:15 PM   #4
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For anyone like me who didn't know what HENRY stands for: High Earner, Not Rich Yet.
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Old 11-13-2010, 12:22 PM   #5
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For anyone like me who didn't know what HENRY stands for: High Earner, Not Rich Yet.
Thank you.
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Old 11-13-2010, 12:58 PM   #6
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I may be misinterpreting your situation.

But... IMO - I would rather reduce my lifestyle (LBYM) while making a good salary, payoff my debt, and work my butt off to get to FIRE than work till I drop because I reduced my earning potential.


I certainly would not let a loan cause me to lower my income potential.

Unless I suppose the loan far exceeds my ability to pay it off.

You should to do more analysis and create long-term plan (assuming you are young).... factor in a LBYM lifestyle. Do not make any knee jerk decisions.
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Old 11-13-2010, 01:10 PM   #7
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I would rather reduce my lifestyle (LBYM) while making a good salary, payoff my debt, and work my butt off to get to FIRE than work till I drop because I reduced my earning potential.
Agreed, that's why I'm discussing this as a plan B. It makes no sense to switch to a job where one is saving less just to qualify for IBR. However, if you can find an IBR-eligible job that is enjoyable and in a lower cost area, then one may be able to take a substantial pay cut and still break even, especially quality-of-life-adjusted.
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Old 11-13-2010, 02:41 PM   #8
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You wascally womantic

I guess that follow your bliss book didn't appeal to you?
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Old 11-15-2010, 08:59 PM   #9
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Originally Posted by market_timer
Hi,
Here are the characteristics that I would find most appealing:

(1) High benefits-to-pay ratio: only pay is included in AGI, so benefits like free housing, health insurance, a pension, and international travel would be ideal
(2) Minimal work week, flexible schedule: technically, 30 hours per week is the minimum for full-time
(3) Position that increases one's skill set for a second career: for example, a government job that leads to a private sector consulting position


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Originally Posted by REWahoo View Post
No brainier - join the military, preferably the branch with the best golf courses (USAF).
You might satisfy #1 and #3 in the military but I doubt you'd satisfy #2.

As a retired Navy guy, I enjoy tweaking the Air Force, but I'm not sure our Air Force comrades are having a great time in the mid-East these days.
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Old 11-15-2010, 09:27 PM   #10
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No brainier - join the military, preferably the branch with the best golf courses (USAF).
I was thinking drug dealer or some other form of crime, but that's probably because O.J. Simpson is facing a similar debt-repayment problem-- trying to pay off a huge civil judgment with few assets, low income, and a small pension... and of course he does have lots of free time.

Your idea of drawing combat pay sounds a lot less painful.
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Old 11-15-2010, 09:50 PM   #11
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market timer,

I'm glad my posts on IBR motivated you to join!

I don't have a lot of suggestions on good PSLF jobs. However over the last 2 months I have managed to sneak myself into a good government job at a decent organization that qualifies for PSLF. Problem is, I don't think I'll work 10 more years to benefit from PSLF (maybe 5 more years is all I need). The potential for PSLF was really a non-factor in my employment decision though.

I'm really thinking IBR will "pay off" for me if I can get the AGI low enough in ER to get me near the poverty level and make loan payments close to zero for 25 years. One of the semi-fire jobs I have lined up if I want it is something along the lines of what you are describing. It allows travel, and tax free reimbursement for meals and travel expense (mileage). And would be 1099 income, hence I just may have a bunch of "ordinary and necessary" business expenses to write off against income, further lowering my AGI income.
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Old 11-15-2010, 10:04 PM   #12
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Fuego, the reason I'm focusing on PSLF is because the forgiveness is not taxable, and it is only 10 years. Regular IBR requires 25 years, and forgiveness is taxable. The tax implications can be horrendous. For example, consider a borrower with $150K at 6.8% interest, who remains at the poverty level for 25 years making no payments.

$150K compounds to $777K after 25 years at 6.8% interest
$777K forgiveness at an average tax rate of 33% would result in a bill of $259K

What this means is that IBR merely cuts the interest rate from 6.8% to 2.2%.

Are you assuming forgiveness will not be taxed?

It may be worth starting a 501(c)(3) organization in order to "follow your bliss" while qualifying for PSLF.
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Old 11-15-2010, 10:09 PM   #13
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My rate is 0.75%. I figure whatever debt is forgiven will generate a tax bill lower than what I would have paid under the standard repayment. And a $50,000 tax bill in 25 years is only $24,000 in today's dollars (using 3% inflation as a discount rate). Using a 6-8% discount rate knocks the NPV down again by 1/2 or 2/3.

We only have $115k or so of student debt, and in 5 years (when we hit ER) it will probably be under $100k.

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Are you assuming forgiveness will not be taxed?
I don't really know. I imagine once we get close to year 25 of IBR for folks who started it in the last couple of years, we will start seeing media outrage being expressed at the grave injustice of poor people on IBR being asked to pay large five figure tax bills. Dateline and 60 minutes will run pieces trying to get to the bottom of it, we'll have a student loan IBR crisis, and they will exempt debt forgiveness from IBR from being recognized as taxable income. Forgiven mortgage indebtedness just experienced this same process (ie no longer recognized as income). Pure speculation. And it just changes the numbers a little one way or the other. Maybe they will allow folks to spread the recognition of income over a 5 year period or something??

For those who have 10+ years remaining in the work force, it certainly makes PSLF much more appealing. Couple PSLF with a govt pension after 20-30 years of service, and you are getting somewhere.
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Old 11-17-2010, 10:04 AM   #14
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IBR? PSLF? HENRY? (thanks ProspectiveBum) ... this thread is starting to read like corporate-speak ... does it come with a dictionary?
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Old 11-17-2010, 10:24 AM   #15
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IBR? PSLF? HENRY? (thanks ProspectiveBum) ... this thread is starting to read like corporate-speak ... does it come with a dictionary?
While reading and re-reading the title of this thread, "Revisiting Fuego's IBR FIRE idea", I keep mis-reading IBR as IBS, "Revisiting Fuego's IBS FIRE idea".

Then in confusion I muse about that for a while, thinking "I didn't know that Fuego had Irritable Bowel Syndrome! Poor guy!!"
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Old 11-17-2010, 10:31 AM   #16
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IBR? PSLF? HENRY? (thanks ProspectiveBum) ... this thread is starting to read like corporate-speak ... does it come with a dictionary?
IBR and PSLF pertain to federal student loans.

Income Based Repayment
Public Service Loan Forgiveness

Googling either term turns up a full explanation.

HENRY was new to me. I'm more of a HEAR. (almost)
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Old 11-17-2010, 10:33 AM   #17
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Then in confusion I muse about that for a while, thinking "I didn't know that Fuego had Irritable Bowel Syndrome! Poor guy!!"
Quite normal lately, thanks!
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Old 11-17-2010, 10:48 AM   #18
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Quite normal lately, thanks!
Glad to hear it! (Mental note to self: IBR, not IBS... IBR IBR IBR!)
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