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Hello Fellow financial planners & investors,
I have been a do-it-yourselfer, investing for 15 years, since I
started a job after completing an engineering PhD (I am in silicon
valley area, but I am not a comp science or electronics engineer).
Over the years, my wife and I have been aggressive savers, with a view
towards early retirement, and we think we have done well. Would
appreciate some critique and analysis, and discussions on potential
blind spots we may be missing.
Self age: 41; spouse: 35; two kids, 7 and 4.
GOAL: Retire by 45, definitely by 50.
Home: in SF Bay Area, bought 10 years back @ 360K; remodeled with
about 100K 1 year back. Presently valued at about 650K (after the fall
in prices; before was at about 800K).
Mortgage: 210K. 7-year fixed mortgage at 4.5%, will convert to ARM in
April 2011 (in 2.5 years)
HELOC: 45K, ARM, @ 4.25% presently (prime MINUS 1/8th or so)
Other debts: NONE (no other debts of any kind)
Income: Self 140K; wife: 60K (works only 60% of the time, to help with
children after school)
Retirement savings: $420K total.
Details: 400K in two 401Ks; 20K in IRAs (don't qualify for Roth).
Retirement funds are broadly diversified in S&P 500 index, Growth
index, and a bunch of other mutual funds. No single fund more than
10%; international about 25%; all stock funds. The total has been as
high as almost 500K, before the last 1-year's downturn.
Nonretirement savings: Total: 500K (details below)
DRIPS (XOM: 70%, PFE: 6%, BAC: 8%, LMT: 12%, IIBK: 4%): total: 200K
Mutual Funds: (Vanguard 500: 25%, Vanguard Growth: 25%, Wells Fargo
Enterprise: 50%) total: 250K
529 funds for children: (50% for each child, CA scholarshare mutual
funds): 40K total.
Misc. 10K
Life insurance: Self: 500K (self-pruchased, outside term) + 400K
(employer paid group term)
Spouse: 200K (self purchased term) + 250 (employer paid group term)
Disability: both have group disability for about 2/3rd of pay (self-
paid, but through work)
LTC: NONE
Been VERY LAZY about: wills, probate, estate planning
Expected inheritance: NONE form either side
Doomsday Retirement Plan: Have a large home, car, and 8 acres of
irrigated, agricultural land in an overseas location.
How we got here: Education put us in good jobs; we have always saved
45% to 55% of our earnings, first 5 years to accumulate down payment
and get in a home, and last 10 years to "fill the house" and build the
above portfolio.
WILD CARD: I have employer stock (not options) worth 350K (pre cap-
gains tax). This is a private company stock, valued once a year in Oct
(i.e., price remains fixed for the year), encashable once a year over
a 2 months window; has a 3-year history of paying annual dividends at
about 2% of the stock value. The stock has grown 7-fold over the last
7 years, but the future growth is expected to be more modest, say 15%
-20% a year for next 2-3 years. What to do with it? Sell it, and pay
off the mortgage, and live "debt free" or let it grow...
I would like critique on all of the above, but particularly on the
wild card. It's becoming about 25% to 30% of my total investment (Excl
home equity), which seems too high a concentration. On the other hand,
it is immune from daily fluctuations of the market, since it is
private and valued just once a year. The company has been consistently
profitable last 10 years (and 16 of the 19 years of its existence).
Revenue growth about 20% per anum; operating margin 30% to 34%. Has 50%
+ market share in its domain; curr employees about 300, and rev about
150M.
M N Door
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In article
<a...@q...go
oglegroups.com>,
m...@y...com wrote:
> Hello Fellow financial planners & investors,
>
> I have been a do-it-yourselfer, investing for 15 years, since I
> started a job after completing an engineering PhD (I am in silicon
> valley area, but I am not a comp science or electronics engineer).
> Over the years, my wife and I have been aggressive savers, with a view
> towards early retirement, and we think we have done well. Would
> appreciate some critique and analysis, and discussions on potential
> blind spots we may be missing.
While I cannot give advice to you, here is what I would likely do
in that situation.
First off, pay off the home with the funds that you have in non-
retirement savings. Get rid of anything that costs you each month
an interest payment. The tax savings on a mortgage are not worth
what they cost.
Second is dump the life insurance. Why pay for that when you have
more than that much sitting in the bank?
Third, I wouldn't mess with drips. I don't see the value of any
investment that makes one have to jump through those kinds of hoops.
Fourth, I'd consolidate this stuff at a brokerage house or a
private bank such as US Bank or Wells Fargo. Let someone else
worry about the details. Get a single statement each month.
Have someone that you can call and talk who is on your side
when it comes to investing.
Fifth, visit a family lawyer and get a will set up. You don't
want your kids to become foster children in the event that you
and your wife are in a bad car accident. You want some kind of
a plan for the end game.
Sixth, call a travel agent and book a cruise. You and your
wife have done well here, and you deserve to celebrate a bit.
And at the end of the cruise season, you can get a top notch
cruise for less per day than what a good hotel will cost.
-john-
--
====================================================
==================
John A. Weeks III 612-720-2854 j...@j...com
Newave Communications http://www.johnweeks.com
====================================================
==================
--------------------------------------
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On Sep 27, 4:46 pm, m...@y...com wrote:
[snip]>
> I would like critique on all of the above, but particularly on the
> wild card. It's becoming about 25% to 30% of my total investment (Excl
> home equity), which seems too high a concentration. On the other hand,
> it is immune from daily fluctuations of the market, since it is
> private and valued just once a year. The company has been consistently
> profitable last 10 years (and 16 of the 19 years of its existence).
> Revenue growth about 20% per anum; operating margin 30% to 34%. Has 50%
> + market share in its domain; curr employees about 300, and rev about
> 150M.
>
XOM and LMT have been good, BAC looks ok going forwards and has a nice
yield - depending on when you bought. PFE has disappointed many, but
the yield is nice, and I didn't look into IIBK but I guess you have.
I'd suggest comparing your overall returns on those to your returns on
mutual funds, and perhaps you would consider applying the same type of
analysis you applied to the company your currently work for to find
some more profitable investments for yourself. (I would prefer to take
divs and skip the DRIP plans, personally, but it's not a huge
difference.)
At a 4.5% mortgage, I'd keep the mortgage in place since you can take
full advantage of the deduction to further reduce your costs of funds
there, and since your return on capital is higher elsewhere. The home
value may well recover within five years. And your stock holdings
(mutual funds included) should recover as well.
The company you work for and a share of which you own sounds like it
is doing well, and you sound like you are in a position to know. If at
some point in the future the company should elect to go public, your
returns could very well be an immediate and very large increase. So,
indeed, I agree with your assessment that it is a bit of a wild card.
As long as the company is doing well, and you see no real economic
reason to sell, why not hold on to your ownership interest?
Just guessing that your after-tax savings run about 80k, and making a
rough estimate of your future liquidated net worth after taxes in five
years - I come up with about 2.7m, which should be enough to preserve
capital and generate 100k before taxes. Your retirement home would be
bought out of those funds. Many here on this forum have tried to
future-estimate health-care and college costs. Twenty to thirty years
from now, your health costs will rise, but will probably not overhwelm
your budget. As Elle pointed out months ago, the bulk of health-care
cost falls in the last three to five years of life, and thirty years
from now, that chunk may run at 200k a year, each.
I see three points where a bit of weakness may be present in your
plans:
1) Your kids' college costs are not paid for
2) You may find retirement at 45 is not as pleasant as you imagine
(nothing to do is a curse - really, there's only so much golf you can
play)
3) While you fall into the upper 5%, you may want to cushion your
retirement even more than 2.7m less new home. Twenty years from now
you may want more than 150k annual income.
4) You should do estate planning and help your kids when they need the
most financial assistance, right after college
See if you can find a copy of Ben Graham's "Security Analysis" fourth
edition (sixth is available easily) and learn about investing in
common stocks. If you do retire early, you may find investing is a
nice hobby that you get paid well for, at your level. E.g. What is
your company's return on invested capital? Also, the Bureau of Labor
Statistics has some demographics for income and net worth that you may
find useful to identify yourself as far as standard of living goes.
Also keep in mind that every 10k of pension or retirement benefits
implies an underlying net worth of about 143k, assuming a 7% rate of
return.
Hope the above gives you a useful viewpoint for comparison.
--------------------------------------
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On Sep 27, 2:53 pm, "John A. Weeks III" <j...@j...com> wrote:
> In article
> <a...@q...go
oglegroups.com>,
>
> m...@y...com wrote:
> > Hello Fellow financial planners & investors,
>
> > I have been a do-it-yourselfer, investing for 15 years, since I
> > started a job after completing an engineering PhD (I am in silicon
> > valley area, but I am not a comp science or electronics engineer).
> > Over the years, my wife and I have been aggressive savers, with a view
> > towards early retirement, and we think we have done well. Would
> > appreciate some critique and analysis, and discussions on potential
> > blind spots we may be missing.
>
> While I cannot give advice to you, here is what I would likely do
> in that situation.
>
> First off, pay off the home with the funds that you have in non-
> retirement savings. Get rid of anything that costs you each month
> an interest payment. The tax savings on a mortgage are not worth
> what they cost.
I am not keeping my mortgage for tax savings, but more for the reason
that the rate on it is pretty good (only 4.5% from April 2004 through
April 2011), and even after the current severe loss in the markets,
over the last 10 years, most of my funds / stocks have averaged about
8% to 14% annual gain. I am very debt-averse guy (twice in life too
car loans, which I paid off in less than 4-5 months, as soon as CDs
matured), but the mortgage debt I feel like keeping at least until
2011.
>
> Second is dump the life insurance. Why pay for that when you have
> more than that much sitting in the bank?
John, can you elaborate a bit more on this?
Our reasoning is that, should I die, wife should be able to pay off
mortgage, immediate-fund the college savings for kids, without
touching our investments for retirements (the 401Ks and outside
investments), and, fo wife to be able to go from 60% work to 25% work,
or so. For 500K term I am paying about $350 per year (current one is
15 year level term, about 5 years into it; previously had smaller
amount of insurance) -- so, even if I am fired tomorrow (so group term
is gone), and next day I am gone, wifey and kids are at least
financially protected, for the current premium of $350/month. At my
leve of "pleasure consumption" this means only 5 weekend ski trips/
year vs. 5 weekend ski trips, so I am able to rationalize it. But
would welcome additional discussion from you and others.
>
> Third, I wouldn't mess with drips. I don't see the value of any
> investment that makes one have to jump through those kinds of hoops.
You are right, some DRIPS have put in a lot of hoops. Fortunately,
mine are XOM, LMT, BAC, PFE, IIBK, and all of these are eitehr fee-
free, or miniscule fee, and it's all on auto-pilot. I have not had to
fill any forms, or make any call in years; each month just there's an
auto-withdrawal from my credit union a/c, and I get monthly statement.
>
> Fourth, I'd consolidate this stuff at a brokerage house or a
> private bank such as US Bank or Wells Fargo. Let someone else
> worry about the details. Get a single statement each month.
> Have someone that you can call and talk who is on your side
> when it comes to investing.
Thinking about this, but still not decided about paying someone to
manage. For now, I use vanguard's service (cashedge engine at the
back), which aggregates all my accounts from everywhere to show a
consolidated view. Good to monitor, rather than 15 separate online
accounts; but on a bad market day, the total drops by 80 to 100K :
( But I am cool with that.
>
> Fifth, visit a family lawyer and get a will set up. You don't
> want your kids to become foster children in the event that you
> and your wife are in a bad car accident. You want some kind of
> a plan for the end game.
Yeah, this is one area where we have been very lazy. We tried once or
twice, read all Nolo press books, started getting some references for
family lawyers, but never got to the point of completing selection,
making appointments and moving ahead.
>
> Sixth, call a travel agent and book a cruise. You and your
> wife have done well here, and you deserve to celebrate a bit.
> And at the end of the cruise season, you can get a top notch
> cruise for less per day than what a good hotel will cost.
Great idea, than you! Actually, we do have our pleasure consumptions
-- so while we have never had any cable/satelite, and actually watch
less than 4 hr/week TV, we do splurge on all kinds of kitchen gadgets
(4K induction stove!, a wine refrigerator), ski trips, beaches, and
also sampling all kinds food, at home and at restaurants. But cruise
sounds a great idea.
I know my previous post was long, as is this one, but you skipped over
the wild card. What do you think of the employer stocks I have, which
is becoming 25% to 30% of total. Time to sell, just to keep
percentages in check (hey, history is full of Enron, Merryl Lynch,
Wamu, Bear Sterns,...), or keep it, since it is a private equity,
valued just once, and not subject to market volatility.
>
> -john-
>
> --
> ====================================================
==================
> John A. Weeks III 612-720-2854 j...@j...com
> Newave Communications http://www.johnweeks.com
> ====================================================
==================
>
--------------------------------------
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In article
<5...@a...go
oglegroups.com>,
m...@y...com wrote:
> > While I cannot give advice to you, here is what I would likely do
> > in that situation.
Caveat still applies.
> > First off, pay off the home with the funds that you have in non-
> > retirement savings.
> I am not keeping my mortgage for tax savings, but more for the reason
> that the rate on it is pretty good (only 4.5% from April 2004 through
> April 2011), and even after the current severe loss in the markets,
My personal philosophy is that folks should have a core holding
of safe investments including at least one good car and a home
that can be depended on. As a result, I suggest a more modest
paid-for home as opposed to the mini-mansion that is mortgaged
to the hilt. You never know what kind of eggs life is going to
lay for you, and they cannot repo a paid-for house.
> > Second is dump the life insurance. Why pay for that when you have
> > more than that much sitting in the bank?
>
> John, can you elaborate a bit more on this?
>
> Our reasoning is that, should I die, wife should be able to pay off
> mortgage, immediate-fund the college savings for kids, without
> touching our investments for retirements
If you have the money on hand, then life insurance is more like
playing the lottery. The chances of getting a payout is remote,
so it is mostly like feeding coins into a slot machine. If you
allocate the money you have on hand, you can pay off the house,
establish college funds, and leave your wife in good financial
condition.
> > Fourth, I'd consolidate this stuff at a brokerage house or a
> > private bank such as US Bank or Wells Fargo.
> Thinking about this, but still not decided about paying someone to
> manage. For now, I use vanguard's service (cashedge engine at the
> back), which aggregates all my accounts from everywhere to show a
> consolidated view.
I don't want you to pay a full management fee of 1% or more. I
was thinking of something like what you have. One firm, one
statement, and maybe a few hundred a year at most for the service.
At the same time, you want to pay enough to get access to a top
notch broker. Not joe sales guy, but a gold team level or above
advisor has a track record.
> I know my previous post was long, as is this one, but you skipped over
> the wild card. What do you think of the employer stocks I have, which
> is becoming 25% to 30% of total. Time to sell, just to keep
> percentages in check (hey, history is full of Enron, Merryl Lynch,
> Wamu, Bear Sterns,...), or keep it, since it is a private equity,
> valued just once, and not subject to market volatility.
This is problematic to answer. My view is that having stock
in your employer is too risky because you have too much wrapped up
in one company. The rules of diversification says that you should
dump all (or at least most) of the company stock. You don't want
to be another Enron-like employee where the million dollar stock
account goes down to being worth a buck-fifty. Since you have
funds in both retirement and taxable savings, this isn't as bad
of a risk. You don't lose it all if the company tanks. The
other problem is that as soon as I say to sell all the company
stock, it will probably have a great year, and you will come
after me with an Uzi. Common sense says get rid of it (or
reduce your holdings), but you have enough invested elsewhere
such that it isn't a show-stopper issue.
Again, I cannot advise you here, I can only suggest what I might
do if I found myself in your situation.
-john-
--
====================================================
==================
John A. Weeks III 612-720-2854 j...@j...com
Newave Communications http://www.johnweeks.com
====================================================
==================
--------------------------------------
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"John A. Weeks III" <j...@j...com> writes:
> My personal philosophy is that folks should have a core holding
> of safe investments including at least one good car and a home
> that can be depended on. As a result, I suggest a more modest
> paid-for home as opposed to the mini-mansion that is mortgaged
> to the hilt. You never know what kind of eggs life is going to
> lay for you, and they cannot repo a paid-for house.
A car isn't an investment; it's an expense. Because of insurance and
maintenance costs, it eats money even when you're not driving it.
The same is true of owning a house. OTOH, I've found I can get by
just fine without owning a car (between walking, taking public
transportation, and using ZipCar); I'd have a harder time getting by
without having a place to live. ;-)
Anyway, yeah -- I'm certainly happier having a modest home that is
100% paid for than having to fork over huge mortgage payments on a
mini-mansion every month. Housing is most people's biggest expense,
and once you're free of that mortgage payment it makes a huge
difference in your cash flow situation.
-Sandra the cynic
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On Sat, 27 Sep 2008 22:33:40 -0500, dapperdobbs
<G...@h...com> wrote:
>At a 4.5% mortgage, I'd keep the mortgage in place since you can take
>full advantage of the deduction to further reduce your costs of funds
>there, and since your return on capital is higher elsewhere.
I really enjoy your posts, but it has been many moons since we could
earn 4.5% risk-free "elsewhere". I suspect that most of the folks who
have been investing while running a mortgage are in a serious hole.
(I say "risk-free" to keep this apples and apples since the choice we
are discussing is investing vs. paying down/off a mortgage.)
-HW "Skip" Weldon
Columbia, SC
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In article <m...@f...com>,
Sandra Loosemore <n...@f...com> wrote:
> "John A. Weeks III" <j...@j...com> writes:
>
> > My personal philosophy is that folks should have a core holding
> > of safe investments including at least one good car and a home
> > that can be depended on. As a result, I suggest a more modest
> > paid-for home as opposed to the mini-mansion that is mortgaged
> > to the hilt. You never know what kind of eggs life is going to
> > lay for you, and they cannot repo a paid-for house.
>
> A car isn't an investment; it's an expense. Because of insurance and
> maintenance costs, it eats money even when you're not driving it.
> The same is true of owning a house. OTOH, I've found I can get by
> just fine without owning a car (between walking, taking public
> transportation, and using ZipCar); I'd have a harder time getting by
> without having a place to live. ;-)
I use the definition of an investment to include a tool or machine
purchased with capital to be used to earn a rate of return. That
includes stuff like a punch press at a factory or a roller mill
at a steel plant. In my case, and in many cases that I know of,
I sell my time to make money. If I cannot get to the jobsite, I
get no paycheck. As a result, a reliable working vehicle is an
essential tool in my manufacturing operation where I convert time
into pay. Yes, a little different way of looking at it.
My point was, investment or expense, is that you don't want to lose
a $250,000 a year job over a beater car that won't start a few times
a week, or makes you late for work on a regular basis. At the same
time, one does not need to run a late model car lot in front of
their house with a vehicle for every day of the week, and payment
books to match. Just make sure that you have one reliable car so
you don't put the big picture at risk over small change.
-john-
--
====================================================
==================
John A. Weeks III 612-720-2854 j...@j...com
Newave Communications http://www.johnweeks.com
====================================================
==================
--------------------------------------
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"John A. Weeks III" <j...@j...com> writes:
> I use the definition of an investment to include a tool or machine
> purchased with capital to be used to earn a rate of return. That
> includes stuff like a punch press at a factory or a roller mill
> at a steel plant. In my case, and in many cases that I know of,
> I sell my time to make money. If I cannot get to the jobsite, I
> get no paycheck. As a result, a reliable working vehicle is an
> essential tool in my manufacturing operation where I convert time
> into pay. Yes, a little different way of looking at it.
>
> My point was, investment or expense, is that you don't want to lose
> a $250,000 a year job over a beater car that won't start a few times
> a week, or makes you late for work on a regular basis. At the same
> time, one does not need to run a late model car lot in front of
> their house with a vehicle for every day of the week, and payment
> books to match. Just make sure that you have one reliable car so
> you don't put the big picture at risk over small change.
Certainly, some people would have a very hard time earning their
living without a car, either because it's the nature of their job or
because they have chosen to live and/or work in an area with few
alternative forms of transportation available. OTOH, it's getting
easier and easier for folks to get by without owning a car, as
telecommuting becomes more common and car sharing services like Zipcar
are catching on.
Back when I got my first job out of college, I bought a new car and
drove it to work even though it was easy walking distance, because I
grew up in the Detroit area back in the 60's and 70's thinking that's
what grown-ups did when they got jobs. It wasn't until my last
"beater car" died of old age several years back that I realized that,
hey, I don't really need a car anyway! I telecommute now; in my
previous few jobs, even when I still owned a car, I walked or took
public transportation to work.
Anyway, my point here is that telling folks they need to "invest" in a
reliable car is 1970's Detroit thinking. Nowadays, not every working
adult really needs to own a car -- and for those who don't, a car is
an unnecessary expense, not any kind of investment. Moreover,
choosing to live in an area where you need to drive 10 or 20 miles to
get to the places where you need to go every day seems to me to be as
pointlessly over-consumptive as buying the mini-mansion or late model
car lot in front of it.
-Sandra the cynic
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> I really enjoy your posts, but it has been many moons since we could
> earn 4.5% risk-free "elsewhere". I suspect that most of the folks who
> have been investing while running a mortgage are in a serious hole.
>
> (I say "risk-free" to keep this apples and apples since the choice we
> are discussing is investing vs. paying down/off a mortgage.)
>
>
> -HW "Skip" Weldon
> Columbia, SC
Not more than a year or so ago, CDs were near 5%. Rates seem to go up
faster than they drop. There's a (mortgage) rate where I'd agree 100%
with you, but it's a bit higher, maybe 6-7% as the grey area.
At 4.5% mortgage rate, 28% bracket, a return (based on 15% div and cap
gain rate) of 3.81% or higher is the OP's breakeven. DVY (the iShares
Dow Select Dividend ETF) is currently pushing a yield of 4.75%. If the
market remains flat to down slightly for the next decade, this choice
will break even for this situation. Not risk-free, but not using a long
term return assumption (of 8-10%), either.
Joe
www.blog.joetaxpayer.com
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FROM THE MODERATORS: Lengthy posts
Big Slide in 401(k)s Spurs Calls for Change
Short-term Fund purchasing advice...
FROM THE MODERATORS: Posting to misc.invest.financial-pl an
graph net worth - CD return vs S&P index return
Infant kids/ life insurance proceeds
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