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Stock options workshop = *headdesk*

June 11th, 2015 at 06:22 am

I went to a stock options workshop at work. Now that the stock price has risen such that my vested options are worth a whopping $344K at fair market value (rising to $500K by year's end when more shares vest, assuming the price holds steady), I figured that it's finally time to learn how to deal with them.

I went into the workshop all happy and excited. I left decidedly less so, because I realized that I dun goofed pretty badly when it comes to tax planning.

My original plan was to buy out all of my ISOs with about $50K in cash in September, after the remaining shares vest, and hold them for long-term capital gains. I was also going to start selling off my NQs up to the Roth IRA AGI limit each year and move the money into more diversified investment vehicles.

Now that I've learned all about the AMT, I've realized that I can't do that.

I want to preface what's coming next by first saying that (my earlier marriage penalty post aside, which was more intended to be an analysis than actual griping) I almost NEVER complain about taxes. Furthermore, I HATE people -- especially rich people -- who complain about taxes. Yeah, I get that they're a pain, and it's not like I don't try to minimize/optimize my own tax bill (mostly because I try to minimize/optimize everything), but at the end of the day, taxes are the price you pay to live in a civilized society, as well as a "problem" that you only have if you've MADE MONEY. Making LESS money is still way better than making NO money.

But the phantom tax on ISO spreads? OMG, that's TOTAL BULLSHIT.

I know, I know, cry me a river -- but I am relatively certain that after I buy out my ISOs, I cannot afford the AMT that gets triggered on the $330K spread. I am FINE with paying taxes if I've actually made money, but I'd like to buy and hold in this case, which means that not only have I not made a dime, I've sunk in my own capital, and not even a nutjob like me has the kind of liquidity to afford the tax bill under the AMT. Not to mention the fact that triggering the AMT effectively negates all that is nice about ISOs relative to NQs.

I'm immensely frustrated right now, because I should've learned about all this way earlier. I should've been buying out my ISOs two years ago when the spread was much lower. I let the ball drop on this, and I'm kicking myself. As it stands, I'm gonna be spending the weekend plugging numbers into the AMT worksheet and seeing if there's any way to make this situation suck less.

I got all excited when I saw the stock price shoot up earlier this year. I thought that I could shave a few years off my FIRE date. I thought that if the market doesn't tank, maybe I could FIRE as early as 2017. Now I will probably have to throttle my ISO buyout to stay under the AMT threshold, and at the rate the stock (and my salary) is rising, I have no clue how long that's going to take.

I'm really trying to keep some perspective on all this. Yes, I got blindsided by the AMT with regards to exercising my ISOs, but even in the absolute worst-case scenario, in which I assume that half of my options are lost to taxes, my projections still have me reaching my FIRE goal of $1 million in three years, which is still two years ahead of how long it would take without any options at all.

I'll re-evaluate everything once I've worked out the AMT numbers. It is what it is and I'm still a lucky bastard no matter what. Once this is all sorted and I have a plan, I hope to not complain about taxes again for a long, long time.

Is this the real life? Is this just fantasy?

May 18th, 2015 at 03:34 pm

Employer stock price went crazy and hit record highs today, and look at what happened in Mint --

I fully expect it to dip back below, but it sure was exciting to see assets hit seven figures for the first time. Maybe by this time next year, net worth will also be seven figures. One can dream. Smile

1Q 2015 Checkup

April 10th, 2015 at 01:51 am

Quick snapshot of the financial situation as of close of business 9-Apr-15:

Cash: $16,297.63

Home: $169,378 minus ($129,766.66) mortgage = $39,611.34 equity

Car: $13,900

Investments: $749,901.40

- 401(k): $113,746.98
- Roth IRA: $115,696.03
- Rollover IRA: $65,449.31
- Rollover IRA Brokerage: $9818.84
- HSA: $1132.78 (currently in cash; need $2500 minimum balance to invest)
- Taxable: $149,983.61
- Stock Options: $294,073.85 vested (out of $504,931.90 total)

Net Worth: $819,710.37

In recent weeks/months, I've made the following adjustments to my portfolio:

- Swapped 20% of my 401(k) from Vanguard Institutional Index (VINIX) to Vanguard Extended Market Index (VEXAX) to approximate the Vanguard Total Stock Market Index (VTSAX, which I can't get directly in my 401(k)), and balanced my future contributions to be an 80/20 split.

- Seeded $11K from money market into a taxable VTSAX holding, and will henceforth be using that instead of my S&P500 holding, which I'm retiring.

- Increased my taxable investments from $400/week to $500/week -- because I got a raise and bonus at the end of last year, and what else am I gonna do with it? :P

- Killed my (brand-new Frown) traditional IRA. I apparently make too much money to take the deduction now.

- I want my domestic to international equities ratio to be 2:1, but I'm at 2.76:1 right now, so I'm aggressively rebalancing my AA more towards international without triggering taxes. All of my Roth IRA and 80% of my taxable contributions are going towards Vanguard Total International (VTIAX). If this approach is taking too long (e.g. if by next quarter that ratio has barely shifted), I might buy/sell within my Roth space, or rebalance my 401(k) contributions.

I set a goal in Mint where I called reaching $1M in assets (excluding home/car equity and HSA) "FIRE", and the projected completion date is sometime in 2017 (April 27 at the moment, but it jumps around a lot). I love the fact that market appreciation is actually dwarfing my (fairly substantial) monthly contributions. Go Go Gadget Compound Interest!

FIRE and the ACA

March 24th, 2015 at 09:25 pm

I've been taking steps in recent months to get my health care finances in order. During open enrollment at the end of last year, I switched to a high-deductible, HSA-eligible insurance plan, which dropped my annual premiums from $1690 down to $1144. Add in the $1000 HSA match that my employer kicks in, and I'm effectively paying only $144 per year for my health insurance. Even accounting for the new, higher $1500 deductible, I still come out on top.

And the out-of-pocket max of $3000 is definitely affordable in case I blow through the deductible due to a catastrophic circumstance.

Plus, I get a shiny new tax-advantaged investment vehicle to play with, which can be used to pay Medicare premiums or even function as a 401(k) when the time comes. Awesome. So I'm all set for the near-term.

Health insurance coverage and costs in early retirement might be more tricky -- or so I thought. One possibility is to go on the SO's employer plan -- that is, if he decides to continue working, and we actually get married. Currently, that would cost $1344 per year after adjusting for the $500 HSA match. Okay, so not nearly as good as my current employer plan, but is certainly tolerable.

But what if going on his plan is not an option? I certainly don't want him to keep working a job just for the health insurance if he doesn't want to!

We live in CT, so I went on our state health exchange to do research. I put in my expected FIRE income (which I guestimated at $10,000 if solo)... and kept getting bumped to the login page because, "Based on the income information you entered your household may be eligible for HUSKY D/Low Income Medicaid."

Erm... huh? I was so, so confused. I was expecting to look at subsidized private plans, not Medicaid. I mean, we may be freaks of nature, but we're certainly not poor, not if we're FIRE'd. Surely this can't be right?

But, as it turns out, with expanded CT Medicaid under the ACA, the annual income limit for a single-person household is $16,243, and for a two-person household, it's $21,984. There are no asset tests for eligibility. No matter how you slice it, whether solo or married, we are going to come in under these limits post-FIRE, especially since these figures are for MAGI (modified adjusted gross income), and thus easy to manipulate using deductions and Roth distributions.

I looked further into CT's implementation of the ACA, and Medicaid in particular. Apparently, ACA subsidies operate along a linear income scale. Above 400% FPL, there are no subsidies. Between 250% and 400% of FPL, one tier of subsidy kicks in (tax credits). Between 138% and 250% of FPL, a second tier of subsidy kicks in (cost-sharing).

Below 138% FPL, you are supposedly considered too poor to afford health insurance, and the subsidy is essentially 100%. And that means getting covered by Medicaid, where the government pays for all your health care costs.

There is no way to change what tier of subsidy you qualify for because it is predetermined by income. Furthermore, the subsidy is all-or-nothing -- you either take what's offered, or you turn down all subsidies. In my case, the choice is to either go on Medicaid, or pay full price for a private health plan. I don't have the option of getting a partially subsidized private plan.

And the cheapest private plan on the state exchange costs $2400 per year for a $6000 deductible, and goes quickly downhill from there. Yuck. And ouch?

I am honestly feeling seriously conflicted right now. On the one hand... it looks like health insurance will literally be completely free in FIRE (I actually spent quite a while trying to google "Medicaid premiums" before I finally realized how the program worked and that premiums don't exist). This is amazing and totally unexpected, since I've just been assuming that health insurance was going to be a major unknown expense in my projections. CT Medicaid even covers dental!

On the other hand... I feel so guilty (not to mention shocked) about potentially going on Medicaid. It is just strange to be mooching off a program intended for the socioeconomically disadvantaged. I mean, I am both willing and capable of paying a reasonable amount for health insurance. It's just that it genuinely looks like the program is working exactly as intended, and full price of a private plan is... kind of outrageous. How do you expect a rational decision-maker to turn down free given the alternative (or lack thereof)?

What does make me feel slightly better is the knowledge that on Medicaid, I would only cost the government money if I incur health care costs -- compared with an otherwise constant stream of private insurance premium subsidies. So the government might actually come out ahead, considering that I never go to the doctor (last time I went was in... 2007?) -- at least while I'm still young and healthy.

I think I'd budget $3K per year for health insurance anyway, just in case, but Medicaid being the preferred route is going to take some getting used to.

The Asset Allocation Training Wheels Are Coming Off

November 2nd, 2014 at 12:11 am

I have made the executive decision to no longer use a Target Retirement fund to manage my retirement asset allocation. That's right, the training wheels are finally coming off. It's time to learn to balance my investments on my own!

I have decided to make this change for a few reasons. The first is that the Vanguard Target Retirement funds charge fees based on the investor share class, and due to my portfolio size, I will save hundreds of dollars per year by moving over to the equivalent admiral share class. That's a good enough reason as any to make the switch, even if I wanted to keep the Target Retirement fund's pre-determined asset allocation. For a few hundred extra bucks per year, I am willing to deal with the so-called "inconvenience" of having to manually rebalance my investments.

Another reason to leave the Target Retirement fund is that I want the flexibility to change my asset allocation. Right now, the 2050 fund allocates 10% to bonds. I do hold bonds, but I'd rather hold them in my taxable accounts, and save the tax-advantaged space for equities with higher growth potential.

As an aside, I've heard the argument for holding less tax-efficient funds such as bonds and dividend-yielding stocks in the tax-advantaged space. My gut feeling, however, is that protecting equity growth and capital gains (especially in the Roth space, which not only grows but is also distributed tax-free) beats out protecting bond interest and dividends (which are designed to be lower), although I am totally willing to be convinced otherwise using math. Right now, though, I'm also using bond holdings specifically as a short- and intermediate-term savings vehicle, so I want them to be easily accessible in a non-retirement account.

I also realized that I am likely going to retire sooner than 2050 and may need to deviate from their glide path anyway, so I might as well cut the cord now.

As for how I'm handling the asset allocation... I have decided to hold a 70/30 split of Vanguard's Total Stock Market Index Fund and their Total International Stock Market Index Fund. This mirrors the Target Retirement 2050's exact ratio of these same two funds (at 63% and 27%) but without the bonds. In reality, this is slightly complicated by the fact that my active 401(k) is held in a separate account with different fund choices, but I'll get as close to this breakdown as I can. The larger goal is to force myself to start actively managing and rebalancing my asset allocation.

Switching to a traditional IRA

October 2nd, 2014 at 05:12 am

Up until now, I've been using Roth IRAs exclusively. I just followed the extremely typical advice for young people to use a Roth, because it's better to pay taxes when one is younger, making less income, and thus in a lower tax bracket.

I also thought that the math worked out better, at least if one assumes a constant tax bracket. In a Roth, you pay your taxes up front, but everything after that grows and is withdrawn tax-free. It's a very simple FV calculation. In a traditional IRA, the same contribution amount goes in and grows tax-free, so you wind up with the same FV as the Roth, but the withdrawal is taxed.

This seems like a bad deal until you remember that you get to keep the taxes that you would've lost with the Roth. If you also invested the amount that you would've paid in taxes, and let that grow over time, it essentially makes up for the withdrawal taxes on the IRA itself, at least if the tax rate is the same. However, that investment with the saved taxes is outside of the IRA, so it is not tax-advantaged, so you actually wind up with less FV than if you'd just gone Roth to begin with.

So I managed to think through all of that, but for some reason, I never questioned the implicit assumption that my tax bracket in retirement would be the same as now (or higher). I guess I wanted to make sure that I "could" withdraw as much as I wanted in retirement, so I didn't see the harm in accepting that I'd have a high income in retirement.

Now that I'm properly thinking through my current income and expenses, it has become abundantly clear that this assumption is false. My savings rate is in excess of 50%, so I am spending nowhere near my current level of income, and my expenses are expected to drop even further once the mortgage is paid off. There is ZERO need for me to replace my current income, so I will be in a LOWER tax bracket in retirement -- and that's a good thing, because it makes FIRE that much easier to achieve.

So it seems like Roth has been the wrong way to go all along. I should've been using a traditional IRA and taking the tax break right now. Oh well.

I've gone and made myself a traditional IRA in Vanguard, and I'm swapping over to it. I may even inquire about recharacterizing this year's contributions. This just goes to show that always assuming a worst-case scenario can cost ya.

(I also have another reason why I'm interested in switching to traditional, and that has to do with the Roth Conversion Ladder, which I'm learning about right now. Maybe I'll write it about it later, after I've got it worked out in my head.)

Should I cash out my pension?

September 27th, 2014 at 02:28 pm

I realize that pensions are rare like unicorns these days, but I actually have a small one under a previous employer. It's not worth much because I only worked there for three and a half years before being laid off, but the pension is supposed to pay out $261.88 per month starting in 2049 (when I turn 65).

They are now offering what I presume is a buyout. I can either:

1. Roll over a lump sum to an IRA or another employer's qualified plan ($6352.78).
2. Take a lump sum cash distribution ($5082.22).
3. Start monthly payments now ($24.71).
4. Retain the original pension benefit.

Should I take it? To figure out if this is a good deal, I calculated the present value of this future annuity.

Step one: Calculate the PV of the annuity at age 65. I'm arbitrarily using an interest rate of 6%, and a life expectancy of 100 (so 35 years).

PV(0.06/12,12*35,261.88) = $45,928.57

Step two: Discount that to today's dollars using the same rate.

PV(0.06,2049-2014,0,45928.57) = $5975.55

So it looks like the lump sum payment is a reasonable offer. I'm also assuming an extremely long life expectancy, which would bias the value upward. I'm not sure what rate I should use, but 6% is a figure I can hope to beat by investing on my own. I've tried plugging in different interest rates, but that causes the PV to fluctuate wildly.

I am really tempted to take it. If I roll it into an IRA now, I know I'll have control of and access to it before age 65, which is particularly helpful if I'm planning ER. I also avoid the risk of the company underfunding, raiding, or otherwise reneging on their obligation (I'm looking at you, Hostess) anytime in the next 35 years. I have so far been completely ignoring my pension in retirement planning, so this would allow me to take it into account.

I have until month's end to decide. Hmm.

Goals for FIRE and SWRs

September 23rd, 2014 at 07:09 am

How much does one need to retire securely?

I've been trying to answer this age-old question ever since I learned how to spreadsheet. In fact, my Google Drive is littered with the desiccated remains of various retirement projection spreadsheets that I've attempted over the years, but could never figure out how to finish. Usually, it ends with me throwing up my hands and going, "It's a pointless crapshoot to try to guess 40 years into the future, but it's impossible to overshoot it at this juncture, so just maximize the sh*t out this, and you can figure out the details later."

That has been a pretty good approach up to now, but if I really want to FIRE it up in the next decade or so, I need to set actual goals and criteria for success.

I know that the standard guideline for having enough retirement savings is the 4% rule. So if your expenses total no more than 4% of your nest egg, then your nest egg can sustain you indefinitely, assuming a 7% rate of return with inflation at 3%.

And that's where I start getting twitchy. Can you really count on 7% returns in perpetuity? I know that's (more or less) the historical long-term stock market average, but there's no way to know for sure what future returns will look like. Plus, I would need to be sustained for many decades longer than a normal retiree, which makes projections even more difficult to make. I don't want to run out of money, especially given the fact that I can easily continue working and I don't have to take early retirement at all in the first place.

What I'm getting at is that I am very risk-averse and financially conservative. And I don't mean risk-averse in the sense of investing; on the contrary, I'm fairly risk-tolerant there because I know my timelines are flexible. I'm risk-averse in the sense that my mind always jumps to worst-case scenarios. I don't like being on the edge. My natural tendency is to save and save and save, because I don't know what could happen tomorrow and I might need that cushion. I could lose my job. (Actually, been there, done that. :P) Or come down with cancer. A tree (or a meteor) could fall on the house. The SO's Beetle could get creamed by a Mack truck. The possibilities for catastrophe are endless.

As a result of this rampant paranoia, I need to build in a large safety margin. I need to know that I can survive anything, and I'm not decreasing my financial resilience by giving up a fairly nice income. But I also want to be somewhat realistic and not let irrational fears and rampant goal inflation make FIRE unattainable, even though the honest truth is that I'd be terrified.

But I'm gonna force myself to come up with something just to get the ball rolling.

My current thought process is that I have two criteria that must be fulfilled before I would feel comfortable declaring FIRE -- a paid-off house, and two million in assets.

The paid-off house is pretty straightforward. As detailed in my recent spending review, the mortgage is by far our largest fixed expense, and knocking that out alone would drop our annual spending from $40K down to $25K, with another $5K being shaved off when I stop renting in and driving to/from NY. Furthermore, the mortgage is something that needs to be done sooner or later. We're already paying extra towards the mortgage every month, and we're on track to paying it off in about ten years.

As for the two million in assets... We already have $1M, which, according to a 4% withdrawal rate, could already (in theory, with proper allocations, etc.) support our current $40K in annual expenses. But as I've already said, I don't feel even remotely safe enough with a 4% SWR. With a two million dollar portfolio and ~$20K in expenses, that would be a 1% SWR, which I think is conservative enough. And even if something horrible were to happen to the SO, I should still be able to handle a 2% SWR on my half of the two million. And there's even wiggle room to increase spending if it really came to that.

So I think the preliminary goals for FIRE should be no mortgage and $2M. I would not be too surprised if I chicken out and raise/revise it later, but this seems reasonable for the time being. I'm already thinking that home equity and inaccessible retirement vehicles shouldn't be included in the $2M, but we'll cross that bridge when we come to it.

And I've also got some time before we reach the goal to work on emotional readiness and all that jazz.

Frustrated with Financial Advisors

July 8th, 2014 at 03:47 pm

My workplace will occasionally bring in financial advisors to give seminars and one-on-one consultations. I've been to two of these sessions, meeting with three advisors total, the most recent of which was just this past week, and have come away frustrated at the lack of productivity every time.

I understand that it's a free service, the scope of their help is limited by time, and they're likely not expecting someone like me, but I think it goes beyond that.

The main crux of the issue is that we simply don't see eye-to-eye philosophically.

For this most recent meeting, I tried to go prepared. In the past, showing my various account balances just resulted in sputters of disbelief and a request to repeat my age, so I brought my complete Social Security earnings history. When I say that my spending is such that a withdrawal rate of $20K is sufficient to maintain my lifestyle, I get asked what kind of car I drive and what model phone I have, so I actually tallied up the entirety of my annual spending to demonstrate that I am not, in fact, grossly underestimating my expenses.

But it didn't work. I still got asked to repeat my age. I still got told soothingly that "circumstances change", that expenses rise over time, and that once I get used to a higher standard of living, it's difficult to go back. The advisor took one look at the grocery line on my budget and told me, pityingly, "Well, you don't look like you eat much".

That last comment just made me laugh, because it shows how deceiving appearances can be. Now, I am a tiny, tiny person, so I guess it might seem like I "don't eat much", but that's not the case at all. I actually love eating and cooking, and I even briefly attended culinary school and worked as a prep cook at a restaurant before my pharmaceutical career took off. Our pantry is stocked to the brim, we make all our food from scratch, and we eat like kings -- all on a fraction of the cost of average households.

But what's more, that comment also betrayed the tacit assumptions made by the advisor. I am tiny because I don't eat, and she feels sorry for me because she assumed that I'm purposefully depriving myself, and that I will let it go at some point. It's fairly galling to me, mostly because it really reminds me of the condescending comments I've gotten my entire life when I tell people that I don't want kids, and they're like, "Oh, you may say that NOW, but just wait and see..."

Um, no. I know what I want, it's not the same as what you want, please don't project yourself onto me while ignoring what I actually say, because it causes you to come to incorrect conclusions about me, which makes me quite grumpy.

The truth of the matter is, at our current level of spending, we have almost everything we could possibly want, and I frankly don't know what else to spend money on. I don't want a bigger house; I actually prefer it small and cozy. I don't want a fancy car -- I barely even want a car at all, although I accept that I need one at the present time. I don't want a smartphone, I'm perfectly fine with my six year old phone, and I don't even have texting or a data plan.

And as for food... When I can make gorgeous artisan bread for less than a dollar per loaf, why would I ever want to spend more? And even if I go hog-wild and stop subbing walnuts for pine nuts in my pesto recipe because pine nuts are too expensive, I still don't see my grocery bill increasing by that much, because at the end of the day, any raw ingredients, even pine nuts, simply don't add up to more than a few hundred dollars a year.

Perhaps the hardest fact for these financial advisors to wrap their heads around is that I really and truly do not find consumerism to be all that appealing. For me, frugality is not a form of masochistic self-deprivation; I genuinely find it much more satisfying to live a simple and efficient lifestyle. As a result of these dispositional differences, all of their advice and experience is predicated on a set of assumptions that do not apply to me.

I think this is a big part of why haven't felt comfortable and in sync with these financial advisors. (Hell, I think this is a big part of why I feel out of place in this world. :P)

There was a bit of good news that came out of this session, though. After I finally got her to stop fighting me on the validity of my numbers, she conceded that she does think I can early retire in ten years. Actually, she doesn't think I need more than five years, especially if I can line up a side hustle. Obviously, I won't just take her word for it, but at least this tells me that I'm not on a wild goose chase. This is a realistic and achievable goal.

I just have to work out all the details.