Thoughts on my game plan for ER?

[Fermion]

I have generated 30% returns for 13 years in my trading account and I doubt I could find someone willing to invest $5 if I created a hedge fund.

Now if I touted that there was going to be a big crash every year and one year I was right, I could get billions.

 

[dallas27]

I have generated 30% returns for 13 years in my trading account and I doubt I could find someone willing to invest $5 if I created a hedge fund.

Now if I touted that there was going to be a big crash every year and one year I was right, I could get billions.

More than 30% every single year? or do you mean 30% CAGR.

 

[brewer12345]

OP, getting defensive is not likely to result in more constructive criticism. Fleshing your ideas out more fully will help, though. You will not get a receptive audience on your trading strategy here, so don't expect it. I would however take seriously the commentary that your expectations of 25% a year every year are quite unrealistic. Plumb what the depths couple be if your strategy breaks down and come up with at least one Plan B (several would be better). If you flesh out all of the bits and pieces of your plan and execute it successfully, I would strongly encourage you to write it up in detail and stick it on a blog so that others can benefit. In the past I have looked for overseas retirement information mostly out of curiosity and I have found the same stuff you did: sleazy come-ons and precious little information.

On your specific comments on ETNs and CEFs:

- I personally really do not like ETNs. The chief reason is that they are generally unsecured (and sometimes subordinated) notes issued by completely opaque financial institutions. If they blow up, your outcomes are likely to be very poor. As a result, I avoid the structure.

- CEFs are another matter entirely. There are lots of funds out there with unusual strategies and there are many oddities when it comes to discounts/premiums to NAVs. shop this market regularly looking for opportunities. Premiums and discounts tend to be persistent. I won't own funds with a premium, preferring to buy at a generous discount, but we should not go into such an investment planning on making hay from the discount collapsing. This happens from time to time, but it is difficult to predict and often hinges on fund managers taking actions that may be detrimental to their own bottom line. WIW, for example, has been flopping around a 10+% discount for a number of years with no end in sight and no apparent move by fund managers to do anything about it. Other funds will take action, but tend to be gradual. PEO has had a giant discount for a long time. The management of the fund committed to a minimum distribution of a certain percentage of the fund's assets every year and they periodically buy back some shares in the open market. This serves as a mini-liquidation every year that can help close the gap over time, but it is unlikely to do so any time soon. That said, you can access very good managers and buy at a discount sometimes in this market. I own GIM and think it is a very attractive opportunity. Excellent managers with a good track record, reasonable fees (for a CEF) and trading at a much fatter than historically usual discount.

 

[Milton]

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.

I doubt that many (any?) people here doubt the potential for earning outsized returns. It's the ability to do so consistently, and without incurring substantial risk, that is in question.

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

Retiring overseas certainly doesn't appeal to everyone, but that doesn't make it crazy. If you have a flexible attitude and good language skills, it can result in inexpensive living and so provide FI at a young age.

I have no idea what the kidnapping risk is in those two countries, and I suspect that the people you're talking to don't either. Presumably you will conduct proper research before deciding exactly where you want to live in retirement.

I 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.

No one has all the answers.

People say the USA is the greatest country on earth, it's crazy to think about living anywhere else. Then I find out these people have never left the states, ever.

Yes, it's almost a cliché. People all over the world tend to prefer their own nation's culture/climate/health care/legal system/political system/whatever; but Americans are notorious for insisting that the US is "the best" in everything … despite the fact that fewer than 40% hold passports and consume little foreign media. Don't sweat it.

If there is a retire at 40-45 overseas forum, I'd love to check it out.

May be of interest: "Travel, Tourism and Living Abroad"; "Early Retirement Abroad"; "Retire Overseas on $1,200 a Month"; "Retirement Abroad: Pitfalls of Paradise"; "Early Retirement Abroad".

 

[Milton]

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.

I doubt that many (any?) people here doubt the potential for earning outsized returns. It's the ability to do so consistently, and without incurring substantial risk, that is in question.

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

Retiring overseas certainly doesn't appeal to everyone, but that doesn't make it crazy. If you have a flexible attitude and good language skills, it can result in inexpensive living and so provide FI at a young age.

I have no idea what the kidnapping risk is in those two countries, and I suspect that the people you're talking to don't either. Presumably you will conduct proper research before deciding exactly where you want to live in retirement. And once there, presumably you will conduct yourself prudently, avoid unnecessary 'bling', and stay away from rough areas. I think automatic weapons would be a bit much, though.

I 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.

No one has all the answers.

People say the USA is the greatest country on earth, it's crazy to think about living anywhere else. Then I find out these people have never left the states, ever.

People all over the world tend to prefer their own nation's culture/climate/health care/legal system/political system/whatever; but Americans are notorious for insisting that the US is "the best" in everything … despite the fact that fewer than 40% hold passports and consume little foreign media. It's almost a cliché, but don't sweat it.

If there is a retire at 40-45 overseas forum, I'd love to check it out.

May be of interest: "Travel, Tourism and Living Abroad"; "Early Retirement Abroad"; "Retire Overseas on $1,200 a Month"; "Retirement Abroad: Pitfalls of Paradise"; "Early Retirement in the US vs. Abroad".

 

[Fermion]

More than 30% every single year? or do you mean 30% CAGR.

CAGR. If I had managed 30% in 2008 I really would start a hedge fund. I have had years of -30% and years of +70%.

 

[eridanus]

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?

Yeah, the studies show that it can work. Note that the puts being sold are cash-secured, without margin.

(PUT) is based on selling a near-term fully cash-secured S&P 500 at-the-money put option

[emphasis added]

I have played with options on margin for SPX and RUT futures. At the end, I was making six figures writing puts. It lasted until August 2008. That's how I know about the capital loss carryback rules.

Sell puts in a spread. Buy VIX or VIX calls. Know that, eventually, you'll get caught by the steam roller. Have a plan for that.

 

[bad_LNIP]

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.

Oh, I know the risk is real. I've taken my lumps over the years.

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

I've thought about starting a fund, even a plain vanilla mutual fund using these strategies. There aren't very many and the ones out there are very, very new and small. The only thing is that it takes about 100k to get started in one, and I don't think they are giving SBA loans to do that. Typically to get some backing, you need some track record.

I can only repeat my earlier advice to consult with a knowledgeable CPA or tax attorney

Good suggestion. I will, and I know just the guy. He is overseas right now, so he should have some good insight on it.

It's the ability to do so consistently, and without incurring substantial risk, that is in question.

I have a higher risk tolerance than most, although as I gain (hopefully) I'll be scaling that back quite a bit.

CEFs are another matter entirely.

Yes, they are. I have found there seems to be great misunderstandings about CEF's, especially covered call option ones and return of capital. Doug Albo a real money manager has some great analysis on them over at seeking alpha, but essentially ROC with option income funds isn't destructive like it is with a typical fund. When you add in a sustained and significant discount, you can also get as he describes them windfall returns, so an CEF is paying $1.00 and is at 10/share for easy math, you get a 10% yield.

With a 10% discount, though at $9, you get an extra 1% kicker. Reinvesting and compounding can help drive that advantage.

I have played with options on margin for SPX and RUT futures. At the end, I was making six figures writing puts. It lasted until August 2008.

What were you doing to manage the downside? I'd be interested in discussing that more over PM if you prefer.

OP, getting defensive is not likely to result in more constructive criticism.

Fair point. I will write up the game plan and a few scenarios tonight.

 

[nash031]

And made it all back triple fold by 2012. Markettimer

Yeah, but there's a lot more to it than that. His summaries:

"Summary: Econ grad student applies Mortgage Your Retirement theory at the top of the last bull market, starting around 2x leverage, loses $210K of borrowed money, and is forced is to sell what's left of his portfolio at S&P 821 in November 2008. The complete wipeout results in a reflective period where he recollects the circumstances that led him to adopt this strategy, some of which will be included in a book. He spends five weeks in Asia and begins writing about how risk and progress can be framed. Returning to the US, he slashes his expenses, finds several ways to increase income, earns 914% on the IRBLTG Fund, and pays off all his high interest credit card debt."

And later:

"Net worth has steadily climbed to $350K since the Q4 2008 trough of -$210K. The past few years have been spent dealing with the consequences of going so far into debt, while trying to move on with life in the direction that had been planned pre-crash. I married Borte (mentioned earlier in thread), finished my PhD, and am about to become an expat in Southeast Asia."

This discussion would seem germane to OP's plan in that - yes, "markettimer" has seen his NW rise to $350K (threefold) since his experiment started in 2007, but he also had to move BACK to the US due to being $210,000 in margin debt alone with no income to support it, margin calls, high interest credit card debt, etc. etc. Six years later, he's in a better place, but the toll it took on him in the mean time likely makes this plan unsupportable for the several decades OP would need.

In other words, if his SO is willling to go through potential bankruptcy, having to move from the PI back to the States, and they can handle the stress of waiting out the next margin call while wondering what they're going to eat that day - sure, have at it!

 

[nash031]

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.

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.

I have lived in Bahrain and Japan for several years as well as the US. I have traveled to the Phillippines, Singapore, Hong Kong, South Korea, India, Qatar, UAE, Kuwait, Thailand, along with various places in Europe and Australia.

The standard of living in the United States far exceeds every one of those non-Euro/Australian countries I listed. Besides Chennai (India), Manila was the worst place I have ever visited. The overpopulation in that country (along with Indonesia) is a real concern. No offense to your SO, but I would do some serious homework before agreeing to move to the PI with her. Others have commented on what amounts to scams coming out of there - supporting entire families, etc. As a Navy guy, I know plenty of Filipinos who are very successful in the US... and they stay in the US other than to visit family. There's a reason for that.

Comparing the violence that occurs in the Philippines with that in, say, Chicago is disingenuous. Three "neighborhoods" or "districts" in inner-city Chicago account for the vast majority of violent crime, with murder rates ten times or more than that in the suburbs. I doubt (though I could be wrong) that you're looking to retire in Washington Park.

Meanwhile, the overall murder rate in the PI is 25% higher than that in the US overall. There are plenty of fun terrorist groups actively operating (as in blowing stuff up or murdering people multiple times per year) in the PI: Abu Sayyaf, MILF, MNLF, and the New Communist Army. Some even characterize the PI as "at war" with the latter... on their own territory, mind you, not in far off Iraq, Syria, Afghanistan, etc.

I am 37. I don't like my job and am aiming for ER at around age 42. Even if my means weren't what they are (a COLAed pension coming), there is no way that I would plan for such an extreme lifestyle shift in order to get out of the rat race early. Any retirement plan requiring extreme risk with investments, the potential of bankruptcy, and where I'm justifying it saying that at least I can purchase heavy machine guns for protection isn't for me. I mean, think about that: you're going to risk your financial future in order to fund a lifestyle where you just said you could buy a SAW to protect yourself (instead of, say, a new Tesla). That's crazy to me. YMMV.

Good luck.

 

[Totoro]

The only thing is that it takes about 100k to get started in one, and I don't think they are giving SBA loans to do that. Typically to get some backing, you need some track record.

If you only need 100k: family, fools, friends and your own capital.

With consistent returns above 15% it is easy to attract that kind of money. If you have a good backtested strategy (so not even proof!) even collecting 1M from several investors is easy to do.

 

[fh2000]

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.

I think you posted in wrong board.
You should post here: Elite Trader

Good luck to you

 

[growing_older]

I'm skeptical. If you have been steadily earning 30% per year for 13 years, why do you not have the 100k to start your fund already.

 

[Fermion]

I'm skeptical. If you have been steadily earning 30% per year for 13 years, why do you not have the 100k to start your fund already.

I think you are mixing up the OP and me. I was the one saying I have earned over 30% per year for 13 years, but I only started with $1700.

The OP was talking about something else to do with $100K and a fund...

 

[bad_LNIP]

Ok, so I have had a few discussions with CPA's and tax pro's that are familiar with expat taxes, and they do confirm that you can essentially trade/invest through a LLC, pay yourself a reasonable salary, and claim the FEIE and collect up to 200kish tax free for a husband/wife.

One can't entirely dodge all taxes, though, as you would owe self-employment taxes, BUT if you structure it as an S- corp, you can pay yourself a reasonable salary and then take anything over that as a distribution free of Federal taxes thanks to the FEIE and skip out on the self-employment taxes as well on the distribution. Your net taxable rate would be something in the mid single digits, probably 5-7% on 200k in income.

I read some interesting tax court cases and learned most IRS actions against S corps are for people who haven't paid themselves anything at all. Folks that brought in 300k in income and paid 100% of it out in income. There has only been one case that I read where someone actually paid themselves a salary, which was like 24k on well over 100k in income for 2 years. I'm sure if they had paid themselves something more reasonable like 50-60k they wouldn't have drawn as much attention.

As far as funds needed, I don't think I need more than 4-5k per month personally for living expenses, once the basics are taken care of (food/shelter), so while I would like to make 100k/year, half of that at least is going to get reinvested, just as a goal/concept. I know with a longer horizon, I need to continue to grow my portfolio.

Understand as far as starting a fund, I do have the 100k, but those are the fees just to LAUNCH the fund in the first year, not capital to invest. Funds typically need 40-50M to be profitable, figuring 1% in fees.

I'm acquainted with elite trader forum. Great board.

As far as hedging, I'm shorting VIX puts and have shorted IWM. I think I am going to run about 20-30% of the portfolio short on IWM/SPY.

 

[sunsnow]

I'm not an expert in this at all, so maybe someone with more knowledge can help me understand. As far as I can see, OP is considering residing in Ecuador, Panama, or the Philippines in order to use the foreign earned income exclusion to avoid income taxes on 200K per year. But in order to do that, the taxpayer needs to be a bona fide resident, which includes being a taxpayer, of that foreign country. Look at line 13b of IRS form 2555:

http://www.irs.gov/pub/irs-pdf/f2555.pdf

The three countries under consideration seem to have tax rates at the top bracket (which is not that high) between 25% - 32%

List of countries by tax rates - Wikipedia, the free encyclopedia

How does this save any substantial amount of money? If the OP wants to live somewhere without personal income tax, then that might be a plan, but there don't seem to be a lot of desirable places fitting that criterion, which also are welcoming of new residents. Maybe I'm missing something here?

 

[karluk]

I'm not an expert in this at all, so maybe someone with more knowledge can help me understand. As far as I can see, OP is considering residing in Ecuador, Panama, or the Philippines in order to use the foreign earned income exclusion to avoid income taxes on 200K per year. But in order to do that, the taxpayer needs to be a bona fide resident, which includes being a taxpayer, of that foreign country. Look at line 13b of IRS form 2555:

http://www.irs.gov/pub/irs-pdf/f2555.pdf

The three countries under consideration seem to have tax rates at the top bracket (which is not that high) between 25% - 32%

List of countries by tax rates - Wikipedia, the free encyclopedia

How does this save any substantial amount of money? If the OP wants to live somewhere without personal income tax, then that might be a plan, but there don't seem to be a lot of desirable places fitting that criterion, which also are welcoming of new residents. Maybe I'm missing something here?

I was the one who suggested that OP consult with an expert on tax law before implementing the tax dodge he is contemplating. The fact that he says he has done so and has been given a go-ahead does not make me any less skeptical of the merits of his scheme. But he did what I advised, and it's not for me to question the professional qualifications of his experts. So more power to him, and I hope the IRS doesn't hit him with a huge penalty and possible criminal charges several years down the road. I would only suggest that anyone reading this thread and feeling tempted to claim the same sort of foreign earned income exclusion should do their own due diligence and not rely on OP or his experts as the final word on the subject.

 

[bad_LNIP]

But in order to do that, the taxpayer needs to be a bona fide resident, which includes being a taxpayer, of that foreign country.

Absolutely true, and I will definitely not be present in the US physically or otherwise, certainly not for more than 30 days.

The three countries under consideration seem to have tax rates at the top bracket (which is not that high) between 25% - 32%

Also true, but the work I do for that Bermuda or US corporation will probably qualify as foreign sourced income, which is not taxable in Panama. The US is the only country that taxes citizens on their worldwide income, so this is a bit of a new concept.

How does this save any substantial amount of money?

You are assuming I am taxed on my worldwide income, but like I said, the rest of the world doesn't operate like that. Only my Panama sourced income is taxable. To recap: My Panama sourced income is zero, so zero panama taxes, zero US taxes, up to 200k, which will but dutifully reported to the penny, and zero state income tax.

So, what is my tax bill on 200k? Probably somewhere around 5-10k, so lets say 7k. That corporation as an S-corp would pay a healthy distribution, which is 100% tax free as well as a "reasonable" salary that is subject to self-employment (SS/Medicare) taxes. Say I pay myself 50k on 90k in income and pay out the rest as a distribution, the Self employment taxable income is 50k, for which taxes come to about 7k. 14k or so on 200k in income or about 7%, net net net taxes paid, and I can live with that.

http://www.claytonmckervey.com/attach/worldwide-tax-guide-panama.pdf

Most of my reading came from IRS.gov and a few tax court cases on S-corps written by CPA's, and I had one consultation with a CPA that focuses on Expat taxes and another friend who actually claimed the FEIE and worked overseas for several years recently that is also a CPA. I felt pretty confident before talking with them, and I feel even more so now. Everyone is free to do their due diligence, but given the language on the IRS website, I would love to read some tax cases to the contrary.

I would note that I think statements about criminal charges are way, way, WAY overblown. People usually get hammered criminally for that when they are just not reporting large amounts of money like Wesley Snipes or "the situation" who was recently indicted. If you just don't file a return in a year where you make 2M, you are going to have problems. If you lie on your return, and these usually have to be huge lies you can't deny or explain away and not math errors, you are going to have problems.

Taking the FEIE when I am actually living in a foreign country for the entire year? I doubt they are going to bat an eye.

I doubt if challenged by the IRS and I lost in tax court that I would even have to pay penalties as I am relying on professional advice. I'm not worried about criminal penalties, at all.

If there are some notable FEIE tax cases I am missing, by all means someone please point them out to me.

 

[sunsnow]

Also true, but the work I do for that Bermuda or US corporation will probably qualify as foreign sourced income, which is not taxable in Panama. The US is the only country that taxes citizens on their worldwide income, so this is a bit of a new concept.

I am aware of the uniquely wide reach of the IRS, so I wasn't thinking that the foreign country was going to go after your foreign sourced income. I wasn't thinking that the work you were doing in Panama, for instance, would be foreign sourced income in Panama. What allows it to be qualified as that? Wouldn't your presence in the country for the entire year make that a questionable position? Again, I'm not especially knowledgeable in this, but still hope I can understand how you are envisioning this working.

 

[bad_LNIP]

Looking over what I could find on it, since you aren't working for a Panama corp, the income you generate would be considered not sourced from Panama.

Why is it qualified as such? It is work done for a non-Panamanian entity. It's the rules, man. I'm just trying to play by the rules. seriously, though, Panama exempts taxes on agricultural businesses up to 250k, for example. Non-Panama businesses/sourced income is exempt as well.

Physical presence/duration of stay generally isn't an issue in the countries I am looking at. Most people aren't knowledgeable about it. I am aware of it as I recalled several pay packages for contractors hiring ex military officers paying essentially the FEIE limit plus housing, food, laundry, 2 or 4 weeks paid vacation anywhere in the world, plus a return ticket anywhere in the world you want to go. Guys would rack up an easy 100k, cash, in a single year and walk completely from almost all taxes. There was little time/opportunity to spend the money (fancy a night out in the Korengal Valley anyone?)

I only started looking at it again seriously when I was reading international living magazine, and inbetween the ads for colored diamond investments, rare earth metal investments, gold, real estate, gold, and more real estate, I did find some nuggets of good info.

The Tax Break-Down: Foreign Earned Income Exclusion | Committee for a Responsible Federal Budget

Live Offshore and Earn Nearly $200,000 Annually, Tax-Free

Don't have an overseas job? You may still qualify for the FEIE if you have sizeable liquid assets that you can manage offshore in the appropriate foreign entity and pay yourself a salary as a portfolio manager out of the income those assets generate.

This guy has captured my thoughts well.

I haven't really found any info that suggests that I couldn't do exactly what I am planning on doing. I don't intend on getting an offshore bank account to hide money from taxes, and I plan on reporting everything I legally must report. No reason not to, as there isn't much in the way of taxes that I would owe. If I really wanted to get froggy with it, there are a lot more aggressive and probably legal things that you can do, but the benefits of having a pass through entity as well as a foreign corporation are helpful in the host country. As far as the US, like I said, I would report every single penny then claim the FEIE.

Here's the worldwide income tax guide all 1400 pages of it.

http://www.ey.com/Publication/vwLUAssets/Worldwide_Personal_Tax_Guide_2013-2014/$FILE/2013-2014%20Worldwide%20personal%20tax%20guide.pdf

 

[sunsnow]

Looking over what I could find on it, since you aren't working for a Panama corp, the income you generate would be considered not sourced from Panama.

I tried to find a more authoritative source to get clear on the rules for Panamanian-source income, but had difficulty finding much about this. I did find a couple of publications that seem more thoroughly researched than the international living piece. Looking over them, it seems to me that their interpretation of Panamanian-sourced income doesn't fit with your interpretation. Here (p. 2) it says that where the person performs the work determines whether it is Panamanian-sourced income.

https://www.kpmg.com/Global/en/Issu...g-beyond-borders-2011/ies-tbb-2011-panama.pdf

and here (p. 7) it lists foreign-sourced income types, and what you are proposing is not on the list, and in fact seems to be implicitly disallowed by a couple of the items.

http://www.pwc.com/us/en/hr-international-assignment-services/assets/panama-folio.pdf

I think it's not enough to talk with U.S. CPA's -- someone seriously considering this would need also to consult with a Panamanian tax lawyer to get clear on these rules. I think your idea is interesting, and I hope it does work for you. But so far it doesn't look too promising to me. Please keep us updated as you learn more.

 

[bad_LNIP]

For KPMG, be sure to consider on page 2 the tax trigger points about income being excluded if attributable to services performed in other countries not economically related to taxable activities performed in the host country.

Looking at "Other income" on the PWC document, seems to exclude gains on sale of securities, income not produced within panama territory.

I think we can agree that the LLC's income won't be taxable in the US or Panama, and any wages/salary paid to me won't be taxable in the US (Thank you FEIE), so only the questions remains about taxation in Panama or the host country.

On the Ernst and Young document, p 963, it states that dividends from a non-Panama company are tax free. Foreign source interest is also exempt from taxes. Just right there, I am sure one could think of a few ways to structure things so that your Panama tax bill = zero.

Looking at Ecuador, p.332, ( I am leaning towards Ecuador, but I haven't been to Panama yet, and I want to return to Ecuador at least one more time before making any life changing events), according to the EY document, self-employment income is exempt from taxes unless the goods/assets/activities are occurring in Ecuador. Dividends also seem to be exempt if paid from a non-ecuadorian company. Stock options are non-taxable compensation as well. Capital gains on stock is exempt from taxes.

 

[bad_LNIP]

Hedging The SPY ETF With Options: Pulling it Together | Seeking Alpha

Thought this was a very, very interesting concept as far as 100% portfolio hedging. It is a requirement when you are running a leveraged portfolio or really investing in general.

Buy puts to cover your portfolio's beta equivalent (ie. if your portfolio has a beta of .8, you need 80% coverage), and then sell puts (calendar spread) weekly to cover the cost of the puts divided by 52.

If you buy puts when the vix is low (ie under 15, like right now) and sell puts, you will essentially buy when options prices are lower and sell puts when options are more expensive, assuming VIX returns to historical norms, which should allow you to recoup the cost of the puts over time.

 

[DJRR]

So when the market drops 25% in a day like in 1987 and you are on margin don't you lose 50% - 75% of your principal? I don't like plans where everything can go up in smoke in a day. I can handle a 25% loss now because I am not in withdrawal phase, but I plan to ratchet down the risk as I get closer to it.

Seems the plan limits your upside, selling puts, forces you to use margin to reach for income, and is exposed to a wipeout when the market really goes to hell. You are gambling and maybe the odds are in your favor until they are not. Agree that you will have a great story to tell

 

[bad_LNIP]

So when the market drops 25% in a day like in 1987 and you are on margin don't you lose 50% - 75% of your principal?

Not quite. The long portion of my portfolio would decline by say 20% overall and the short portion of my portfolio would increase by 25% as I have a beta in the .75-.8 region.

Say, you are long 500k of various diversified CEF's and short SPY 400k. Play with the numbers, but I don't see a 75% loss in the cards. If the market drops 25%, the short position is worth 500k and the long position is worth 400k.

Short underlying + equivalent call = synthetic put, which should suggest how it will perform.

I don't like plans where everything can go up in smoke in a day.

Me neither, hence the short position.

I can handle a 25% loss now because I am not in withdrawal phase, but I plan to ratchet down the risk as I get closer to it.

Although I can handle a 25% loss, I figure there is no benefit to testing the theory, and I might as well just avoid the outcome just the same.

Seems the plan limits your upside, selling puts, forces you to use margin to reach for income, and is exposed to a wipeout when the market really goes to hell.

On the puts, yes, it is a limited gain income strategy, which for that portion of the portfolio. On the overall portfolio, no that is incorrect as capital gains are certainly possible, although not really necessary for success and are not really even targeted. I'd be just peachy if 5 years from now the SPY/DOW was exactly where it is right now. Most people can't say the same.

Selling puts doesn't really force you to use margin, btw. You can do it in a 100% cash IRA account, for example depending on the broker. How do I know? I've done it with options house. If there is a market wipeout, selling puts is always superior option to just holding the underlying over any meaningful period of time. PUT beat SPY 7 out of 10 years from 2001 to 2011 and missed by less than 1% in 2 out of the 3 years where it failed to beat the SPY. Most notably, in 2008, is beat the market by over 9%. You might want to look at the notional PUT index and its performance vs the SPY. The PUT index has been crushing it since 1986.

http://www.cboe.com/micro/buywrite/Pap-AssetConsultingGroup-CBOE-Feb2012.pdf

You are gambling and maybe the odds are in your favor until they are not.

I only gamble in poker. I think the one thing a lot of people aren't grasping is that I'm not betting on stock price movements. I don't need anything to hit any target price to be successful. I'm investing for income.