Tax Time

The weather here in D.C. was pretty horrible all day. Freezing rain. Blech. So – I used it as an opportunity to get started on my taxes. I use Turbo Tax at the moment and I feel it walks one through everything pretty well. Still, it is always amazing to me just how complicated the action of completing ones taxes is. Honestly, why don’t we just completely re-haul the tax code and get rid of all the crazy credits, deductions, and nuances! Instead, just have everyone pay a basic percentage of their income and other earnings and call it a day!

The other thing that I was reminded of was just how much the wife and I pay in taxes! I mean seriously! We do very well, there is no doubt about that, but shit! It definitely makes one a little bit grumpy.

I have a dream of someday amassing a small fortune in municipal bonds and just pulling down tax free income from those. I know this probably would never be the best investment strategy, but you’ve got to admit that on a more emotional level it sounds pretty appealing.

Anyway – that’s all for today. Just a little rambling about taxes! Hopefully spring is on the way soon to brighten our moods!

My 401K and Employer Contributions

I took a little time at lunch today to review how much I’m contributing to my 401k and how much my employer is pitching in (employer match). For me, it’s not a question of whether or not I’ll max out my 401k, because I will, but rather trying to determine how quickly to fund it. I was reading another blog recently and the writer talked about trying to max out his 401k as early in the year as possible in order to let the money have more time to grow in the market. I suppose there is a dollar cost averaging argument to be made against this approach, but it seemed like something I should at least consider.

As I looked into it though, I realized that my employer will only contribute 25% on each 1% the employee contributes, up to 6%. Once the employee goes over the 6% threshold, no more employer contributions for that pay period. As such, there is no incentive (from the perspective of maximizing the amount of “free” money I get from my employer) to max out the 401k early. If I do, I will forgo the largest possible employer contribution I could get.

The employer contribution is not terribly huge in my case, but from a pure emotional standpoint I’m more than reluctant to give it up. That said, if I maxed out my 401k earlier, I might make the same or more in dividend earnings and market gains.

What would you do? Invest the max as quickly as possible, or slow the contribution pace so you could get the most money as possible from your employer?

I went with the later for the time being. This meant reducing my contribution to 10% per month. I’ll now have a little more money in each paycheck, which I will need to make a plan for saving or investing in a taxable account.

Honestly, this stuff can be so confusing even for someone that is very experienced and intelligent on the subject. No wonder so many people throw their hands up in the air when it comes to financial matters such as this!

Bringing in others…

The wife and I had a long drive over the weekend to visit her family up in NY. During the ride back home yesterday, we got talking and some of my freedom 40 plan came up. Well – not exactly, as we were not explicitly talking about this particular crazy plan, but rather we were talking about the idea of moving or me taking another job.

I was explaining that I had no interest in continuing to climb the ladder of a corporate existence for the long term. Instead, I told her I wanted to consider taking a year or two off, maybe working during that time, maybe not. While I’ve been thinking about this sort of thing for some time, I guess I’ve never really shared it much with the wife because she was pretty surprised / shocked / looking at me like I was crazy.

I have to remember that I think about this type of thing all the time and  I reinforce the belief by reading blogs such as Mr. Money Mustache, and Chris Guillebeau, and by reading books like “Four Hour Work Week“, “Vagabonding“, “Wide-Eyed Wanderers“, and “Saved: How I quit worrying about money and became the richest guy in the world.”

From all of these voices, fused with my own ideas, I have built a worldview that says working for 40 years straight is not something I want to do. Rather, I’d like to live simply so I can get by with less money, and consider mini retirements throughout my life, rather than waiting until 65.

I think this may have been the first time I’ve actually articulated some of these ideas to my wife. So – I suppose it was pretty natural for her to be a bit shocked. Of course, I want to consider her goals too along with mine – and I recognize that these may not align. I might be ok with living in a van and travelling around the U.S. or South America for a year, but for her, that may sound terrible.

One thing she asked me was, “Are you just dreaming, or are you serious?”

She’s right to ask because I do have a habit of talking about things like this and then never doing anything about it to make it happen. I’m a dreamer, I know this. But I’m trying to take those dreams and make them a reality. That’s part of the reason for writing this blog.

I’m still not sure exactly what my real goal looks like. I think it could be a lot of things. I suspect it will continuously change as well. I might try one thing, and realize I don’t like it at all. In fact, maybe I’ll even want to go back to a “real job” after being out for a while. I don’t know. That much is sure. I just don’t know. However, I know I want to try it and see what happens.

What I do know is that I want to have the freedom to choose whatever it is I want to do (within reason). I want financial freedom so I will not be a slave to a corporate master and rather I can determine my own path.

All of this will need to be coordinated with the wife though. I certainly don’t have much interest in doing any of this without her. We’ll need to work to get on the same page and set goals that are in both of our interests. That could take some time…

Monthly salary needs…

In my last post I determined, after a very quick and dirty estimate that we need an approximate salary of $8,300 per month.

That just seems high to me though. Why? Here’s why…

We currently spend almost $3000 per month just in mortgage, taxes, and other housing fees. This is a ridiculous amount of money. However, it is the reality we are in so long as we live in the metro D.C. area. If we were to move though, I feel that we could reduce this expense significantly. Perhaps to $1500 a month, maybe $2000 to be safe?

With just that change, we would bring our total estimated need to $6,300 per month as a goal. Or, $75,600 per year. That would require a “nest egg” of about $1.5 million invested dollars. (At 5% this would yield approx $75k/year) Just like that, we’ve brought our goal down by half a million dollars.

I suspect we could also reduce our expenses significantly as well. That said, I don’t have much interest in living like a complete pauper. We like to go out to a nice restaurant occasionally, we like to travel, we like to buy nice things. I want to keep doing all these things…

So, the goal continues to be refined…more to come….isn’t this fun?!?!?

Refining the freedom 40 plan goal

As stated in an earlier post – the goal I’m working towards is to retire by 40. Sounds good right?

But let’s boil this down a bit. For those who are fans of SMART goal setting, let’s make the goal something that is Specific, Measurable, Attainable, Relevant, and Time Bound.

Getting Specific –

What exactly am I shooting for in terms of being able to retire. There should be a specific dollar figure out there that I set and adhere too. Otherwise, there is the tendency to continually spin the wheels of the rat race believing that it is never enough money.

I met with a financial planner about a year ago and when talking about retirement he said it is good to plan for 80% of your current expenses. (I didn’t have the freedom 40 plan in my head at that point in time, so he was basing this on a “normal” retirement age.

I’m not sure if that planning factor is a very good one though. Currently we live in metro D.C. one of the pricier regions in the country. In most freedom 40 scenarios I envision, we live in a much more affordable area. Most likely something close to the mountains. In fact, I’d love to take advantage of some geographic arbitrage and live in South America for a while. Or, at the least, somewhere cheaper right here in the U.S.

But for simplicity’s sake and to get this ball rolling, let’s take that 80% number. For Mrs. 40 and I, that would currently look like about $100k. That seems high to me and I know we can live happily for much less. But, let’s stick with it for a minute.

If we divide that by 12, we come to a desired “salary” of $8,300 per month. Ideally, this would be earned through investment income (dividends, rents, etc) only, but we might also consider supplementing with odd or occasional jobs. Again, if we reduce our living costs, which should be easy, we could quickly half this figure and still be pretty good.

A back of the envelope calculation shows me that if I had $2M throwing off 5% a year, that would give me $100k per year.

Based on where we are now…that’s a long damn way to go!

Looks like some further refinement and thought on this is needed! Challenge accepted!

Promotion – A false Goal?

I said in my last post that I would next write about further defining my specific goals to achieve the freedom 4o plan. But based on some conversations at work today, I think I’ll take a slight detour first.

I’m currently going through the process required for a significant promotion at my job. This involves a number of things, including interviewing with various members of the leadership team. I had lunch with one of these individuals today and found him asking me a number of interesting questions that I didn’t expect. Perhaps I should have.

I was anticipating specific questions about the part of the business I’m involved with, or maybe asking me to explain a challenge I’ve overcome, but instead his focus was more closely related to the following.

  • What excites you about the work we do?
  • What’s your favorite thing about your job?
  • What motivates you?

It’s interesting because I feel like these questions should be easy to answer for someone committed to the work and the employer. I suppose it was smart on his part because as I gave somewhat hollow answers on these topics he may have ferreted out the fact that I don’t really see myself in the position for a long period of time. It is certainly not my main goal right now, rather, I see it as a means to an end.

Perhaps I’m seeking this promotion for all the wrong reasons. Namely, money and pride. The promotion should give me a substantial pay increase, and thus help me reach my other, true goals. Like freedom 40. (It’d also be nice to have that higher title on the top of my resume if and when I rejoin the workforce) Otherwise, I’m mainly seeking this promotion for peer recognition and just to be able to prove to myself that I can do it. I know I can do it. But the new title will affirm this and indicate it to others as well. It’s a shallow reason I think. I know this. But still, I seek it.

Maybe I’m just a little burnt out. Maybe I’m just down because work hasn’t been very intellectually challenging or rewarding lately. Maybe I’m a dreamer and I’ll be in the same job 15 years from now still thinking about doing something else. I’m not sure.

As for the dreamer part, perhaps this blog will be a regular reminder and motivator to not loose sight of the goal that is more important to me….