Archive for the 'Goals' Category
Tuesday, June 11th, 2013
Here’s a mid-2013 update of our retirement portfolio, including employer 401(k) plans, self-employed retirement plans, Traditional and Roth IRAs, and taxable brokerage holdings. Cash reserves (emergency fund), college savings accounts, experimental portfolios, and day-to-day cash balances are excluded. The purpose of this portfolio is to eventually create income and enable financial freedom.
Target Asset Allocation
Since my last update, I made a minor change to our target asset allocation by removing Emerging Markets as a separate added weighting as it now includes some huge companies and comprises nearly 20% of the Total World ex-US (Total International) asset class.
Read the rest of this entry…
Friday, April 12th, 2013
Originally posted here on December 3rd, 2005:
Thinking about goals and the future some more, I have this picture in my head of our dream future in 5-10 years:
- I work at a job I enjoy for only 20 hours a week
- My wife also works at a job she enjoys for only 20 hours a week
- We both share responsibility for taking care of our kids with minimal, if any, need for daycare.
- Our combined incomes still make it possible for us to reach our financial goals. However, we’re not really interested in being filthy rich.
We are gonna make this happen. Check back with me on 12/3/2015
We both really wanted this, even though we are more tired now than when we were both working full-time. (Even though we sleep at 9pm now instead of 1am.) Although I write about money daily (at times it may seem like an obsession)… it certainly didn’t feel like 8 years had gone by since I made this goal.
I recently bought a new print that will be in my daughter’s room eventually, but for now hangs in my home office. It says Don’t Forget To Be Awesome. I think we all have own personal definition of “awesome” – whether it’s starting your own business to being active in your community to simply being a good parent (even though that is anything but simple). Now, we are still far from reaching our “awesome”. But I think the phrasing is perfect; it’s so easy to forget to pursue our unique dreams in today’s hectic, noisy world.
Wednesday, January 23rd, 2013
Here’s a belated 2012 year-end update of our investment portfolio, including employer 401(k) plans, self-employed retirement plans, Traditional and Roth IRAs, and taxable brokerage holdings. Cash reserves (emergency fund), college savings accounts, experimental portfolios, and day-to-day cash balances are excluded. This is the portfolio that we are depending on to create income and thus financial freedom.
Asset Allocation & Holdings
Here is my current actual asset allocation:
The overall target asset allocation remains the same:
Read the rest of this entry…
Wednesday, January 16th, 2013
The free Personal Financial Planning course on Coursera has begun (there’s still time to join), and the first week’s topic is “Where are you? Where are you going”. One of the activities is calculating your personal net worth.
It may seem like a small thing, summing up your assets and subtracting your liabilities, but I am a living example that it does make a difference. I posted my first public net worth on December 9th, 2004:
Assets: *= pre-tax
Cash Savings: $54,983
Brokerage (non-retirement) $ 7,808
Roth IRA: $ 2,001
Traditional IRA*: $ 5,383
529: $ 1,097
Credit Cards: $26,522
Net Worth: $55,750
(I had a lot of money tied up in no fee 0% balance transfers at the time, with the money safely earning 3-5% interest in bank accounts.)
Now, I no longer share our raw numbers on the internet down to the dollar, but I still track my net worth privately and update my progress towards financial freedom regularly. I definitely think it made a difference, seeing the benefits of a pay raise or debt payoff. A little over 8 years later, our net worth is many times larger and we plan on paying off our mortgage completely this year. Knowing how you stand won’t solve all your problems, but it may give you a reality check especially if you were like me and exiting college well with a 5-figure negative net worth.
As I’m sure someone wise/rich/famous has said – “If you don’t know where you are, then how do you know how to get where you’re going?”
Or the other classic – “If you don’t know where you’re going, any road’ll take you there”
Monday, April 23rd, 2012
This updated post explains my ratio-based method of tracking our financial progress towards early retirement (as shown by the status indicator on the top right of every blog page).
Cash Reserves / Emergency Fund
Our goal is to always have a full year of expenses in cash equivalents as our “emergency fund”. (This is not the same as a year of income. Our expenses are much lower than our income.) This is a cushion for a variety of potential events including job loss, health concerns, or other unplanned costs. It also allows us to take a more long-term view with our investment portfolio since we know we won’t have to touch it.
Since our emergency fund is relatively large, I try to maximize the yield. If we stuck it all in a money market fund, the yield would be barely above zero. With a bit of work, our cash earns a blended rate of over 2% annually without taking on extra risk. We use the same accounts to make money from no fee 0% APR balance transfer offers, but currently don’t play that “game”. Here are recent updates on where we keep our cash:
March 2013 Cash Reserves Update
June 2012 Cash Reserves Update
March 2012 Cash Reserves Update
May 2011 Cash Reserves Update
January 2011 Cash Reserves Update
I don’t think everyone should buy a house (or more accurately, take out a huge loan on a house), as it historically doesn’t necessarily work out to be a very good investment over short or even long periods. However, if you are geographically stable, I do think buying and eventually owning a house free and clear can be a solid component of an early retirement plan. My current forecast is to have our house paid off in
10-15 5-10 years. Housing is very expensive where I live, so once that mortgage payment is gone, the actual income my investments will have to produce will drop drastically.
There are many ways to define home equity, and I am sticking to a simple method of calculating home equity by taking 100% minus (outstanding mortgage balance / original home purchase price). As of 2011, our home price has rebounded to over the original purchase price according to a refinance appraisal and comparable sales. Overall, I’d rather enjoy having continuous progress without worrying about my home’s exact market value. Here are some previous mortgage updates:
April 2013 Mortgage Paid Off
November 2011 Mortgage Payoff Update
February 2011 Mortgage Payoff Update
The goal of my investment portfolio is allow withdrawals to support our needed expenses in “retirement”. Again, income and expenses are not the same thing. After mortgage payoff, I expect our required expenses to be less than 25% of our current income. I like to assume a simple 3% safe withdrawal rate, which means for every $100,000 saved, I can generate $3,000 a year of inflation-adjusted income for the rest of our lives. I used to assume 4%, but since our target “retirement” age is in our 40s and not 60s, I feel that 3% is better. Even 3% is not guaranteed, but again it does provide a quick estimate of progress. Here are recent portfolio updates:
July 2012 Investment Portfolio Update
February 2012 Investment Portfolio Update
November 2011 Investment Portfolio Update
July 2011 Investment Portfolio Update
My initial goal was to try and keep the home equity and expense replacement ratio about the same so that both will reach 100% at the same time, but we’ll see. I am still (very slowly) researching shifting to a more income-oriented portfolio that yields about 3% and has a principal value that can grow with inflation.
The actual implementation of my plan will probably require more flexibility. At some point, I plan on using some of my money and invest in an immediate annuity for some income stability. I’ll also need to vary my exact withdrawal rates a bit with market conditions. Once I reach age 70 or so, Social Security will kick in something. I don’t think Social Security will disappear although I do expect means-testing, but who knows these days.
Wednesday, February 15th, 2012
When dealing with other people, it’s always easier when you know what makes them tick. What motivates them? This led to some introspection. What did I really want out of life? I realized that I was probably much different than others. The following characteristics aren’t mutually-exclusive, there is no wrong or right really, as everyone may have a little of each but you may realize one is prominent.
Don’t take the Lego characters too seriously either, eh? I just went to a Lego-themed birthday party and watched Star Wars again.
“I seek the admiration and respect of others.”
“I like being the boss and giving orders.”
Duty / Honor
“I find a higher calling in serving my religion/country/world.”
“I love my job.”
“I want be a good wife/husband/mother/father.”
“I don’t take orders from anyone.”
Path of Least Resistance
“I don’t question the status quo and like to follow others.”
I would say that my top preferences from highest to lowest would be personal freedom, family, and duty. I’m still working on starting a family and how to best help higher causes. Low on my list is power and prestige. I don’t enjoy managing others (having people below me in the ranks) or being told what to do (having people above me). I feel this hurts me in the areas of leadership and probably makes me a bad employee. This make me think I should just work for myself. How about you?
Monday, November 14th, 2011
The late Randy Pausch became well known as a Carnegie Mellon professor who made a inspirational “last lecture” called Achieving Your Childhood Dreams (over 14 million views) after his diagnosis with pancreatic cancer. He later then wrote a book called The Last Lecture with Jeffrey Zaslow. As a former bestseller, you can now find copies on the cheap. It is a short and worthwhile motivational read. All the quotes are from the book.
Time is all you have. And you may find one day that you have less than you think.
One of the things I think about a lot more these days is legacy. As a human, I think most of us have a desire to outwit our own mortality.
What wisdom would we impart to the world if we knew it was our last chance? If we had to vanish tomorrow, what would we want as our legacy?
I think children help fulfill that need, as they allow a chance for a part of us to live on forever. For him, the Last Lecture itself was a legacy project for his family so that his young kids would know him better when they grew up. He also talked about his professional legacy:
Now a computer science professor at Washington University in St. Louis, Caitlin (oops, I mean, Dr. Kelleher) is developing new systems that revolutionize how young girls get their first programming experiences. [...] (You can keep tabs on their progress at www.alice.org.) Through Alice, millions of kids are going to have incredible fun while learning something hard. They’ll develop skills that could help them achieve their dreams. If I have to die, I am comforted by having Alice as a professional legacy
So his legacy projects were three things: his family itself, something for his family, and something to leave the world a better place. I think this is good framework for creating my own legacy.
Now how did he achieve those childhood dreams, as well as his legacy goals? More or less it was just hard work and persistence. What stood out to me was the idea that some things should be hard to achieve, and if you get it anyway you should be proud of it. Time spent complaining is time wasted.
The brick walls are there for a reason. They’re not there to keep us out. The brick walls are there to give us a chance to show how badly we want something.
…The brick walls are there to stop the people who don’t want it badly enough. They’re there to stop the other people.
Pausch didn’t get there on his own, even with all the hard work. He showed gratitude to his parents, his wife, the professor that got him into grad school after he was rejected, his kids, and many other colleagues.
Wednesday, November 9th, 2011
Time for another update of my investment portfolio, including employer 401(k) plans, self-employed plans, IRAs, and taxable brokerage holdings.
Asset Allocation & Holdings
You can view my target asset allocation here, along with link to other model portfolios. Despite the headlines, I still like to buy, hold, and rebalance. Here is my current actual asset allocation:
Everything is within acceptable ranges, other than I need to buy more TIPS. This is just an overshoot since I have my 401k buying shares in a stable value fund automatically, and my TIPS are mostly stuck in IRAs. Actually, my TIPS holdings have been doing great, due to how low real yields are right now. Last I checked, even 10-year TIPS had negative real yields.
My current ratio is about 75% stocks and 25% bonds. I’ve been thinking about this balance. On one hand, I’m contributing a lot of money into the portfolio, and I hope that I can get my “early” retirement on within the next 10 years. At that point, I’m going to want something closer to a 60% stocks and 40% bonds setup, the classic balanced fund ratio. So I want to shift towards bonds, but bond yields don’t look very appetizing right now. For now, I’m just going to keep up the gradual shift.
Vanguard Total Stock Market ETF (VTI)
Diversified S&P 500 Index Fund (DISFX)*
Fidelity Extended Market Index Fund (FSEMX)*
Vanguard Small-Cap Value Index Fund (VISVX)
Vanguard FTSE All-World ex-US ETF (VEU)
Vanguard MSCI Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VGSIX)
Vanguard Limited-Term Tax-Exempt Fund (VMLTX)
Stable Value Fund* (3% yield on past purchases, 1.8% on new)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
The overall expense ratio for this portfolio is in the neighborhood of .20% annually, or 20 basis points, which is much lower hurdle to overcome than the average mutual fund expense ratio of over 1% annually. This is all DIY, so I don’t pay portfolio management or financial advisor fees.
3% Safe Withdrawal Rate
I’ve also decided to use a 3% theoretical safe withdrawal rate instead of a 4% withdrawal rate. So instead of reaching 25 times our annual expected expenses, we will need to save 33 times. This is due to the fact that we will probably reach early retirement with 10 years, and thus our portfolio will have to last a lot longer than a conventional age 65 retirement. 3% is a more conservative number, and in reality I doubt that we will even go by the 3% number in strict terms. From reading other early retiree stories, we’ll stay flexible and adjust our withdrawals somewhat with market returns.
With portfolio increases and additional contributions, at a 3% withdrawal rate our current portfolio would now cover 43% of our expected expenses. If you recall, I plan to have the house paid off at retirement as well. It might be nice to have a portfolio that yields 3% where we could spend the dividends and interest payments, and I have been tossing around ideas for that as well. I still like the idea of 50% Target Retirement Income (or similar) and 50% Wellesley Income.
Monday, November 7th, 2011
We closed on our mortgage refinance about a month ago, the old loan has been paid off, and we are just about to make our first payment on the new loan. Still, I always seem to go back and forth between different possible scenarios of paying down the house quickly or according the “minimum payment” as I call it. Technically, I could just about pay off the house now, if I chose to liquidate my taxable investments and empty out my emergency fund reserve.
I decided to go back and reconstruct a chart of our home equity over time, and compare it to a couple of alternate scenarios.
The red line represents our actual home equity, as a percentage of our purchase price. We use the purchase price because our home is currently worth about the same as when the bought it. An appraisal done for our refinance last month came in at 6% above our initial purchase price. Before the big refinance, we did a haphazard combination up of throwing in a few hundred extra bucks each month and one big lump sum prepayment. Currently, we’re right at 35% home equity.
Just for fun, the dotted red line is an exponential trendline of the red line. It has the loan being paid off somewhere around 2020.
The blue line represents our theoretical home equity if paid according to the normal 30-year payment schedule of our initial 6% fixed mortgage, starting from when we bought the house in the start of 2008. This would have had the loan paid off in 2038.
The green line represents our theoretical home equity if paid according to the normal 15-year schedule of our new sub-4% fixed mortgage, starting from this month. This would have the loan paid off in 2026.
I definitely still want to pay it off in under the current 15-year term, but as usual I like the flexibility. If children come into the picture, we’ll probably cut back on work and slow things down. But for now, I’m still hacking away. We hit the 401k cap already for 2011, so we have some extra cashflow.
By the way, I am only a proponent of paying extra towards your mortgage if you are maximizing your available tax-advantaged accounts like 401ks and IRAs as well as have a nice cash cushion. Although now I do think everyone should consider 15-year mortgages. Who wants to take 30 years to own a home? Most other countries don’t even offer 30-year mortgages, and the government support of 30-year mortgages here simply inflates property prices.
Friday, March 4th, 2011
Like millions of other people out there, I decided to start trying to lose weight and get in better shape on January 1st. I cut out virutally all meat and was eating tons of fresh vegetables and whole grains. I went to the gym, ran outside, or played sports with friends nearly every day. I rarely ate out at restaurants, and when I did I ordered things like steamed vegetables and brown rice. I lost 15 lbs. within the first month.
Then I hit the wall. I was still exercising almost every day, but I started to dread the workouts. Even worse, I stopped losing weight. I started eating meat again, and adding some snacking back in. I could feel myself losing willpower. I was horrified to discover I had gained weight back.
I knew I had to make some changes. I allowed myself one “cheat day” per week so that I could eat out or drink a beer. I made an exercise routine for the whole week in to be more efficient and starting doing some workouts first thing in the morning before work. I try to only have one big meal a day and the rest much smaller. I acknowledge that I have my weaknesses (like snacking while watching ESPN, and getting hungry after watching Food Network) and avoid doing those activities. I started losing weight again, at a more regular pace of 1-2 pounds per week. More importantly, it didn’t feel like deprivation.
I’ve read that it takes 30 days to break a habit. Well, it took me 30 days to perhaps break my habit, but it took another 30 days to create a new habit that I feel that I can live with for the long run. The best part is the feeling of control that I have now. I know the things I need to do to lose weight. I know the things that I could do that will make me gain weight. It’s up to me. I call this the “I Can Do This” moment.
Applications to Saving Money
Like many other folks, I draw parallels between the actions of saving money and losing weight. In dealing with food, I often tell myself I have 1,500 calories a day to “spend” and so I should get the most value from my calories in terms of flavor, texture, and hunger satisfaction.
When I thought about this, I remember the same thing happened when I graduated college and started earning money on my own. Could I pay down my $20,000+ in student loans? How long would it take? Could I still afford the things I wanted? But the paychecks started coming in, and you started having to balance what was coming in and what was going out. Some things like electricity cost about the same each month, but then you learn to deal with things like car repairs and new computers. Eventually, I reached the “I Can Do This” moment where I felt a connection between my actions and the resulting surplus I had each month.
Here are some observations about reaching this point, which you may or may not agree with:
- When starting a difficult task, it’s good to go all out for a while even if you run out of willpower eventually. I needed that first 15 lb. loss. The same could be said about going on a “no-spending month” and saving up $500 or $1,000. I had built up something that I didn’t want to lose.
- It’s important to see a direct connection between your actions and the results. (At least initially.) This is why I no longer like articles with “52 ways to start investing with $100″. If you’ve managed to save $100 a month, it should go in the bank. If you invest it and one day your $1,000 balance turns to $500, then it affects your emotions and motivation. You’ve just lost 5 months of hard work. With a interest-bearing savings account, the amount will always be higher than yesterday. These days it’s not much, but it’s still higher.
- Routine makes everything easier. Make less decisions. Don’t make every single thing another mental decision. “Should I work out today?” “What about tonight or tomorrow instead?” That’s exhausting. Go to your Yoga class every Tuesday and Thursday. Every. Week. Tell everyone you’ll be there and not at happy hour. Remove the decision. Along the same lines, having money taken out of your paycheck or bank account automatically just keeps your mind from decision fatigue.
- Keep supportive friends. Changing your lifestyle often alienates you from some of your existing friends, and they may see it as a negative judgment upon themselves. They can sabotage your best intentions with their own selfishness, so be sure to find and keep people who support your decisions.
Do you remember your own “I Can Do This” moment?
Wednesday, March 2nd, 2011
Oh alright, here’s another net worth update. My last snapshot was about 9 months ago. I know people like the voyeurism, but hopefully my commentary will also provide some helpful insights as to achieving our goals.
Credit Card Debt
I used to take money from credit cards at 0% APR and place it into online savings accounts, bank CDs, or savings bonds that earned 4-5% interest (yes I know, much less recently), keeping the difference as profit while taking minimal risk. (Minimal in regards that the risk was only dependent on my behavior and not outside factors.) However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”.
Most credit cards don’t require you to pay the charges built up during a monthly cycle until after a grace period of about 14 days. This theoretically provides enough time for you to receive your statement in the mail and send back a check. As this is simply a snapshot of my finances, my credit card debt consists of just these charges. I don’t carry any balances or pay any interest charges.
Retirement and Brokerage accounts
Since my last update, the broad stock indexes have risen significantly, about 25% including dividends according to Vanguard Total World Stock Index ETF (VT) that I use as a general benchmark. Although these high valuations make me nervous, I am still a believer in stocks for the (very) long run and rebalancing your asset allocation regularly. Don’t buy high and sell low.
Here is our target asset allocation. Being heavy in stocks, our portfolio bounced back significantly as well.
Our total retirement portfolio is about $360k or on an estimated after-tax basis, $318,000. At a theoretical 4% withdrawal rate, this would provide $1,060 per month in retirement income, which brings me to 42% of my long-term goal of generating $2,500 per month. These are all really rough numbers, but helpful to measure progress and visualize living off your portfolio.
Cash Savings and Emergency Funds
We are happy to hold a year’s worth of expenses (conservatively estimated at $60,000) in our emergency fund. According to my emergency fund poll, many of you readers also have substantial savings set aside, with most having at least 4 months of expenses. Very nice.
Recently I wrote about how I maximize interest in my emergency fund, including the specific banks and institutions I use.
I would like my house paid off in 15-20 years at most, so I’ve been putting some extra money towards the mortgage. Note that this is only after maxing out both our 401k plans, fully funding IRAs every year, and creating a one-year emergency fund. I’d like our mortgage pay-down progress to parallel our portfolio growth so that both are ready for at least partial retirement in about 10 years.
So there you have it. Mrs. MMB and I both earned a six-figure salary again last year, which combined is in the top 5% of households. We try to save a lot of it while it stays this way. The future is hard to see, but we’re getting there a lot faster than we thought we could.
Saturday, January 1st, 2011
As 2010 draws to a close and the champagne is all gone, here’s an update on the status of our personal financial goals. I’ve been on the fence for a while about whether to continue our detailed net worth updates, and I’ve decided to reclaim some privacy and stop doing them in the previous format. Instead, I’d like to keep tracking our progress but in a opaque manner where I think everyone can still calculate their own and compare with us if desired. I’m not sure exactly how to do this, but here is a rough outline.
Credit Card & Consumer Debt
I think the first part of any healthy financial status should be to outline and pay off any consumer loans. We do use credit cards, but we pay our balances in full each month. We don’t have any auto loans or other forms of consumer debt.
I used to take money from credit cards at 0% APR and place it into online savings accounts, bank CDs, or savings bonds that earned 4-5% interest, and keeping the difference as profit while taking minimal risk. (By this I meant that the risk was dependent on my own actions.) I could have also used such 0% loans instead of other debt like student loans. However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”.
As far as financial freedom goes, there are a number of ways to fund your living expenses without working. Pensions, Social Security, stocks, bonds, real estate, and so on. For us, I have boiled down “financial freedom” to be two things:
Part 1: Accumulate 25 times annual (non-housing) expenses
Part 2: Own my house / Pay off mortgage
I think it’s important to note that these two parts don’t necessarily have a number attached to them. Minimizing expenses are just as important as increasing portfolio size, as well as minimizing the amount of house that you “need”. More detail can be found in this post entitled A Quick & Dirty Plan To Reach Financial Freedom.
For Part 1, the basic idea is to assume that a portfolio can return 4% annually with adjustments for inflation. So if you have $1,000,000, that would create $40,000 a year. The exact implementation of this is more complicated, as there are several ways to help avoid portfolio depletion like annuities and adjusting your withdrawals during market downturns. Most folks won’t need a million dollars, though, if they have already paid off their house. For example, if your non-housing expense are only $1,000 per month, then you’d only need 12 x 25 = $300,000.
Back in July I was 33% of the way to reaching this goal. We are now 40% of the way. At this pace, we could finish Part 1 in less than 10 years, but we will likely scale back our income when we have kids. We’ll have to keep a close eye on those expenses as well.
Housing & Mortgage
Owning a house isn’t for everyone, but I think that if you are geographically stable, it can be a great way to become financially independent. Once you pay off the house, then your housing “expense” is mostly taken care of. (There is still maintenance and property taxes.)
We have owned our house for about 3 years now, having taken out a 30-year fixed rate mortgage initially with a 20% downpayment. Since I want to retire before I’m 50, I need to speed things up. Over the past year, we have made additional payments toward principal, as well as lowered the interest rate to 4.75%. These prepayments have been irregular lump-sum amounts, although I agree an automated plan is easier to maintain. The outstanding loan principal is now 67% of the purchase price. If we were to continue the original minimum-required payments, our home would be now be paid off in 21 years. This is good, as we can support that payment on one income.