Saturday, March 16, 2013

Counting Chickens

I'm sure the recent steady rise of stock prices has a lot of people feeling richer -- myself included.  Although I've been reluctant to make many new additions to our FI Portfolio recently, the reality of our finances is that most of our investments are held in long-term retirement accounts which have benefited greatly from the return of markets to record highs.

In a classic case of counting chickens before they hatch, I projected the future performance of our retirement savings over 25 years (the length of time between the average age of my wife and me [34] and 59.5 years old [when current US laws would allow us to start to withdraw money from these accounts without penalty]).  I used the sum of the most recent market values of our retirement accounts (as of last Friday's close) and assumed several different average rates of return to see a possible range of outcomes.

As you can see in the image below, assuming a conservative 3% annual return, we would have a million dollars in our retirement accounts in 25 years.  Each 1% increase in the average rate of return above 3% would significantly add to our nest egg when we reach the government-approved retirement age.  At a 5% annual return, we'd have $1.6 million.  If we can somehow manage to see 8% returns on average, our retirement assets would swell to $3.3 million.


Of course, our investments are not guaranteed to go up.  As an extreme example, we could see a 30% drop in value next week, meaning the starting amount in year 0 of the table would be significantly less, and the numbers in year 25 wouldn't be as impressive.  However, even in that more pessimistic scenario, after 25 years the end result should allow us a modest lifestyle in our golden years.

One thing my table doesn't show is any new contributions we will make to our retirement accounts.  We both get matches from our employers on contributions to our workplace savings plans.  We also expect to continue adding the max amount to our Roth IRAs every year we are earning a paycheck.  So it's possible that the year 25 row values are on the conservative side.

The point of this exercise for me was to confirm my suspicion that we have oversaved for our retirement up to this point in our lives, and undersaved for the 25 -year span between the present and when we are 59.5 years old.  When you also consider that we should get something in the form of Social Security benefits in our 60s, the possibility that we've oversaved for retirement becomes even more likely.

The reality of our current situation is that we have 25 years to bridge, but I don't see us getting our FI portfolio to a point where it would produce enough income to allow us to quit full-time work any earlier than 10 years from now -- given our current savings rate and lifestyle.  By that point we'd only need to cover 15 years until we could tap our retirement savings.  And by then we could probably afford to spend some of the principal of our FI portfolio (along with the income) in order to get ourselves to age 59.5.

I've been trying to come up with creative ways to access our retirement savings early so that we can make a smoother transition to part-time work or early retirement.  Unfortunately the current US tax laws don't have many loopholes to aid people in our situation.

If we happened to see a new bull market in the near future and had several years of significant gains (similar to what happened in the 1995-1999 timeframe), I wouldn't necessarily be opposed to pulling some money out of the retirement accounts early and paying the 10% penalty.  I think this would be an extremely fortunate and unlikely scenario though.

We can withdraw our Roth IRA contributions at any time without penalty.  I think this would be helpful making a final push to get our FI portfolio where we wanted to be.  For example, if in the future we had $500K in our FI account and our goal was to have $600K in income-producing assets, we could take $100K of contributions out of our Roth IRAs and move it over to the FI account to reach our goal.  This won't make a huge difference in the near term, however.  This would likely be a shortcut we could use several years down the road.

We could always stop contributing to our retirement accounts.  This would allow us to divert more income to our FI portfolio.  But since we get matching contributions from our employers, it seems like we would be neglecting an opportunity for free money by making that choice.  Even if we decided later to withdraw from the accounts early and pay the penalty, our employers are matching at a rate higher than the 10% penalty -- so we would still come out ahead in the end.  And as I said before, any contributions we make to the Roth IRAs can be withdrawn penalty-free later, so it makes more sense to me to contribute to the Roths now to allow an opportunity for some income/appreciation to occur in the tax-sheltered account until we are ready to pull the contributions back out.  So stopping retirement contributions seems like a bad choice to me.

My wife has also talked about making lifestyle changes that would help us reach our goal sooner.  For example we could sell our current house and downsize to a very inexpensive location (a trailer in the middle of nowhere) and pinch our pennies while waiting for our investments to compound over time.  This sounds sort of romantic, but it would be a major change and would require us to give up a lot of things we currently enjoy.  I think there is probably a middle ground to be found here, but it would require a lot of planning and discussion so we can agree on what we want from life over the next 25 years.

We could also try harder to change from full-time to part-time work.  However as I've mentioned before, it doesn't seem like there are many opportunities for us to work part-time in our current fields -- employers seem to want to hire professionals for full-time positions only these days.  (As an example, my employer has all but eliminated part-time positions across the firm.  Current part-time employees are "grandfathered" in but no new part-time positions are being offered.)  In order to shift to part-time, we'd need to find new types of employment, and the most common part-time work is found in very low-wage jobs.  It might be possible for us to create our own higher-paying part-time jobs, but it seems to me that getting to a point where one can work in a part-time consulting or entrepreneurial role requires a large amount of up-front effort (in hours, stress, money, education/licensing, etc).  I really don't want to take on a huge commitment for something meant to last only 5-10 years.  I'm not looking to embark on a new 25-year career.  I'm looking for the path of least resistance.

I keep hoping I'll stumble across something new that I haven't considered (or didn't know about) which would help us in our situation.  Until then we'll continue to work our jobs and save as much as we can.

Monday, March 4, 2013

The Cost of Recreation

My boss at work just returned from a vacation with his family.  They flew to Florida, spent several days at the Disney parks, then went on a five-night cruise around the Carribean.  He described to me how buying twelve-month passes to the parks saved his family money, since the cost for a family of four to go to Disney is something like $354 per day (tickets and parking -- not counting food, lodging, or souvenirs).  This is a typical vacation for them -- one they've taken once or twice per year going back almost a decade now.

I have another friend at work who likes to spend time with his (adult) son working on and then driving/piloting various motorized conveyances -- motorcycles, ATVs, snowmobiles, Jet Skis, etc.  He's always saving up to buy a new engine or some other upgrade for one of the machines.

I have a few other work friends who own "ski cabins" up in the mountains that they use as a base of operations for their frequent ski trips.  I have yet another acquaintance at work who is a serious computer gamer -- always telling me about the latest game or equipment he's bought and is spending time on.

The reason I mention all of this is not to commend or criticize any of these behaviors.  I am definitely an advocate for taking time to enjoy life -- "working to live" rather than the other way around.  The reason I mentioned these folks is because it occurs to me that the sorts of things I am naturally drawn to, and which I try to partake in whenever I have an opportunity for some recreation time, are things which don't cost nearly as much as any of the things that a lot of the people I work with do.  The activities I enjoy usually require a bit of upfront cost, but very little in they way of ongoing/maintenance costs.  For example:

Hiking and Backpacking.  I love getting outside and seeing the scenery.  Hiking up to a high point in the mountains in this part of the country is a rewarding experience.  My wife and I have spent many a day together on the trails, either for short day trips or for longer overnight/backpacking hikes.  But hiking costs very little.  All you really need is a good pair of boots or trail shoes and a backpack.  Nothing has to be fancy.  Most of the trails around here are free or have very nominal parking fees, which can be alleviated through the purchase of a yearly pass for around $25 (just over $2 per month).  For the winter months, a good pair of snowshoes comes in handy.

Ultimate (frisbee).  What a great game.  I discovered it in college and have been playing informal/pickup games ever since.  It's often possible to find space to play on a free field in a park.  Discs cost around $10 each.  Cleats are the only special equipment that I use, and not everyone uses them (some even play barefoot).

Board games.  Countless hours of fun can be had for a very small up-front cost.  This offers an excuse to get together and socialize with others on a regular basis -- we've been playing with our group about once a week.  If everyone brings their own food and beverages, game nights can be a very inexpensive way to have fun.  My personal favorite these days is Settlers of Catan (of course including the Seafarers and Cities and Knights expansions).

Other favorite pastimes include reading (usually library books or free eBooks from sites like Project Gutenberg), blog writing and reading, and bicycling (primarily a commuting exercise for me).

I guess I should consider myself lucky that I'm naturally satisfied by experiences that don't come at a high price.  I prefer using my muscles over using motors or engines.  I'm not drawn to activities that require a lot of high-priced equipment or regular usage fees (like hockey or golf or skiing).  I also hit the jackpot when I found a woman who appreciates the same sort of low-cost entertainment as I do.  We've had some great vacations backpacking in some of the national parks for very little cost -- transportation to the parks being the main expense.

For this reason, I expect that once we are able to break away from our full-time jobs and have more hours to fill with recreation, we won't have any trouble filling our days with fun and enjoyment without significantly increasing our expenses.

Sunday, March 3, 2013

Getting A New Dog

It's Spicy Princess here, reporting for the first time.  You'll quickly be able to identify my writing in the future from the ! and :) that will be dropped in.  And, probably most obvious, when you read the title and go "how the heck does that relate to The Executioner's plan?" - bear with me, there is always a connection.

We're not really getting a new dog, but I have named my Rollover IRA Spot, because I am funny that way.  At first I was only thinking about the name Spot with the fact that Rollover is in the name, however after thinking about the paperwork that went into getting Spot into my possession (and by possession I mean loaded with my hard earned money) and all the research I am doing on what I should do with said Spot, it is feeling a lot like a new dog.  I remember when I got my first dog, at the age of 21... I read every book and looked at all kinds of websites to prepare for it and questioned every decision I made.  I am feeling a bit like that again now - at age 21.5 (joking).  Luckily for me, a huge difference in this process is that I have an experienced partner and coach.  The Executioner did some amazing explaining on the what's and why's and showed his patience in explaining some things again and again and again.

So now that I have Spot, I am deciding what type of tricks I want him to do.  I am using the websites, books, and lists The Executioner (TE) has suggested and am hoping to have come to a (somewhat) final decision/plan to talk through with TE within the next week or two.  Work keeps getting in the way of my concentration and learning about Spot though.  I'll be back soon to tell you all about Spot's new tricks. 

Saturday, March 2, 2013

Sitting on Cash

On a daily basis I read as many personal finance and investing blogs and articles as I have time for.  One that I read in the recent past (which sadly I did not bookmark) listed a number of key characteristics that make a successful investor.  One from the list was the ability to remain patient and hold cash for long periods while waiting for opportunities to arise.

I'm not sure that I would call myself a successful investor yet, having dabbled in individual securities for less than a year, but I was grateful for the reassurance.  Since the change of the calendar to 2013 I feel like I've struggled to find many values.  In fact in February I sold two of our holdings (CLF and PBI).  After reflection I felt like I had not bought them at a compelling entry price and decided to get out at a small gain while I had the chance to do so.  I may look to purchase these again in the future if the price is right.  However those were two of the higher yielders in our portfolio and as such our average dividend yield has dropped considerably.

I've made only one new purchase in calendar year 2013.  I have been maintaining a watch list of 20+ companies I'd love to own, but all of which are trading at valuations that make me hesitant to invest.

It's hard to be disappointed in a steadily climbing market, since the bulk of our investments are held in long-term retirement accounts which have increased in value along with the major indices.  Meanwhile, our FI portfolio is stagnating a bit as we have not been putting cash into action in recent months.  I'll continue to research potential investments and be ready for any opportunities that arise.  Should prices drop in the future, it's nice to know we are prepared with cash on hand.

Friday, March 1, 2013

Rollover Complete

My wife's rollover from her former employer's retirement plan showed up her IRA a couple of weeks ago.  In an age of instantaneous communication and same-day asset transfers, it seems strange that a process like this can still take six weeks from start to finish.  It sounds like the administrators of her former plan had to do some research to ensure that the right amount had been withheld from her paychecks over the years.  My wife also had to send paperwork to three different entities to initiate the process, so the coordination between multiple parties also inherently delays things.

Although there were a couple of follow-up questions regarding the submitted paperwork, my wife was able to get everything sorted out so there weren't any major issues.  Kudos to her for making everything happen.  This isn't a role she normally assumes in our relationship, so I know she was a little out of her comfort zone.

She's been talking with me about some ideas for investing the cash, but so far hasn't committed to anything yet.  Still, the extra cash makes a nice addition to our overall net worth (I hadn't been including this in our Retirement assets until the rollover completed).