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The other day we were on a video chat with a few friends who are working towards reaching FIRE (financial independence / retire early) themselves and talking about everyone’s plans for next year and one of them said, “Hey 2021 will be your first normal FIRE Year!” That hilarious blurt reminded us of how unusual the idea of traveling full time is for lots of people. So ok fine, perhaps 2021 will be our first normal year after reaching FIRE since we’ll no longer be nomads. Yippee we’ll finally be normal (*bursts into laughter)!
One thing’s for sure, reaching FIRE has allowed us a ton of flexibility in choosing our lifestyle. We started our post-FIRE years as full time international travelers, and now we’re getting excited about the idea of setting up a home base in Arizona next year. No doubt 2021 will be full of challenges and there will be many ups and downs, but hopefully 2021 will feel a lot more stable for everyone.
Because we’re setting up our new home and planning to spend the majority of our time there next year, there are a lot of details to think about. Most of the time we’re sleeping really well these days, but we both have a lot on our minds as we think about 2021. Including…
- Things that really matter:
- Continued COVID-related struggles and suffering for too many people
- Continued American political drama
- Continued violence against people of color and LGBTQ people
- Things that probably aren’t worth worrying about, but still keep us up at night:
- Buying a car
- Paying for ACA health insurance
- Paying for major tree work on our new property
- Paying for construction work on a separate rental space for our housemate
- Buying things so we can set up our home
- Paying utilities every month
- Possibly spending beyond our budget for the first time since reaching FIRE
- Having much less travel time
Giving Ourselves Time to Think and Plan
Right now we’re staying in a tiny home on the Isle of Wight in England enjoying our last trip as full time nomads (for now). The Airbnb owner at our current place built this tiny home behind a Victorian era building at the back of a narrow High Street lot, replacing the family’s old potato shed. We love that story, and we love this 24×24 cottage. Staying here has given us a lot of inspiration for our own home, which is 30×36, and the separate rental space for our future housemate as well. It feels good to be here imagining and planning for the work we’ll do on our own property next year.
Our 3+ month trip to England also allowed us to keep our 2020 global health insurance plan with IMG through the end of this year, and for up to 180 days in 2021 as well. We would have disqualified ourselves from our existing insurance before the end of October if we didn’t take one last trip out of the USA. We had already paid for our insurance through the end of the year and we want to be in good standing with IMG as well. But most importantly, we weren’t ready to get on the ACA in 2020. As of today we need to stay in England for 27 more days until our global health insurance renews for 2021. At that point we can switch to monthly payments, cancel IMG when we’re ready, and also let our old and new insurance plans overlap a bit.
The second reason we came to England for the winter is that back in September we weren’t ready to settle down in our new home and live full time in the USA just yet. The decision to buy a home of our own was strategic but it was also spontaneous and ahead of the schedule we had agreed to. We wanted to give ourselves time to adjust to our lifestyle change, both emotionally and financially. We had cash ready for our home purchase, but we didn’t want to then also start making additional purchases in 2020 for things like a car and furniture which we’ll need when we move into our new house. And we were still reeling from spending five months in the USA this year when we had only planned for a couple of weeks. So we went ahead with our plan to spend the winter in England, which was an awesome way to wrap up our nomad chapter (for now).
Adjusting to a Different Set of Tax Obligations
When we started planning for living in one place again we assumed we would go back to Washington State, where there are zero state income taxes. But instead we bought a house in Arizona so we’ll be paying taxes and voting in Arizona starting in 2021. This will be our first year paying state income taxes in decades, a thing we haven’t done since we were still in our 20s and living in California (otherwise known as the land of incredibly high income taxes).
Starting in 2021 we’ll also be paying property taxes again as well. As for federal taxes, our goal as early retirees is to keep our total taxable income within the USA’s 12% income tax bracket and 0% capital gains tax bracket. We assume there will only be minor changes to the lower income tax brackets starting in 2021 when President Biden passes his tax plan, but it sounds like there will be increases in corporate taxes as well as individual income taxes for those making over $400,000 annually.
We’re ready to shift the way we pay for housing costs away from using all of our housing budget on lump sum payments for short term Airbnb stays in various locations. By the end of January in 2021 we’ll start using our housing budget to pay for property taxes, insurance, and utilities on our own property. Even though we’ll be paying more taxes we’ll have the ability to turn on and off the kinds of income we draw from our portfolio and also choose the amount of income we use. Most of our income at this point is in the form of qualified dividends and capital gains, which are taxed at a much lower rate than ordinary income. Our Roth conversions are taxed at ordinary income rates and even though those funds are not spendable now the conversions push our taxable income up.
Planning For Roth Conversions
When we run different simulations on our portfolio showing growth as well as annual withdrawals for living expenses, it seems clear that Roth conversions will work in our favor. The original goal was to completely empty our IRA accounts and move all of those funds into our Roth accounts, but even good plans have to change sometimes. Our goal at this point is to make annual conversions that are big enough to help secure tax-free money for our long-term care needs at the end of our lives, but also small enough to help us qualify for partial ACA subsidies right now. When we’re elderly we want to be able to take reasonable withdrawals to cover our living expenses, and if we don’t make Roth conversions now our RMD withdrawals would greatly exceed even the largest budget we can imagine needing. This is a great problem to have, but it’s still something we want to fix if we can.
Our Roth conversions will be targeted to fit within our Married Filing Jointly personal deduction which is $25,100 in 2021, up from $24,800 in 2020. Our ordinary income tax Roth conversions would ideally be offset by our deduction, making them tax free.
In 2019 we converted $62k from our IRAs to our Roths, and our plan for 2021 seems very clear with a much smaller Roth conversion of around 15k. It’s the 2020 plan that’s a bit more complicated since it’s our last chance for a bigger conversion before we get on the ACA. We converted $29k during the COVID Crash earlier this year, and we’d like to do another Roth conversion of about the same amount before the end of the year.
As of today we’re in the middle of finalizing our plan for a second Roth conversion, keeping in mind the link between taxable income levels and ACA subsidies. Premium subsidies are tax credits so we’re working with our CPA to finalize our plan. Unlike most tax credits, we can take premium subsidies in advance to adjust what we pay to our health insurer. Or we can claim the entire amount on our tax return just like any other tax credit. We don’t want to pay unsubsidized premiums and wait for a refund as a tax return. If we apply for the ACA after we file our 2020 tax return we can use our estimated 2021 income based on what we actually submit to the IRS in order to prove we qualify for subsidies and avoid paying full premiums throughout the year. That’s the other reason we’re thrilled to have access to our current global health insurance until July of 2021.
We’re always running simulations in our super-mega-complex-magic-FIRE-life spreadsheet. Below we’re sharing a few screenshots of the types of graphs we generate as we test our portfolio by throwing the kitchen sink at it.
Planning for Long-Term Care
The other bonus of Roth conversions is longer tax-free growth in our Roth accounts instead of leaving 42% of our money compounding for decades in tax-deferred IRAs. We like the idea of paying more taxes now in a lower tax bracket in order to pay fewer taxes when we’re elderly and possibly dealing with health issues. We hate the idea of being forced to take huge IRA RMDs and being pushed into a higher tax bracket when we’re elderly and need our money the most.
There’s certainly a chance that one or both of us will need assisted living, or skilled nursing, or memory care when we’re elderly (unless I find a vampire and we live forever in good vampire health). My grandmother needed skilled nursing and memory care when she was elderly, and I carry the same Alzheimer’s risk gene as well. I also think about the fact that Alison is 10 years older than me and 6’3” tall, where I’m only 5’2.” If Alison needs help when she’s elderly there’s no way I will be able to lift her. For these and a million other reasons, we definitely want to be prepared to pay for whatever type of assistance we might need down the road.
My grandmother paid into a long-term care insurance plan, and it’s a good thing she did because it turned out to be exactly what she needed when her Alzheimer’s progressed to the point where she could no longer walk or feed herself. Alison and I are not going to buy long-term care insurance, we’re going to self-insure for our long-term care needs. We want to move enough money over to our Roths to grow for a few decades so we can pull out tax-free growth and keep our taxes lower when we are elderly and dealing with health issues.
New Budget for Settling in the USA
Over the past couple of months in England we’ve had time to adjust our budget for next year to match the higher cost of living in the USA. We’ve also designed our 2021 withdrawal plan to accommodate a year of higher spending with both cost of living expenses as well as expenses for setting up our new home. We haven’t had to pay home utilities in a few years so that’s a change to our spending plan as we switch back to being homeowners. After doing some research we have a pretty good idea for what some of our monthly utility costs will be, most importantly water and sewer. Welcome to the water-starved desert state of Arizona!
Our new monthly utilities in 2021:
- Water and Sewer: $72.73/month just as a base, with actual usage costs added to the base (WOW!)
- Trash and Recycle: $34.64/month
- Internet: $49/month for standard or $65/month for fiber (we haven’t decided on a plan yet)
- Gas: I’ve heard this is relatively affordable
- Electricity: I’ve heard this is relatively expensive
For now we’ll keep our Traveling Mailbox account even though we’ll be living in one place again. This system has worked really well for us and became part of our routine back when we were still living in one place in Seattle. We’ve already paid our $299 annual fee which covers us until July 21, 2021. So we can cancel our account next summer if we find we don’t need it anymore. We’re thinking having a housemate in AZ along with online billing and almost every account being paperless will cover our mailbox needs even if we start traveling for longer periods again.
We have a lot of one-time planned purchases for next year since we’re setting up our new home. Including larger expense like buying a car, setting up a separate space for our future housemate, and doing some significant tree work on our property (*cringe). Whether we buy things new or used it’s still going to make us uncomfortable to shop and buy things after buying almost nothing for the past five years and more as we worked our way to FIRE. Thankfully we don’t need to buy everything on our list at once, there are a lot of things on the list below that we can let slide for a while.
This is our list of one-time purchases we have budgeted for in 2021, and we’ll buy used as often as possible…
- New used car
- 2 beds, mattresses, and linens
- Bed frames and other bedroom furniture
- Living room furniture, like a couch, some tables, and a couple of comfy chairs
- Dining room furniture, like a small bar and a table with chairs
- Bathroom and kitchen towels
- Kitchen basics like silverware and other utensils
- Kitchen cabinets
- Washer and dryer
- Small freezer
- Sewing machine
- Outdoor BBQ
- Home maintenance tools
- Yard work tools
- And probably a million other little things
Modified Emergency Fund Plan
Since 2021 will be a bigger spending year we’re adjusting to make things easier on ourselves and on our portfolio. For example, we’re adjusting our emergency fund plan. The old plan a million years ago in 2020 (*bursts into laughter) was to maintain three years of living expenses as an emergency fund, on top of having the current year’s living expenses on hand in cash. For 2021 we’ll only be holding two years of living expenses as an emergency fund, on top of having our 2021 living expenses on hand in cash. That will help us set aside more funds specifically for home setup, separate from our living expenses. We’re comfortable with a two year emergency fund for now and we can always change it again later, because the priority is taking care of our portfolio during this big spending year. We don’t want to withdraw any more money from our investments than we absolutely have to.
Getting on the ACA and Qualifying for Subsidies
One of the most important things we need to do next year is to start paying for ACA health insurance in Arizona. It’s reassuring that we can end our IMG plan and move onto the ACA in a Special Enrollment Period anytime before July 1. We haven’t chosen our 2021 ACA plan yet but we’re hoping to get our premiums to be similar or even lower than our global plan premiums.
We have some FIRE friends in the USA who have managed to manufacture low enough post-retirement income to qualify for maximum subsidies that make their ACA premiums very close to zero. That’s not as easy for us since we want to do Roth conversions.
Depending on the Modified Adjusted Gross Income (MAGI) we produce in 2021, it looks like we can qualify for an ACA subsidy as high as $1,686 per month and our options for silver plans in Flagstaff, Arizona range wildly. The premium scale we’re looking at goes from around $100 per month for the lowest cost silver plan with a high subsidy and no Roth conversions, to as much as $2,111.71 per month for the highest cost silver plan with no subsidy and larger Roth conversions. We’ve decided we won’t consider any gold level plans for now, but we will compare all of the silver and even bronze level plans for next year since we are relatively healthy and have a relatively large emergency fund.
Our 2021 Withdrawal Plan
2021 will be our first year of really dipping into our investments for living expenses since we started our post-FIRE lives with five years of living expenses in cash. It seems ironic that our first time truly depending on our personal safe withdrawal plan for living expenses includes needing extra cash for other things like a car purchase.
Our withdrawal plan for now has us depending entirely on our brokerage account for our living expenses for the next few years. We’re also considering the idea of dipping into Alison’s rollover IRA for part of our living expenses after she’s 59.5 years old. We’re running tons of simulations in our super-mega-complex-magic-FIRE-life spreadsheet looking for the right allocation mix for withdrawals and maximized portfolio growth. Relying partially on Alison’s IRA without penalties combined with our brokerage account will help us empty that IRA account before RMDs would start. This new withdrawal strategy will help us manage smaller Roth conversions, reduce RMDs, and lower our lifetime tax obligations as well, which is the triple crown in our AOC safe withdrawal plan.
We’re Heading Home!
I was looking at our Packing List to remind myself of how few worldly possessions we still have right now. We have two bags with us and we still have two bags of clothes at my sister’s house in California, which we’ll be picking up in January. We’ll also be picking up some artwork and special family belongings from our storage unit in Seattle in January, and we’ll be very happy to stop paying for our little storage unit. Once we gather all of our worldly goods at our new house I assume our relatively small supply of clothes and shoes will look funny in our new closet, and that kind of minimalism will make us happy. We’ll probably need to buy a few more things right away though since we expect winter snow and we have nothing to wear in that kind of weather. Once we’re all setup it will feel great to have more of the things we appreciate in a home, like a king-sized bed with plenty of good pillows, enough bowls and cups and silverware in the kitchen, and comfortable chairs. Why is it so hard to find comfy chairs in Airbnb’s???
I think 2021 will be a really good year, though I doubt it will feel any more normal than our full time travels. Is this kind of big spending all in one year normal? I hope not! We look forward to fully embracing a new location that we chose together, and getting to know a town we’re still really unfamiliar with. We’re excited about owning a home of our own that we paid for in cash, and we look forward to having a housemate. We’re also excited to be living in the middle of all of our family for the first time. We each have a sister and some nieces and nephews in California; a nephew in Colorado; Alison’s younger sister, mom, and niece in Arizona; and I’m very excited that we’ll be living so much closer to my little brother in New Mexico and my youngest sister in Texas.
As for travel, I might want a short trip to Mexico for my birthday next year if we can cover it all with our remaining travel credits. But the real priority is a longer trip towards the end of next year since our youngest niece recently announced that she wants to take her first international trip next Fall and she wants to do that with us. So I’m hoping for a couple of weeks traveling with our niece next year if we can all three get vaccinated for Covid. Fingers and toes are crossed!
As of today we only have to wait 23 more days until this crazy pandemic year is behind us, and only 42 more days until the next American President is sworn in and things in the USA can really start to improve. Hallelujah! That’s all we want for Christmas. I love the idea that we won’t arrive at our new home or settle into our new life until after a new President is sworn in!