Ornoth

This is a question that has followed me for most of my life. From the college employer who had no idea what I did for him; to Inna’s family and friends who wonder how I spend my copious free time, since I don’t work. It’s a question even Inna herself can’t answer, despite having lived with me for six years!

That question – what do you do? – confuses me, because I make no secret of it; there’s evidence plastered all over my social media.

I suspect that people are confused because I don’t push myself and my interests forward in verbal conversations. I’m more of a listener, allowing others to guide the conversation, and will only talk about myself after people express interest in what I’m up to; although most people will naturally direct conversations toward their own interests.

And then some of my closer friends avoid delving into my interests because they know that once I do get that implicit permission, I’ll talk about them enthusiastically and at length. Kinda like when you open up one of my blogposts… There’s a reason why my writers’ group always cautioned new members with, “That’s Orny… Don’t encourage him.”

On a side note, my interests tend to be very long in duration and deep in nature. It might take a while before I commit myself to something, but when I decide to do it, I insist on doing it well and thoroughly. I will not half-ass anything I do; this is one of my core values as a person.

So let me attempt to answer that eternal question: what does Orny do, anyways?

Number one: cycling. I ride up to 10 or 20 hours a week, either solo, group rides, or major events, both outdoors as well as on the indoor trainer through the winter. And that doesn’t include time spent on bike cleaning, maintenance, repairs, and performance analysis. Cycling is my passion.

Number two: meditation. I spend 2-4 hours a week in meditation, and another couple hours listening to dhamma talks. About twice a month I lead two different meditation groups, and must put time into researching, developing, practicing, and delivering my own dhamma talks. Sometimes I’ll go off on weeklong silent retreats, and I’ve always got plenty of dhamma reading to do. The philosophy and practices behind Buddhism are a central part of who I am.

Number three: investing. My former employment at Sapient gave me enough capital to consider living free of the working world. However, that means my “full-time job” is to invest my finances wisely and safely, and provide financial advice to Inna. So I devote a ton of time to reading financial news and books about investing. I keep tabs on the market daily, both because I want to be aware of my opportunities and, frankly, I enjoy monitoring my success. Financial self-sufficiency and independence are life goals that were drilled into me by my parents.

Number four: the Pan-Mass Challenge. I’ve ridden this annual fundraiser for the Dana-Farber Cancer Institute sixteen times and raised $119,000 for cancer research. You have no idea how much time that fundraising effort requires: the countless emails, tracking contacts (and writing my own database to manage it), chasing down corporate matching gifts, et cetera. For many years, it alone was a full time job from May through August. But this has been one of the most fulfilling things I have done.

Number five: learning Japanese. This winter I’ve put 10-15 hours a week into this newest intellectual challenge I’ve committed to. Characteristically, I’ve attacked it with energy and dedication. Academic learning and developing new skills are lifelong pleasures, and this is their current form. There’ll probably be a separate blogpost on this sometime later.

Number six: my relationship with Inna. It should go without saying that a lot of time goes into sharing our lives together and helping one another out. Partnership and family have always been a challenge for an introvert and loner like myself, so this is where a lot of work needs to happen.

So those are the big things.

Now fill in the remaining gaps with some of my more episodic background interests. Between my general and cycling blogs I write two or three dozen posts per year. I devote time to artistic interests in both photography and videography. I find time to enjoy a number of simulcast anime series and follow MLS soccer and the New England Revolution as well as the US national team.

And there’s always plenty of household duties. I’m fairly fastidious about my living conditions, and my responsibilities include vacuuming, laundry, garbage & recycling, car maintenance, computer maintenance, and cat feeding, grooming, litterbox, and exercise (if you only knew!). Plus grocery shopping and cooking for myself every day. And then in the background is researching our future move away from Pittsburgh.

That’s my life every day. If you ask me, I think the question shouldn’t be “What does Orny do?” but more like “How does Orny possibly do all that?”

Two years after I wrote a couple posts about money—The Ghost of Munny Past and The Ghost of Munny Present—an astonishing discovery has prompted me to finally complete the cycle.

But before I get to the meat, how have the past two years gone?

Pretty good. My investment gains are keeping pace with my spending, which is convenient. Most of my stocks have been winners (or at least not losers), although I’m surprised by the amount of turnover in my portfolio. And gold has been a surprisingly good call. Overall, I’m quite happy... at least at this precise moment in time.

But what I really want to share with you is a windfall that’s so big, I can only compare it to when I discovered how to cash out of my 401k / IRA without paying any income taxes. It’s the same level of jaw-dropping awesomeness.

And it comes in two parts.

It began when I needed to look up capital gains tax rates. Short-term gains from stocks held less than a year are taxed at the same rate as regular income, and I thought long-term gains were taxed at a single flat rate.

But I was wrong; long-term capital gains are taxed at three graduated rates based on your income, and at low income levels, the long-term capital gains tax rate is 0%!

That’s right: so long as your total income is less than $39,375, you pay no federal tax at all on long-term capital gains! Better still, your $12,200 standard deduction also factors into your income, which means that 0% tax rate still applies for people with incomes up to $51,575!

If, like me, you have unrealized profits from long-term investments, but negligible income because you’re between jobs, this means you can sell your stock and pocket the entire proceeds without paying any federal tax on it! If you sold stocks that had appreciated by $30,000, that would save you $4,500 at the basic 15% tax rate, or $6,000 at the higher-income 20% tax rate. That’s an absolute steal!

“But Orny,” you say, “I want to keep my investments. I don’t want to sell them, especially the ones that are making lots of money!”

Such a deal I have for you!

Here’s what you do: sell your appreciated stock, then just buy an equal number of shares to open a new position. That way, you recognize the profit now, while you can take advantage of that mindblowing 0% capital gains tax rate, but continue to stay invested. It’s called a “wash sale”.

The newly-purchased shares will have a new, higher cost basis, which reduces any capital gains tax due when you eventually close that position. Aside from trading fees, the only drawback is that you also reset the timer on how long you’ve owned that position, so the new shares become a short-term investment until you’ve held them for a full year.

“But wait a minute,” you say, “aren’t there tax laws that forbid selling and buying the same stock within 30 days?”

Yes, there are; but here’s the second bit of jaw-dropping awesomeness: the federal wash sale rule only applies to investments sold at a loss! Because you accrue tax benefits when you lose money on an investment, the IRS doesn’t want people monkeying around and taking artificial losses. But they only care when you're selling an investment at a loss; the wash sale rule doesn’t apply at all when selling an investment at a profit!

So go ahead: sell your winners, pay zero taxes on the capital gains, then turn around and repurchase the shares at a higher cost basis if you want. It’s all completely kosher!

Like my tax-free 401k trick, this windfall is only open to people with low incomes, but if you qualify, it’s a flabbergasting opportunity that you shouldn't ignore.

Honestly, these unexpected benefits of unemployment are a persuasive argument to never go back to work again!

It’ll surprise those of you who know me best, but aside from my 2016 mention of my condo sale, I haven’t posted about money at all in four or five years, mostly because “people get funny when you talk about munny…”

But since money is one of my six necessities for happiness, and because things are afoot in that department, I’m going to correct that with a two-part look at money and investing. This first part will be a retrospective covering the 25-year period from 1990 to 2015, and a followup post will discuss more recent developments since moving to Pittsburgh.

The Windfall

The event that kickstarted my savings was, of course, working at Sapient. I joined a startup of 120 people, and during the dot-com boom we grew to over 3,600 staff, went public in an IPO, and were added to the prestigious S&P 500. We were one of the biggest internet darlings, and my Sapient stock options made me a moderate but comfortable nest egg.

On one hand that was just an unexpected windfall: a completely arbitrary gift from the heavens. On the other hand, I worked my ass off at Sapient for seven long years, and my coworkers did the same… That windfall was the result of our long hours, huge sacrifices, mental discipline, and collective business and technical acumen.

I was a pretty conservative stockholder. I never wrote covered calls against my Sapient stock (i.e. selling others the right to buy my stock at a particular future price), nor did I use my Sapient holdings to buy other equities on margin (i.e. borrowing against unrealized paper gains). Thus I avoided the pitfalls that claimed some of my coworkers’ fortunes when the internet bubble deflated. Some simply held their stock for too long and watched, paralyzed, as it spiraled into the shitter. Others got hit with margin calls, which forced them to sell their stock well below its peak.

I was a little bit wiser and a fair bit luckier. I knew buying on margin was stupid, and also that tying up 99 percent of my net worth in one volatile internet stock was even more stupid. Instead of thinking the stock could only go up, near the top of the bubble I decided to cash out most of my stock and use the proceeds to buy a condo. I attribute the fortuitous timing to blind luck, but financial wisdom drove my decision to move my tenuous paper gains into something less volatile, e.g. real estate.

Not that I wasn’t making big mistakes of my own. When I sold, I incurred a ludicrously heavy capital gains tax burden, which threw me into the dreaded Alternative Minimum Tax category. Then I compounded the problem by not knowing enough to file quarterly estimated taxes, which incurred substantial penalties. I know: “First World problem”. But let me tell you, writing an obscenely huge tax check to the government ranks as one of the most painful things I’ve ever done. Lesson learned!

Congratulations on Your New Mortgage!

Those who parrot conventional wisdom will tell you that carrying a mortgage is a smart way to force yourself to save money, and that you get great tax benefits by writing off your property taxes and mortgage interest payments. Then you sell your home for maybe 50 percent more than the original purchase price. Sounds pretty awesome, doesn’t it?

It isn’t. Consider your expenses.

No one lends you money for free. When you add up all your mortgage payments, you’ll find that over the course of the loan, you pay back two to three times the amount you borrowed. That’s like going to the bank every week and depositing $300, but only being credited with a $120 deposit!

Then add on all the ancillary costs: local property taxes, mortgage insurance premiums, home insurance, condo fees, utilities like heat and water and sewer and electricity, maintenance and repair, and more. Now your 50 percent profit is looking mighty thin.

But you won’t see that 50 percent profit anyways. Remember that when you sell your home, you’ve also got to cover the real estate agent’s fee and closing costs. And if there’s still any profit left, don’t forget the tax the government will levy on your capital gain.

Sure, sometimes owning a home makes financial sense. But much of the time it doesn’t, and it’s a ludicrously inefficient way of saving for your future.

Unemployment, or “Quasi-Retirement”?

So after selling my stock, my main job became ensuring that I could pay for that mortgage lunacy. For the next decade, I bounced around five jobs, quitting twice, being laid off twice, and taking severance when one employer got bought out. That’s pertinent because I learned one of the most valuable financial lessons of my life after leaving Sapient due to my first layoff experience.

Being laid off ain’t so bad at first. You might get some severance pay, and you’ll get unemployment insurance checks. You might be able to get by for a while; I did. I even kept my mortgage payments up! But a year later I had a problem: how to pay the mortgage when both my severance and unemployment ran out?

About the same time, I realized something important while doing my post-layoff income taxes. My only income that year came from my severance and unemployment checks. Then, when I looked at my deductions, I got those promised mortgage interest and property tax deductions, which would offset about $25,000 worth of income. Basically, those huge deductions offset all of my meager income, which meant I owed zero taxes!

But with my severance gone and unemployment ending, I was in a really strange position. I had a huge liability to pay (my mortgage), but no income, and a huge $25,000 tax deduction which I couldn’t benefit from unless I had income! If only there was some way to apply the deductions to my mortgage payment…

That’s when I remembered my other big, forgotten asset: my retirement savings. There was plenty of cash in my 401k and IRA, but since I wasn’t retirement age, I would have to pay regular income taxes on anything I withdrew, plus a 10 percent penalty.

But if I only withdrew $30,000, that “income” would be completely offset by my mortgage deductions, plus my personal income tax exemption. Essentially, I could withdraw a certain amount from my retirement account, and—thanks to those mortgage deductions—pay *no income taxes on it at all*, just the 10 percent penalty! Then I could use that money to pay my mortgage, and everything would be copacetic!

Now, I wouldn’t advise normal people to raid their retirement account. But compared to my Sapient windfall, my IRA was a small part of my net worth. I always expected to finance my retirement with the proceeds from my Sapient stock (now tied up in my Back Bay condo), rather than my comparatively small “retirement” account. So it actually made sense to raid my IRA account.

That worked out so well that I took three years off between Sapient and my next job. I recharged my utterly depleted energy levels, did lots of biking, traveled, and generally just enjoyed the hell out of life. It felt like taking three years of my retirement and pulling them forward into my forties, when I could enjoy them more fully than if I were older. It was an immense, immense blessing.

And boy, did I internalize that lesson! When I went back to work, I dedicated myself to building up my savings, so that when I was laid off again in 2008, I could afford to take two years off without having to raid my retirement account. And another whole year off in 2014, when my employer was bought out. And I converted the majority of my IRA to a Roth IRA, a taxable event that was made easier by having no other income for that year, but large mortgage deductions.

To be honest, in the 16 years since Sapient let me go, I’ve spent more time unemployed than employed. Having the financial resources to take a year or two between jobs, bringing several years of my retirement forward, has been one of the greatest blessings and most valuable financial lessons of my life.

Taking Stock

After leaving Sapient, my financial life was mostly quiet, since most of my net worth was tied up in my condo. I did hold some money back, so that I had a little cash to invest elsewhere.

At first I tried my hand buying individual stocks, but being very uneducated about the market, I had mixed results at best. Looking back, I’m surprised at how many individual stocks I bought. At various points I held: Cardinal Health, Staples, Fleet Bank / BankBoston, gold miner Freeport McMoran, MBNA, and Sprint.

I never made real money on any of those stocks, and eventually accepted the fact that I was taking too much financial risk and not reaping any reward. And more than anything else, I wanted to keep those assets safe, so that they would cover my expenses if I had the opportunity to take time off between jobs. So I satisfied myself with the much safer alternative of just buying and holding less volatile mutual funds.

Paying the mortgage and shepherding my assets, alternating between work and time off: that’s how more than a decade would pass. That would change dramatically in 2016, but that part of the story will be told in my followup post: The Ghost of Munny Present…

The date: August 2008. Ornoth pulls the trigger on a $10,000 stock deal, adding 100 shares of copper and gold miner Freeport McMoRan (FCX) to his qualified retirement fund.

Well done!

Three months later, the stock has plummeted 83 percent: from $92 a share to just $15. My $10,000 investment is only worth $1,500, having lost $9,000 of value in the banking collapse of 2008.

Timing… I has it!

Since then, the stock has slowly recovered in sporadic fits and starts. But today I was able to sell those 100 shares of FCX off at $92: a wash sale. It took 22 months—two years—for the stock to finally regain the value it lost in those first 3 months. Or you could look at it this way: in the two years since that 2008 low, the stock has appreciated 586 percent, and I just locked in that “gain”.

Wow. That was one scary ride. Jane, stop this crazy thing!