Now that I’m on Medicare, I thought I’d summarize what worked over the past 40 years.
Minimizing the “Skim” – the Key to Retiring Early
https://retireearlyhomepage.com/minimizing_the_skim.html
intercst
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You’ve beat the drum on a lot of these topics for a long time. Nice to see it all pulled together in one place.
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This is mostly right and eye-opening. A counter to the rent-vs-buy debate is, it really depends on a few important factors itself. Couple of anecdotes below, reader, beware.
- type of neighborhood / location of the house / the area.
- condition / age of the house
- interest rate paid over time for the loan.
Absolutely, buying after a generational real estate crash, a solid foreclosed or bank-owned house, is one way to do well. Example: My father did this and willed the (rural but nice) house to me. When he passed 9 years later, it came to 27 year old me with stepped-up basis, selling it tax-free - which I invested some but needed to spend some to live around here on our teacher’s salary, cheap insurance company salary, and pay the deductible on a necessary IVF procedure (by far our best investment ever) - and interest rates back then were 10%! imagine what a spike of 10% would do to housing prices now! In hindsight, what I should have done was pay off the loan on my house, and LBOM a little, but it was the early 90s and stocks were going to the moon Alice!
Second scenario - I had my 2nd house built nearby 9 years later in a then-new subdivision in a very desirable low-tax area. I was able to put 25% of the construction cost down. If I had sold it a year later I would have made 30% on that down payment. 20 years later, with the solidity/excessiveness of the local market, my equity is essentially a wash with SPY’s 8+% lt CAGR. And, the itemization of interest & property tax until 2018 reduced taxes by 3 months of total payments. Renting would have been zip.
(The 8% SPY debate is specious for most, because a vanishing few people would dump everything 100% into SPY for 20 years, stomaching the volatility. Now, VBINX 60/40 at 7.1% CAGR, on the other hand…)
Meantime, rents around here are ludicrous - now up to $2500/mo for a 2 BR apt/condo in a sleepy bedroom town. That is a recent WFH phenom that it’s significantly more than my entire P,I & escrow payment, but it wasn’t much cheaper before. I’ve paid nearly $200K in interest in 20 years. Rent for a smaller house alone would have been (conservatively) 2x that by itself.
Ben Carlson at awealthofcommonsense.com has done a good bit of work on this debate, it’s worth a read.
The rest of that page I completely support. My eyes have opened at my daughter’s feedback from living in the UK the last year. And, I’ve always had a problem watching the total cost of my health insurance triple in the last 15 years - $27K to insure a healthy family of 3 with a $7000 annual deductible? Really? Company has paid about 80%, but my small business owner friends don’t offer insurance - can’t afford it and stay in business! Knowing that a big part of the cost is passthroughs of malpractice insurance costs against unlimited lawsuits… Can’t wait to get DW on Medicare in a couple of years and then get to the RE part of FIRE.
FC
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This is a good post, Intercst. However, it would appear that your key was not as much avoiding the “Skim” as it was avoiding having a family. Once you become a family person, it’s tough to avoid the skim. I’m not judging…I think it’s great that you figured out what works for you and makes you happy. But many/most of us end up “married with children”. And yeah, you still have to work to minimize the “Skim”, but it’s much tougher to do so than “single with no kids”.
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Once you become a family person, it’s tough to avoid the skim.
Not sure how a family is relevant to avoiding skim (insurance, expense ratios, taxes, etc., etc.)?
What intercst didn’t mention was that your portfolio doesn’t care whether you have a family or not. It can either support your lifestyle or not.
If you have $3 million, and you’re skimming $90,000/yr, it doesn’t matter if you’re single or supporting a family, as long as the $90,000 covers your bills.
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Family is VERY relevant to being less able to avoid the skim. You have to provide health insurance for 3 or more people, not just 1. College skim is a direct function of having a family. Housing is a direct function of avoiding the skim. It’s much easier to hole up in a cheap apartment if you are single than if you need a decent public school system to educate your kids. Even cars…you might be OK taking a risk driving an old junker, but do you really want to put your kids in something that is more likely to be unsafe?
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Yes the rent vs buy argument depends on the part of the country you live in too. I live in a very low property tax area (I pay $600 a year on a 2400 Sq ft house) add insurance and we pay $2K a year for taxes and insurance plus whatever maintenance comes up. House has been paid off for 12 years. Peace of mind knowing I don’t have an eternal rent payment going up yearly at the whims of a landlord.
In fact I own 3 houses, the other two paid for by tenants over 15 years.
I also have significant stock holdings. And am married. With kids. We did it by having a dual income, living on one and investing the other.
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Daryll44 writes,
This is a good post, Intercst. However, it would appear that your key was not as much avoiding the “Skim” as it was avoiding having a family. Once you become a family person, it’s tough to avoid the skim. I’m not judging…I think it’s great that you figured out what works for you and makes you happy. But many/most of us end up “married with children”. And yeah, you still have to work to minimize the “Skim”, but it’s much tougher to do so than “single with no kids”.
If I was married with kids in Houston, I’d rent a 3-bedroom apartment in the Memorial area where all the wealthy people live. (When I was paying $600/mo for a 900 SF 1-bedroom apartment, you’d pay about double that for 3 bedrooms.) Your kids would go to the best public schools in the area (i.e., the ones with the 10,000 seat football stadiums and Olympic-size swimming pools.) When they graduated high school, you could send them to Univ. of Texas, or Texas A&M where full-price, in-state tuition is $10,000/yr. Both are excellent schools.
And of course, I’d be very careful in my choice of marriage partners. She’d be earning a similar salary and fully onboard with the early retirement deal. You’d still be saving 50% of you gross income under that situation.
It’s all about the choices people make.
intercst
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Re: ‘The College “Skim”’
It won’t be too long until the “free college” takes hold, then we can see plenty of new college grads in Modern Dance, Grievance Studies, Medieval Art History, Music Performance, etc. We can drastically reduce the students’ “skin in the game.” Maybe we can even make it so kids won’t have to deny themselves their dream college in lieu of a good but affordable State school.
Although, now that I think of it, that won’t reduce the skim but merely relocate it.
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That will increase the skim. College is owned by The Left and they will never, ever, put that beast on a diet. But just keep looking for new sources to keep feeding it.
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If I was married with kids in Houston, I’d rent a 3-bedroom apartment in the Memorial area where all the wealthy people live.
Are you assuming it is 100% your decision to make?
And of course, I’d be very careful in my choice of marriage partners. She’d be earning a similar salary and fully onboard with the early retirement deal. You’d still be saving 50% of you gross income under that situation.
Would it intimidate you if she made quite a bit more than you?
PSU
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PSUEngineer aks,
Would it intimidate you if she made quite a bit more than you?
F-no. I’d retire and let her work.
intercst
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“College is owned by the left”.
Before I go off, it would be best if I understood exactly what you meant by that statement.
1poorguy (was a registered Republican all through college and grad school)
And of course, I’d be very careful in my choice of marriage partners. She’d be earning a similar salary and fully onboard with the early retirement deal.
I guess you don’t realize that the prospective “she” has a choice in the matter, too.
And the “she” reserves the right to change her mind about her job, kids, spending, etc. at any time, for any reason.
It’s amazing how people who have never married are all experts at having a wife. And how childless people are all experts at raising a child.
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And the “she” reserves the right to change her mind about her job, kids, spending, etc. at any time, for any reason.
Doesn’t “he” also reserve the right to change his mind about his job, kids, spending, etc. at any time for any reason?
PSU
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To 1poorguy: My comment about college being owned by The Left just means that most who teach and who run the nation’s universities are a big part of the Democratic constituency. Dems won’t do anything to reduce money flowing to that constituency. What needs to happen is something like Mark Cuban’s plan, here:
https://frugaling.org/mark-cubans-horrific-student-loan-debt…
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Rayvt writes,
<<And of course, I’d be very careful in my choice of marriage partners. She’d be earning a similar salary and fully onboard with the early retirement deal.>>
I guess you don’t realize that the prospective “she” has a choice in the matter, too.
And the “she” reserves the right to change her mind about her job, kids, spending, etc. at any time, for any reason.
It’s amazing how people who have never married are all experts at having a wife. And how childless people are all experts at raising a child.
I’m continually astonished that more people don’t analyze the risks of marriage and kids, and avoid it.
Of course, marriage and birth rates are down, so maybe that’s happening.
Years ago I had a young colleague tell me that he and his wife were getting a dog.
“If the dog gets vicious, you can have it put down. What are you going to do with a vicious kid?”
Good question. Mental health services in the US are pretty thin.
intercst
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I’m continually astonished that more people don’t analyze the risks of marriage and kids, and avoid it.
I did analyze the risks. I determined the rewards were greater than the risks.
PSU
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Doesn’t “he” also reserve the right to change his mind about his job, kids, spending, etc. at any time for any reason?
You must be a newlywed.
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Who analyzes “the risks of marriage and kids”?
If you’re analyzing, you’re not in love. Not that this necessarily bad. I was in my 30s before it hit me. I had figured it would never happen to me, until it did.
As for kids, if you want to be preemptive, get snipped. End of problem. Well, 99%+ of the time.
Mental health services in the US are pretty thin.
Which is sad, but veering too far off-topic. I will agree we should do more in this area, though. Reagan closing the facilities in the 80s set off a chain of events we are still living with today.
But back to planning…
You do the best you can do, and roll with whatever life tosses your way. The unexpected isn’t always bad.
1poorguy
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