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Ralphs. Fresh for everyone. ♪ ♪ It's Friday! ♪ ♪ Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now, while building a plan for financial freedom in 10 years or less. My name is Joshua, I am your host, and today is Friday.

I don't have a live Q&A show, but I do have a lively Q&A show. I hope. That's my intent. I guess we'll see. ♪ Happy Friday to you all. I was not able to get ahead enough, and to get the new little newborn squared away enough, that he will be quiet to where I will be able to record a show as scheduled with live call, and kind of got to sneak around and figure out when I can do these things at the moment.

Little boy's been sick the last couple of days, and so... Not sick, just anyway, a little fussy and whatnot. You might hear him in the background, but let's get to it. I got a Friday Q&A show, and today I'm going to handle a handful of questions that listeners have written in.

I think it's kind of a fun variety. Let's get right into the questions. First question comes in from a listener who's asking me about how to contribute to an IRA, though he be an expat. Listener writes in and says, "Hi, Joshua. I'm a long-time listener. I really enjoy your perspective, and it's been helpful in lifestyle choices and financial options.

Your episodes on expatriate life are of particular interest to me." Episodes 634 and 636. "I'm an American expat, and I have been living abroad for over five years. I have been using the foreign income exclusion, and it's great for me in general. However, one of the caveats is the inability to contribute to an IRA.

As I understand it, when utilizing the exclusion, you are unable to contribute to an IRA, either a Roth or a traditional. But with the foreign income tax credit, I believe you can contribute to an IRA. Not sure if a Roth or traditional or both. So I've been unable to contribute since moving overseas.

Could you talk about this in an episode? Maybe on retirement investment options while abroad. Would life insurance be an additional option? Would setting up a USA-based LLC or some sort of entity be helpful? Would that be advantageous in some sort of way if you're self-employed? Thanks so much. Keep up the great and helpful work." So this is a great question, and let me answer it directly.

I need to give just a... I'll try to keep it to a few minutes of background information to make sure that we are all on the same page. This listener is a US citizen. US citizens, though they move abroad, continue to be required by the United States of America to pay the United States of America income tax on their worldwide earnings, even if they do not live in the United States of America.

This is unlike any other nation in the world save Eritrea, which has the same system. So it's unlike anyone else in the world, but it is the fact for US citizens. So though this listener is living outside of the United States, he is still required to pay the United States income taxes on his worldwide income.

Now, the United States government offers three basic things that are useful for people who don't live in the United States. They are, number one, the foreign earned income exclusion, which allows you to exclude up to about $105,000 of your foreign earned income from the federal income tax system. That's called the foreign earned income exclusion.

The second thing that is available is the foreign housing deduction and/or the foreign housing exclusion, which allows you sometimes to additionally deduct some of your housing expenses if you are outside of the United States. And then number three, you have what's called the foreign tax credit. The foreign tax credit allows you to receive a credit against your US income taxes for income taxes that you have already paid to a foreign government.

Now, the number one and number two, the foreign earned income exclusion and the foreign housing deduction or exclusion function together, whereas the foreign tax credit is a separate system. Now, when you use the foreign earned income exclusion and you qualify for it, what it does is it wipes out your income, basically.

The foreign earned income exclusion functions as a form of anti-income. So if you earn $100,000, you can take the $100,000 exclusion and you will effectively have, for the purposes of your federal income tax return, no income because it is all excluded. You thus have no income, thus you owe no taxes.

This is a problem if you are trying to participate in something that requires you to have earned income, for example, to make an IRA contribution. In order for you to make an IRA contribution, you have to have earned income at least equal to the amount of your IRA contribution.

And so the problem this listener is facing is their income is being wiped out by the foreign earned income exclusion, leaving them with no tax liability, but making it not possible for them to contribute to an IRA. Now, is there a solution? Yes, there is a solution. And I'm going to give you three solutions, one of which you have mentioned.

Let's start with that one, which is your worst solution. What you are suggesting is that instead of claiming the foreign earned income exclusion, you simply claim a foreign tax credit. Now, you are correct that if you claim a foreign tax credit, you will have income. Let's say that you earn a hundred thousand dollars.

Let's say that you live in a country that is, I don't know where you live. Let's just say you're paying an effective tax rate of 15% on your money. So you've paid $15,000 of foreign taxes on your income to a foreign government, not in the United States. Well, if you are in that situation, then you can claim a credit, a tax credit for the $15,000 for the U.S.

government. Now, the way the foreign tax credit works, it doesn't actually save you any money. All it means is you won't be double taxed. So let me use an example. Let's say that you go to Canada, Canadian citizen. Let's say that you're a dual citizen of Canada and the United States and you have moved from the United States to Canada and you're earning a hundred thousand dollars.

Assume for the sake of argument that your effective tax rate in the United States on a hundred thousand dollars would be 20%, but your effective tax rate in Canada on the same hundred thousand dollars is going to be 30%. Well, you'll pay $30,000 of Canadian taxes and then you can take that as a credit against your U.S.

taxes, but and you'll effectively wipe out your U.S. taxes, but you won't save any money. You're going to pay the money out to either Canada or the United States. Now, let's say that instead of working in Canada, you instead were working in the Cayman Islands. So the Cayman Islands doesn't have an income tax.

They don't have any kind of income taxes imposed on people who live there, who work there. So now you don't have any foreign taxes paid. Well, now you can't take the foreign tax credit. What that means though is you're going to pay $20,000 to the U.S. government on your hundred thousand dollars of income, assuming that you didn't qualify for the foreign earned income exclusion.

Remember, we're just talking about the foreign tax credit here. So the tax credit really doesn't save you any money. It just keeps you from double paying. So if you pay taxes abroad, then you don't have to doubly pay those taxes in the U.S. You will pay it whatever the total highest tax bill is.

If you're living and working in Canada, Canadian taxes are higher. You'll pay the higher amount of taxes to Canada. If you're living and working in the United States, in a place where the taxes are lower than the United States, you'll pay the lower taxes to the United States. So the foreign tax credit can be useful if you're paying foreign taxes.

If you get the credit, you might as well use it. But what I'd love to see most people do is use that for offsetting things like their capital gains taxes, etc., and use it if you have it. But don't try to get there this way. However, you are correct that even if you don't qualify for the foreign earned income exclusion, if you're paying foreign income taxes, you can still claim those foreign income taxes and you will still have earned income allowing you to contribute to an IRA.

But that's the expensive way. Don't do it that way. Take the foreign earned income exclusion, which let's go to number way number two. The second way that you can contribute to an IRA is if you will simply make more money than you can wipe out with the foreign earned income exclusion.

Simple example. Let's say that you can earn a hundred and fifteen thousand dollars, but yet you can only wipe out a hundred and five thousand dollars with the foreign earned income exclusion. Now you have ten thousand dollars of earned income. And the way it works is you will pay and owe US taxes on that ten thousand dollars of income.

It doesn't start at the bottom of the bracket. It'll rather it will start at the top of the bracket, but you will still be able to claim your deduction, your standard deduction or your itemized deduction. You will still be able to claim maybe a child tax credit or some of that if you have it against that ten thousand dollars, but you'll have ten thousand dollars of earned income, which you can then use for an IRA contribution.

So that's another simple way is make your income higher so that you have more earned income. However, easy for me to say maybe harder for you to do. Maybe you're just enjoying making less money and you don't want to make a hundred and thirty thousand dollars or whatever it is that you need.

So let's go to way number three and that is based upon how you claim your foreign earned income exclusion. There are two tests that can be used to qualify for the foreign earned income exclusion. The first test is a strict days test. It's a test that simply goes based upon how many days you spend outside of the United States.

If you will spend at least three hundred and thirty days out of a three hundred and sixty five day period outside of the United States in a foreign country, then you will qualify for the foreign earned income exclusion regardless of any other factor. That's the strict days test. Now this is one example wherein it's a little bit easier for U.S.

citizens to avoid the tax on their first hundred and five thousand dollars of income than it is for other citizens. For example, you as a U.S. citizen can leave the United States and as long as you are outside of the United States for three hundred and thirty days out of the three hundred sixty five days.

And by the way, there are a few little rules there about international waters not counting and things like that, but just keep it simple. Just just say you're outside of the United States for at least three hundred thirty out of a three hundred sixty five day period. Doesn't matter where you are.

Doesn't matter if you pay taxes anywhere else in the world or not. You can claim the foreign earned income exclusion. This allows you to live in, say, a tax haven or to do some of the things that we've discussed where you cannot pay any taxes to any other jurisdiction other than the United States.

That would not be the same if you were, say, Canadian. If you were Canadian and you left Canada and just spent a year bouncing around the world, you would still owe the country of Canada taxes because you're still considered to be a resident of Canada. In order for you to end your relationship with the Canadian taxing authorities, you have to become a resident somewhere else, pick up a residency and sever all your ties with Canada.

So for a hundred thousand dollars or less, the US system is probably a little easier to work with than the Canadian system. Now, my hope is, of course, we all get to more than a hundred thousand dollars, in which case I'd rather have the Canadian system. But what what can we do?

So that's the strict days test. We'll come back to that in a moment because you have to use it for the trick that I'm going to tell you to work. Now, the other way that you claim the foreign earned income exclusion is with what's called the bonafide residence exception.

So this is where you actually live somewhere else and you have a series of factors that demonstrate that, yes, you actually live somewhere else. If you can prove that you actually are a bonafide resident of another place, you actually live somewhere else. You're not just bouncing around the world.

You actually live somewhere else. You have a residency visa or you're a citizen of another country. You have stable house there. You work there. Your family's there, etc. You're a resident and you plan to be a resident there forever. Then you can qualify for the foreign earned income exclusion under the bonafide residency test.

And that will give you the ability, if you needed to or wanted to, to spend more physical days in the United States than the strict days test. Generally, you could probably spend up to about four months in the United States. You can't spend more than four months in the United States every year because that would cause you to fail the substantial presence test if you were spending more than 120 days in the US every year and thus automatically subject you to US taxation.

But if you spent, you know, a couple, three, four months in the US each year, you could do that as long as you were a true bonafide resident abroad. That won't work and allow you to contribute to an IRA if you're claiming the foreign earned income exclusion under that test because that test is an annual test.

It only works on calendar years, which is why generally when people expatriate, the advice is claim using the strict days test first. And then if you're going to set up a residence, move into the bonafide residence exclusion. But here's the cool thing with the strict days test. Let's talk about how it works.

It doesn't have to be January 1 to December 31. So you don't have to be gone from the United States from January 1 to December 31 in order to claim the foreign earned income exclusion. You simply have to qualify for it during any rolling 365 day period that you choose, which means that you could if you wanted to spend January, February, March, April, and May in the United States, you could leave the United States on June 1 and be gone until June 1 the following year and then return to the United States for July, August, September, October, November, December of the following year and still claim the foreign earned income exclusion.

Now the way that would work is you claim that 12-month period, but then it is prorated to your 12-month tax year. So if you under that fact pattern I just described from June to June, if you claim the exclusion during that period of time, you would say, listen, I would have 50% of my earnings that are subject to tax and I would have 50% that are able to claim the foreign earned income exclusion and the exclusion itself is prorated.

So you would have access to say $52,500 of the exclusion. But the thing is you control that date. Now let's assume for the case of simpler facts that you are outside of the United States all the time. You haven't come back in five years. You have zero days in the United States.

So that's automatically you're going to always qualify for the foreign earned income exclusion under the days test. Now what you've most likely been doing up till now is claiming your year to go from January 1 to December 31 just for simple convenience. That's what you've been claiming. Here's what I would point out to you though.

You don't have to claim that. You don't have to claim that. So here's what you can do to create earned income that will allow you to contribute to an IRA. Claim a different time period. Now it doesn't matter. You're not representing to the IRS that you were in the United States for a different time period.

You're just saying I'm claiming a different time period. So let me give you an example. Let's say that you earn $100,000 per year. So we divide $100,000 by 365. Your daily wages in that situation are $274 if we go based upon seven days a week. $274. Now you're trying to generate some money, some earned income to contribute to an IRA, but you also want to make sure that you qualify for the foreign earned income exclusion.

Well, you don't come back to the United States, but 275 times say 30 days or January is 31, right? So let's do 274 times 31 is $8,494. So what you can simply do is when you fill out your tax return and when you fill out the form, what is it, 2555?

Form 2555 for the foreign earned income exclusion on section, let me find it here, section, sorry, very unprofessional, very unprofessional. Where is it? Section part three, taxpayers qualifying under the physical presence test. Line 16 of part three says the physical presence test is based on the 12-month period from this date through this date.

So when you are filling out form 2555, you simply write on that paper, the physical presence test is based on the 12-month period from February 1, for example, 2018 through February 1, 2019. Then you go on and you explain that you haven't traveled in the United States, you were physically present in a foreign country or countries for the entire 12-month period.

But because you wrote on that line February 1 to February 1, you automatically still now have 31 days that are not subject to the foreign earned income exclusion, which means that your income is going to be prorated and you will pick up $8,494 of income from that 31-day period.

Thus, that $8,494 of income will flow through your tax return and it's available for you to make an IRA contribution. That's how you do it. So if you want to create earned income, just claim a different set of dates on form 2555 and you can do that every year.

You can do that February 1, 2018 to 2019. And then when you do the following year's tax return, you can claim February 1, 2019 to February 1, 2020. All that you're claiming is the days that you're going to subject to that physical presence test. And so you have now created 31 days that you're not going to claim the income for.

So that's up to you. Now, I would just say you're going to need to play with these numbers because this is very much one of those things where you'll jigger the numbers as you're doing your tax return. You're not going to change your facts. Although you could if you are very comfortable with this foreign earned income exclusion and if you're trying to spend time in the United States or whatever, you could just go ahead and spend the time there and change your dates every year.

So we're not trying to jigger the facts. Sorry, but we're just jiggering the numbers. The facts are what they are, but you're jiggering the numbers here to see what's going to help you the best. So I hope that helps you to be able to claim that so that you can make an IRA contribution if you want to.

Comment for you on IRA contributions. I don't see any reason for you to participate in a traditional IRA under this particular plan. What's the point of deferring taxes to a later date when you can just go ahead and pay zero taxes if you're not already maximizing your foreign earned income exclusion amount?

I can see why you would participate in a Roth IRA. I can see that as being useful. But just you judge appropriately. Now with regard to your other questions, let me just hit those very quickly and not give you detailed answers, but just hit you with a couple of quick questions.

First, talking about retirement investment options while abroad. Of course, there are many options and just because you are abroad doesn't mean that you can't participate in retirement plans in the United States. Now it can be a little complex to set it up. And again, this is where in some ways we could argue that the US system is an advantage versus a Canadian system.

If you were Canadian, you need to leave and you're not going to participate in things back in Canada. But for the United States, since your only way to ultimately leave is to formally renounce citizenship, assuming you're not going to do that, you can still participate in everything in the United States.

You can have your entire financial infrastructure in the United States because the only thing you're going to get by living abroad, other than perhaps lower cost of living or better lifestyle or personal happiness, the only financial benefit you're going to get is going to be foreign earned income exclusion, foreign housing deduction, and the foreign tax credit.

And we'll talk in a moment about avoiding employment taxes. But you can still participate in things in the United States. So depending on your family setup and depending on the family situation and all of that, you can still contribute to other retirement accounts. You just have to have that earned income.

There's lots of stuff that you can do and to go beyond that, you would have to look at how you're actually running your business. Now, would life insurance be an additional option? Sure, it would be, but that's not going to matter whether where you are. You can have the same life insurance investment options in the United States versus outside the United States.

The only thing wrinkle you will get into is when you go to take out a life insurance policy, you'll have to work with a company that wants to work with somebody who's not a physically present in the United States. But you can be a US citizen and you can work with an offshore life insurance, with a foreign life insurance company.

You can do that. You just set up a trust and have the LLC on the life insurance policy. You can do all kinds of stuff. You can have a captive insurance company if you want to. You can do all the fancy, fun, sexy stuff that's in the world of life insurance planning.

Or you can do everything in the United States, but that's immaterial. It doesn't make any change based upon where you are in that situation. Now you ask, would setting up a USA-based LLC or some sort of entity be helpful? Most likely, yes, for the ease of doing your business.

But yet, depending on how you do this, more importantly, what you probably want to do is set up an offshore company. And you should be working and running your business, especially if it's a business. A little different if you are doing services. But if you're actually running an actual business, you definitely want to set up an offshore company and you want to structure it so that you are the employee of the offshore company.

Because that would allow you, and I'm gaining the idea that you're an entrepreneur of some kind or working for yourself in some way, because that allows you to avoid the employment taxes. And those employment taxes are your heaviest hit on your first $100,000 of income. So with taxes, remember that there are two systems and they work differently.

You have federal income taxes, which are progressive, where they start off with $0. And then the more and more money you make, the more you go up the tax bracket. But I don't think that federal income taxes are that massive when compared at $100,000 of income or $50,000 of income, when compared to what they are at $500,000 of income or a million dollars of income.

I mean, depending on your family situation, all that, you've got $100,000, you've got probably under $10,000 of federal income tax. Now, should we save the $10,000? Absolutely. It goes a long way. We can supercharge your results. But it may be less, depending on your deductions, etc. Probably $7,000, $8,000, it just depends on your situation.

So that's very different than if you were earning a million dollars and paying, you know, some taxpayers might be paying in excess of 50% on the top half million, which is just utterly obscene. So your income taxes at $100,000 are not the bigger deal. The bigger deal is your employment taxes, which is for self-employment, if you're paying both sides, $15,300 per year.

That's really tough. But the employment tax wage scale tops out around $120,000. Then it just drops down to a couple percent. So below $120,000 is 15.3%, then it drops down to a couple percent. So that's your really bad ones. Your big savings from being abroad will come from your getting a chance to work for an offshore company.

Because if you continue to work for a US company, then you're going to continue to have to pay your US taxes. For example, let's say that you're working for, you know, Big Corp USA, but you happen to work remotely for Big Corp USA. When I was out traveling around the United States, I met a bunch of people who were working remotely for Big Corp USA.

So one guy's a technical service guy or whatever, you're an accountant, doesn't matter. Well, if you just simply move from, say, Texas to Mexico, and you live in, that's bad, because Mexican, you might subject yourself to Mexican taxes. Let's say you move from Florida to the Bahamas, and you make that move, you still have an internet connection, you can still work for Big Corp USA.

You will still have, your employer will still save 7.6%, take 7.65% as the employer contribution, send that off, and then you'll have 7.65% of your pay deducted. So you'll still be paying employment taxes in that situation, but you won't be paying federal income taxes on the first $105,000 if you qualify for the foreign earned income exclusion.

But, if you, so you can travel the world, you can still work for Big Corp USA. Now that's exactly the same if you continue to work for, you know, your own LLC. If I start Joshua's LLC, and I work for Joshua's LLC in the United States, then I'm going to still continue to pay my self-employment taxes, if that was what it was.

Or if I'm paying C Corp, or sorry, S Corp, if I've got an S Corp, and I still work for that S Corp, then I'm going to pay employment taxes on my income. But if I will simply start an offshore company, and I work for the offshore company, and here you can do it where you have a US-based LLC that passes through to an offshore company, so you can run your business from the US LLC, but just simply the ownership is with the offshore company, and the US LLC is disregarded for tax purposes.

Now if you work for the offshore company, then you are no longer subject to employment taxes or self-employment taxes if you live outside the country. So now you can live in the Bahamas, and if you work for a foreign company, you don't have to pay the $15,300. And so in my example that I did when I talked about saving a lot of money moving outside of the United States, that was how we got to $25,000 or maybe $30,000 of tax savings.

It was by combining federal income taxes and employment taxes. So if you've got $100,000 income, instead of losing $25,000 to, again, employment taxes and federal income taxes, then you can keep the—and only getting $75,000 after tax, you can keep the full $100,000 if you will set it up with an offshore company.

So absolutely, yes, a USA-based LLC can be helpful. It's probably easier for you to run things through that than through your foreign company, but you need to have a foreign company at the top of the structure in order to save on those employment taxes. Now, of course, remember—I guess it's probably obvious— remember, you're not going to be getting Social Security credits if you're not paying Social Security taxes.

So you need to think about that. Maybe a problem for you. It's certainly not a problem for me. I'm happy about it, but you should consider that because you won't have much of a Social Security—you won't have any Social Security credits, so thus your formula will be lower. My opinion, take the $25,000 and run and invest that money like crazy.

I don't care whether you invest it in a retirement account or not. Invest it like crazy, and then you'll have millions, potentially, which instead of a measly couple thousand dollar check. All right, next question. Whew, that took longer. Hope I didn't destroy you on a Friday. Okay, that was technical question one.

This is still a technical question, but less technical. So if you got with me, less technical. Let's go. Listener writes in and says, "Joshua, here's something I've been pondering for a while, and I'd love to know your take on it. A lot of FIRE advice"— FIRE, of course, for the uninitiated financial independence, retire early movement— "A lot of FIRE advice is centered around 'your worst case scenario is everyone else's everyday scenario' premise, meaning you can always come back to a job, at least some job.

While this is correct for many, it is totally misleading for most high-income earners or career professionals. In my particular case, walking out from a high-paying job means starting almost all over again if I want to get back into the industry. You jump off the ladder. What framework would you use in a situation where making the wrong move has very significant financial cost and is truly life-altering?

For a lot of people, getting to FIRE, getting to financial independence, is an easy part. Pulling the trigger is the real challenge, as it is irreversible." I think that's an excellent question, and I do think you are right to point out that there are problems, especially if you are just a job wage earner, a corporate person, etc.

When you leave a job or a career, you will very quickly start to see your skills atrophy, your connections will start to grow cold, unless you are very diligent about maintaining those skills, maintaining those connections, maintaining that sense of connectedness. And frankly, if you are going out to be financially independent, it will probably be hard for you to do that, because you probably won't care as much as you once did about going to all the industry things that you have been to for 15 years and you are just tired of the rubber chicken dinners and all that stuff.

Since I left the financial business professionally, my skills have atrophied. I am not as good with a spreadsheet as I once was. I am not as good with a financial calculator as I once was. I have lost many of my industry contacts. I am not as current on all the products in the industry.

I used to be I could tell you about all the products because I read the prospectuses. All that stuff is gone. I don't do that anymore. And so my skills have grown cold, and the same that all of us. Now, I have built up other skills to compensate, and I think that that's what really most of us should do, is build up other skills to compensate, but your skills will grow cold, and you certainly won't be able to come back in at that same level that you once were.

It is a significant factor. You won't be able to pick up where you left off immediately. You just won't. Now, I would point out, however, a few things here, and I'll give you my framework. First, some comments on is this really a problem. I don't think this is really a problem if you are truly financially independent.

I'm going to assume here for the sake of answering this question that we're defining that term using the 3% rule metric. The idea being that you have a large enough portfolio that you can live on, say, 3% of the net worth of the portfolio balance. And I think here, we need to make sure that we're dealing with some serious numbers.

So we're not doing some kind of silly thing where I'm 22 years old, and I have $130,000 in the bank, and I'm going to consider myself five because I can live on $4,000 a year, and my life is never going to change. That's silly. But let's say you've got $2 million in the bank, and you're saying, "I could live on $60,000 as a safe withdrawal rate.

I've got $2 million. I'm going to be doing well." So here's the first thing I want to point out. If the 3% rule doesn't work, we are in uncharted territories, and something is seriously wrong. In a scenario where the 3% rule is not sufficient, we're not just in some kind of weird, you know, "Hey, there was a temporary correction, a temporary bear market." We are in end-of-the-world-as-we-know-it territory.

We're in civilizational change. If the 3% rule doesn't work, you better have 24-hour security on your homestead. I mean, I think that's where we're at. The 3% rule is a very, very robust rule of thumb to use, and there is a lot riding on everything working as it has worked.

So just imagine you're in a situation where the market—I'm assuming you're mostly in stock market, you're a wage earner, and you're mostly investing in stock market investments, paper investments, mainstream mutual funds, etc. If the 3% rule doesn't work, there's—again, we're in the end-of-the-world-as-we-know-it stuff. We're in massive civilizational unrest.

We're in Great Depression, but worse. And I just want you to imagine what that would do in our economy, what that would do when you look at the disruption from common bear markets, and yet all the common bear markets are factored into the 3% rule. So I would say if the 3% rule doesn't work, there's no guarantee you would have been able to maintain your job at all, because many of us would very—be facing the loss of our jobs.

Now, you'd still be more employable if you were still working, but we've got problems across the society. If the 3% rule breaks, it's because things are very, very deeply broken. Now, is that possible? Of course it's possible. Is it likely? I don't think it's likely, but I think it's possible.

And so I think you need to plan for that, and the best way I know how to do that is with good disaster planning. You think about what would happen if we were in an end-of-the-world-as-we-know-it scenario. What would happen if we were in 40% unemployment territory? And then you think, "How would I survive that?" And it doesn't cost much to be prepared for that.

It just costs a lot of mental energy to kind of convince yourself that it's worth it. And you got to put on your catastrophist hat for a moment and say, "All right, I think we're going to collapse. What does collapse look like?" So I think it's certainly a possibility.

I would say an unlikely possibility, but a possibility. I think it's worth preparing for. So recognize that if the 3% rule isn't working, there's no guarantee you would have been able to maintain your job at all. That's important first. Second, I would point out that unlike wage earners, people who are living on an income portfolio actually do have a lot of warning.

When there's a wage earner, so the vast majority of people in the United States have no money, save no money, work and spend, and it's paycheck to paycheck. That's the normal experience for the majority of the people. If people have net worth, it's usually tied up in their house, and it's only a small percentage of the population that actually has savings and investments.

You're always going to have that. Seemingly in every society, you're going to have a Pareto distribution, where 20% of the people are going to have 80% of the money. But there is a distinct difference between living paycheck to paycheck, earning $10,000 a month, spending $10,000 a month, versus living on, say, $10,000 a month from, or for whatever the number is, $10,000 a month from your retirement portfolio.

Because if things start to turn south, you have warning. If you're meeting with your financial advisor, or you're sitting down and crunching the numbers on a quarterly basis, you're starting to notice that your distribution rates are ticking up, and you have years of runway to look at. Years of runway to look at.

Now, I guess that's not true if you face something where your portfolio goes to zero, there's dollars, toilet paper, but I can't conceive of how those circumstances are possible. So let's just knock all that stuff out of the way. I can't ever see how I could even design the chain of events that could cause that to happen, given the way things are today.

20 years from now, we'll see what happens. But we're not living in Zimbabwe world. So we're living in the United States of America, or in a much more stable place. So this is not going to happen. So if you start to overdraw your portfolio, you have time. There's warning.

And so now you can start to make changes. So you're much, much safer than even the average person is. Now, here's the next thing I would point out. You don't have to pick up your pre-retirement earnings in order for you to be able to maintain your financial independence. So let's assume that prior to your early retirement, you're earning $200,000 a year.

If you're earning less, if you're earning $80,000 or $100,000, those jobs are all over the place. And so I think you can come back in. But if you're up $200,000, $300,000, $400,000, no, you're right. You can't just jump into those without having the network. But let's say you were earning $200,000.

Now you need to go back to work. No, you might not be able to go and get your $200,000 job back. But you don't need $200,000. You need $50,000. You see why? Because you're drawing from a portfolio. You're not, you don't have to go to drawing from zero on a portfolio.

You just need some money. You need $50,000. And here's what's more. If you're actually early retired, if you're actually, you know, fi, then you make $200,000. You only need $50,000 to live on because you were saving a huge amount of your money before. So you don't actually need the job there anyway.

You just need $50,000. You don't need $200,000. You need $50,000. Here's what's more. When you are actually financially independent, you have so much capital available to you that you can make choices with what to do with that. So you need more money? Well, you've got tons of money that you can spend on creating more income.

So maybe you pursue a different investment strategy. So you say, well, I can't go get my $200,000 job yet back. Yeah, maybe that's true, but you still got a million dollars. Give me a break. Give me a million dollars. I can manufacture a $200,000 job in dozens of businesses.

I may not be able to manufacture $200,000 of investment, of passive investment returns from a million dollar portfolio, but give me a million dollars and I can… come on. If you're willing to work and you're willing to take a job, you can do it. Now my nervousness would be if you're used to being a corporate employer, employee, and you don't know how to create a $200,000 job for yourself when starting with a million dollars of capital.

So that might be something that might be hard for somebody who's only ever worked for other people. But you go to the average businessman who's earning a good income and say, could you create this income if you had a million dollars to start with? I could make five times that amount of money because most businessmen that start to make a $200,000 income started with nothing.

Now you give them a million dollars to start with, you got options all over the place. Now notice I'm saying you create for yourself a $200,000 job. I didn't say, again, passive investment returns. But if you're willing to work, and by definition, that's what we're talking about. You're saying I was working, then I retired, but now I've got to go back.

If you're willing to work, once you have capital, you can print money all over the place as long as you're willing to work in it. It might be harder to do with retirement, but you can do it with work. You start a McDonald's, you open a gas station, you buy an apartment building and manage it yourself.

I mean, the ideas are endless. They're endless. But most people don't have that capital. So when you have that capital, you've got huge options available to you. So those are kind of just some common sense answers to your question. Again, by review, if 3% doesn't work, frankly, there's no choice.

You wouldn't necessarily have been able to have a job in any place. There's no job guarantee at all. You will have lots of warning, or at least some warning, more than the average person is who loses their job. And then all the other, you know, you won't need to pick up where you left off.

You don't need $200,000, you need $50,000 to get you through until the markets come back or until you figure out a new plan. And when you have capital, you have choices, and you can just deploy that capital more efficiently. You might very well be totally happy putting your money in an index fund, spending a little bit of it while you're traveling the world, but when you start to run out of money, you come back and say, "How can I make more money?" Well, you can absolutely make more money than putting it in an index fund.

You're just going to have to put in more work. So maybe you take on a more active approach to your investing. Maybe you take on a more active approach to business management in some way. But a more active approach will raise your rates of return if you're competent and don't screw it up.

And then now you can fix your portfolio problem. So I don't think it's a huge factor, a huge problem. Here's what I do think is a major problem. I think you should have a career plan, or at least some guesses on a career plan, for after your early retirement.

I really do. I think that it is bad to plan, to sit around and do nothing. And I think it's bad to plan to just engage in— I don't know what words to use. I don't want to use the word "hedonistic" things, but just playing all the time. Playing all the time is not a good way to live.

It's bad for the soul. It's bad for the character. It's bad for the soul. Now, I think if your play is more active, there are probably ways that you can do better. You know, the guy who says, "I'm going to retire," and goes home and just watches TV all day, the dude gets cancer and he gets old and he dies, and it's bad, and he has no quality of life, and his friendship's atrophy, etc.

So that's bad, but we're not talking about that. But let's say you just say, "I'm just going to quit and play all the time." Well, why? It's not fun to go and play all the time. Play is valuable. Rest is valuable. But you also need work. And so why should you work and not make money?

It's the thing that I don't get about the whole FIRE movement. I understand it mentally, because when I've been in jobs that weren't well-suited for me, then I kind of felt stuck, and I was like, "Man, I can't wait to get off of this." But if that's you, take a sabbatical.

Take three months, and about the end of three months, you're going to be done with it. At the end of a year, certainly, you don't want to sit on a beach anymore. And so I think the key thing is not to go from work, or from your big corporate job to nothing, or to play all the time, but to go from your big corporate job to your next job, your next business, your next thing that you're going to dedicate yourself to.

And most things, even if you go to something without the intention of making money, most things have income switches that can be turned on when they need to. And I think, you know, I've never lived exclusively on earnings from my investment portfolio. I haven't done it. But I don't see very many examples of anybody who has done it, and I don't see many examples of people who've done it and enjoyed it.

I think there might be a few people who do it, and who do think that it's enjoyable. But they're a very small percentage of people. I don't really understand it. If that's you, then I think you should know it. But the vast majority of people seem much better served to me by working, especially men.

You need to work. If you're a man, you need to work, because one of your most valuable contributions to society is the work that you do. I don't care what that work is. I just care that you work. It's good for you to work. Then you work and you rest, and you're going to enjoy your expenses, your rest, your relaxation far more if you can do it out of income.

What I think the best thing to do is this. If you're going to pursue fire, great. Pursue fire. Build up a big stash of money. If you're going to quit, quit. Take a sabbatical. Take a year. Do it, whatever you want to do. Write a novel. Read the great novels.

Whatever it is. Go travel. Do whatever for a year, or however long you think is right. But at the end of the year, you better have another thing to put your hand to. And now you may put your hand to it with a different attitude. You may not put 80 hours a week into the corporate grind.

Sure. You may do it a little bit more modestly. You may work it into your life in a little bit better way. But don't quit and do nothing. Stay working, and then just spend out of that income, and set yourself goals. And then when you multiply your income throughout your lifetime, you don't get into this selfish perspective of just saying, "Well, I'm just going to keep all the money for me, and it's got to just last it for me." You maintain this sense of abundance, where you know there's so much money.

Now you can impact others. Now you can accomplish change in the world. Now you can put money to good use. And it's just a lot more fun. I don't ever want to be in a position where my income is going down. That stinks. You want your income to go up, and to have the confidence that it's going to go up more and more and more.

And I don't see any reason why that can't be fun and rewarding, especially if you have time to do it right, etc. So those are my thoughts. I don't think it's a major problem. But I do think, for the reasons said, but I still don't think you should plan on that, for the reasons stated.

I don't see really many examples of anybody who just does well by stopping and quitting. So if you want to leave your corporate job, great. But you don't need $2 million to leave your corporate job. If you're earning $200, and you're living on $50, you don't have to have a million-dollar portfolio to go and do something else.

You can leave the $200,000-a-year job, and go take a $50,000-a-year job that you think will give you a better lifestyle. So why wait till you're fired? That's basically, every time I go through fire, I come to this thing. Why wait? What's the point? If you accept anything that I said, that work is good for the soul, that work is meaningful, it's a meaningful part of your contribution in life, it's important, it's valuable, and you recognize that the problem is usually that someone's doing work that's not well-suited to them, where they don't feel competent or effective, or they're in a bad environment that's something where they're not appreciated, or they don't have opportunities for growth, and/or if their work life is just not healthy, 100 hours a week, you know, massive pressure and stress.

If you just realize that those things can be changed, you can find work that's well-suited for you, and you can move into work that is in a very comfortable work life, why not start there? You don't need a million dollars. 10,000 bucks will do it. 100,000 bucks will do it.

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