FIRE FAQ?

Financial Independence/Retire Early -- Learn How!
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ElSupremo
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FIRE FAQ?

Post by ElSupremo »

Greetings FIRE folk :)

I was wondering if anyone would like to take on the task of writing a FIRE Faq? I know this was discussed a while back and it would be great to have a faq for this board. We can add it to our FAQs page and the author will get full credit for his/her work. Thoughts?
Last edited by ElSupremo on Tue Oct 07, 2003 8:53 am, edited 2 times in total.
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ataloss
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Fire Faq

Post by ataloss »

:lol: hocus and other may have different points of view. Not sure there would be agreement.

Maybe a set of links (REHP, Trinity Study, Gummy)
Last edited by ataloss on Sun Sep 07, 2003 9:15 am, edited 3 times in total.
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Re: FIRE FAQ?

Post by peteyperson »

I think that is should carry a hocus warning sticker!

But seriously, a good one would need to explain the basics and then layout various approaches to investment. For instance, chips if I recall correctly has a high weighting in S&P500 and plans to live off dividends from that. This puts a heavily overweighted situation in his lap that may be problematic over the long haul, but due to being non-protected from taxes cannot easily change it. Others have chosen a more diversified approach, others still are timing in/out of asset classes that look expensive/cheap despite the findings of Dalbar Inc from 1984 to 1995 that showed that timing reduced US private investor returns from sub 500% to 111%

So styles vary and one approach doesn't fit all, however a general explanation of what the boards are aiming to do possibly with some links to a range of recommended reading from FMO, hocus, ataloss, wanderer, raddr etc to give a broad range of different opinions/approaches could make an FAQ more unbiased to any one approach. I suggest ES putting up a recommended reading thread on the FIRE board for people to pitch in books with amazon.com links (to save ES doing all the leg work there) and putting a category to the book would be a good start i.e FMO & BenSolar could put up their fave real estate investing books to give that perspective. This avoids slanting the advice to one viewpoint and should please all in that regard.

My thoughts.

Petey
ElSupremo wrote: Greetings FIRE folk :)

I was wondering if anyone would like to take on the task of writing a FIRE Faq? I know this was discussed a while back and it would be great to have a faq for this board. We can add it to our FAQs page and the author will get full credit for his/her work. Thoughts?
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Post by therealchips »

for ataloss: A link to Ed Easterling's Crestmont results, too.

for petey:
For instance, chips if I recall correctly has a high weighting in S&P500 and plans to live off dividends from that. This puts a heavily overweighted situation in his lap that may be problematic over the long haul, but due to being non-protected from taxes cannot easily change it.

Sorry I misled you. I could change my allocation substantially and without tax consequences, but I don't want to.

I could reallocate the assets in my IRA with no tax consequences at all. I could withdraw the capital from my unmortgaged house with no tax becoming due, not even on the capital gain on this investment and certainly not on the return of capital. It's only my taxable account where reallocation is inhibited by capital gains taxes, and that inhibition is much less with the new 15% maximum tax rate. My allocation is about what I want it to be, except maybe that I still haven't finished clearing out the actively managed funds left over from years ago, or a few individual stocks that represent speculation I may abandon, running up a capital gains tax bill. That's a fairly small part of the retirement stash, and is not in index funds.

My beef (gripe? complaint?) about allocation was that I may have put too much of the retirement stash in the tax sheltered account. It is almost half the pot, and faces very large and escalating taxes at ordinary income tax rates when mandatory withdrawals set in about six years from now. There was no way I could tell, back in the period between 1978 and 1993, that I was possibly contributing too much to the tax-sheltered accounts. I couldn't predict that income taxes on dividends and capital gains would be cut to 15%. (I can't predict now whether that tax rate will continue after its scheduled expiration.) Dividends and capital gains realized inside an IRA come out of the IRA as ordinary income, taxed at rates much higher than 15%.

Maybe the lesson is that retirement plans will have to be flexible enough to accommodate changes in tax law, and not just the market volatility and inflation that we talk about more often. None of that is predictable with high confidence.

Good luck. :wink:
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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Post by peteyperson »

Hey chips,

So tax free contributions to a 401k or IRA are more heavily taxed on the way out than if you investing in a ROTH IRA or just invested independently of tax wrappers?

Given the variability of the tax situation, I would say having a 50/50 split is a pretty good hedge that you won't be too wrong either way. Here in the UK we only have a pension fund and you use 75-100% to buy an annuity after that. If you have two pensions, you're stuck buying two annuities from only two different providers. A bad case of allyour eggs in two baskets. The providers decide what profits to add before the pension fund matures and the annuity rates & profits added have been shrinking with poor market performance. Many of the providers have large debts because they agreed to too high payouts and paid out too much profits and annual returns to attract new investors (bit like a Ponzi scheme there). The UK gov is reforming it a bit and there is a call for a 401k type scheme instead but I doubt we'll see it.

Investing even 50% in a pension plan would mean not knowing what you'll receive until you reach 50 to 65 and see what the annuity rates are at that point. You're strongly penalised for retiring in the 50s which might lead you to retire, living off a high w/d rate off other assets and buy the annuity in your 60s to raise the payout %. People who did that the last decade found that the market gains were lost via reduced annuity rates! It would make planning near impossible unless you work until 65 and take what you can get. All annuity payouts are fully taxed as if you were employed, so much like your situation. Despite the gross tax benefits inbound, I'm planning to avoid it in favor of net salary investments knowing how much I have invested, what kind of w/d rate I can have based on my asset allocation and leaving open the option to retire early with all the facts at hand. Better to perhaps have less but be clear on what you're doing that rely on others and not have the right facts to make a decision on FIRE. A recent survey said that 90% of people without a private pension plan here do so because pensions are so complex that they cannot understand them, so UK gov is trying to address that.

Petey
therealchips wrote: Sorry I misled you. I could change my allocation substantially and without tax consequences, but I don't want to.

I could reallocate the assets in my IRA with no tax consequences at all. I could withdraw the capital from my unmortgaged house with no tax becoming due, not even on the capital gain on this investment and certainly not on the return of capital. It's only my taxable account where reallocation is inhibited by capital gains taxes, and that inhibition is much less with the new 15% maximum tax rate. My allocation is about what I want it to be, except maybe that I still haven't finished clearing out the actively managed funds left over from years ago, or a few individual stocks that represent speculation I may abandon, running up a capital gains tax bill. That's a fairly small part of the retirement stash, and is not in index funds.

My beef (gripe? complaint?) about allocation was that I may have put too much of the retirement stash in the tax sheltered account. It is almost half the pot, and faces very large and escalating taxes at ordinary income tax rates when mandatory withdrawals set in about six years from now. There was no way I could tell, back in the period between 1978 and 1993, that I was possibly contributing too much to the tax-sheltered accounts. I couldn't predict that income taxes on dividends and capital gains would be cut to 15%. (I can't predict now whether that tax rate will continue after its scheduled expiration.) Dividends and capital gains realized inside an IRA come out of the IRA as ordinary income, taxed at rates much higher than 15%.

Maybe the lesson is that retirement plans will have to be flexible enough to accommodate changes in tax law, and not just the market volatility and inflation that we talk about more often. None of that is predictable with high confidence.

Good luck. :wink:
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Post by wanderer »

My beef (gripe? complaint?) about allocation was that I may have put too much of the retirement stash in the tax sheltered account. It is almost half the pot, and faces very large and escalating taxes at ordinary income tax rates when mandatory withdrawals set in about six years from now.

Then again, you could have elected to move those monies into higher (esp. interest) yielding investments within the IRA and enjoyed the tax free ride for the better part of ten years (where those of us with funds outside of tax deferred accounts have to pay ordinary taxes on income currently). That would have been a good choice over the last three years.
regards,

wanderer

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Post by therealchips »

That would have been a good choice over the last three years.


Yes, indeed, but then, if I knew how to time the market, I'd be fabulously rich instead of merely comfortably retired. Hindsight in picking good investment ideas is of no use that I know of. There is no particular reason to focus on just the last three years. The seer could have instead been in or out every day of the last ten years or longer, according to what was most profitable. Judging by what I see in the Forbes 400, there are no such seers. In any case, I am certainly not qualified to peer into the future or practice market timing.

Here are my actual, year-end results in my IRA since I retired in 1993 -- with no trading, no market timing, no hassle, no worry, no personal effort on my part, and, of course, no taxes.

Year, Value of IRA relative to Starting Year of 1993

1993 100%
1994 100%
1995 137%
1996 168%
1997 223%
1998 287%
1999 355%
2000 324%
2001 281%
2002 221%
2003 258% (as of last Friday)

I have taken some money out of the IRA in that time period, so the actual investment results are better than this. Should I cry because my IRA at the moment is only 258% of its value when I retired, instead of 355% as it was at the end of 1999? I don't fret over it and I reject market timing. The analysis that says the US market is overvalued is countered by real people putting up real money, buying and selling these assets today at today's price. I am more impressed by actual commitment of cash by large numbers of people than by academic studies from a few, or by the performance of money managers whose skills I can't recognize early enough for it to matter. One of you has pointed to Peter Lynch as an example of a man with such stock picking and market timing skills, and with a proven record showing that he can outperform the market over an extended period of time. Last Friday on the Louis Rukeyser show, I heard Lynch advise against market timing.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

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FIRE FAQ organization

Post by Dual »

It seems like a big job for one person. How about starting a sticky (pinned) thread where people could contribute posts with questions and answers? Later, volunteers could go through and combine similar questions into single posts.

For example, a post might be:
What are some books about early retirement?

Cashing in on the American Dream by Paul Terhorst.
Great book for the why and some of the how of ER. Shows Terhorst's mental process as he considered and then took the big plunge. Be warned that it was written in the early 1980's and the investment advice is suspect. I understand that Terhorst himself later went to a more conventional balanced stock/bond portfolio. The Terhorsts are now permanent travelers. Not my cup of tea but interesting choice. For an update on their travels see http://www.geocities.com/TheTropics/Shores/5315/

I don't have time now but I can contribute reviews of Your Money or Your Life and Gillette Edmunds' book and perhaps others.

Dual
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Post by therealchips »

Hi, Petey,
So tax free contributions to a 401k or IRA are more heavily taxed on the way out than if you investing in a ROTH IRA or just invested independently of tax wrappers? Given the variability of the tax situation, I would say having a 50/50 split is a pretty good hedge that you won't be too wrong either way.


Right, contributions to a 401k or a classical or regular IRA are deductible (generally) on the way in and not subject to any income tax on internal results, but all the distributions are taxed at regular income tax rates when they come out, even if they represent dividends or capital gains. IRS has rules that force withdrawals from a classical IRA after age 70½, specifically so that IRS can collect income taxes on them.

Contributions to a Roth IRA are not deductible on the way in, not taxable inside the Roth IRa, not taxable on the way out after certain holding periods, and not subject to any forced withdrawals. I have seen analyses that purport to show that it would be to my advantage to convert some of all of my classic IRA to a Roth IRA. All these analyses seem currupted by the false notion that the tooth fairy will pay the income taxes I would owe on that conversion. My strong preference is "Pay no taxes before you must!" Anyway, I don't entirely trust the government to leave Roth benefits tax-free. These are the people who force us to pay income taxes on the money we "contribute" to Social Security and then charge us income taxes again on most of our Social Security benefits.

People subject to US taxation and in an accumulation phase currently may be able to distribute their savings between three choices -- regular IRA, Roth IRA and taxable accounts. The Roth IRA didn't exist during my accumulation phase.

I think Wanderer made the point and regrettably, I missed it, that some taxpayers are not eligible for IRA's. I had that problem for most of my working career, so I understand it fully. My present IRA assets come mostly from rolling over my 401k when I quit working in 1993.

(Warning for people rolling over 401k assets into IRAs: the 401k custodian must send the assets directly to the IRA custodian, without passing through the taxpayer's hands, to avoid large withholding and possible income tax problems! Fortunately, I read the warnings soon enough and I had the money go directly from my 401k custodian to my IRA account at Schwab with no tax or withholding problems.)
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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ElSupremo
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Post by ElSupremo »

Greetings Dual :)
It seems like a big job for one person.

LOL! :lol: Check out the index funds board FAQ. :wink:
How about starting a sticky (pinned) thread where people could contribute posts with questions and answers? Later, volunteers could go through and combine similar questions into single posts.

Fine with me whatever everyone wants. Even if it doesn't really come together that way there would sure be some interesting posts!
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Post by wanderer »

Yes, indeed, but then, if I knew how to time the market, I'd be fabulously rich instead of merely comfortably retired... Should I cry because my IRA at the moment is only 258% of its value when I retired, instead of 355% as it was at the end of 1999? I don't fret over it and I reject market timing.

You could have held vwehx for the last 25 years and earned 9.5% p.a. Not too shabby.

Most humans I know 'time' the market, in one form or another. The vast majority do it badly - selling when they should buy and vice versa. Steady income like this fund provides might have kept some of them from such an unfortunate choice. Plus it would have come in a tax protected package and would not have been transformed into ordinary income, which you were 'crying' about in the previous post.

I don't think you want to know the results of our 'market timing' through this Bear. :)

Hindsight in picking good investment ideas is of no use that I know of.

It's a substantial part of the basis of every SWR study of which I'm aware. :wink:
regards,

wanderer

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ataloss
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Post by ataloss »

Q: Fire?

A: Financial independence/ retire early. Originated by Wanderer.
Have fun.

Ataloss
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ataloss
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Post by ataloss »


Have fun.

Ataloss
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Wanderer reports outstanding results.

Post by therealchips »

Wanderer said,
I don't think you want to know the results of our 'market timing' through this Bear.

Quoting me, Chips: Hindsight in picking good investment ideas is of no use that I know of.

It's a substantial part of the basis of every SWR study of which I'm aware.


I think you already posted that you made 135% or so during the bear market when I lost about 45%. Good for you, and it was kind of you not to rub it in. In addition to having fear and greed under control, I have envy under control. I drive past multi-million dollar houses every day. Do you think you can continue achieving such outstanding results? It should not take many more years at that rate to get you to the Forbes 400.

My comment on hindsight was only an abbreviated way of saying things such as the following long-winded but familiar version:
http://www.investorhome.com/do
However, if past performance does not predict future performance, this information is of little use in selecting mutual funds going forward. While there have been studies showing that strong performers continue to outperform over certain periods, several recent studies have demonstrated that investors should not expect recent strong performers to outperform in the future. . . . Other articles on the subject include The Grand Infatuation (7/99) by William Bernstein, several from The Vanguard Group (The Perils of Relying on Past Performance and Pursuing Past Performance Is A Common, Costly Error), Past Performance from Errold Moody, an article in the Washington Post by James Glassman on the dangers of investing in top performing funds, and Performance Persistence (Abstract) by Stephen J. Brown and William N. Goetzmann in the Journal of Finance (June 96).


The original includes URLs for these references.
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Chips
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Post by wanderer »

chips in this thread: ... Do you think you can continue achieving such outstanding results? It should not take many more years at that rate to get you to the Forbes 400.

chips, in a recent thread: Meanwhile, I need 2% real annual return to support my present standard of living, and got 1% just today.

At your rate, you should be there well before me. :lol:

So I guess you don't like my "if you're getting run out of town, go to the front and pretend it's a parade" approach to making the best of the ordinary income treatment of stuff coming out of tax deferred accounts. :lol: I'll file that under 'different strokes'...
regards,

wanderer

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Post by ataloss »

Dual:
I don't have time now but I can contribute reviews of Your Money or Your Life and Gillette Edmunds' book and perhaps others.


that would be great, or we could have a thread discussing eachbook (if there is enough interest) and the FAQcould link to the thread
Have fun.

Ataloss
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ataloss
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Post by ataloss »

I think it would be a mistake to have links in a FAQ that went to a password protected message board. Especially if the original posters are available to share their "insights" at NFB.
Have fun.

Ataloss
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ElSupremo
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Post by ElSupremo »

Greetings ataloss :)

I agree.
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Post by JWR1945 »

I disagree. The issue is copyrights.

Have fun.

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ElSupremo
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Post by ElSupremo »

Greetings John :)
The issue is copyrights.

Please clarify. What do copyrights have to do with this? :?
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