2020 has made a lot of folks (including us) re-evaluate their long-term goals. Thanks to a few informed colleagues, I stumbled onto the FIRE movement and the associated rabbit-hole. I first scoured the MadFientist’s podcast which suggested J.L. Collins’ blog, which in turn introduced me to his book. The book appealed to me to a fault, and I anticipated validating what I knew and then learn some more. On the whole, the book was a disappointment. It is condescending and is a primer whose ROI is high only if you are a relative n00b in this area. There’s a lot of regurgitation and repetition (invest in VTSAX, bring bonds into the picture during the later years, etc.) throughout the ~300 pages. This is where a good publisher / editor should have advised Mr. Collins to condense this into a blog / YouTube video series / podcast.
With the criticisms behind us, the book still did introduce me to a few new ideas. Namely:
the roth conversion ladder
If you decide to retire early, you’ll need to depend on your investments to foot the expenses rather than your labor. Withdrawing money from your tax-advantaged accounts way before you are 60 is going to incur both penalty and tax hits. The Roth Conversion Ladder is a clever way to avoid these fees. This ladder can be broken down into 3 steps:
- Roll-over your Traditional 401(K) to a Traditional IRA
- Migrate your Traditional IRA to an after-tax Roth IRA: You wouldn’t incur tax hits on step 2 because you have retired and would most likely end-up in the low income-tax federal bracket.
- Withdraw money from this Roth IRA in 5 years: The 5 years lock-up period is important to ensure we are not hit with any penalty fees.
You can already infer that’ll you need to rely on other income sources to supplement your expenses in the first 5 years. The MadFientist recommends using money from your taxable investment accounts for this. Here’s an in-depth guide with numbers.
myths around dollar cost averaging (DCA)
DCA is indirect market timing! This is relatively common knowledge nowadays, but the book highlights that investing a lump-sum into the market is going to beat DCA. DCA only works if the market goes down and the average cost of stock becomes lower as the year progresses. The odds of market dropping YoY is in lower 20%. Also, throughout the year, you’ll have a lot of cash sitting on the sidelines doing nothing. Inefficient.
My wife and I plan to give away a small % of our earnings to charity each year. Opening a charitable fund is a great idea to gain favorable tax treatment when you are in the lower tax bracket. Opening a charitable fund is relatively straightforward thanks to Vanguard ($25K will do). You get a tax deduction in the year you fund your foundation. If you’ve investments that have appreciated in value, you can move these directly into your charitable foundation. You get the tax deduction for their full market value, plus you don’t have to pay any capital gains taxes on the gain. Tax win and more $$$ available to donate.
If you are a fresh-grad, a recent immigrant who isn’t aware of the US Financial system or someone who’s starting out in their FIRE journey, I’d suggest this book in a heart-beat. Otherwise, skip this book and go read a few FIRE blogs.