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Revamping Our Early Retirement Backup Plan

by retirebyforty on June 11, 2014 · 49 comments

in early retirement

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early retirement backup plan

Relocating can cut living cost by a huge amount. Here is a 4,000 sq ft house in Port St. Lucia, Florida for $200,000. That’s much more affordable than Portland.

Last time, we looked at the fear of outliving your money in early retirement. This is a real danger if you quit working in your 30s, 40s, or even 50s. You will spend much more time in retirement and that will greatly increase the risk of outliving your money. We put some safeguards into place so we’d get an early warning if our finances start to go south. Here they are.

  • Track our monthly expense to make sure it’s not increasing too much over time. We should be cash flow positive every year until we’re 60.
  • Track our FFR* and keep it at an acceptable level with the goal of over 25 when we’re 60.
  • Rebalance at least once a year to keep our asset allocation on target.

*Financial Freedom Ratio = investible asset/annual expense.

Now, the FFR can dip pretty easily if we have a big stock market crash. Our net worth would drop quite a bit if the market drops 50% and that will wreak havoc on our FFR. Also, our expense has already been creeping up over the last few years and it will continue to do so. So what do we do if our finances head south?

Monthly Expense

Let’s take a look at our monthly expense first because that’s a long term issue if it keeps increasing.

Expense 2012 2014 so far
Housing -$2,031 -$2,160
cash -$700 -$300
groceries -$400
transportation -$75 -$75
pet -$30 -$30
kid -$87 -$380
bills -$285 -$270
medical -$50 -$90
entertainment -$70 -$90
misc -$90 -$1,000
Total expense -$3,420 -$4,785

 

  • Housing – about 5% increase due to property tax and HOA.
  • Cash and groceries – about the same for now. I spend less cash now that I’m not working anymore, but the grocery price definitely went up over the last couple of years. They cancel each other out for now.
  • Transportation – I drive a little less now, but not by much because I was taking public transportation to work pretty often.
  • Pet – We went from 3 cats to 1 so this should go down next year.
  • Kid – RB40 Jr. is going to preschool now and that’s the added cost.
  • Bills – about the same.
  • Medical – nominal increase.
  • Misc – We’re starting to travel again so that’s the big increase from 2012.

I think we’ll be able to bring the average down to about $4,500/month by the end of the year. We’re done with our big vacation for this year.

So in just 2 years, our expenses increased almost 30% (from $3,500 to $4,500/month.) However, our online income also grew at a good clip and we have still been able to keep our month cash flow positive. This level of spending is very comfortable for us and I don’t think we’ll increase much over the next few years. Let’s work on some backup plans with the 2014 expense in mind.

Original Backup plan

We lived without spending my paycheck (invested them) for over a year before I pulled the plug on my comatose career. The test run was good because it showed Mrs. RB40 that quitting my job was feasible. We also had a backup plan in case she got tired of working or lost her job.

Basically, we’d need to cut our expense drastically. Our biggest monthly expense is housing and we can reduce it by moving into our rental home. Of course, now that our rental home is being sold, we don’t have that option anymore. We’ll need to revamp our backup plan to account for this.

Revamped Backup Plan

If Mrs. RB40 loses her job AND my online income disappears, we will be in big trouble with our current monthly expense. We won’t have positive cash flow anymore and we’d need to seriously cut expense. Here is my estimate.

Expense 2014 so far Target
Housing -2160 -1000
cash -300 -200
groceries -390 -400
transportation -75 -100
pet -30 -30
kid -380  -50
bills -270 -200
medical -90 -90
entertainment -90 -80
misc -1000 -50
Total expense -4785 -2200
  • Housing – We can move to a cheaper area and rent a 2 bedroom apartment for under $1,000. We already live in a 1,000 sq ft condo so it’s not a huge change. We love our location though and probably wouldn’t move out to the suburbs unless we really have to.
  • Cash and groceries – We can cut cash spending a bit, but groceries probably will stay the same.
  • Transportation – I’d have to drive more if we move out to the suburb.
  • Kid – We’d probably take RB40 Jr. out of preschool if Mrs. RB40 doesn’t work anymore.
  • Bills – Our bills would decrease a bit if we rent instead of own.
  • Misc- We can put travel on hold if our finances are in trouble.

At this level of spending, I would be pretty comfortable with our finances. We should have about $1,000 from passive income and we can cover the rest by withdrawing from our saving or retirement accounts. We can also work part time to cover the short fall.

Relocate to a more affordable location

So our backup plan #1 is to move out to Beaverton and rent an apartment there. This is still in the Portland Metro in case Mrs. RB40 needs to stay in the area.

If location doesn’t matter, then we have a lot more options.

  1. Move to California High Desert area near Mrs. RB40’s parents. The cost of living in this area is still pretty affordable.
  2. Move to Chiang Mai, Thailand near my parents. The cost of living is very low compare to the US and we can home school Jr. This is probably a temporary solution, though.
  3. Port St. Lucie,Florida? The weather is warm and housing is 50% more affordable than Portland.

Moving far away is a pretty drastic measure and we will only do that if Mrs. RB40 quits her job AND I lose my online income. If it’s just one of the two disasters, then we can cut expense modestly and take other measures to raise our income.

  • Stop contributing to our retirement plans so we’d have more take-home income.
  • We can both take up part time work.
  • Take on more side hustles.
  • Transfer some funds to higher income financial products. Cash to municipal bonds or something else.

Of course, I wouldn’t consider myself retired anymore if I had to get a real job. Oh well, we are doing pretty well for now and I’m thankful for the time away from a corporate job. I’m still working on our passive income and hopefully, I can bring it up to about $2,000/month by 2020. I’m pretty confident we’ll make it to 2020 without hitting any huge disasters. Mrs. RB40’s work is actually very stable, so I don’t foresee her getting fired or anything. In 10 years, she’ll probably be tired of working, but by then our passive income should be at a much better level.

What about you? What would you do if you retired early and your finances started to go south? The good thing about early retirement is that it doesn’t have to be permanent. You can always go back to work in some capacity.

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{ 49 comments… read them below or add one }

Melissa June 11, 2014 at 1:14 am

I think its always good to have a back-up plan as you never know what upsets life may throw at you.
To have a plan formed in your head already so if the worse were to happen, you already have an idea of what you should do, may prevent you making a rash decision and making mistakes.
I’m along way from becoming FI and quitting my job so haven’t got a back-up plan yet as I am still trying to work out a plan to retire early!

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Clarisse June 11, 2014 at 1:25 am

y having a solid back up plan would really help us a lot just in case the worst scenario come. I already learned a lot when my father died, our family is just a one income family and when my father passed away, we really had a big financial problem.

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retirebyforty June 11, 2014 at 9:36 pm

With one source of income, you really do need a good back up plan. Thanks for sharing.

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Jon_Snow June 11, 2014 at 5:11 am

If I had to, I would sell our city home (mortgage free and worth around 300k) and move to our 10 acre island property on the B.C. coast. I would be able to catch much of our protein needs from the ocean, and have a massive garden and orchard.. some chickens too for meat and eggs. I am already a good fisherman, but my gardening skills need a lot of work. But I don’t think it wouldn’t be long until we reached a certain level of proficiency at “living off the land”.

Something drastic would have to happen for us to have to make this move to our little island, but I like to be prepared for anything. I much rather do this than go back to work after retiring early… BTW, looks like I’ll be ER’d by October 1 this year – already starting to draft my letter of resignation. :)

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retirebyforty June 11, 2014 at 9:37 pm

That’s a great backup plan. Good luck with October 1st! Can’t wait to hear about the big day. Great job!

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John C June 11, 2014 at 5:33 am

I’m a big fan of backup plans. Once we reach F/I, or an FFR score of 25 or greater, I still plan on working part time in my field to keep my foot in the door, this will also keep some money coming in and cover the vast majority of our expenses. I would be working about 8 – 12 weeks a year. If we came on rough times I could increase the number of weeks I work.

Moving out of the area wouldn’t do us much good, but if push came to shove in a really bad scenario we could sell our main residence and move into our rental house, which is about a third of the value.

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retirebyforty June 11, 2014 at 9:38 pm

Working part of the year is a great idea. I will try to do that when we get a bit older to bring in a little income.

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Steve June 11, 2014 at 6:23 am

Interesting that you didn’t mention getting back into Real Estate. That backstop seemed helpful, as you have mentioned not having it a few times now, and John mentions it too. I’ve never owned a rental, but am struggling to find good, ER longevity helping investments…

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retirebyforty June 11, 2014 at 9:40 pm

We’re working on a rental backup plan, but I’m not sure if it will go through. We’ll have to see how it goes. I really like rentals as a long term passive income generator. We just need to find the right properties.

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Frugal Pediatrician June 11, 2014 at 7:04 am

Thanks for explaining the FFR. I thought we were doing pretty good but we are in our mid to late 30s and ours is only 8.8. So 25 is the goal? I like that there are multiple metrics people use to test your health for early retirement. My husband is having some health issues but we are covered by sick and disability leave and have a huge buffer. We had controlled our spending drastically about 2 years ago compared with our peers, so we have played the financial emergency scenario around and feel comfortable. Worse case scenario I would keep on working and we would sell 1 or our rental properties to pay the house off, and still be fine in terms of monthly cash flow.

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retirebyforty June 11, 2014 at 9:46 pm

Yes, 25 is the common benchmark. That way you can withdraw 4% and your chance will be pretty good. Historically, that size portfolio should last 30 years or more. However, if the retirement time is 50 years, then it’s a different story…
You guys have very good income so you should be able to increase your FFR very quickly. I’m sure you’ll get to 25 very soon. Good luck!

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Justin @ Root of Good June 11, 2014 at 7:44 am

Plan A is to ride out short term drops in the portfolio. When I start to worry, Plan B will kick in, which is to trim spending and maybe ramp up the online efforts to pull in a few extra bucks. Plan C is go back to work full time or part time.

A half time position in our old careers for either me or Mrs. RoG would fund our living expenses, but a half time position is probably impossible to find.

It looks like you have a good series of steps in your back up plan to cut costs if/when necessary.

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retirebyforty June 11, 2014 at 9:47 pm

Good backup plans. Yeah, half time position for me would be hard to find too. Maybe consult for 6 months and then take the rest of the year off?

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SavvyFinancialLatina June 11, 2014 at 7:46 am

Having a back up plan is always a good idea! If we were to lose our jobs, we would just have to find new jobs since we are so young and don’t have huge savings to live off our rest of our lives.

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retirebyforty June 11, 2014 at 9:48 pm

Yeah, you’re young so work is a good option for you. :)

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Susan June 11, 2014 at 8:14 am

Seems like you forgot that the healthcare expense would rise if Mrs. RB40 lost her job and you had to purchase insurance on the open market. Although at a much reduced income you would qualify for a subsidy (under the current ACA). Just a thought….

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retirebyforty June 11, 2014 at 9:49 pm

You’re right. That is a big problem. Our insurance cost would rise by at least $2-300/month. I’m pretty sure we can get the subsidy with less income.

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Aldo June 11, 2014 at 11:21 am

If I lost my job, I would definitely have to find another job within 3 months – I only have a 3-month emergency fund and almost no other income. I’m slowly building my emergency fund and working on ways to earn more money on side jobs, but I’m not there yet.

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Nicola June 11, 2014 at 11:44 am

It’s always good to have a back up plan – I don’t think we’ll need one as it seems like we’ll never reach our goals! But, I’d have to leave the door open to going back to work, if all else fails.

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Chris June 11, 2014 at 12:14 pm

The wife and I are pretty mobile. We love Chattanooga, but the backup plan would be to move to a new job. There is a fair amount of demand for my profession and I’m confident I could find a quality job in less than a month.

If we were tied to our city and refused to move away, things would be more dire. Our investments couldn’t generate enough passive income to get us by. Scary thought.

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Happyu June 11, 2014 at 12:20 pm

Would you consider an interesting part time job ? The longer you are out of the workforce the less attractive one becomes to possible clients or employers.

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retirebyforty June 11, 2014 at 9:50 pm

Yes, I would find something part time. Probably not in my previous field. Or maybe start a small business. That will be more than a full time job, though.

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Harry June 11, 2014 at 4:43 pm

Interesting reading, once again. Just out of curiosity: Is there any “science” behind your FFR ratio of 25 or just a rule of thump (like expecting you make it another 25 years beyond your sixtieth b’day and assuming that inflation will be compensated by a nominal interest rate equal to the inflation rate)?
Thanks

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retirebyforty June 11, 2014 at 9:53 pm

Yes, see the “Trinity Study” http://en.wikipedia.org/wiki/Trinity_study
Historically, your portfolio growth should enable you to withdraw 4% and last a normal retirement.

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Philip June 11, 2014 at 5:26 pm

RB 40-How did you find out that real estate in Port Saint Lucie, FL was so reasonably priced?

Thanks,

Philip

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retirebyforty June 11, 2014 at 9:55 pm

From the internet. :) I just searched for best cities in Florida. I know Florida is more affordable so that sounds like a nice destination to me.

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Dividend Mantra June 11, 2014 at 5:52 pm

Joe,

“The good thing about early retirement is that it doesn’t have to be permanent. You can always go back to work in some capacity.”

I think you nailed it right there. Retiring early doesn’t mean you hand in some kind of work card and you’re never able to have a traditional job again. Besides, I think anyone enterprising enough to retire very early in life is unlikely to never again be in a situation where they’re going to earn some kind of active income.

But I can’t recommend Florida enough. No state income taxes, great weather, laid back lifestyle, and plenty of sunshine. Wait, why did I move back to the North???

Best wishes!

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retirebyforty June 11, 2014 at 9:57 pm

Thanks for the encouragement. We’ll have to visit Florida and see if it’s the right fit for us. Sounds really nice. I also believe that if you can retire that early, then you’ll figure out a way to get through temporary setbacks.

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Maverick June 12, 2014 at 1:50 am

Joe, since you like southeast Asia weather, I assume you wouldn’t mind the humidity of southwest FL. My wife’s aunt lived near Port Saint Lucie. For my wife and I, it was great to visit from Jan to April! July through September was absolutely awful…we went from the house A/C to the car A/C to the store A/C. Rented a small boat, went out in the gulf and found large areas of dead fish floating on the water due to red tide (a reddish algae bloom caused by a microorganism common in the Gulf of Mexico). We’ve gone there to visit for many years and were always surprised at how fast neighborhoods and stores changed to less than desirable areas. Pick an area and visit it for 10 years, you’ll see what I mean. Again, I love visiting there…just not investing my life there.

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retirebyforty June 12, 2014 at 10:07 am

Changing neighborhood is a problem. I wonder why. I guess a lot of houses were foreclosed and the neighborhood went down hill. There are still so many foreclosed property in Florida. Thanks for your input.

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davidmichael June 11, 2014 at 6:18 pm

Joe…one thing coming up will be cost increases for your son. Kids get more expensive as they grow older. When they are teens…lots of unforseen expenses…anywhere from a car to private high school to saving for college. My granddaughter who is a world champion rock climber (age 16) costs her parents easily an extra $1000 a month just for travel to the competitions.

Florida as compared to Oregon? Check it out first. Hot, humid, buggy, flat, and snakeville.

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retirebyforty June 11, 2014 at 9:59 pm

Thanks for your advice! I didn’t cost my parents much at all when I was a teen. :) We’ll have to be flexible when the time comes. If we have a lot of money, then we’ll be able to pay for activities. If not, then we’ll just have to make do. I don’t mind the humidity, but I don’t think Mrs. RB40 will like it. :)

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Bruce June 11, 2014 at 6:41 pm

Joe

Like the plan you laid out. Simple and realistic which is the best plan of all. I live in Port St Lucie and you can buy 1,300 sq ft homes for half that amount. Just sold one a few weeks ago. 1,400 sq ft, great nieghborhood completely renovated for $140,000. Taxes were $1,900 a year and utilities about $100 – 140 a month. Pretty cheap living.

Bruce

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retirebyforty June 11, 2014 at 10:01 pm

Thanks for your input. I’ll have to go check it out soon. Portland is getting more and more expensive. It’s okay for now, but we probably should move in the long term.

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No Nonsense Landlord June 11, 2014 at 7:15 pm

FL is quite a bit cheaper.

I often think I am close enough now that I hope to lose my job. A decent severance package, followed by unemployment would be nice…

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retirebyforty June 11, 2014 at 10:01 pm

Good luck with a severance. :)

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Allan June 12, 2014 at 7:17 pm

I think that what is great about being financially independant is that you have a lot of time to think and prepare B and C and D plans like these. Most people don’t even have a B plan in case they lose their job (unique source of income). I think you’ll do just great. You have online income and like you said, you could just go back to work for whatever corporation in case of emergency!
Keep going!

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Grise June 13, 2014 at 5:42 am

A desired south florida neighborhood is very expensive taxes and insurance are a problem, please look into the school system. Lived here for 34 years and love it.

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Financiable June 13, 2014 at 8:47 am

Wow – how do you keep your pre-school and grocery costs to $380 and $400 a month respectively?

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retirebyforty June 13, 2014 at 10:06 am

He only goes to preschool 2 days/week from 9 am to 1 pm. Grocery isn’t that bad at $400. That’s plenty of food for 3 people. We mostly cook from scratch.

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Caroline June 13, 2014 at 9:21 am

Interesting that the numbers don’t show what happens to medical expenses if Wife loses her FT job. Medical expenses are a big chunk of typical household budget even in lower costs states, like FL as you profiled. I’ve seen some early retirement sites that just forsake medical insurance altogether, but that’s a different type of risk.
What is your backup plan for medical if you both retire before Medicare kicks in?
Thanks,
Caroline

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retirebyforty June 13, 2014 at 10:05 am

Thanks for calling me out. I updated the entry for medical expenses. I just checked our state’s health insurance site and we can get a silver plan for about $90/month with tax credit. The kid can get subsidized (free) coverage from the state. At that level of income, I don’t mind a little subsidy. Is that wrong?

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EL June 14, 2014 at 5:49 am

Yes retirement concerns can be worrisome. If I remember correctly the sale of the 4 plex should boost cash flow if you place the proceeds in dividend stocks. As the stocks don’t cost a dime going forward when compared to the 4 plex long list of repairs.

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Dividend Diplomats June 14, 2014 at 3:01 pm

RB40,

It’s amazing that where you live is a primary/huge driver in your overall monthly expense listing. Once you factor in: Mortgage Pmt, Prop Tax, Insurance, Utilities and the typical fixers in the house – it wipes a lot from your pocket. I bought a house 3 years ago and renting now always intrigues me, as you essentially reduce the “out of nowhere” expenses (roof, leaks, pipes, furnace tune up, gutters, etc..) and can actually keep the payment down/can be cheaper. Great article! We also had an article out that you can save a large amount on an annual basis, and invest it into a pretty “hefty” nest egg. Talk to you soon!

-Lanny

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retirebyforty June 15, 2014 at 11:30 pm

It really depends on where you live. I still think in most places, it’s better to own. The home is a great way to accumulate equity as long as you don’t refinance too often. Good luck!

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Scott June 16, 2014 at 7:02 pm

We are all about positive cash flow. Mid-late 40s with $2k monthly dividend & interest payments and keeping the appreciation growing. Very little risk in our portfolio.

Living in Mexico at the moment. Likely to return to Texas some day. Maybe Florida too.

Backup plan is to return to work, but will try not to. We’d really like to keep volunteering wherever we go.

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retirebyforty June 16, 2014 at 10:34 pm

$2k passive income per month should go pretty far in Mexico, right? I’d love to do that too, but the family dictate our US location for now. When we both retire, I think we’ll try living in a foreign country for a while.

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Allan June 24, 2014 at 12:10 am

I like you blog because what you say is very honest, unlike some others out there. I am 55ish and planning on retiring soon.

As others have mentioned, watch out for medical expenses and insurance. There are premiums certainly, but also deductibles and out-of-pocket expenses. These added expenses can easily be in the 10′s of thousands of dollars. It is not just premiums that matter, but the “out-of-pocket” maximums.

It’s also easy to get complacent when your young and healthy and expenses seem low, but believe me, things can turn on a dime.

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retirebyforty June 25, 2014 at 9:20 am

Thanks for your input. Medical and insurance expense is a big concern. I’m not looking forward to it at all. Maybe we can move to a foreign country with more affordable healthcare for a few years.

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