Hi Jeremy, thanks for all you do. I really appreciate everything you share on GCC. You guys are really living the dream. The thing is, we really love our life here in the US. Traveling the world and having grand adventures might be fun for a year or so, but we ultimately want to just enjoy a simple life in a (TBD) nice place in the US. I know this is different than what you guys are doing. What do you think?
Well… I have to say…
… that sounds great! And I certainly hope your goals are different. Financial Independence only provides options, and it would be a little creepy if someone didn’t have their own dreams so they just decided to copy ours. ;)
Seriously though, do what you will like best. That’s the whole point.
But, if a bit of travel sounds fun, there are some tremendous advantages to incorporating a year or more of international travel to kickstart your (early) retirement.
Kickstart Your (Early) Retirement
The psychological transition from saving/accumulating to spending/withdrawing is challenging for many. “How did it feel to stop saving and start spending?” is one of the more common questions I’ve heard in the 100s of coffee talks I’ve had with GCC readers.
One of the tricks we used to ease the transition was to continue to LBYM (live beneath your means), and an epic round-the-world trip is a great way to do just that while providing mental stimulation and severed ties to the old habits and mental patterns of the working world.
You can thank of it as your own grand Eat Pray Love adventure, just without the need to first lie on your bathroom floor in the fetal position and cry yourself to sleep. (That is purely optional.)
Travel on a budget
One of the biggest risks to any early retirement plan is sequence-of-returns risk. Specifically, that your investments dive in the first several years of drawdown.
A good way to minimize sequence-of-returns risk is to save a crapload of money – just work an extra 10 or 15 years until you can easily support your desired lifestyle on less than 2% of your portfolio value. If you want to spend $40k per year, save $2 million instead of $1 million. Easy, right?
An alternative method, and the one we chose to incorporate, was to spend less than 2% of our portfolio value by living large where it costs less to live large.
“But television told me that the only safe place on the planet is where I am currently living!”
That’s nice. Might I suggest not watching television? (Suggested reading: They Will Kill You For Your Shoes!)
“But I don’t speak the language!”
“But airfare is expensive!”
Not really. Just book all of your flights using miles and points. (Example: $7,000 worth of airfare for $200.)
Build up a bunch of points before you retire, and then get yourself some nice business class seats (cuz you deserve it.)
(Points don’t pay interest and airlines and hotels are always depreciating their benefits programs, and you can always get more, so there is no point in saving them for some undetermined point in the future.)
If you are going to apply for some new credit cards to get some great bonus points, it is always appreciated if you use our credit card portal (affiliate links, no cost to you.)
Spending half of what you might “back home” to live like royalty is nice (I can attest to this from personal experience) but what is even nicer is when Uncle Sam covers much (or all) of the cost of the trip.
Stepping outside the Federal/State*/Health Insurance tax triumvirate is a fun way to live even further beneath your means.
The year is 2018, and a family of 3 travels the world with a budget of $20,000, provided in total via dividends on their $1 million portfolio (2% withdrawal rate / 2% dividend rate.)
In addition, they do a Roth conversion of $24,000 and harvest long-term capital gains in the amount of $57,200.
Total tax due: $0.
If they were back “home” in California, attempting a similar bit of tax management would result in a CA tax bill of $3,000 and a loss in ACA subsidy of $12,000.
Stepping outside the US for a year saved them $15,000.
The tax savings don’t stop there though. The $24,000 in Roth conversion will grow tax-free for life, and the $57,200 in stepped-up basis will mean lower taxes and higher ACA subsidies in the coming years.
While you are out traipsing about the globe without a care, perhaps consider some medical tourism.
US medical insurance doesn’t cover care abroad (usually) but you ditched that policy anyway on your way to the airport. The loss of subsidy helps with that decision. Instead, you’ll just pay cash for any care you might need or get a global health policy at a fraction of US prices (it’s probably best to at least carry a travel policy (one possibility), if not full-blown international health insurance.)
We paid about $1,000 each for a root canal and gold crown, cash price. I heard this would cost about $5k-$6k each in the US.
We went to a dentist in Mexico for our annual cleaning at a cost of ~$30/person. My cost in the US was about $160.
Savings: $130 each.
We pay $75/month for health insurance at the moment, and occasionally pay $3 – $10 to see a Doctor. We once paid $30 for an emergency room visit. The entire cost of childbirth was about $1,000.
“But I heard the US has the best health system in the world!”
Again, might I suggest not watching television? (data)
Some ideas for planned medical care: dental work (root canal, crowns, implants), eye care (LASIK, etc…), outpatient surgeries, IVF, excessive exams, things that require expensive equipment (CAT scan, MRI, etc…)
Stepping outside the US for a year or more is a great way to kickstart your (early) retirement. It is a clean break from normal life that provides substantial mental and financial benefits.
By targeting some lower cost-of-living destinations and using points and miles for free airfare, it is possible to continue to live well beneath your means. This is a good way to reduce sequence-of-returns risk.
Additionally, by being outside the US tax and medical system, it is possible to benefit from some aggressive tax minimization options (Roth conversions, capital gain harvesting) as well as some strategic medical tourism. The savings from these 2 things alone can pay for most (or even all) of the trip. And the tax benefits continue upon the return “home.”
Perhaps the biggest risk is that one year abroad just won’t be enough.
Check out more examples of traveling for free through the use of points and miles.