We are the type of people that pay cash for everything, choose older houses and cars, and look for insurance plans with low premiums and high deductibles. Our annual expenses can seem low when we “luck out” and don’t incur an “emergency”. In fact our drawdown from investments over the last several years in retirement has been zero.
Zero? Yeah. I boasted about that on my recent post about our trailer trips. But we don’t expect it to stay that calm for long. Because we have set up our finances to say “okay” to risk.
And things have been overly calm. Right up until last month. Then, out of the blue, we got hit by several large bills, all in a row. Major car maintenance, rental repairs, and one of our tenants is moving out. Do these things come in threes? Or will this be a streak that is just getting started?
It’s all right. Bring on the wild swings! We are set up to roll with the punches. We can handle a series of emergency events. In fact, we have designed it that way.
What we have found is that the larger our savings nest egg is, the more money we can save in general, even when we need to absorb big fluctuations. Let’s take a look at some of the lower cost approaches we have chosen.
Can You Afford to Own an Old Car?
For years, I drove a 1983 Mercedes diesel, racking up 500,000 miles along the way to the moon and back. I bought it used in 1988 and drove it for 22 years.
I paid for it in cash. Which is sort of like withdrawing from an emergency fund, right?
With older cars, our insurance bills are lower and the registration costs are a fraction what new car owners are paying. Especially here in California.
Without monthly car payments, you might look at our monthly spending, heck, even our annual spending, and conclude that our auto expenses are really low.
But then, just like that, something major happens and the repair bill makes you wonder if you really should stick with the car or buy something else. For instance, just this month, Matt’s 2005 SUV had a repair that set us back $5600. Oh, that hurts. That was the most we have ever had to fork out for his car — so far. But it is getting up in age. And we use it to pull our travel trailer.
The big question is whether you can foot the big, unexpected bill when it comes in. Are your finances set up to handle the “emergency”?
The emergency that you know for sure is coming. You just don’t know when or how much it might cost.
Many people who live paycheck to paycheck can’t handle that. They don’t have enough in savings. These are the people who are usually driving around in nice, new cars. Worse yet, they are leasing them.
Our Healthcare Premium is $2.42 Per Month
We’ve been buying a Covered California plan every year since they became available in 2014. Before that time, we bought a high-deductible plan that cost us $500 per month for both of us and didn’t pay a dime unless one of us used $5000 of care. Then it paid for everything.
With Obamacare, that plan got eliminated, and we have been using ACA plans every year since.
The approach we use is similar to that high-deductible health insurance.
First, we make sure we qualify for the subsidy, which is huge. As a married couple with no kids, we get a healthcare tax credit as long as our income is below $64,960, which is four times the poverty level. Surprisingly, at least at our ages of 58 and 61, we can get a really cheap plan even when our income gets close to that line.
The thing about the ACA law that many people miss is that every year they have a cap on the maximum out-of-pocket amounts you pay, regardless of whether you have a Bronze, Silver, Gold or Platinum plan. Sure, some plans offer lower deductibles, but the high premiums you pay in order to get that are not part of that “out-of-pocket”. You lose that money right off, whether something happens or not.
So why not keep the premium the lowest and buy a Bronze plan? That makes the most sense for us.
For example, in 2018, that maximum amount is $7,350 for an individual and $14,700 for a family. This is the most money you will pay for your deductible, copays and coinsurance percentages. Like I said, your premium is not included.
We are healthy people (knock on wood!) and so far neither of us take any medication. The way we approach it is similar to driving an old car and dealing with the sudden cost of a new transmission or something. We buy the cheapest plan, keep ourselves healthy, and are prepared to pay the $7,350 out-of-pocket if one of us gets sick or injured.
Granted, I realize that there a lot of people out there facing major health issues. It is a tough call once that happens. In fact, I have been researching options for a family member currently fighting cancer, in order to try to make a good choice in a bad circumstance. It is not an easy call, that’s for sure.
The Roth IRA Protects Our Healthcare Subsidy
Keeping our incomes below the Obamacare cliff is a major consideration for this strategy of wild swings. Although we have IRAs, Roths and after-tax brokerage accounts we can draw from, we have to be careful on what to tap so that we don’t cross that critical line.
Even selling an index fund in our after-tax brokerage is tricky. I’ll give an example. We built up a sizable after-tax account at Vanguard during the last 4 years I was working, saving my entire salary as we prepared for early retirement. That was in 2006 to 2010, and I was dollar-cost-averaging into the VTSAX, paying regular taxes on it first. Now all these years later, with such big stock market gains, those accounts have more than doubled. A sale of $10,000 for us has nearly $6000 in capital gains to report.
How does that affect our ACA subsidy?
With our income, the capital gains tax is zero. But that calculation does not happen immediately on the 1040 form. First, for assessing the ACA subsidy, the capital gain is included as part of our Modified Adjusted Gross Income. This article from nolo.com lists various items that are included, even if later you end up paying zero tax on it. Capital gains are like that. So are qualified dividends.
We have about $50,000 coming in from Matt’s pension and our two rentals. Yeah, the rental income is great if no repairs are needed. Since Matt is 61, we can draw from his regular IRA without penalty, and we do that. On a good year, we can do a Roth conversion with that money. But if we get hit by several of these cash emergency type events at the same time, then we look to his Roth IRA account.
So far, that has only been a theory. We’ve been lucky.
This Year, Our Luck Is Running Out
This last month has been unlucky. But we knew that! Of course. We have been planning for it.
In fact, considering that our house was built in 1965, and our two rentals were built in 1954 and 1983, let’s face it. Older homes are like ticking time bombs. Heck, I bought a foreclosure home that had known plumbing problems.
In this article by Paula Pant, she estimates that you should expect to spend 1% of your home value every year on maintanence. For us, using the combined Zillow estimates on the 3 properties, we should expect to spend about $10,000 per year to maintain our million dollars worth of property (I did mention we live in California, right? Even Stockton has high property values).
We have really not had to spend much on any of our houses for several years. Tick, tick, tick!
But over the last month, we had a list of items to repair at one rental and right after that, we got a 30 day notice from the other tenant who has lived in the property for seven years. Seven years with a family that has been pretty hard on the place. We can only cringe and brace ourselves for the list of items we will be tackling in just a few weeks.
Each of our cars just had large repair bills. And it is only July! We have already taken 15K out of Matt’s IRA. So I think this year will most likely be the first of our Roth withdrawals.
But that’s okay. Because we …..
Expect the Unexpected
Are we playing with fire? Or FIRE?
We feel that the power of having large amount in savings is to be able to handle the ups and downs. People who don’t have that kind of buffer are stuck renting rather than owning a home. Of course, there are other reasons people choose to rent, but my point is that you don’t have the option if you can’t handle a big repair coming your way.
The home insurance on each of our 3 houses is $5000 deductible. Higher than most people’s, but ask yourself, have you had a loss that seemed too low to hand in? Are you afraid that they will just raise your rates so you don’t run that through your insurance? We saw this trend a decade or so ago and decided to just raise our deductibles. We really don’t intend to make an insurance claim unless it is substantial. The same with our car insurance. And it has saved us a lot of money with reduced premiums all these years.
We will most likely not purchase long term care insurance either. Our nest egg is fairly large, so if one of us needs assistance, we will have to foot that bill. That one would be pretty substantial. But I believe we have enough to cover it.
Are you a long term stock market investor? If so, then you are likely prepared for large fluctuations that come periodically. This is really a similar situation. You go with a winning money strategy, but in order to reap the benefits, you have to be able to ride the waves and accept the downs that come with the ups.
You might have noticed I referred to selling our VTSAX to raise money for one of these events. Should we have these funds in cash? Well maybe. There is a lot of debate about that. I like a recent post from Big ERN on this subject. He argues that your emergency fund should be completely invested in equities. We were already doing that before I read the article, maybe just because we are risk takers. But he makes quite a good case to continue doing that.
Is Your Luck Running Out?
Or maybe you are too young to have experienced a big stock market bear. To watch your portfolio and net worth take a huge hit. Are you really prepared for the wild ride that is sure to come?
I hope so. Please read this post from Fritz at Retirement Manifesto to consider things you could do to get ready.
Because, just as our “luck” has been running out lately, possibly yours might too. Over and over, I read of people referring to their regular annual expenses or their net worth in a way that describes them as if they are steady. In my experience, that is just not the way life goes.
Why not design your finances accordingly? We did.