Category: FI Posts

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Your Net Worth is Gross

Which weighs more, a pound of feathers or a pound of bricks?

Trick question of course but consider this:  two couples have the same net worth, $2 million.  One couple has $2 million in Roth IRAs and the other has $2 million in taxable IRAs.

Which couple has the higher net worth?  Obviously, the first couple, because they have no tax liability on this money. 

Based on this simple example, I’d like to introduce the concept of Gross Worth to differentiate it from Net Worth.

We are told that Net Worth is all of your assets minus all of your liabilities.  This is really Gross Worth.  Gross Worth does not account for the transactional cost of accessing your money. 

Net Worth is Gross Worth less transaction and tax costs of converting assets to spendable cash. 

Why this matters:  in very general terms one achieves Financial Independence (FI) when one’s Investment Net Worth is 25x one’s net annual expenses (subtract income sources such as rental income, social security, pensions from annual expenses, investments must cover the rest).   However, when considering the transaction costs and tax consequences of converting various investments/assets into cash, it turns out that what we have been counting as Net Worth has been Gross Worth and we must take the difference into account.

Before proceeding further let me stipulate that I am neither a tax expert nor an estate expert.  The information below is my understanding of the consequences of converting various assets to spendable cash.  It is not advice.  If you have better information, please post it in the comments. 

Let’s work our way through various assets and account types to see how this works. One term that will come up is Basis – this is your cost/value of an asset for tax purposes. 

Real Estate

Personal Residence:  Financial planners typically exclude one’s personal residence from net worth calculations, as they should when preparing an income statement/budget. After all, one cannot spend one’s house to pay the utility bill.  That said, a house is still part of one’s worth, but we should separate gross worth from net worth.  Typically, the calculation is the current market value of the house less the mortgage. However, if one is selling the house, the transaction costs reduce its value.  Where I live, this can easily be 9-10% of the selling price.

One might also monetize this differential by refinancing, taking out a second mortgage or a HELOC. Finally, as one ages it becomes possible and perhaps valuable to do a reverse mortgage.  This can be thought of as one’s final emergency fund if one is able to stay in this home. These refi options come with transaction costs and lenders will not normally refinance up to 100% of a home’s value.

Finally there is the tax consideration.  Under current tax law there is a $250,000 exemption for single filers and a $500,000 exemption for married filers on the profit one makes from selling one’s personal residence. One must reside in the home for at least 2 of the last 5 years.  So, if one has lived in a house for a very long time and the gain from the sale of the home is higher than these amounts, the difference is subject to capital gains tax.  If one does not keep the house for 2 years then there is no exemption. In either case, the gross worth of the equity in one’s house may not be the same as one’s net worth.

The final consideration is inheritance. If the house passes to a child, the child gets a step-up in basis, meaning the starting point for future tax calculations becomes the value of the house on the date of death. 

In my own net worth calculation, I value my house at less than market value for these reasons.

Rental Real Estate:  The same transaction cost caveat as described above applies to rental real estate as well. One way investors can pull cash from their properties without selling them is to refinance occasionally, assuming of course the property has appreciated.  As noted above, there are transaction costs for refinancing. The advantage to this strategy is that one delays paying taxes, as would be the case when selling the property. Net worth calculations should take into account these transaction costs if this is the strategy.

Speaking of tax considerations, taxpayers are required to depreciate rental real estate. This shields some current year profit from current year income taxes but not necessarily forever.  When selling rental real estate, the accumulated depreciation is recaptured – this means it is taxed at ordinary rates.  The remaining gain on the sale is taxed at capital gains tax rates.  Reminding the reader that I am not giving advice, I always set aside 1/3 of the amount I received from selling rental property to cover the recaptured and capital gains taxes and at the tax rates in effect at the time this proved to be enough.  Effectively this meant that my net worth for these properties was 2/3 of Gross Worth.

Heirs also benefit from step-up in basis for this asset.

Jewelry and Collectibles

What are the chances that you have kept track of the purchase price of every valuable piece of jewelry, or every collectible coin, stamp, or piece of art?  Mine are 0.  At least with coins and many stamps there is a face value (until forever stamps came along anyway). Determining gross or net worth of any of these assets seems problematical, and financial planners typically do not include them.  If we are talking about real value here, an appraisal will be needed and this will be the transaction cost.  If one is selling to a dealer, since they are in business to make a profit, they will offer something less than current market value and this should also be considered (ever watch Pawn Stars?).  Heirs will benefit from step-up in basis but the appraisal would be required to determine what that new basis is.  Depending on the value of these assets, they should be insured, which is an annual cost to consider. 

Financial Instruments:  Stocks/Bonds/Mutual Funds/ETFs

Financial assets (stocks/bonds/Mutual Funds/ETFs) are cheap to buy/sell (transaction costs) and easy to convert to cash.  This was not always the case.  Forty some years ago, when I was in my 20s, these assets had the following characteristics:

  • Stocks had to be purchased in lots of 100 shares or an odd lot fee was charged.  One could only purchase shares in whole units and a commission was charged for each transaction.
  • Bonds had to be purchased in groups of at least 3 (my best recollection) and commissions were charged
  • Mutual Funds had front-end loads (purchase price commission) as high as 5.75%.  There were annual fees on the accounts and the annual costs paid by the fundholders to the fund managers could be 2-3% or more. 
  • ETFs did not exist.  (there are only slight differences between ETFs and MFs for those who trade infrequently they are insignificant). 

This has changed greatly in the past 20 years. 

  • Stocks can be purchased in any number of shares, even fractional shares with no penalty.  The purchase is commission free when purchased online. 
  • Bonds can be purchased individually.  I don’t do this so I am not sure if there is still a commission or trading fee.
  • Front-end loaded mutual funds still exist, but there are so many more no-load options and the front-end loaded mutual funds do not perform any better so there is no need to buy them.  I no longer pay annual fees.  This may be because of the value of my account though.  The annual costs for many funds, especially index funds for non-specialty funds are typically less than 0.5% and index funds are as low as 0.03% or less.
  • There are equivalent ETFs for existing mutual funds and the industry seems to be heading in this direction.  To the investor the only differences I am aware of are that the valuation is calculated in real time (MFs are valued at the end of the trading day), and transactions occur immediately.  With MFs, the trade occurs at the end of the trading day when the fund is valued for that day. 

For these financial instruments the transaction cost is now zero or close to zero, so this does not impact the difference between Gross and Net Worth. 

The impact to Gross vs Net worth is a function of what account type financial instruments are held in.  Account types include after-tax, retirement pre-tax, retirement Roth, HSAs, and inherited variations.

After-tax accounts – these are accounts set up at your favorite brokerage (eg Vanguard, Fidelity, Schwab) with after tax money.  One may fund these accounts by setting up a transfer relationship between a checking account and the brokerage account.  One transfers money from the checking account to the brokerage account and then chooses one or more of the financial instruments described above.  One can schedule transfers and automatic purchases as well. 

The tax consequences of these accounts can depend on the holding period and the exact instrument being purchased.  Investments held for less than one year are taxed as ordinary income.  Investments that are held for more than one year are taxed at lower capital gains rates.  Fully qualified dividends (FQD) are also taxed at capital gains rates.  Mutual Funds/ETFs may report dividends (FQD or ordinary dividends) and capital gains monthly, quarterly, or annually (or any combination).  One can somewhat control how much one earns in dividends and capital gains with the purchase/sale of individual stocks.  One has no control over this with MF/ETFs.  Some MF/ETFs will attempt to keep these to a minimum, others may not.  One can donate appreciated assets from these accounts to a charity (without selling them first) to avoid paying taxes on them, yet still get credit for the appreciated amount (if itemizing deductions).  Heirs realize a step-up in basis for these assets.

The Gross Worth/Net Worth difference then is determined by how one disposes of the assets (sells them, donates them, bequeaths them).

Retirement Pre-Tax – these include traditional IRAs, 401Ks, 403Bs, TSPs, etc.  Traditional IRAs are set up similarly to after-tax accounts (open account with your brokerage firm, fund from your checking account).  They are designated as IRA accounts and there are annual contribution limits and income limits.  The other traditional accounts are set up through one’s employer (self-employed individuals have additional options based on how their self-employment is set up). 

The money invested in these accounts is subtracted from taxable income in the year contributed, saving the taxpayer on federal and state income taxes.  Taxes are paid on withdrawals which are taxed as ordinary income no matter the financial instrument.  As this income has never been taxed, the government requires the taxpayer to begin distributions in their early to mid-70s (exact date depends on date of birth).  These are called Required Minimum Distributions, RMDs.  RMDs are based on life expectancy tables.  They start close to 4% and increase with age.  A portion of the RMD can be donated to charity, avoiding the taxes on them (but they are not deductible on one’s taxes). 

With some specific exceptions outside the scope of this article, one cannot withdraw from these accounts until at least 59.5 without paying a 10% penalty. 

The rules on inheritance depend in part on what year the owner dies.  There is no immediate tax consequence for spouses, but for all others they will pay the taxes on this income.  I am not qualified to address all the complexities.  Depending on the details many may be required to take withdrawals (and pay the income taxes) over a 10-year period.  Others will be required to take withdrawals based on their life expectancy or the life expectancy of their bequeather. 

The difference between Gross Worth and Net Worth for pre-tax accounts depends on the taxes (and possibly penalties) one may pay on the distributions.   This difference can be significant.  Planning may be useful to optimize when to take the distributions based on one’s specific future income expectations.  One will only know if the pre-tax retirement account was a better option than other retirement accounts much later in life.

Roth Accounts

Roth accounts are funded with after tax dollars and grow tax free forever.  So, the Gross Worth value and Net Worth value of these accounts are identical.  They are tax free to heirs as well. 

HSA Accounts

HSA (Health Savings) accounts can be triple or quadruple tax free.  To open an HSA account, one must choose a qualifying high deductible health plan.  The insurance premiums for these plans are typically much cheaper than for standard plans and when subsidized by one’s employer, can be very inexpensive.  The drawback of course is the high deductible, i.e. the annual maximum out of pocket expenses.  For ACA plans I have seen the deductible in the $13000 range, but for corporate sponsored plans it can be as low as $6000.  These numbers are for family coverage. These plans can work best for families that generally have low annual medical expenses and for families that are likely to max out.

The tax savings for choosing these plans include:

  • Contributions are made pre-tax and can be invested in a number of ETFs depending on the plan.
  • Investment growth is tax free.
  • Withdrawals are tax free if there are corresponding covered medical expenses that can go back to original time of enrollment in the plan. 
  • The 4th benefit depends on the amount of FICA wages earned per year.  The current FICA maximum is about $168,000.  If one earns less than this per year, and if the HSA contributions are made through payroll deductions, the amount contributed is not subject to the FICA tax. 

In addition, employers may make contributions to the HSA.  There is an annual cap on contributions, regardless of who contributes. 

The strategy works well for those who can pay their medical bills out of pocket while letting the account grow.  It does require one to keep records of the medical bills accrued during the life of the plan, to be able to use this money tax free later.  If the account outgrows one’s total accumulated medical expenses, the remaining value in the account can be used as a taxable IRA at age 65 (no RMDs apply though).  If an account is bequeathed to a child or other non-spouse beneficiary, it is taxable income to the heir in the year of the bequest.

If one has enough medical expenses to withdraw from this account later in life, then the Gross Worth of this account is equal to the Net Worth.  If the account effectively becomes a taxable IRA or is inherited by a non-spouse, the normal differences in GW vs NW would apply.  

Summary

The transaction costs and tax consequences of liquidating an asset can reduce its cash value.  It is therefore helpful to think of the market value of an asset as part of one’s Gross Worth and the liquid value of that same asset as part of one’s Net Worth.  The value to a beneficiary may be maintained by step-up in basis but may be reduced by tax consequences as well.  A pound of feathers may not weigh the same as a pound of bricks.

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TDSF Power Plant: Year 5 report

At the end of year five the meter reading was 98767, meaning we have produced about 1240 KWh more than we consumed over the past 5 years. The first three years we were slightly in the hole, as the meter read 00387, so the gain has come in the last two years. At the end of year four it was 99602 so we came out ahead by 835 KWh this year.

What is surprising about this is that this was our lowest year of production yet, producing a rounding error less than 9 MWh, whereas the first four years we did a little better than 9 MWh. We generated our 46th MWh on March 20.

Is this because the panels are losing their production capacity? Probably a little bit. They are guaranteed not to lose more than 1/2% per year after the first year. However, weather probably plays a factor as well. This past summer we were impacted by smoke from Canadian wildfires. This past February we had two back-to-back snows with freezing temperatures, so the panels produced no power for about 10 days. Just adding what would have been 80 kilowatt hours over that period back into our totals would be enough to get back over the 9 MWh mark.

We had built up enough surplus over the summer and fall that I was sure we would cover the winter deficit. We did cover through January, but the 10 day February shortfall used up the surplus and left us with a small bill (about $22) for that month. Fortunately, we are back in surplus again in March.

As a review, the way our billing works, the March/April bills produce a large surplus (days are longer, sun is higher, no AC) but this gets zeroed out at the end of the April billing period and we get a check in May for the supplier portion of this surplus. The utility keeps the delivery portion.

(Incidentally, the delivery portion has roughly doubled recently, from 2.5 cents to about 5 cents per KWh so electricity now costs about 16 cents per KWh – it was about 10.7 cents early in our journey).

This means we resume building a surplus to carry us through the winter (October – February) starting in May.

I sometimes get asked about the ‘payoff date.’ This is the amount of time until the savings from not paying an electric bill equals the cost of the system. Honestly, I don’t know when that will be as one factor is the current cost of electricity. As that increases, now up about 50% from when we went operational, that date shrinks.

I have rather focused on what the cost of electricity will be for us over the 25 year guaranteed life of the panels. By the way, they keep producing electricity in year 26!

Assuming our panels generate at least 200 MWh over the 25 year period (which seems conservative, as they have generated 46 MWh in the first five years) and assuming the SREC market supports a price of $50/MWh (this is not guaranteed at all – it is currently about $4/SREC in Ohio and over $300 in New Jersey and DC), and that our March/April surplus averages about $60/year, the total cost of the power our panels will generate will have cost us about 2-4 cents per KWh. That is a good deal.

Of course we will have to pay market rates for anything we consume above what the panels generate, but that is to be expected. As of now though, our electricity use continues to decline, as evidenced by the meter continuing to run backward, compared to the same month of the prior year. Should we get an EV sometime in the future, or convert our heat and hot water to electricity this will of course change.

Whether solar panels are a good deal are very much dependent on site location, federal and local $$ help with the project and whether there is something like an SREC market. For this project specifically, it seems to be a great deal.

Here is the comparative overview of the past 5 years on a monthly basis:

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TDSF Power Plant: Year 4 Report

Our solar panels have been active for four years. In the first two years we used more electricity than the panels produced. I know this because I follow the electric meter almost obsessively. When the meter shows a low positive number, it means we are using more than we are producing, as of that moment in time since the panels went live. If the meter runs backwards (into the 99000s), then we have cumulatively produced more electricity than we have consumed.

I record the meter reading every March 26th around 1:30 PM, the approximate time we went live in 2019. Following are the readings and cumulative production totals at the end of each year:

Year ending March 26Meter Reading
(Kilowatt Hours)		Cumulative
Production (MWh)		Annual
Production (MWh)
2020004559.679.67
20210109818.779.1
20220038728.19.33
20239960237.259.15

After year’s one and two I had concluded that we should have installed a few more panels to be energy neutral. However, I also knew that over time we would probably use less electricity and that has proven to be true. We are now 853 KwH ahead (398 to get back to all 00000 + 455 above that.

Should we get an electric car or convert to electric heat/hot water (currently on natural gas), we would be under producing.

Under the current Maryland net-metering system, excess generation is paid out in May, based on the surplus KWh at the end of April meter reading. Since March and April are both good surplus months (days are longer, sun is higher, but no AC yet), this means the typical customer receives a check each May for the commodity portion of this surplus. Recall that the other major portion of a bill is the delivery fee. This is kept by the utility company.

There is one issue with this current system. Because the March/April surplus is paid out (albeit at about 2/3 the actual rate), we do not quite generate enough surplus May-September to carry us completely through the winter, although this year we came pretty close. This means we have to pay the full price for the energy consumed once our surplus is used up. Our first two winters this cost us about $135 each. We got better though in year’s three and four building up our summer surplus. These winters only cost us about $26 and $11 respectively.

A new law has recently passed the Maryland General Assembly that, if signed by the governor, will create an additional option, to accumulate this surplus indefinitely until the surplus is used up (for example by buying an EV) or until the account is closed.

Is solar a good deal in Maryland?

I continue analyzing our experience in light of the question, is this a good deal, and if so, for whom. Most people think in terms of payback time, which for us is looking to be about 10 years. Since the panels have at least a 25 year life span, this seems like a good deal if one has the money to install the system and one expects to stay in the home long enough to realize the benefit.

Another way to look at the problem is Total Cost of Ownership (TCO). My after tax cost for my system was $16,500 (This is documented in previous posts). To determine 10 year TCO we have to make some assumptions:

  • MWh generated : 90
  • SREC $$ generated: $4500 ($50/MWh)
  • May surplus re-imbursed: $600 ($60/year)

Subtracting the SREC payments and the May surplus checks from my after tax cost brings my 10 year cost to $11,400. Dividing this by 90 yields about $127 per MWh or 0.127 per KwH. This is about what rates are now. Will they go up over the next 6 years? I expect so, but I do not know.

Over a 25 year period, these TCO numbers look even better:

  • MWh generated: 200 (assuming a decline in output as the system gets older)
  • SREC $$ generated: $10,000 ($50/MWh)
  • May surplus re-imbursed: $1500 ($60/year)

This brings the cost down to $5000 for 200 MWh generated, which works out to $25/MWH or 0.025 (two and one-half cents per kilowatt hour). This seems like a great deal to me.

Note that we do not know how long the SREC program will exist or how the May reimbursement program will work – if we end up switching to the infinitely cumulative surplus, we could perhaps build enough surplus to power an EV for a long time, so these calculations are all subject to change. The point though is that the lifetime cost of the panels should be significantly less than the utility rates for the same amount of electricity.

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TDSF Power Plant: Year 3 Was a Great Year!

In my Year 2 Report, I mentioned that we would have needed 2 more panels to generate more electricity than we consumed. That’s because the meter reading at the end of year 2 (March 26, 2021 at 1:30 PM) was 01098 and our worst panel had produced about 257 KWh/year.

What a difference a year makes. On March 26, 2022 the meter reading was 00387. This means we consumed 712 KWh less than we produced this year (1098 – 387). The 3 year reading for our worst panel was 778.2 KWh. So one more panel that was at least as good as our poorest producing panel would have put is in the black (the meter reading would have been negative).

Does this mean we produced 712 KWh more this year than last year? No. Here are the meter readings and total production for the first 3 years:

Meter ReadingAnnual TotalCumulative Total
04559.679.67
010989.118.77
003879.3328.1
First 3 years of production

We produced a little more in year 3 than in year 2 (230 KWh), but the main reason for the improvement was a reduction in consumption (482 KWh). This reduction allowed us to build up a greater surplus going into the winter months so that we only had an electric bill for two months of the year, for a total of 200 KWh. The only reason we had these two bills at all is because BGE, our utility company, zeroes out the surplus after the April reading and sends us a check for the surplus supply amount we generate each March and April. This means we do not have enough credits by the end of the winter and so we have to pay for what we do not produce those last few months.

As you may recall from previous posts, the electric bill is divided into supply and delivery (and smaller amount for the meter charge and taxes). The delivery amount is about 3.5 cents per KWh.

DateKWhRate (Supply)Check Amount
5/20/20194460.087939.20
5/22/20205350.08280944.30
5/24/20219130.07144665.23
Total1894148.73
Payment for March/April Surplus

I will not get a check for this year’s surplus until late May, but using .08 per KWh as an estimate for the supply rate and 300 KWh for the March surplus (300 * .08 = $24), we can guess that the total March/April surplus by the end of year 3 is about $173.

The $24 amount is interesting for the March surplus, as the cost for the 200 KWh that we got charged for in January and February (due to the zeroing out the previous March) was approximately $24 as well. If BGE did not zero out the surplus each year we would have essentially had no electric bill this year, except for the (approximately) $100 per year they charge for the meter (labeled as a customer charge).

Looking at this over the 3 year period, we used 129 KWh more per year (averaged out) than we consumed. This is calculated by dividing the meter reading (00387) at the end of year 3 by 3. Rounding a bit, using 0.12 per KWh or $120 per MWh, in theory we should have paid on average $15.48 per year, or $46.44 total over three years. In fact, because we are not compensated for the delivery portion of the March/April surplus, we paid more. Following is the approximate reconciliation:

AmountComments
Amount paid $595What we sent BGE over 3 years
Meter charge$300Approximate (varied from $8.22 – 8.75/month)
Net paid for electricity$295$595 – 295
Surplus BGE paid us for$173includes guess for March 2022
Actual bill for electricity$122$295 – 173
Delivery not reimbursed$77Approximate using .035 per KWh
Net should have paid$45
Reconciliation of what we should have paid vs actual based on meter reading

So the amount we should have paid reconciles with the amount we actually paid. Effectively, the March/April surplus zero-out cost us an additional $2.14 per month.

How did we reduce consumption by almost 1/2 MWh? I’m not sure. Some of it was intentional. We found a few more bulbs to convert to LED. We set our thermostats a little differently, focusing on comfort at the end of the house we were in and reducing/increasing the setting at the other end. We took a couple of short trips, 3-5 days each and set the thermostat higher while we were gone. Finally, my wife required more sleep this year due to her health, and so she was generating less electricity while sleeping. I expected we would use less over time as we got older and as appliances got more efficient, but we have not replaced anything yet.

I have noted previously that the amount of solar energy we convert to electricity is highly dependent on how cloudy/rainy it is. Panels theoretically degrade slightly as the year goes on. However, we can see from this snapshot that more recent quarters sometimes produced more electricity than older quarters.

One last picture, to show that we had surpluses (or accumulated surpluses to zero out our bill in every month this past year but two:

One last note. As our annual production was over 9 MWh each year, we produced our 28th SREC on March 22, 4 days before the end of year 3.

Please respond with any comments or questions. I enjoy helping people decide if solar panels are a good opportunity.

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TDSF Power Plant – Year Two Report

(This post is now the latest in this on-going series. Here is Part 1).

The sales information on solar panels state that year two may see a loss of power produced of about 2%. Unfortunately, there is no way to tell if that occurred for our panels. In order to measure this, the weather would have to be identical each year, including the timing and density of clouds and rain. These two items play a much larger factor in how much this site produces.

This year snow was a small factor. Usually we have a warmer, sunny day after a snowfall. This year it snowed just ahead of the polar vortex that caused so much trouble in Texas and other places, so instead of melting off almost immediately, the snow stayed on the panels for several days, reducing output for those days.

Did I mention that my dog ate my homework? OK, enough excuses, here are the numbers:

Annual Electric Usage for March 27, 2020 – March 30 2021

Again we had 8 months of 0 billing and partial billing for 4 months. The sun does not provide much energy in the winter months.

Following are the meter readings at the beginning and at the annual anniversaries:

DateMeter ReadingAccumulated ProductionAnnual Production
03/26/20190001200
03/26/2020004559.67 MWh9.67 MWh
03/26/20210109818.77 MWh9.10 MWh
Data needed for calculating $ benefit of our solar panels. Readings taken at 1:30 PM on these days

The meter reading indicates that we are falling further behind (continuing to use more power than we produce.

Year 1: 9.67 + 0.433 means we used about 10100 KWh

Year 2 the meter went up 643 KWh over Year 1 (01098 – 00455). So year 2 usage is 9.10 + .643 = 9743 KWh. So we cut our usage by about 357 KWh for the year, but due to some combination of weather and normal 2nd year reduction, production dropped 570 KWh. Clouds got in the way.

Here is the full spreadsheet:

Two years of BGE electric bills after installing our solar panels.

Our cumulative spend for this period is $469.07. Subtract out about $200 for the meter costs (typically $8.32 a month) for an adjusted cost of $270.

BGE zeroes out any accumulated surplus based on the end of April reading. They pay us for the supply price of the surplus we generate in March and April. We will not have this number until late May. The cumulative total of the previous 2 checks was $83.50.

Assuming for the sake of discussion we get about $40 this coming May, these checks total about $123.00.

The price of electricity all in (supply, delivery, taxes) has actually gone DOWN since we installed our system. It was a little over 0.12 per KWh in year one and a little less than 0.11 per KWh in year 2. For a quick calculation, let’s use .1125 to see how much we have saved:

18770 KWh * .1125/KWh = $2112 – estimated value of energy produced.

Our last data point is the dollar value of the SRECs produced. To date we have received $895. In May we will receive $55 for the SREC produced in March, bringing this total to $950.

Approximate dollar value realized to date – $3185:

$2112 + $950 + $123 = $3185 – This is how much we did not pay ($2112) + real checks we got from BGE. Our installation cost after incentives was $16500. To date we have recovered about 19.3% of these costs (3185/16500). Because electricity costs have gone down (and perhaps because of those persnickity clouds) we are on track to recover our costs in a little over 10 years now.

The following chart shows that weather may play the most important role in power production:

Monthly Generation – Predicted vs Actual
Predicted2019 Actual2020 Actual2021 Actual
January487.8326.78302.78
February607.3516.92376.02
March944.8848.071020
April1095.49491010
May1231.511101150
June1295.412601260
July128413101320
August1121.711301040
September950.2831733
October765.4463428.86
November473.3349305.71
December392.9254231.54
adjustment*354
10649.780109170.88
*Note: April, May 2019 had some reading errors so totals are really higher
About 355 KWh readings not recorded properly
Predicted generation vs actual, by month

As noted above, April and May of 2019 had some monitoring errors (corrected by the company that collects the data) so these numbers are not necessarily comparable against 2020. It is clear that this past fall we had much poorer conditions than the previous fall. But then look at March 2021 – Much better readings than March of 2020 and much higher than the predicted number.

Last year I concluded that if we had installed two more panels that produced at least as well as our poorest producing panels we would break even. That still seems to be about true:

Two years of solar production per panel.

The worst panel shows a two year cumulative production of 513.62 KWh. The best panel produced 621.13 KWh during this period. So, 2 panels producing somewhere in-between would have broken even more or less.

As the surplus generated in March and April is paid off in May instead of crediting against the following fall/winter shortage, it would take another panel or 2 to avoid having a bill at all, except for the meter cost.

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What is Different about Senior FI?

Tie Dye Senior FI

Talking to pursuers of Financial Independence (FI) of different generations, I am coming to notice some differences between those of us who are older from those who are younger. To some degree, the changes brought on by the current COVID-19 situation have made me think about this some more.

On the positive side:

  • We are tested. We have seen ups and downs in the economy, in our work history, in our fortunes, and in our lives. While changing events in any area of our lives or in the greater world still bother us, we have some confidence that this too shall pass.
  • We may be more prepared. We have hopefully developed multiple income streams, diversified our investments, and normally keep a useful supply of staples on hand, so that we are not as fearful of specific changes. That said, we were at a lower level than our normal safety stock of paper towels when the recent shopping crisis hit, but we were not at zero. I had time to build the stock back up to a safer level. We had enough of everything else though.
  • Our financial stress is mostly behind us. Our kids are grown and doing well. Our investments took a hit like everyone else, but they are still in good shape. We are completely out of debt. Our base expenses are low. Our savings rate is high.

On the negative side:

  • Health concerns. We are not only concerned about our own health, but the health of our aging parents. We are doing our best to get exercise, eat right (that one may be debatable 🙂 ), take our medicines and consult with our health experts.
  • Change in income – we are experiencing some of our best income years, but anticipating retiring, we have fewer years left to earn this good money. Once we quit the high-income job it will not be as easy to earn this much again. This higher income could be masking some poorer choices, although we really have reduced most expenses. Sometimes this is called the ‘one more year’ syndrome.
  • Concerns with what comes next. Will I really take on the projects that I know need work (around the house for example)? Will I maintain enough social contacts to avoid the isolation that hurts so many older people? Will I find productive uses for my time (fear of watching too much TV)? These concerns can affect younger retirees as well, but it would appear that the younger retirees have more energy and perhaps more options to reverse course if needed.

(Note: I started writing this post in April, before my retirement date was set. It seems to be standing up though, now that retirement is for real.)

A month into retirement I have spent some of the time catching up on sleep (seems almost hopeless), doing yard work, working with my local improvement association, watching probably a little more TV than is healthy (but I am almost caught up on Mrs. Maisel!).

There were a number of logistical items to deal with regarding my employer separation – forms to fill out, equipment to return, 401K to transfer. We still need to select next year’s health care provider, a scary task.

I am trying to devote more time to blogging. Make no mistake, this is work, but I enjoy it. I have a lot of articles I want to write, meaning lots of thoughts swimming in my head.

I have also done a little DIY. Biggest success to date: with the help of a neighbor who has the right tools and understanding of how things work, we located the safety switch beneath my riding lawn more and replaced it. A $10 part that saved me from having to buy a $6000+ (new) one. It took us a number of hours to get to it, prove it was the issue, confirm the correct part (my mower is roughly 20 years old and part numbers change over time), and replace it. Fortunately my neighbor is also retired. As my property is rugged (to put it mildly), I need a sturdy vehicle for this job. So I am quite grateful my neighbor was able to help.

Another win involved our printer, also a few years old. The print quality was horrible, even after replacing the ink cartridge. My wife wanted to order a new one (printer that is, she tried 3 ink cartridges with no luck). I did some googling and found an article with all the possible methods of cleaning the clogged nozzles. The easiest method, using the printer’s own capability to clean it, worked. Printers are not super expensive but still, no point buying one when this one works fine.

We are preparing to visit friends in West Virginia – they are even more isolated than us (and we are being careful), so we feel safe doing this.

Bottom line is that I am keeping busy enough (getting walks in almost everyday). I have not tackled any major projects inside the house yet. Other than that, so far, so good.

If you are newly retired (whether senior or not) or you are looking at retiring closer to traditional retirement age, as I did, let me know about your story. Are there questions you would benefit from me covering as topics?

November 1 is open season for enrollment in next year’s health care plans – I will document what we picked and how we are managing this, once we pick our plan.

You can always drop me an email at tiedyeseniorfi@tiedyeseniorfi.com

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What the 4% rule (of thumb) really needs to cover

How much invested money do you need to cover your expenses in retirement?

The general rule of thumb is that you need at least 25 times your annual expenses to be able to safely withdraw, cover your expenses, and not run out of money before you die. This is known as the 4% rule of thumb.

Others have written about the merits and complexities of this rule (and this is just the starting point for determining ‘how much is enough’).

In this post I want to cover a specific aspect of this calculation that changes from pre-retirement to post-retirement.

If you are earning a paycheck before you retire and you take the time to document and analyze your expenses you may have a list that looks something like this:

  • Housing costs (rent or mortgage, property taxes, utilities, upkeep, insurance)
  • Food costs (eating in and dining out)
  • Non-food supplies (toilet paper, tissues, laundry detergent, etc.)
  • In-home entertainment (internet, TV/film subscriptions)
  • Phone
  • Transportation costs (car upkeep, gasoline, insurance, registration, commuting fees)
  • Outside entertainment not covered already (vacations, event costs, hobby costs)
  • Other Insurance (Umbrella, other policies not mentioned)
  • Medical costs for doctor visits, medicines, dental care and vision care

What is not covered typically are health insurance premium costs and taxes. This is because these costs were previously taken out of your paycheck and you were looking at costs using your checking account and credit card statements. Honk your horn if you agree.

You were looking at:

SBITHC: Spending Before Income Taxes and Health Care

(When I look at some investment opportunities EBITDA comes up: Earnings Before Income Taxes and Depreciation. Somehow I connected these two concepts. Strange, huh?)

If the money you spend in retirement comes from after tax savings, from a Roth IRA or an HSA, you do not have to pay income taxes on these funds as you have already paid them.

On the other hand, if like many of us baby boomers, a substantial portion of your spending will likely come from your pre-tax investments (IRA, 401K, 403B, etc) or from interest, dividends and capital gains on investments held outside a tax-deferred account, you will probably be paying some income taxes.

In the past, your taxes were withheld from your paycheck and you just reconciled with the IRS every spring. Now, you will have to learn how to estimate these taxes and pay them quarterly, or pay someone to do this (and add that cost to your expenses).

Simple Example for a married couple who are at least 59.5 years old (or otherwise able to withdraw from their retirement accounts).

Suppose life (all the expenses mentioned at the top of this article – your SBITHC) costs you $50,000 a year. Multiply this by 25 and your minimum needed to retire is $1.25 million. (4% of $1.25 million is $50,000 – that’s how this rule of thumb works).

Now suppose all of that money is in a tax deferred vehicle (IRA, 401K, etc) and you must pay taxes on it.

As of this writing, a married couple would have to pay about $2600 in federal taxes on $50,000 of income. State income taxes would of course vary by state.

If federal and state income taxes were not in your budget, your real costs are now closer to $53,000 per year and the amount needed is now at least $1,325,000.

As the TV announcer says, ‘but wait, there’s more.’

You are probably on an employer subsidized health care plan – the subsidy is often 80-95% of the premium and the benefits may be better than what you can get from the ACA market place.

So now we have to add in the cost of the premiums and the extra out of pocket costs, remembering this is not just for medical, but for dental and vision as well.

So again, for simplicity we will add $24,000/year for these costs. This number will be high for some, but may be low for others.

It appears now that life costs about $74,000 per year before taxes. To have $74,000 left after taxes, a married couple might need something closer to $90,000 per year to have enough left over after federal and state taxes to be able to afford the extra medical costs and still have about $50,000 left over for their ‘normal’ SBITHC spending.

$90,000 per year in taxable income requires a minimum of $2,250,000 invested to cover this amount.

This was a simplified example. Different types of income are taxed differently, or not at all. Consider:

If $1 million of your investments were in a ROTH vehicle, and you are already 59.5 years old you could choose to use up to $40,000 towards your annual expenses without paying taxes on them.

If you managed to save $1 million outside of retirement funds altogether, ie, in your brokerage and savings accounts, you could choose to fund another $40,000 per year from savings. Alternatively, assume $700,000 of these funds are in fully qualified dividend investments paying on average 4%, generating $28,000 per year in dividend income.

If you can use some combination of these examples, your spending might still be $74,000 per year, but the taxes needed to support that spending might be much lower, maybe as low as 0. (I am not a tax professional, do your own due diligence – anyway tax law changes continually so this paragraph will lose some accuracy over time).

If you have started collecting social security, note that it may be considered partially or fully taxable income, depending on how much other income you earn.

If you are hoping that Medicare will reduce your health expenses that may be true, but it will not reduce them to $0, or anywhere near it. There are many choices to make, so each couple will have a different experience (location matters as well), but do not be surprised if you are still spending as much as $12,000 a year or more once your are both enrolled.

Roger Whitney, the Retirement Answer Man, does a great job exploring this (and scaring me) in his series of podcasts of September, 2020.

In summary, remember to add income taxes and additional health care costs (premiums and larger deductibles and co-pays) into your calculations when determining how much you will need to have saved before you retire.

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Gone Fishing, er Retiring

Retirement is Under Way
Gone Retiring, Actually

Determining when to retire is in part a math problem and in part a time problem. Retire too soon and you can end up with lots of time, but not enough money. Retire too late and you can end up with lots of money but not enough time.

Years ago I tuned into Suzie Orman every Saturday. In one of her segments she would coach a viewer regarding the question ‘when can I retire.’ She often advocated working until 70. If the viewer had a nice pension or other reliable income streams, sometimes she would ‘allow’ the viewer to retire earlier.

Having failed at my earlier attempts to produce enough income to supplant my job (real estate being one example, but I will cover others as well in another posting), I internalized this idea of working until I was 70. I could see our retirement accounts growing and knew by then we would have more than enough money.

The issue for me was time. My wife’s health is not great (more chronic than life-threatening issues), but if I am to spend time with her, even just to enjoy her company, than I needed to rethink this.

Enter FIRE. I have no specific recollection on how I found the Financial Independence Retire Early community. One day I found myself reading a Mister Money Mustache article and one thing led to another.

As I was already 60+, Retire Early did not really apply to me. Retire on Time became the goal. Of course FIROT is not the best acronym out there!

I had recently paid off my house (took 22 years, like others, I had other priorities as well) and was trying to figure out what to do with this money. When the student is ready the teacher appears. Between JL Collins, ChooseFI, Retirement Answer Man, Big Ern, and others in the community, I started making those 1% changes that make so much difference.

I opened a Vanguard account, moved some money into their money market fund, VTSAX, and their total bond fund. I set up regular transfers and increased the amounts over time. In less than 3 years I had increased my savings rate to well over 50%.

I focused on my after-tax savings, as I had spent most of my working life building up the pre-tax savings.

I also worked on reducing expenses. Some of this occurred naturally as the kids moved out into their adult lives. Our house is about 26 years old. Almost two years ago I replaced the roof, having saved into a fund for that purpose.

The next decision, to add solar panels, took some research, which I have documented in this series. That lowered our energy bill. We also reduced down to a single car. The story on how that came to be deserves it s own post.

By the beginning of 2020 I realized I was probably in good shape to retire by the end of the year. I had joined and was helping to lead a local ChooseFI chapter and I consulted with some folks who had come before me in this journey. They agreed.

In March I told my boss of my plans, giving her plenty of time to adjust. I was the leader of a team with members in two countries and I knew this was going to be a difficult transition. I have been with my current company for over 20 years and wanted things to work out in a mutually agreeable way.

I talked with my boss’s boss about this and she in turn talked with her boss and they made me a great offer, including a date we could mutually agree on. My workload then increased for a bit, as I spent more than a month training my replacement in addition to my normal duties.

The day before I left they threw me a great Zoom retirement party with some nice gifts. I put some thought into the those last emails one sends before leaving a company (a couple recipients commented that they were the best good-bye emails they had ever read). I felt good about the way I left.

Now, at 63.5 years young, it is time to attend to the next season of my life. Writing this blog and improving this website are two of my goals. I am soliciting feedback and suggestions for improvement. I also hope to be of help to others on this journey.

A note of gratitude to many in the FI community:

Brad Barret and Jonathan Mendonsa , thanks for building out the ChooseFI community – you inspired me to focus my efforts these past three years to get to this point. Jonathan, just one comment you made in one podcast made a huge difference.

JL Collins – your stock series and longer term perspective encouraged my to focus my asset allocation and to create my bucket strategy.

Big ERN (Karsten) – thanks for your explanation of the sequence of return risk. Those of us who spent our lives accumulating now have to learn how to decumulate, a topic which is not discussed as much.

Roger Whitney – each month you break down a complex subject into four smaller pieces, so we can all learn to rock retirement. Many thanks.

Dan Soltys, Alex Wong, Michael Scepaniak, and Dave Schlappich – fellow members of our local ChooseFI group who have advised and inspired me.

My thanks to all who gave advice and helped me to walk this journey.

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TDSF Power Plant Part 10: 9 Month Update

Got an electric bill again

(This is the latest in an on-going series. Here is Part 1).

As 2019 wraps up, I have some good news and some not-so-good news to report.

First, the good news: in November we got paid $213.32 for the 4 SRECs we generated in the 3rd quarter (July – Sep). These were SRECs 4 – 7. (1 SREC = 1 Megawatt Hour of electricity generated. )

Now, the not-so-good news: in the 4th quarter (Oct – Dec), production dropped off drastically. It took us until Dec 21, 84 days, to generate our 8th SREC.

Megawatt (SREC) History
DateMWhDaysCumulative
3/26/20190
4/21/201912727
5/21/201923057
6/14/201932481
7/6/2019422103
7/30/2019524127
8/26/2019627154
9/28/2019733187
12/21/2019884271

From the table above, you can see that the time to generate each of the first 7 SRECs ranged from 22 to 33 days. Comparatively speaking, that 8th SREC took forever.

So, what happened? As mentioned in Part 9, the sun got much lower in the sky and the days got shorter. The oak trees on the south side of my house (some of which are in my neighbor’s yard) did not drop their leaves until early December. Finally, we had a lot of cloudy days. These factors all combined to lower power production greatly. Shown below in picture form:

Through the end of September’s billing period, we had built up a surplus of almost 600 KWh. By the end of November’s billing period we had used it all up, and then some. We owed our electric company about $5 above the $8.22 charge for the meter. So in December, we were billed for all of the electricity we used, less the 255 KWh that we generated. See the chart:

Date DueBilling PeriodCurrent ReadingPrevious ReadingMetered UsageCarryover AppliedAccrued CarryoverAmount Owed
5/20/20193/26 – 4/249956612-4460-4468.26
6/20/20194/24 – 5/239926599566-3000-3008.26
7/24/20195/23 – 6/269897199265-2950-5958.22
22-Aug6/26 – 7/2698982989711111-5848.22
9/23/20197/26 – 8/2699009989822727-5578.22
10/21/20198/26 – 9/259896799009-420-5998.22
11/22/20199/25 – 10/289926298967295295-3048.22
12/19/201910/28 – 11/259960899262346304013.21
1/22/202011/25 – 12/2783996084750065.86

In picture form, here is our electricity usage (from our utility) – solar panels went live 3/26. Our billing cycle begins about the 26th of each month (varies slightly).

Agreeing with the Judy Collins’ song, I really don’t like clouds, at all. Here is what cloudy/rainy days in December look like compared to more normal days:

The really short lines around the 1st and the 15th of the month (and a few others) are examples of very low production on cloudy/rainy days. On good days in December, production tops 10 KWh. Compare that to the summer months, where a good day produces over 50 KWh. Big difference!

So what is the take away from this post? When we went live on March 26 our meter read 00012. When they read the meter for our Dec 27 billing, it read 00083. So in 9 months, we have used a net 71 KWh from our utility. In other words we have produced all of the electricity we need to run our house from our solar panels over this 9 month period, less about 3 days. Not too shabby.

As the days get longer and the sun gets higher, here are my predictions for the next 3 months:

  • January we will still be in the red, using more than we produce, but less than December. I am hoping we cut the December overage (475 KWh) in half.
  • February we will do even better, and I hope we cut the overage in half again.
  • That would mean we get billed for about 240 KWh in January and 120 KWh in February, or 360 KWh total.
  • In March I expect we will generate a surplus.

I will let you know how it turned out in future posts.

If you enjoy reading these updates, please drop me a note. I will be happy to respond to questions as well.