Is a SIMPLE IRA a good choice for self-employed teachers?

There is no doubt that the lack of benefits is one of the biggest drawbacks of being an online English teacher. Treating online English teaching solely as a gap year experience is something a lot of young people choose to do. However, the lifestyle is so amazing that you may want to do this on a more permanent basis. If that’s the case, you need to be prepared for retirement. There are several sources that a self-employed teacher can tap for income in retirement. Ensuring you pay your payroll taxes can help you earn credits toward social security benefits. Contributing to Roth or traditional individual retirement account (IRA) is possible if you have US taxable income. However, if you exclude all your income under the foreign earned income exclusion, you may not be eligible to contribute. In previous postings, I’ve discussed the wisdom of having a SEP IRA. I currently contribute to a SEP IRA on behalf of my sole employee (myself).

The issue many people face is that they don’t appreciate the enormity of saving for retirement. If you’re anticipating getting a small check from social security (or no check at all), then you really need to ramp up your private savings. A traditional or Roth IRA will allow you to contribute $6,000 USD per year (again- if you have US income), which isn’t much at all. A SEP will allow you to contribute $56,000 per year or 25% of your salary- whichever is LESS. If you’re making an online teacher’s salary- you’re probably not going to be contributing $56,000. So, without US income to contribute to a Roth or traditional IRA, you’re left with saving 25% of your teaching salary in a SEP. This is probably not going to prepare you for any retirement- much less an early one. A SIMPLE IRA may be the answer.

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What is a SIMPLE IRA?

SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Account. As a self-employed individual or an S-Corp, you can set up a SIMPLE IRA, which will allow you to contribute up to $13,500 of your salary to towards a tax advantaged retirement account. Much like the name implies, your employer can match your contribution (up to 3% of your salary). The contributions grow tax free until you decide to take distributions.

What the rules?

SIMPLE IRAs have some complex rules (including those for filing and reporting), so always consult with a tax professional or a financial advisor. Some basic rules are outlined below.

  • You must be a business that has less than 100 employees.
  • To be eligible, an employee must have earned at least $5,000 in the two previous calendar years and be expected to earn at least $5,000 in the current calendar year.
  • You must make employee contributions at the end of each month.
  • You must make employer contributions at the end of each tax year.
  • Employees over age 50 can contribute an extra $3,000 to catch up for their retirement.
  • The employer can contribute either a flat 2% of the employee’s salary or match dollar for dollar up to 3% of the employee’s salary. The employer must contribute whether or not an employee contributes.
  • You can begin taking distributions at aged 59 and a half.
  • You must begin taking required minimum distributions at aged 72.

What's the better call for a self-employed ESL teacher?

For most ESL teachers who want to maximize their retirement, the SIMPLE IRA seems the better option. Both are pretty easy to set up, but the SIMPLE probably offers the best option for tax deferred savings. The contribution limit ($56,000) is higher for a SEP, but that $56k would need to represent 25% of your total salary- a figure most online ESL teachers don’t reach. If you are earning a higher salary, then the SEP may be better for you. The $13,500 that you are able to contribute to a SIMPLE, along with your employer match, can easily total over $14,000 per year. At $20,000 per year, your employer match would be $600- bring your total contribution to $14,100. By comparison, if you are earning $20,000 and contributing to a SEP, your total contribution would be 25% of your salary, or $5,000. In this case, a SIMPLE is a much better option.

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Why a SIMPLE IRA Might Not Be a Good Fit For You

If you really need your teaching salary that comes in every month, then it’s not for you. SIMPLE IRAs have some contribution limits and regulations that make them a bit more cumbersome to deal with than SEP IRAs. There are also regulations regarding transfers. If you’re relying on the bulk of your income to pay the rent and the bills, then stick to a SEP. If you have financial freedom and flexibility, then a SIMPLE might be better for you. I have been contributing to a SEP for many years and considering transitioning to a SIMPLE. At the time, I needed my income to pay down student debt and mortgages. Now, I’m feeling more confident about my own financial future and think it may be time to stick more money into a tax deferred plan. Bear in mind that you can’t have both a SEP and a SIMPLE.

Similarly, if you hope to retire early and are looking to have your dividends help finance your retirement, then a SIMPLE may not be the best option for you. Remember that you won’t be able to touch your money in a SIMPLE until age 59 and a half. If you contribute to a SEP and then put the rest into a brokerage account, while not tax advantaged, you will be able to withdraw your income from the brokerage account whenever you want free of any penalties.

Final Thoughts

Consider which account suits your situation best. Remember that you need to have earned $5k for the last two years and be in a position to earn at least as much in the current year. So, if you are just starting out, a SIMPLE won’t be an option for you. Whatever you choose, the important thing is to begin saving as much as possible and as often as possible. A SIMPLE is another option to help prepare you for a solid financial future. As always, the information presented here is only informational. You should always check with a financial professional before making any decisions regarding how you invest your hard earned money. Make sure that the rules apply to you and that you are putting yourself in the best position to have a financially stable retirement!

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Useful Tax Deductions for Self-Employed Teachers

As 2019 draws to a close, the start of 2020 means the start of tax season. Most online teachers are not employees (do not receive a W-2) and will be getting ready to report their self-employment income prior to the April 15* deadline. Listed below are some deductions to tally up prior to the end of the year, and/or to keep in mind for 2020.

Some Straightforward Deductions

Props & Realia

Do you use puppets? Stuffed animals? Whiteboards and markers? All of these things are tax deductible expenses that can offset your business income. Anything that you purchase to create the background necessary for teaching is a business expense.

Professional Subscriptions

Do you belong to any professional organizations? TESOL.ORG or your local chapter of TESOL? These professional affiliations may be tax deductible, as well as subscriptions to any professional journals.

Office Supplies

Anything that you use strictly for your work as an online teacher (e.g. notebooks to take notes about the students in your classes) is tax deductible. The pens, pencils, or markers that you use are tax deductible. Similarly, paperclips, tape, etc. is all tax deductible if you are using it strictly for business.

Rented Office Space

 

I maintain a rented office space that I use 100% for business use. This is more a product of the fact that I don’t have adequate internet at my home as opposed to my desire to have a separate workspace. However, the 250 euro I pay each month is a tax-deductible business expense. Similarly, any utilities/internet expenses associated with this office space are tax deductible since they are used exclusively for business use. 

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More Complex Deductions

Expenses for Business Use of Your Home

If you work from home, you can write off a portion of your expenses that are relevant to the business use of your home. You can complete the IRS Form 8829 and file this along with your Schedule C. Bear in mind that when you complete this form, you are depreciating your home. This is a ‘cashless expense.’ That is, you are taking an expense for the decline in the useful life of your home. This is nice at tax time! You get money back for an expense that you never paid! Too good to be true? Maybe… This lowers the cost basis of your home. So, when you sell your home, you will have to recapture that depreciation- that is, pay tax on a gain that never actually made. There is a simpler way- the simplified version.

The home office deduction is available for those who work out of their home as their principal place of business. This home office must be used for “regular and exclusive use.” The simplified version (which allows you to deduct $5 per square foot up to a total of 300 square feet). This does not impact the cost-basis of your home. Further, if you are using the actual expense method, you MUST keep detailed records of all expenses. Many people opt to simply use the simplified version of the home office deduction because the record keeping is far simpler.

That TEFL Certificate

Most people your TEFL would be a straightforward business expense. Not really. You are allowed to deduct any education and training that you do which helps you to do your job better or is necessary to keep your current job. I have been employed with my company for several years. I was able to get hired with a 100-hour TEFL certificate. Since I was hired, the government of China instituted a law requiring teachers to have a 120-hour certificate. I took an online TEFL to meet this requirement and keep my current job. This is a deductible business expense. However, if you are a new teacher who took a TEFL in order to get a job or to switch careers, this is NOT a deductible expense.

Internet

 

Much like the TEFL, this seems like something online teachers should absolutely be able to deduct. You are generally able to deduct the portion of the internet usage that you use for business. If you pay $50 per month for your internet service, but spend only half the time on the internet, then only $25 per month would be deductible. NOTE: If you are claiming the simplified version of the home office deduction, you are not able to deduct separate expenses related to the business use of your home. The internet usage is included in the $5 per square foot. If you use mobile data, such as a hotspot that allows you to teach from a variety of locations, this is not an expense related to the business use of your home and should be tax deductible on your Schedule C. 

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Final Thoughts

ALWAYS consult with a tax professional regarding your own personal situation. This posting is informational, but it is always a good idea to get the specifics of your own return handled by a CPA or Enrolled Agent. Taking advantage of the deductions available to you as a self-employed person is important. Not only does it reduce your income tax liability, it also reduces your self-employment tax liability. Remember that as a self-employed individual, you are paying the employee AND the employer share of your SE-tax: a whopping 15.3%!!! Remember to always keep good records. Running a small business as a teacher is fairly easy and doesn’t require a ton of record keeping. Making an effort throughout the year to keep track of your income and expenses will make things dramatically easier come tax time. 

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Is Investing in Rental Real Estate a Good Idea for Digital Nomads?

Buying a house is a way to put down roots in a particular place, which really runs counter to being a digital nomad. So, for those who are constantly on the move, is rental real estate a good idea? What about the risk? The old saying, “It’s safe as houses,” indicates that investing in real estate is the safest way to enjoy long-term growth of your investment. Many people who invested at the height of the sub-prime mortgage bubble might disagree. There is a real risk to investing in rental real estate. However, it remains a really attractive option for growing your nest egg. This week, we’re going to break down some of the basics of investing in real estate, tax considerations, and some special considerations for digital nomads.

The Basics

So, you buy a home and rent it out to tenants. You are responsible for the mortgage, taxes, insurance, and any maintenance issues. The rest is yours! Easy enough! Well, there are a few things to consider.

Finding a Home

Homes are relatively illiquid assets. You can’t log in to your Schwab or Vanguard account and sell off your investment with a few clicks of a mouse. With this in mind, do some research and figure out where to buy. Remember that this is an investment, so think cash flows. When you’re buying your forever home, you may want to splurge a little bit on things that YOU want. This probably isn’t a good idea for a rental property. Anything that brings you an additional expense should be justified- that is, it allows you to charge additional rent. Think about areas that are likely to have strong demand for rental real estate regardless of the economy. Universities and military bases usually produce a steady flow of individuals looking for a home to rent.

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Financing

It always pains me when I see young people who can pay their bills disregard them because they think it doesn’t matter if payments are late. The truth is that your credit is going to be front and center on the mind of lenders when you are applying for financing for your rental property. Make sure your credit is where it needs to be. If it’s not- take steps to right the ship.

Most of the rentals that I purchased required a 25% down payment. This can be a substantial sum for many young buyers- especially digital nomads. If you see rental real estate in your future, begin growing your nest egg so you have adequate funds for a down payment. Securing additional financing usually comes at a premium (paying a higher rate). Bear in mind that most lenders want to see six months of payments in reserve. This is in addition to any closing costs and prepaid expenses associated with purchasing the home. Depending on where you are buying, it may be customary to ask the seller to cover these expenses- freeing up additional funds for you to apply to your down payment. Again, do your due diligence here.

Taxes *this applies to Americans- check w/ your local tax authorities

Passive income is such an important part of being able to retire (hopefully early). It is especially important if you are a digital nomad and have a job, such as online teaching, that lacks stability. Bear in mind that any income you earn from rental real estate is taxable. As digital nomad expats, many of us get to enjoy the foreign earned income exclusions (FEIE). However, this applies only to earned income. Income from rentals is a form of investment income that cannot be excluded. So, it is taxable. However, there are many tools that can help minimize- or even eliminate the tax liability associated with rental income.

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Mortgage Interest, Taxes, Insurance, & Repairs

This is where accountants utilize the matching principle. Any expense incurred in the process of producing assessable income is deductible. So, mortgage interest and property taxes are deductible. These may also be deductible on your primary residence (depending on your tax situation). However, rental real estate allows other expenses to be deducted. This includes any insurance that you pay on the property, homeowner’s association dues, and any repairs that you make. If you have leaky faucet in your own home, the plumber is an expense that you have to absorb. If it’s your rental real property, you get to write that off.

Depreciation

This is perhaps one of the biggest benefits to owning rental real estate. Your home is an asset which has a useful life. Most assets decline in value over their useful life and are expensed accordingly. So, what does that mean? You get to write part of the value of your home off your taxes (as an expense that you never paid) throughout the period of your home’s useful life. The IRS uses the Modified Accelerated Cost Recovery System (MACRS) to determine how much of the value of your home you can expense. Rental real estate is considered to have a useful life of 27.5 years. Let’s look at an example:

Purchase price of rental unit = $130,000

Value of land = $30,000 (land cannot be depreciated)

Value of the home = $100,000

$100,000 / 27.5 years = $3,636 per year in depreciation expense

Recapturing Depreciation

There is a downside to the depreciation expense. You need to recapture the depreciation that you claim. Internal Revenue Code is clear here- it is claimed or allowable depreciation. So, even if you don’t receive the benefit of the depreciation, you need to recapture it. Let’s look at what that means. Your asset (rental property) has a cost basis. In the example above, it is $130,000 (including land). Imagine you own the home for ten years and claim $36,363 in depreciation. Your cost basis is reduced by this amount. The new cost basis in your home is $93,637. This will impact the capital gains that you have to pay in the event of a sale.

Capital gain = Sale Price – Cost Basis – Transaction Costs

Recaptured depreciation may incur a higher rate of taxation than normal capital gains as well.

There is a way to defer this capital gain. If you roll the proceeds of the sale of your rental real estate into a new (more expensive) rental property, you can take an adjusted cost basis in this property- thereby deferring your gain until you sell that new property. This is called a 1031 exchange (or like-kind exchange). Check with a title company or a tax attorney for assistance as there are guidelines pertaining to how and when funds can be used.

Considerations for Digital Nomads

The biggest consideration is that you may be on the other side of the world. How in the world are you going to be able to manage the property? Truth be told, unless you have a very special situation, you won’t be able to manage it on your own. You need to decide if you want to have a property manager or if you would prefer to have a friend or family member manage the property for you. Of course, there are costs associated with having a property manager. They usually charge a leasing fee and take a percentage of the monthly rent. I have always had a property manager. The fees may vary significantly. In Georgia, the property management company I used took a leasing fee that ranged between $100-200 per month. In addition, they took 10% of the monthly rent. In Florida, the leasing fee was equal to 75% of the first month’s rent for the same company. When you add the regular cut of 15% of monthly rent in FL, the first month’s check wasn’t all that much. Consider these costs when you are researching where you want to buy.

Benefits of having a property manager are many. If you are overseas, they handle the leasing, rent collection, and repairs for you. This makes the income truly passive for you. You also get a nice document at the end of the year that makes your tax preparation easy to handle. Property management companies vary in terms of cost and service as much as properties vary in what they offer a prospective buyer. Find a company that suits your needs.

If you are considering investing in off-shore real estate, check out this great blog from The Entrust Group on doing your due diligence as an off-shore real estate investor.

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Final Thoughts

Being thousands of miles away from an investment as big as a home is a big leap to take and can be a huge source of stress. It can also help to build substantial wealth. When you are considering your own financial future, think of the potential of rental real estate as way to solidify your financial future.

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SEP IRAs for Digital Nomads

SEP IRAs are an amazing way for self-employed digital nomads to defer some of their income from taxation and build their retirement savings. I’ve touched on SEP IRAs in some of my previous postings, but never really got into the nitty gritty of what they are and how they can be advantageous to digital nomads, such as ESOL teachers. This week, I’m going to break it down for you.

What is a SEP IRA?

SEP stands for Simplified Employee Pension and IRA stands for Individual Retirement Account. Last week, we talked about Roth and traditional IRAs. This week, we’re going to focus on SEPs. A SEP IRA is very similar to a traditional IRA in that the money deposited is pretax money and grows tax free. Any distributions that you take on your SEP are taxable as income in retirement. In most cases, you cannot withdraw from your SEP without a penalty until age 59 and a half. Like a traditional IRA, most people need to start taking required minimum distributions (RMDs) from their SEP retirement account by age 70 and a half.

What makes a SEP different?

A traditional IRA is one where you contribute your own earnings and deduct this from your taxable income. Contributions to a SEP IRA are made by your employer. In this case- you are your employer. You are able to contribute a percentage of your income to your own retirement. This money is a business expense, but the account belongs to the employee and grows tax free.

What are the contribution limits?

This is where SEPs are awesome! You can contribute 25% of your salary up to $56,000 per year to a SEP. Remember that your traditional and Roth contribution limits are only $6,000 per year. If you are a believer in FIRE and planning to retire early, $6,000 per year in savings is not going to get you very far. Maxing out your SEP IRA is a great way to ensure that you have adequate savings to retire- and hopefully retire early! For more information on the contribution limits on different types of IRAs, including SEP IRAs, check out this incredibly informative post from The Entrust Group

I run my online teaching business as an S-Corp, so let’s use that as an example. As CEO/President/Director (whatever you want to call yourself), I pay my sole employee (me) a wage and make a contribution to my employee’s (me again) SEP IRA.

 

Having your investments grow tax-free is a huge advantage!

Let’s look at an example below:

Total Revenue: $3,000

Employee Expense: $2,000 (This the wage you pay yourself.)

SEP IRA Contribution: $500 (This is calculated as follows: $2,000 X 0.25 = $500)

If you are making more money, you can contribute a larger sum to your SEP. Just remember that it can’t exceed 25% of your income or $56,000- whichever is LOWEST.

Is there any other catch?

Yes, you have to make sure that you set up a SEP for each eligible employee and that you make equal contributions as a percentage of salary. If you are a one-person operation (which you likely are), then this is not an issue.

 

Running your income through a company allows you to pay yourself a wage, but you can still contribute to a SEP even if you are a sole proprietor.

What if I don’t run a company?

I run my teaching business as an S-corp, but you don’t have to. Many American digital nomads are considered sole proprietors- that is, they file a Schedule C at tax time. You can still contribute to a SEP in this case. The same contribution limits apply, but they will apply to your net self-employment income. Check the IRS website for a good link on how this is calculated. When you first get started, it’s always a good idea to sit down with a CPA and work through the process together.

How do I set up my SEP?

Most brokerage houses can help you to establish your SEP. This is a process that includes completing IRS Form 5305-SEP. I have personally used Charles Schwab and been very satisfied with the service they’ve provided. However, you can do this at many different financial institutions- Vanguard and Fidelity come to mind. There are custodian fees associated with my account, but they are incredibly low and taken directly from my account each year.

How do I contribute to my SEP IRA?

I use online bill pay each month to send a deposit to Schwab, and a few days later the money shows up in my account to invest as I choose. I can say the process to set up a SEP is incredibly easy, and I have a great deal of flexibility. I am able to max out my SEP contributions each month. However, if I did not have adequate cash flow, I could choose not to contribute for a particular month.

 

A SEP offers another source of income in retirement.

How does a SEP IRA impact my ability to contribute to my own IRA?

This gets a little tricky. The money that you contribute to your SEP IRA as an employer may impact your ability to contribute to a traditional IRA. Technically, your SEP is considered a retirement plan at work. However, it does not impact your ability to contribute to a Roth IRA. If you are able to make regular contributions to your SEP on your own behalf (not as an employer- but rather as an individual), your ability to contribute to your personal IRA (Roth or traditional) will be reduced. However, if you keep your SEP IRA strictly for employer contributions, then you can still contribute to your Roth. Check out the IRS website for more details.

Final Thoughts

One of the major drawbacks that digital nomads, particularly online teachers complain of is the lack of benefits. Living life on the road is awesome, but going without a pension definitely creates anxiety for the future. The best way to be prepared for retirement is to save early and often. A SEP can help you to do that. Many digital nomads aren’t making enough to max out their SEP and take advantage of the $56k tax deferred retirement savings. However, there are still real tax benefits to utilizing this investment tool. Let’s end with a very simple illustration.

If you pay yourself $1,000 per month in salary, you are able to contribute $250 per month to your SEP IRA. This money grows tax free until you choose to retire. Let’s assume that you make the contributions for the length of your career. We’ll assume you work for 30 years.

Assuming a very conservative 5% annual rate of return, that $250 per month will have grown to $208,931 by the end of the 30 years. It may not be enough to retire off of, but it is a nice nest egg to be able to draw on.

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Using the Foreign Earned Income Exclusion (FEIE) and Roth IRA Rollover to Receive Tax-Free Income in Retirement

No one wants to pay tax- not now or in retirement. Living and working overseas may entitle US taxpayers to exclude some or all of their income from taxation under the Foreign Earned Income Exclusion (FEIE). This element of US tax code can be hugely advantageous for expats. However, one major downside is that claiming this exclusion may prohibit taxpayers from the making contributions to tax advantaged retirement accounts- such as a Roth IRA. This week, we’re going to explore an obscure loophole in the US tax code that may help American expats who already have pretax retirement savings convert these savings to a Roth IRA and receive the funds tax free in retirement.

What is the FEIE?

The FEIE allows US taxpayers to exclude the money that they earned working overseas from US income tax. The amount of the FEIE for 2019 is $105,900. This means that expats who qualify for this exclusion can exclude up to $105,900 from their US income tax, provided this money was earned abroad. This does not entitle claimants to exclude investment income, such as dividends or rents. It must be earned income. There are two way to qualify for the FEIE. 1) The Physical Presence Test- having spent 330 days or more outside the US. 2) The Bona Fide Residence Test- being a bona fide resident of a foreign country. Check with a CPA to see if and how you qualify.

What is an IRA?

An IRA is a tax advantaged retirement account. Americans can contribute funds to either a traditional IRA or a Roth IRA. There are other types of IRAs, but for the purposes of this article, we’ll focus on these two.

Traditional IRA

A traditional IRA is a retirement savings account that allows for contributions of up to $6,000 per year. Contributions are tax deductible. For example: If you earn $50,000 and contribute the maximum ($6,000), you will start with taxable income of $44,000 before deductions or exemptions. The money in this account grows tax free. That means any gains on your account will not incur an income tax liability until you are ready to withdraw them. Check with a CPA on required minimum distributions (RMDs). When you do withdraw the funds in retirement, they are taxed as ordinary income. The easiest way to think about this is- TAX-FREE ON THE WAY IN & TAXABLE ON THE WAY OUT.

The ability to receive income tax-free in retirement can be a huge advantage.

Roth IRA

A Roth is just the opposite. The money goes in after tax. So, in the same scenario presented above, you would still start with a taxable income of $50,000. The money would still grow tax free. However, you would now be able to withdraw the money tax free. For those who are eligible to contribute, I am a huge fan of Roth IRAs right now. Tax rates are low. I think it’s a great opportunity to pay these relatively lower tax rates now and receive the income tax free in retirement. To sum up, ROTH = TAXABLE ON THE WAY IN & TAX-FREE ON THE WAY OUT.

The FEIE & IRA Contributions

The downside of the FEIE is that the income that is excluded can not be contributed to either type of IRA. In most cases, if you are claiming the FEIE, you won’t be making IRA contributions. There are a few exceptions. If you earn above the FEIE limit ($105,900) but less than the Roth IRA contribution limit ($122,000), you can contribute the maximum of $6,000 (all 2019 figures) to your Roth. However, this leave a very narrow earnings window. After $122,000, the amount you can contribute to a Roth is gradually phased out until you reach $137,000. If you’re earning above this income threshold, you can’t contribute to a Roth. Traditional IRA contributions may still be possible on earnings that exceed the FEIE ($105,900). However, check with a CPA on the tax deductibility of these earnings. While most digital nomads are not covered by an employer retirement plan, be sure to mention if you are, as this may reduce what you can contribute.

Where the Magic Happens

The benefits of a Roth are clear. You get tax free distributions in retirement and the money grows tax free until that point. Your pretax retirement accounts (traditional IRA or traditional 401k) will likely be taxable income in your retirement. But what if you could covert these traditional savings accounts into Roth IRAs? You may be able to by utilizing the FEIE. Let’s take a look at this example.

Jane lives and works as a digital nomad. She has $40,000 in a traditional IRA.

She earns $35,000 USD per year teaching English online.

She qualifies for the FEIE under the physical presence test and excludes all of her income for US tax purposes.

She is a single filer and can take a $12,000 standard deduction.

She doesn’t have any income to offset against this deduction because the FEIE has already made this income tax-free.

She can roll $12,000 of the $40,000 in her traditional IRA into a Roth. This rollover has tax consequences. However, the standard deduction will wipe out any tax liability on this income.

Her money continues to grow tax-free and now SHE CAN WITHDRAW THIS MONEY TAX-FREE IN RETIREMENT.

Some Conditions

IRA rollovers are a bit complex. Check with a CPA on your specific tax situation to see if you qualify and are able to use this strategy. Be aware that if you do convert these pretax retirement accounts to a Roth, you will not be able to withdraw the funds for a specified period. Speak to a CPA to get the specifics related to your situation. The ability to roll funds into a Roth IRA tax-free is a huge advantage to claiming the FEIE. Being a digital nomad is an awesome lifestyle. However, setting yourself up for a stable financial future is equally awesome.

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What steps can digital nomads take to weather an upcoming recession?

Welcome back to ESL Gypsy. This week, we’re going to visit some of the implications of the impending recession and how digital nomads can better position themselves for the recession. There has been some back and forth on if a recession is coming. Let’s clear this up. The economy is cyclical. A recession is ALWAYS coming. It’s just a matter of when. After that, a recovery will be coming too. Hopefully the upswings last longer than the downswings. So, let’s look at where we’re at now. Unemployment is the lowest it’s been in decades (3.5%), the stock market is at never before seen levels, and Wall Street is raking in record profits. Regardless of how you feel about this, it is what it is. Now, what happens when things go south? Here are some steps that I am taking given the current economic climate. NOTE: Everyone’s situation is different, and this is not meant to serve as financial advice. Always consult with a certified financial planner before making any financial decisions.

Many housing markets have been hot- making this a great time to sell!

Sell off the Real Estate

If you’re in it for the long haul, you may not want to do this- particularly if you’ve found your ‘forever home.’ However, if you’ve got significant real estate holdings in your portfolio, now might be a good time to divest some of these properties. The market is strong, but a prolonged dip in home values may impede your ability to liquidate your real estate holdings in the future. As a digital nomad, you may not need to keep the real estate in the states. Renting overseas is cheap (and so is buying). It’s always nice to have extra cash to buy in when prices do drop, too (just in case you decide to get back into the US market as a landlord).

Keep Cash on Hand

This gypsy is holding significant amounts of cash at present. On March 9, 2009, the Dow hit a bottom of 6,547. I wish I had the cash necessary at that time to invest significantly in the market. Unfortunately, like many others, I had bigger worries. I don’t expect a crash similar to the Great Recession (though many people expect worse). However, I do want to be well-positioned to buy in when prices start to drop. As a digital nomad, particularly those living in LCOL countries, you should have additional cash on hand. Keep this for buying opportunities that present themselves when the market does correct. If you don’t have a lot of cash on hand now and aren’t actively investing, then start to think about how you can adjust your budget to buy in when prices begin dropping. Think big here. Anything is better than nothing, but $100 a month isn’t really what you’re aiming for. Try to save as much as you can now and start to think about investing at least $500-1,000 each month (more is better).

Get rid of that high-interest rate debt!

Pay Off High Interest Debt

This is something everyone should probably be doing anyway. However, it’s more important with a recession coming. If you don’t see an opportunity to earn significant returns on new investments, then it might be a good idea to get rid of student loans that are charging you 6.8% interest. Credit card debt should be paid off as soon as possible. If you’re buying at the top of the market, your return in the near term will likely be negative. Saving on those high interest payments only makes sense.

Keep an emergency fund for a rainy day.

Keep/Build an Emergency Fund

It’s a good idea to have six months of living expenses in reserve, and a year is even better. If that seems out of reach, aim for something smaller- maybe $1,000. You’re going to want to have this extra cash in the event that the recession is both long and deep, as it may impact your earnings. Being stuck overseas without the income necessary to pay your bills (or get home) is no picnic. A solid emergency fund can really cushion the blow. If you find that your job is stable despite the recession, then you can use this money when buying opportunities present themselves in the equity or real estate markets.

Invest in Yourself

Teaching is a pretty recession proof job. Being a digital nomad English teacher, we may be a bit more exposed than others. A lot depends on how deep and long the coming recession is. I am currently finishing a teaching certificate that will open up public and international schools to me in the event that ESL work starts to dry up. Remember that China is the biggest market for online teaching and, like all exporting nations, is highly exposed to downturns in the global economy.

Side Hustles

Build various streams of income. The recession may impact one, or several, of these income streams, but having multiple sources of income helps you to hedge against the risk associated with the coming recession. I’ve written extensively about this, so won’t go into too much detail here. However, look for other opportunities within teaching and outside of this field. If things don’t get as bad as many expect, you can use this income to invest more when assets are priced at a bargain.

Invest in Alternative Asset Classes

It’s always a good idea to be diversified. Gold and other precious metals offer a measure of stability in times of crisis. With a belief in the impending recession, the price of precious metals has been bid up. If things get quite bad, then we’re likely to see the prices for gold, silver, and platinum rise considerably. If we only experience a brief pull back, then metals may represent a bad investment. I would look to these types of investments as simply a hedge against risk in an unstable market. If things get bad, you can make something back on the gold you own. If they aren’t as bad as you think they’re going to be, then your equities are performing well and you (hopefully) didn’t lose too much on the metals you purchased. Purchasing physical gold through companies like JM Bullion is great. However, you need to have it shipped to a physical US address. If you are a digital nomad, this may not be an option. In this case, check out gold/precious metal funds. I’m also continuing to gamble on cryptocurrency. The potential for loss is huge, but then again, so is the potential gain.

Role of Stocks?

Look for business ideas that you think will weather an economic downturn. When I was in college, I had a professor who loved Wal-Mart as an anti-cyclical stock. I personally look for dividends- whether the payout has been raised over the long-term history of the stock. Remember that in times of reduced earnings, companies may cut their dividends. If teaching jobs do disappear, a healthy dividend stock portfolio may help provide some much-needed income.

Final Thoughts

While I’m a fairly optimistic person, I do think that we are in for a recession in the coming months. Growth in the equity market has been too strong for too long. The powers that be are taking what, in my mind, amounts to outlandish steps to artificially spur the continuous rise of the Dow. Negative interest rates in this economic climate would represent a huge risk when a real recession comes along- leaving the Fed with few options outside quantitative monetary easing. I wouldn’t buy everything once the market starts to retreat, but look to buy lightly on the way down. If things are worse than expected, future prices may represent a deeper discount. In order to avoid the worst effects of the recession, begin your planning and saving RIGHT NOW.

 

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Live Tax-Free in Portugal for Ten Years?

Welcome back to ESL Gypsy. This week, we’re covering an issue that most digital nomads don’t even want to think about- taxes. No one wants to pay them, but being in compliance with the law is an important part of what we do as freelance workers. A lot of messages have come in about living in Portugal and the tax benefits that digital nomads can enjoy while living and working here. The visa requirements for relocating to Portugal have been outlined in previous articles, but this week, we’re focusing on the Non-Habitual Residency status that may be available to foreigners who move to Portugal on the D-7/Type 1 visa. Just remember, this post is informational only and should not be considered legal advice. If you are serious about taking advantage of potential tax benefits related to living in Portugal, always consult with a tax attorney or certified accountant.

 

NHR is an added benefit that makes living in places like Lagos, Portugal so attractive.

What is Non-Habitual Residency status?

Non-habitual resident (or NHR) allows expats to have their income exempt from Portuguese income tax or pay a reduced rate of income tax during the first ten years of residency in Portugal. This is especially attractive for retirees who draw a pension or social security income, as this income will be taxed in the United States, and not in Portugal- which has some incredibly high tax rates.

What type of income qualifies?

Unfortunately, not everything. Tax laws are never simple, and the rules surrounding NHR are no exception. In this article we want to focus on the NHR and how it impacts digital nomads- particularly those teaching online. If you are teaching online as a freelancer or independent contractor, which most teachers are, then you may not be totally exempt from Portuguese taxation under the NHR. The income must be foreign sourced. If you are a freelance teacher, then you are subject to Portuguese income tax under the NHR, as the income is considered to have originated in Portugal (regardless of where your clients are). It may still be eligible for preferential tax treatment at a rate of 20%. Let’s look at how to get to 0%…

Avoiding PT Tax on Your Freelance Income (S-Corp)

There is a straightforward solution that should allow your teaching income to qualify as tax exempt under the NHR. This involves creating your own US-based company. This will require segregating your business income from your personal income, such as by having a business bank account and tax ID number. ESL Gypsy has previously run articles on the benefits of running your online teaching business as an S-Corp and some of the steps involved. Many teachers don’t want to be bothered with the hassle, but there are some real benefits where the NHR is concerned. As a one person S-Corp, the money you’re paid becomes your total revenue. From this, you pay yourself a wage. The rest is business income from which you may deduct your expenses. At the end of the year, you issue yourself a Form W-2 (for your employment income) and a Form K-1 (for your business income). Now, your income is foreign sourced. Check out Part II and Part III of the S-Corp articles. If you are not an American, look into the rules in your home country for starting a limited company.

Paying Self-Employment Tax

There’s a wealth of information in the three-part series on starting an S-Corp, including the state fees, as well as state and federal taxes that are due when starting an S-Corp (such as unemployment insurance). Be aware of these obligations, as well as the requirement to pay self-employment tax in the United States. As a one person S-Corp, you will be wearing two hats so to speak- one as an employee and one as a business owner/employer. As an employee, you will be responsible for your share of self-employment tax (7.65%). As an employer, you will be responsible for the other 7.65%. This is the same 15.3% total that you are responsible for as a sole proprietor. Since you are paying yourself a wage that is lower than your total revenue, your self-employment tax obligation should actually be lower than what it would be if you were working as a sole proprietor in America. I’m personally quite happy to make my self-employment tax contributions. It means that I will be entitled to some social security in my old age, as well as Medicare.

 

Uncle Sam is always watching. Americans still have tax obligations.

Foreign Earned Income Exclusion

The USA allows US citizens living abroad to apply for the Foreign Earned Income Exclusion based on the bona fide residency test (are you a bona fide tax resident of another country) or the physical presence test (have you been outside the country for 330 days). This is not automatic. You must apply to have this income excluded. Like all applications, this may be rejected, exposing your income to US taxation. The wording of the NHR is tricky, so it’s best to speak with a tax professional who has experience in this highly specialized area of taxation. However, be aware of the potential benefit of having your income excluded from all income tax for a period of ten years.  

What happens after the ten years are up?

All good things must come to an end. Unfortunately, this is true of NHR. After ten years, you are subject to the same tax laws as a Portuguese person. Remember that after six years in Portugal (five as a temporary resident and one as a permanent resident), you can apply for citizenship. With an EU passport, you can come back as often as you like. As long as you make your tax home somewhere else and spend less than 182 days in Portugal, you may avoid being subject to the high rates of taxation. Check out the recent article on getting your Type 1/D-7 visa. If you are able to achieve FIRE (and draw a very limited income), you may choose to remain in Portugal and pay the tax associated with the limited income you draw in retirement.  

 

NHR extends to those living on the beautiful islands off the coast of Portugal.
Pictured: Azores.

What are the normal tax rates in PT?

Very high. Like the US, Portugal has a progressive tax system. Those earning more, pay more. For those with a taxable income up to 7,091€, the tax rate is 14.5%. The highest tax bracket pays income tax at a rate of 48%. Earners enter this tax bracket when their taxable income exceeds 80,641€. For a complete list of tax rates in Portugal, check out Blevins Franks. This website also contains a wealth of info for those from the UK who are curious about NHR.

Final Thoughts

The NHR offers real tax benefits to those wishing to live and work as digital nomads. Like all good things, it takes a bit of work to get it set up and running properly. If you are interested in living and working abroad and achieving FIRE (financially independent retired early), look into NHR as a tool to help you along the way. The tax savings can represent significant investment to speed up your FIRE journey. Speak to an accountant or tax attorney who specializes in this area of taxation and can guide you as to the benefits and obligations in Portugal and your home country.

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What would you look for in a company if money didn’t matter?

Welcome back to ESL Gypsy. There’s been a ton of content on what people look for in a company and how to select the right company to work for. Most of what has been written centers on the bottom line- the rate of pay and bookings. “Obviously! I gotta make money!” Totally understandable. Everyone has to pay the bills. However, this article aims to examine what we might look for in a job if money didn’t matter.

In their recent Facebook post, Jake and Sarah from TeoLeo brought up the subject of goals. Most people cite financial freedom as a long-term goal. As a big believer in FIRE, and someone who has recently hit some major FIRE milestones, I’ve begun to think about what I’d look for as a teacher who was less concerned with the bottom line and more interested in what else the job can bring me.

Now, you might be saying, “I would be looking for an apartment in Thailand and one of those little umbrella drinks.” Totally understandable. For some people, teaching is just a means to an end. I get that. This article is aimed at people who would continue to teach even if they achieved financial freedom. Listed below are some things I would look for in a potential company.

Focus of the Curriculum

Some people love the idea of teaching purely conversation classes. They’re fun! You get a chance to really get to know your students and watch their language skills develop. Currently, I’m teaching English language arts classes that are aligned with the American Common Core curriculum. Most of my classes focus on literacy skills and reading comprehension. For me this type of curriculum is a lot of fun to teach. If money didn’t matter, what would you choose to teach students? The list of options to consider is practically endless:

Test Prep (IELTS, TOEFL, TOEIC)

Business English

Academic Writing

Creative Writing

Conversational English

Phonics/Emergent Reading Skills

English Language Arts/Reading

Flexibility of Curriculum

I happen to be lucky and work for a company that has a pretty good curriculum laid out. However, some companies leave a lot to be desired in this area. Regardless of how good any curriculum is, experienced teachers know that a one-size-fits-all approach to curriculum never works. Curriculum needs to be adapted to individual student needs, and the very nature of lesson planning is recursive. If your financial situation allows you to get by just teaching a few classes, then you likely have the time to adapt the curriculum to meet the students’ needs… if your company permits you to. Some companies may be very rigid about what they expect their teachers to do. This can create real frustration for teachers that want to do what’s best for their students.

 

Teaching a curriculum you enjoy can make all the difference!

Students

At the end of the day, this is what it’s all about for me. I left a well-paid job in accounting to move into a (eh… less well-paid) job in education. For me, the motivation to get involved in education was the opportunity to work with the students. If money were no object, what type of students would you be happiest teaching? Currently, the market for teaching young learners is huge. I enjoy teaching young learners, but I also love teaching young adults. I feel like I did my best work as a teacher working with university level students. Would working with an uptight, stressed out businessman drive you mad? Would you prefer to teach a young and emerging reader? Consider your options and work with the students that bring you the most satisfaction.

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BA + 1-yr exp.
NES from USA, Canada, Australia, NZ, Ireland, or UK
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Schedule

Bookings are a real concern for people who need to pay the bills- understandably so. Having a solid schedule that you can rely on every week means that there is always money coming in. If you are financially independent, you can aim for a little more flexibility. Personally, I would love the spontaneity of being able to pick up and take off when I want to. For this to be a reality, I would need a schedule that can be changed from week to week. The potential to cancel bookings on short notice might also be something I’d look for. Some people I know who’ve retired early love having a very definitive schedule. They do a few hours a week at a job they enjoy, and the rest of the week follows a predictable routine. Look for what best suits your goals as you achieve financial freedom.

 

Find a school where you have opportunities to contribute to its growth.

Opportunities to Contribute

This is huge. When you are on the road to FIRE, you need to look to save as much as possible to reach your financial goals. Finding additional sources of income within your company is a great way to help you get there. However, a lot of this work can become very demanding- especially if you’ve got your hands in a lot of different projects. The last thing you want to do when you are financially free is to engage in work that is going to stress you out. Find something you’re good at and focus on that area. For me, I love writing curriculum and creating materials. I would look for some way to contribute to my current company in this capacity. If you like building things from the ground up, maybe working with a new start-up would suit you well. As someone who had a chance to do that, I can say that it’s a lot of fun! You really have a chance to make a meaningful impact. When you’re doing that sort of work, it makes the amount of money that you’re taking home less significant.

Final Thoughts

If you’re financially independent- or at the very least secure, then start to look for jobs that can bring you more of what you enjoy about education. Teaching is a great profession. Even if you have the money not to work at all, teaching is something that can still bring you so much value outside of a paycheck. Consider a school with limited hours or a flexible schedule. Find what your niche is and focus on that. If you’re not financially independent yet, start to set goals and work towards them. Being an online teacher in a LCOL country gives you the chance to FIRE before most people back home. When you do FIRE, find a job that allows you to love everything about being in the online classroom.

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Responding to New Regulations in the Chinese Market

Welcome back to ESL Gypsy. This week, we’re going to deal with the impending regulations in China that are requiring students to finish all online classes by 9pm BJT. Many digital nomads who are making their living teaching English online are teaching for Chinese schools. This new regulation may cause companies to cut classes that finish later than 9pm, leaving many teachers to deal with a what could amount to a substantial shortfall in revenue. In this week’s blog, we’re going to outline some possible scenarios that may play out and how teachers may choose to react to this.

Possible Scenario- NOTHING HAPPENS

This is unlikely as it seems the wheels are already in motion. However, throughout my 15 years in education, I’ve seen regulations, codes, laws, and statutes that were definitely going into effect- then, at the last minute, something changed. As of right now, my company has not commented on the impending changes and until they do, I will continue to show up for my 9pm BJT classes.

Possible Scenario- SCHEDULES ARE JUGGLED

This seems the most likely of all scenarios. If this law does go into effect, there are two things that I doubt regulation will change: 1) Chinese entrepreneurs/business people are incredibly hardworking and will look at every possible solution to ensure that the impact on revenue is minimal. 2) Chinese parents have an unquenchable thirst to deliver more education to their children.

As a result, teachers may be asked to open additional time slots- either on their days off, during the day on weekends, or at earlier times during the week. This would spell good news for those teachers who are concerned about how the new laws would impact their take-home pay.

Possible Scenario- CLASSES ARE LOST

The new regulation not only says that classes must end before 9pm, but also that online classes must not interfere with a child’s regular school day. This might make scheduling earlier classes more difficult. However, for the two reasons mentioned in the previous scenario, I think this is unlikely to happen. I do think that the companies will find a way to work around this regulation. However, in the event that all classes after 9pm are lost and teachers are unable to open additional slots, let’s take a look at how teachers might respond to the lost revenue without sacrificing quality of life and their savings.

Take Time for Yourself

 

Consider using the additional free time to enjoy your family.

This may not be an option if you are struggling to pay bills, but if possible, think about taking the extra time for yourself and your family. I currently look after my mother in her old age. If my school cut my 9pm classes, I’d spend more time with her. The best part of my day is when she says, “Thank you for the life you’ve given me.” Walk your kids to school, make breakfast for your wife or husband, and (if you can) try not to think about the lost revenue. This is where the FIRE lifestyle really pays dividends (literally and figuratively).

Seek Out Additional Income with Your School

 

Grow other streams of revenue with your school.

I’ve written about this before, and I truly believe this is the best way for online teachers to supplement their income. Look at opportunities to write curriculum, do teacher training & evaluation, or recruiting & interviewing. One (or more) of these options can add significantly to your income. I’ve done all of these things at one point or another in my career and the money really adds up!

Supplement Your Schedule with Non-Chinese Companies

 

North American Teachers Wanted!
BA + 1-year experience working with kids.

China is undoubtedly the largest market for online ESL jobs. Many of these companies also offer the most lucrative earning opportunities. However, there are other companies with students outside of China. You can still keep your classes with your young Chinese students, and just supplement your income by adding a company, such as Now Speak English, EF Englishtown, or Learnship. The pay may not be what you are getting with your Chinese company, but the additional revenue should help cushion the blow associated with losing classes. Check out eslgypsy.com/jobs and look for companies based in other locations. Another benefit to this approach is that companies like EF run classes 24/7- allowing you to have a bit more flexibility in your schedule.

Freelance

The struggle with freelancing always seems to be finding students. There are a lot of websites, such as Wyzant, that seek to connect teachers and students. If you’re just looking to teach English conversation, it can often be hard to make yourself stand out. You usually wind up competing against so many other teachers that you have to knock your rate down to nothing to get students.

 

Whales English is hiring NES from US, Canada, UK, Ireland, NZ, or Australia. You must have a BA + 1 year exp + 120-hr TEFL.

Two things you may consider:

Jump on with a young website that is just getting going. You’ll have first mover advantage. Talk to Sarah and Jake at TeoLeo about the new project they’re working on. This is a great way to connect teachers and students and their platform offers a lot of great information for prospective teachers.

Specialize. This is really the best way to do well freelancing. If you find a niche, you will stand out from the crowd. Consider teaching TOEFL speaking or IELTS writing. Not only will you cut down on competition, but you can charge more. A friend of mine started his own tutoring service focused on test prep for the Cambridge exams. He charges a minimum of 50£ an hour. He doesn’t have a ton of students, but at 50£ per hour, you don’t need many. Check out his website Cambridge Business Essentials, or subscribe to his YouTube channel to get some ideas for how you might start your own freelancing business.

Final note on freelancing– do the right thing. This should go without saying, but don’t steal students from your school. Even if your student complains of a scheduling conflict created by the new regulations, tell them they need to iron it out with the school, and you are unable to teach them privately.

Look for Revenue Streams Outside of Teaching

This is something I hope to do more of in my early retirement. However, if we wind up with extra time on our hands, there’s no reason that we can’t start now. The options are literally endless! I recently purchased an entry level SLR camera and went down to the beach near my house. I live in a surfing town with TONS of surf schools. I planned to shoot landscapes when I decided to ask some of the people taking classes, “Hey, you want some surf photos?” I sold batches of surfing photos to seven different people at 10€ a person and wound up with 70€ for sitting on the beach doing something I enjoy. Check out an earlier blog post on Earning Extra Income Outside Your Teaching.

 

Pursue other hobbies that might bring in additional income.

Final Thoughts

It seems like the regulation really is coming and it’s going to affect all of us who are employed at Chinese companies. If you’ve positioned yourself for FIRE (being Financially Independent Retired Early), then consider this as an opportunity to transition to a lifestyle closer to what you might enjoy in retirement- that’s what I plan to do. If you do need the money, consider offering your school some flexibility in your schedule (perhaps giving up a day off). If you can’t open additional time slots, look for other ways to supplement your income. In the meantime, don’t worry about something out of your control.

Enjoy the ride-

Jay

ESL Gypsyis

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Six Reasons You’re Still Not Ready to Retire…

Welcome back to ESL Gypsy. In our last blog post, we talked about why if you’re teaching online and living as a digital nomad, you may be ready to retire without a huge nest egg. This week, we’re going to turn things on their head and talk about why you might not have enough.

Staying in the workforce for a few more years has clear advantages for those looking to retire very comfortably (also known as Fat FIRE). However, even for those who are aiming to retire with less and live modestly (Lean FIRE), there are some very good reasons why you may want to work a bit longer.

You have nothing.

 

You may not need a huge nest egg, but you need something!

Last week we talked about not needing a tremendous nest egg to retire. If you’ve ticked all the boxes in our last blog post, then you might be fine working a very limited schedule and earning a small monthly wage ($1,000-1,200 per month). The size of your nest egg depends on you and your anticipated cost of living, but we talked about the possibility of retiring with as little as $50k.  Having said that, if you have nothing- you should continue to work until you have a bit of savings behind you.

Having savings that you can tap into may be required for:

  • Family emergencies
  • Celebrations
  • Medical Expenses
  • Accident/Disability
  • Unanticipated Work Stoppage

Don’t lock yourself out of all that life has to offer. You may wish to get home and enjoy loved ones’ weddings or graduations. In the unfortunate event that a family member becomes ill, don’t deprive yourself of the opportunity to get home and spend precious time with them. Living off a small online teaching income may be enough for you to get by, but if your company goes under or you wind up sick yourself, it’s important to have some savings to fall back on.

There’s an outside chance that you want to retire back home.

I once heard on Bloomberg radio that if you want to retire comfortably in the USA, you should keep your first $500k in what the host called lumpy money. This is in cash/cash equivalents (money markets, short-term CDs, T-bills) to pay for lump sum expenses in retirement. That, coupled with the high cost of living at home, means that you need to devote a good portion of your savings to retirement. Living in low cost of living country (LCOLC) can significantly reduce your need for such substantial sums. Having said that, if you are living abroad now, but think you may want to go back home later in life, you should continue to add to your nest egg as diligently as possible. You can accomplish this as a digital nomad. However, you probably won’t do it working minimal hours and making $1,000 a month.

North American Teachers Wanted! BA + 1 year exp (teaching or working with kids in some capacity). No TEFL required! $14-18 per hour + BONUSES!

You have kids/dependents.

I can’t count the times I’ve heard my friends say, “Having kids changes everything.” Kids are expensive. This is something there’s sure to be a variety of viewpoints on. A lot of people feel the best things you can give your children is your time and love. I agree. However, I think a parent’s responsibility extends further. Having a great education opens doors for young people. Living in Portugal, I have seen first-hand the exceptionally low salaries that most people earn (the average salary in my town is less than 1,000 Euro/month). Ensuring that your kids have access to an American education and the US job market (if that’s what they desire) gives them the opportunity to achieve what others may only dream of. Living as a digital nomad may be our dream, but it may not be their dream. Give them the opportunity to choose.

You don’t have a strong education yourself.

Again, China is the largest market for ESOL teachers right now and the Chinese government is becoming increasingly strict about the requirements. The huge demand is helping to provide work for the glut of teachers in the market. When that demand slows, there will likely be fewer hours, or no hours at all, for teachers that lack a solid educational background. If you’re lucky enough to have established yourself with a company, bear in mind that changing companies without a strong CV behind you will be more difficult. If wage growth is stagnant or decreases, you will have fewer options should you try to earn money elsewhere (in a brick and mortar institution).

Think of your education as your insurance policy. It’s insurance against poverty. I’m not talking about a bachelor’s degree in art history. Get an education that makes you employable- something with transferrable skills. A friend of mine is an accountant who works for PwC. She always assumed I was a ‘just a teacher’ as she put it. During a discussion on international tax policy, she said, “Wow. How did you learn so much about this?” When I told her that I hold a master’s degree in accounting, she said, “Really? Do you wanna come work for me?” I didn’t and I still don’t, but having options is nice.

Teachers Wanted! Native English Speakers from USA, Canada, UK, Ireland, NZ, or Australia. BA + 1-yr exp + 120-hr TEFL. $18-30 + BONUSES!

You Have High-Cost Hobbies.

 

High cost hobbies can really eat into your retirement budget.

Working less means more free time. If your hobbies include reading, gardening, jogging, or other things that don’t break the bank, then you’re set! Enjoy the extra time doing what you love. However, if you have a lot of hobbies that have a high price tag attached to them- traveling to exotic destinations, shopping, collecting cars, you should ensure you have the savings/income to still enjoy what you love. My uncle collects cars in his retirement. He’s worked hard and he’s earned the right to do what he loves. Nevertheless, it’s expensive. Someone who is living off a very limited income may see a large percentage of this lost to such a hobby.

You’re Not Honest With Yourself.

A friend of mine was recently asking about retirement and I told him, “The most important conversation you need to have is with yourself.” Honesty is important with your family, your friends, and your partner- but no one more so than yourself. You know who you are and your expectations for your life in retirement. Not being entirely truthful with yourself about how much money you’ll likely make or spend may lead you to deplete your finances, go back to work earlier than expected, or be less than 100% happy in your early retirement. If your budget includes $800 per month from another stream of revenue, such as the photography business you have been planning to start for the last five years (but just never got around to), then you probably shouldn’t include this income in your budget. At the very least, postpone your retirement until this comes to fruition.

Final Thoughts

Early retirement is something many people aspire to, but you can make it a reality. Limited work schedules and low cost of living locations make for a lifestyle that many people only dream of. If you are disciplined, you may be ready sooner than you think. One thing I found interesting about people who retired early and did it successfully was that many said, “I probably worked a year or two longer than I should have.” Having that extra security may not be a bad thing- especially if the points in this week’s posting apply to your own life.

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