Thoughts on my game plan for ER?

[bad_LNIP]

Greetings all, I am seeking some feedback on my game plan. I am in my early 30's and I am trying to retire in the next few years before 40, ideally around 37ish.

I have done the corporate rat race as a senior operations manager in 2 fortune 500 companies, got paid well, saved up some money, and now I have my own business. Absent life altering amounts of money, I'd prefer not to go back to the rat race.

Here's the wildcard. I am looking at retiring overseas to a lower COL area overseas. I have several I am scouting and visiting now. Could be south/central america (Panama/Ecuador) or asia (Philippines). I have been to costa rica and ecuador. Significant other is Filipino and has friends/family in the Philippines. I think this lowers the risk of retiring early.

My goal is to create an "investment company", hire myself as a manager to capture the foreign earned income tax credit and ideally bank 100k tax free annually or whatever the max is. I have a portfolio is closed end funds and I trade options for income, mostly cash secured puts on the RUT and SPY. Pretty boring stuff, just like I like it. I think this increases the risks of retiring early, as it isn't as safe as a government backed bond, although I make much, much more than what bonds pay.

Health insurance is covered by my favorite uncle Sam for me. SO would have to purchase hers, but an individual policy isn't expensive. SO is a foreign national, so it wouldn't be hard for her to open a bank account overseas, unlike me, thanks to FACTA.

I am looking at potentially starting a business there, wherever there is (shrimp, mangos, tilapia).

I have about 200k in the market now, plus the value of the business, which I think will come in at another 200k when I sell. My thought is to continue to save and build up retirement accounts with the income generated and any funds over the 100k amount.

The desired end state is to have 100k+ coming in from dividends/investments tax free and have the house paid off with minimal living expenses. That is the vision, at least. The devil is in executing it.

Thoughts? Risks? Am I missing anything?

 

[Totoro]

Am I correct in reading that you plan to get 100k+ tax free from a portfolio of 400k?

That's a 25% annual return?

 

[Fermion]

Am I correct in reading that you plan to get 100k+ tax free from a portfolio of 400k?

That's a 25% annual return?

Might be a bit aggressive.

 

[bad_LNIP]

I want to work up to that 100k annual goal, and I do plan on using some margin to sell cash secured puts on index ETF's primarily IWM and SPY.

500k at 2-1 with the goal of 1% per month is roughly 120k per year.

 

[MRG]

Selling cash secured puts on margin, isn't for me. I wish you all the best.

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[dallas27]

You are either much smarter than most, or more foolish.

You are young enough to start over, and will have a good story no matter how it turns out.


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[steelyman]

Selling cash secured puts on margin, isn't for me. I wish you all the best.

I agree. To me, using margin is living on the edge. One big wind gust and you're over the cliff.

 

[Fermion]

Did the OP come back with a new ID later in the post? It may be that his portfolio lasts about as long as his nick.

 

[eridanus]

This will work until it doesn't. In the end, there will be some serious capital losses. The "good" news is that the losses can probably be carried back and applied against the gains.

 

[bad_LNIP]

Sorry, I had another profile but I couldn't remember my PW. I am sticking with this one.

And I thought the controversial part would be moving overseas to live...or the tax structure

You are either much smarter than most, or more foolish.

Probably a little of both. I am trying to get out of the game well before 40 after all and moving to a different country, so the "conventional wisdom" left the building some time ago.

This will work until it doesn't. In the end, there will be some serious capital losses.

How do you think a portfolio selling 2% OTM cash secured puts on SPY would perform vs just the SPY as far as volatility and returns?

Do you think holding SPY or IWM is particularly risky?

Are you saying selling cash secured puts/covered calls is a bad way to generate income from a portfolio? Keep in mind, I'm not saying go 5-1 leverage selling naked calls on Apple or something like that.

Other thoughts on generating income? Just go fixed income and bonds? What about closed end funds trading at a discount.

It seems the margin element is spooking most folks, which I can understand to a degree.

Anyone retire overseas? I haven't seen a lot of threads on it.

 

[brewer12345]

Have you spent time in your intended country? Does having a spouse that is a national there resolve residency issues for you?

I think the amount of scratch you have means you will be living on very little. Is that feasible in the Phillipines? I would not be willing to run your portfolio and I occasionally sell puts on individual equities, own CEFs, and buy long calls.

 

[nash031]

There's a really good, really long, thread on Bogleheads about a guy who traded on margin with a good plan. Lost his shirt in about three months in 2008-9.

 

[Fermion]

There's a really good, really long, thread on Bogleheads about a guy who traded on margin with a good plan. Lost his shirt in about three months in 2008-9.

And made it all back triple fold by 2012. Markettimer

 

[karluk]

And I thought the controversial part would be moving overseas to live...or the tax structure

There are numerous flaws in your plan, including but not limited to your attempted tax dodge. The reason that members have focused on other things more than the tax angle is that your plan appears to have no chance at all to succeed, simply because of your 25% planned withdrawal rate. There is no investment portfolio strategy that will unfailingly produce such high returns, month after month, year after year, for someone who is relying on it to fund a multi-decade retirement. Sooner or later you will hit a rough patch and go bust.

As far as the tax angle, it sounds as if you are planning on claiming a large enough foreign tax credit to entirely offset your federal tax liability. I strongly suggest you consult with a CPA or tax attorney before implementing this plan. As I understand it, the foreign tax credit is just what it says it it - a credit for taxes paid to another country. If you haven't paid taxes to any other country, you get no credit. So hoping for your income to be completely tax free is quite unrealistic. You could potentially avoid U.S. federal taxes by moving abroad, but only by paying enough taxes to your country of residence to offset your tax bill. One way or the other you're paying the same amount in taxes. The only difference is whether you make out the check to Uncle Sam or a foreign government.

 

[MRG]

This will work until it doesn't. In the end, there will be some serious capital losses. .......snip.......

+$80,000
Of my money, no margin involved. Maybe I'm not too smart.
Have you used this stratagy for a long time? Maybe you found the secret sauce or are a better trader.

I still use options but not as my first or second stratagy, they're used for play money.

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[eridanus]

How do you think a portfolio selling 2% OTM cash secured puts on SPY would perform vs just the SPY as far as volatility and returns?

1) Brokers can and do adjust margin requirements in times of extreme market volatility.

2) If there is a market drop of, say, 5%, you'd be pinned. Your margin would explode due to VIX even if the broker requirements didn't ramp up and you likely wouldn't be able to cover a spread or sell farther OTM. You'd either have to close the position or end up buying SPY at a loss. If you're on margin, you'd be wiring money to your broker the next morning.

The question then becomes -- would you have bought SPY when the market collapses 2% in a day? How would you feel if the market then falls another 3% in the same day or next few days? What happens then? Sell CCs on the SPY you just bought at 5% OTM?

3) Selling cash secured puts (without margin) means you miss out on good years, such as last year. Note that through 2011, it only returns +10% and that's excluding reinvested dividends and taxes.

Cash-Secured Puts vs. Buying Stock | Calculating Premiums & Breakeven Points | Scottrade KnowHow News

3) There are a few data-based studies out there on covered calls. The strategy tends to miss out on big years in the market, like last year, but it can work. Sometimes.


VIX is pretty low. If you're serious about this, I suggest buying VIX or VIX options. If/when VIX spikes, those gains could partially cover your margin requirements. Or, better yet, don't sell puts on margin.

 

[bad_LNIP]

+$80,000
Of my money, no margin involved. Maybe I'm not too smart.

I'm not sure I understand what you are saying here.


I still use options but not as my first or second stratagy, they're used for play money.

I like selling options like cash secured puts and covered calls on index ETF, and I like diversified CEF's trading at a discount. I couldn't figure which one I liked better, so I do both about 50/50.

You might be interested in this: http://www.google.com/url?sa=t&rct=...=G6m1hMd4dHPprWAo91Ukrg&bvm=bv.74115972,d.eXY

and

New Study Compares 25-Year Performance of Options Strategy Benchmarks to Traditional Indexes; (NASDAQ:CBOE)

Long story short, according to these studies, selling OTM puts/calls reduces volatility and slightly increases returns. Higher returns with lower volatility gets my attention. It is certainly worth a shot with a 30% reduction in volatility. Note the monthly premium income is 1.8%, and I am shooting for 1%.

• Total Growth. Total growth for indexes since mid-1986 was 1153% for PUT Index, 830% for BXM Index, 807% for S&P 500® Index, and 368% for CLL Index (Exhibits 2 and 6).
• Lower Volatility. The PUT, BXM, and CLL indices all had volatility that was about 30 percent lower than the volatility of the S&P 500 Index (Exhibit 4).
• Left-tail Risk. Over the past 25 years, the worst monthly loss for the S&P 500 Index was a decline of 21.5 percent, compared to a relatively modest 8.6-percent monthly decline for the CLL Index (Exhibit 8e).
• Risk-adjusted Returns. One measure of risk-adjusted returns, the Sortino Ratio, was 0.90 for the PUT Index, 0.75 for BXY, 0.71 for BXM, 0.50 for S&P 500, and 0.31 for CLL Index (Exhibits 10 and 11). Please note that all the indexes had negative skewness.
• Monthly Premium Income. The average for the gross monthly premiums collected by the BXM Index was 1.8 percent. The index options usually were richly priced (Exhibits 12 and 13).

I am by no means inventing fire here or trading some super complex prop algorithm. Thsee articles got my attention, and I prefer indexing over active management anyway. I think the reason this is a fairly new concept is that index ETF's are relatively recent inventions and it wasn't possible to run this strategy 25 years ago. Note all of the studies are within the past 10 years. Despite the studies, I think there may be a handful of funds that focus on these strategies, maybe 3 or 4.

As far as the tax angle, it sounds as if you are planning on claiming a large enough foreign tax credit to entirely offset your federal tax liability.

Not my finest moment mangling terms here. I meant to say the foreign earned income exclusion, not the foreign tax credit. You are correct, they are two very different things and the tax credit is really just not having the burden of being taxed twice on income. The foreign earned income exclusion is a complete tax dodge.

So hoping for your income to be completely tax free is quite unrealistic. You could potentially avoid U.S. federal taxes by moving abroad, but only by paying enough taxes to your country of residence to offset your tax bill.

I'm not sure it is as unrealistic as you say. The exclusion, up to 195k sheltered annually for a married couple, which is enough to get my attention and includes housing costs in the 195k calculation. If I can make nearly 200k a year tax free just by moving out of the country, I'm gone.:

Figuring the Foreign Earned Income Exclusion

The tax credit:

Foreign Tax Credit

If there is a market drop of, say, 5%, you'd be pinned.

I never sell more than I can cover with a significant cushion, although this would require using margin to complete the purchase.

The question then becomes -- would you have bought SPY when the market collapses 2% in a day?

Yes, and then evaluate selling covered calls. What are your thoughts on the studies posted? Max drawdown of 8.9% vs 21% in a month?

Buying VIX is a good idea, and I have looked at buying some of the inverse funds as well to hedge.

 

[growing_older]

People are being far too polite. Your plan is ridiculous.

If you really have the secret sauce that lets you earn 25% on investments year in and year out (more than double what Bernie Madoff was able to do using his best methods) then prove it with a few years of accumulation and retire when your SWR is more normal - like 4%.

If you embark on this dangerous plan, as soon as your investments underperform you will be eating into principle so rapidly you will lose most of your capital base and have to start over. This isn't just risky, or very risky, it's certain to fail and leave you much worse off than you are now.

 

[aja8888]

My nephew went to the Philippines a while back to marry a local girl, start a business and live happily ever after. He is a smart guy, about 35, college educated, self starter, bright, etc.

About one year there, he found out that he would be supporting the girl's whole family and relatives, lost his @$$ in a business, and fortunately did not marry the girl. Because he refused to marry her, he was run out on a rail (so to say), got his motorcycle stolen, his cash and credit cards stolen. I ended up wiring him the cash to get out without being harmed (nicely said).

Good luck with you plans.

 

[dallas27]

Guys, his money, his life. He certainly believes he has answers others dont.

I only ask we get regular updates how it working out is we can learn from him.


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[Milton]

If you really have the secret sauce that lets you earn 25% on investments year in and year out ... then prove it with a few years of accumulation and retire when your SWR is more normal - like 4%.

Indeed it seems like (?) this is essentially the OP's ultimate objective. Unless I have misunderstood, he doesn't intend to fund actual retirement from ongoing options trading; rather, he just wants to use the next four or five years to build capital through aggressive speculation, and then invest the proceeds and live off the relatively modest income ("I am trying to retire in the next few years ... My thought is to continue to save and build up retirement accounts … The desired end state is to have 100k+ coming in from dividends/investments tax free …").

The strategy of employing options and margin is a risky, 'swing for the fences' approach. Apparently the OP realizes that ("I am trying to get out of the game well before 40 after all ... so the 'conventional wisdom' left the building some time ago"), so I have nothing more to say about his plan. I'm not really sure why he sought a critique: surely he must know that most people on this board are fairly conservative investors rather than gamblers?

[A]s soon as your investments underperform you will be eating into [-]principle[/-] principal so rapidly you will lose most of your capital base and have to start over.

Fixed!

 

[bad_LNIP]

If you really have the secret sauce that lets you earn 25% on investments year in and year out (more than double what Bernie Madoff was able to do using his best methods) then prove it with a few years of accumulation and retire when your SWR is more normal - like 4%.

The secret sauce isn't a secret. It is margin/leverage right now. I am just working on getting the strategy right. You can get 36% running 2-1 on CEFL, which is a diversified ETN focusing on several closed end funds and would double every 2 years. That said, I'm not that brave and need to learn more about ETN's. Looking on the board, I haven't seen anyone mention CEFL or exchange traded notes.

Your plan is ridiculous.

I was hoping for a bit more substance than "Gee, that's crazy.", although I am sorta used to it. Maybe something on hedging/controlling left tail risk. I'm thinking 20-30% downside protection should be sufficient, looking at 2008. Buying vix or selling puts on it? That is helpful.

I've been told that retiring overseas is crazy and I'd get kidnapped in Ecuador or the Philippines.

I've been told that the philippines is dangerous and some parts are...then again, so is Chicago. At least in the Philippines I can get a .50 cal BMG or a M249 saw. (These are Heavy/light machine guns for the uninitiated, and no, I'm not joking)

I've heard investing in stocks is crazy, real estate is the way to go, no wait, gold, no wait, rare earth metals. I had a spirited debate earlier today with someone suggesting to them that sitting 100% in cash is not a safe thing due to inflation risk and that while it may not have a significant impact today, it will have a substantial impact over time.

Heck, the idea of retirement, much less early retirement, is crazy to some people. My dear mother asks me rhetorically what would you do if you didn't work, and I know there is a thread on here about that.

People say the USA is the greatest country on earth, its crazy to think about living anywhere else. Then I find out these people have never left the states, ever.
Personally, I think its nutso to invest in an actively managed fund as to a mathematical certainty, nearly all of them are going to underperform the market over time, yet there are multiple threads here on about which funds to invest in.

I don't understand why CEF PHK, which was actually recommended here for building an income portfolio, traded at a 70% premium back in 2012 and for 5 years has traded over a 50% premium. I don't understand why good income generating CEF's trade at a 11% discount, but if I had to choose between the two, I'll take the 11% discount with a healthy 7% yield. Is it risky buying a dollar for 89 cents? Maybe, but I'll take my chances.

I'm not really sure why he sought a critique: surely he must know that most people on this board are fairly conservative investors rather than gamblers?

Well, there aren't really many people who are looking at retiring overseas, particularly when they are young, so I figured this would be my best shot especially since early retirement is a fairly unconventional concept. I don't know everything and the more I learn, the more I find out what I don't know. If there is a retire at 40-45 overseas forum, I'd love to check it out.

Writing it down gets the strategy straight in my head and makes me really think about how to execute it. Peer reviews help me look at other elements I may have not considered, like a good withdrawal rate. Maybe I am off base on the taxation element, although IRS.gov seems pretty straightforward. Most of the stuff I have read on living and investing overseas is very heavy on sales and commercial content. Most retirement plans aren't tailored for people retiring at age 40, either so that is an added complexity.

I probably need to go into more detail on the game plan and will do so tomorrow, but like I said, I'm developing it. Key tenants are going overseas to a lower COL country, making as much tax free money as possible when I am there, while still saving and contributing to retirement accounts. I would ideally like to build/buy a house while in the US and just leave so I would have no mortgage/rent payments, but realistically, I probably need to get boots on the ground for 3-6 months minimum.

Answers lead to more questions. Retiring overseas leads to issues with FACTA, but opportunities with the Foreign earned income exclusion. I've never claimed the deduction, and I don't have a foreign bank account, so I have no personal experience with it.

Anyone interested in making potentially 195k tax free annually, according to IRS.gov? Even if you don't make the max, you can get an instant 15% or more bonus on your investments and deduct housing costs, which you can't do in the states. You may feel better off giving that 15-20% to Uncle Sam, but I think I need that 20% in my pocket instead.

Figuring the Foreign Earned Income Exclusion

Did you know you can potentially skip out on medicare and SS too? I'm not going to get SS at my age, so I'd prefer to avoid paying it.

Social Security Tax Consequences of Working Abroad

Now, 200k tax free may be peanuts to you, but it certainly got my attention. All the cool kids on Wall St. are inverting, so I might as well too. That said, problem #1 is generating 200k annually, but honestly, in a lot of these places, even 100k would be more than enough to live very, very comfortably.

I have been to Ecuador (loved Quito and Cuenca. Want to see the coast) and Costa Rica (Nice, but a little too expensive) country shopping, but there are several countries in South America that I haven't been to that look to have potential (Argentina, Paraguay, Uruguay, Chile) that I have only read about.

Eh, I'm not sure how conservative they are. The CBOE links are pretty darn interesting to me at least from a risk adjusted alpha generating standpoint. Greater returns with less risk backtested 15, 20, and 25 years, I would think someone might be slightly interested in the prospect of lower risk and higher gains. 30% reduction in volatility? Screw that, Options are dangerous.

Granted, these are fairly new concepts and not many funds employing these strategies, so it may be a bit strange and different than what most people have heard of with just investing in an mutual fund for 30 years.

 

[growing_older]

Certainly there are dangers to retiring overseas, but there are dangers anywhere and many people do retire to other counties. That part of your plan may not be for everyone, but you seem to be getting a handle on it, except for the part about acquiring heavy machine guns to defend yourself.

The reason I called the financial part of your plan ridiculous is the assumption that you can earn 25% on capital, steadily and reliably. Sure, some risky investments and some risky leveraged speculations can earn 25% or more. For a time. There are market inefficiencies which can be exploited sometimes even for a few years to make that kind of money. But historically these schemes only work for a while, as is sometimes described here as they only work until they don't. And when they don't work, the portfolios tank.

Maybe you are ridiculously comfortable with risk and would accept the need to start over building your savings after the market wipes out your portfolio. Most retired people are looking for more safety net than that. Only you can assess your own risk tolerance, but what you describe in your plan is so much riskier than any other plan ever that I don't believe you actually believe the risk is real.

 

[karluk]

I can only repeat my earlier advice to consult with a knowledgeable CPA or tax attorney before implementing your intended tax dodge. Passive investment income is not eligible for the foreign earned income exclusion, and forming a shell corporation and "hiring" yourself as the manager is not likely to get around this issue. I would guess trying this is a lot more likely to land yourself in a federal prison somewhere stateside, rather than relaxing on a beach overseas.

 

[Totoro]

And maybe to close of from my perspective.

If you can generate >25% returns (or even >15%), you better do the following:

• Create a hedge fund, start with 200k of your own money
• Generate returns of that sort three years in a row
• Find additional investors in the mean time and afterwards. Charge management of 1% / 20%. Keep searching until you have 30+ million in assets under management.
• Close the fund after 7 seven years with a few million earned in fees