Jun 8, 2016

How to Retire Early


How to retire early

This isn’t a post on how to accumulate massive amounts of wealth, or to assist with identifying what types of careers or business ventures will allow you to retire well ahead of the commonly accepted “Full Retirement Age” of 65-67.

This is an overview and “food for though” for the individual interested in discovering how to leave their job or business for good to live off their accrued investments for a period of more than 30 years.

An Example

Bert is 47 years old with a wife, and 2 children beginning college this year.  Thanks to a successful career in his 20s and 30s, and a business he sold last year, he has accrued $3,500,000 in a mix of taxable and tax-advantaged retirement accounts held at Vanguard.

Bert would like to consider himself “financially independent” and he and his wife are considering using the “R” word as their newest profession.

(The “R” word is Retired… if you haven’t had your coffee yet).

So… what do you think?

Well, if you’re anything like me, at first glance I think they are good to go.  But lets take a closer look at how they might go about solving this desirable problem.  After all, how many lottery winners lose their fortunes within a few years of winning it!

How long will your retirement be?

We never know when we'll die, but in my financial modeling... the age of 95 looks like a pretty conservative figure to use for our example. 

Assuming either Bert or his Wife live to the ripe old age of 95, that leaves 48 years that they'll need to survive on this nest egg!

Down the line, social security will likely help a bit, but Bert has decided to view SS as more of the "icing on the cake" and will focus instead on his investment portfolio as the primary source of future income.

Enter the Trinity Study

"One scenario backtested in the Trinity study suggests that a retiree with a suitably allocated $1 million portfolio could withdraw $40,000 the first year, give herself a cost-of-living adjustment every year afterwards, and have a 98% chance of the portfolio lasting at least 30 years."

This sentence pretty much sums up one of the most commonly referenced studies of the rate at which retirees should withdraw from their retirement accounts to assure it lasts the standard 30 year retirement window. (Age 65 to 96).

But remember the name of our post?

How to retire, EARLY.

So Bert and Co. have a time horizon of 48 years.  What % of their portfolio can they withdraw each year, and can they adjust for inflation?

It seems that the consensus among forum members over at bogleheads.org, (one of the most widely read and followed investing forums on Earth) is that a withdrawal rate of 2-2.5% should be used for perpetual withdrawals.

For example, if the Rockefeller family creates a charitable trust with $100,000,000, in order to preserve principle and keep up with inflation, these funds should be invested in some form of a 25 to 75% equity allocation, and the annual withdrawal should not exceed 2%, adjusted upward each year at the rate of inflation.  This would (hopefully) ensure that annual gift giving could continue far into the future.

Since Bert and his family have a time horizon of 48 years, hardly FOREVER, it would be a logical assumption that a 2.5% withdrawal rate on $3.5 Million ($87,500) adjusted for inflation would result in a high success rate.

(By the way, one method of adjusting for inflation is to find out how much social security payouts increased each year and increase your withdrawals by this %).

Is It Enough?

How did Bert arrive at this healthy portfolio balance?  Well, a successful career in his 20s and 30s, as well as the sale of his business was the primary source of the wealth he's accumulated.  Do you think $87,500 adjusted each year for inflation would support his family's lifestyle? 

I'd assume so, but what if he didn't save a high percentage of his income?  Or what if his annual expenses were $150,000 throughout his adult years?  Would his family be able to retire and keep their current lifestyle?

Herein lies the question.  If Burt ended up with $3,500,000, he either made a high income, was a very disciplined saver, inherited it, or a combination of the three.  I can almost assure you that the average family earning the median US income will not reach this figure by age 47.

The Allocation Variable

The Trinity Study also took into account the overall mix of an investor's portfolio, and how it may effect success rates.  The short version is, investors in their 50's and 60's should consider having between 40 and 60% of their portfolio in equities (the rest in bonds) to retain buying power.  Here's my asset allocation plan, you're welcome to use this as a starting point:

Stay the Course:
Age..........Ratio

25-50........80 stocks/20bonds

51-65........65/35

60-75........50/50

over 75.....35/65.
(Equities divided 70/30 between Domestic and International)
60-65 year old would be in the 65/35 if still working, in the 50/50 if not.
Please refer to the 3 fund portfolio for more information on my allocation.

Takeaways

Now that you have a grasp of what it takes to retire early, do you think you have what it takes?  A retirement age of 60 to 65 may very well allow a safe-withdrawal-rate of 4%.  If you've accumulated $1,000,000 by age 65, this would leave you with $40,000/year.  But if you choose to retire in your 40s or 50s, this may only support an income of $25,000/year.

I hope you have a better understand of what you'll need to do to retire early if that is your desire, be it by increase your savings rate, or MAKING MORE MONEY.  Whatever the case, it would be wise to aspire to have fun along the way, and do you best to not run out of money in your golden years.

With a heart full of love,

TB

May 27, 2016

Updates


Updates

My oh my has it been a while since I typed some stuff into this site.  My world has changed DRASTICALLY!  I welcomed my first child (TB Jr.) into the world last spring and completed my MBA this month.  It was truly a wild 22-month journey, and this site has suffered for it, but the phoenix will rise again! 

How the Road Has Changed

During this time, I have fed an insatiable appetite to learn more about the FI/RE movement (financially independent, retired early) and am committed to bringing informative, relatable content to you fine folks month in and month out.  Sites like Mr. Money Mustache, Frugal Woods, Early Retirement Extreme, Go Curry Cracker, MadFientistLiving a FI (this dude's awesome), Root of Good, JLCollinsnh, and the fine REDDITers at r/financial independence have been a daily read for me and I am bursting at the seams to share some good stuff with anyone interested in learning how to get out of the rat race early.

New Goals

I've honed in on some new goals for my own family of 3's finances, outlined below:

Investable Assets: $750,000
Paid off Home: $300,000
Net Worth: $1,050,000
529 Plan: $90,000
Reach FIRE by 7/4/2022

I'll detail my current progress in future posts, but my net worth as of 5/27/2016 is 565,000 so we're well on our way!

Discoveries I've Made About FI/RE

When I founded this blog in 2013, I was a firm believer in boglehead principles.  While the excellent minds over there are still a daily read for me, I've shifted my lens a bit to the early retirement community and have been incredibly energized by posts such as Mr. Money Mustache's The Shockingly Simple Math Behind Early Retirement.  Posts such as these have prompted a fierce behavioral shift in my spending patterns, and I'm proud to say my family has exceeded a 60% savings rate in both 2015 and 2016.  This has added rocket fuel to our net worth growth, taking it from ~$400k to today's new high of $565,000 despite a flat stock market.  (Real estate has done well in Hawaii though).  My wife and I have an income of 90k/year, so the math tells me via excellent resources like the networthify calculator I can retire on Independence Day, 2022.


Ethos for Tortoise Banker

If I had to summarize my Ethos for this site, it would consist of the following pillars:

  • Aim to save at least 50% of your income
  • Invest in low-cost index funds
  • Denounce consumerism
  • Help others along the way
I also wrote a set of foundational principles which make for a great read to assure you're on the right track with your finances.

I'll speak to each of this in upcoming posts, highlighting how exactly I got to where I am, and takeaways I've discovered on my path to FI/RE that might help YOU get there as well. 

Thank you for your valuable time as I know all of you are exceptionally busy, and be sure to subscribe to future updates via the email box on the upper right section of the site.

Lucas

Archives

May 26, 2016

Principle 16: Do Not Delay, Start Investing Now

 I don’t think anyone has one defining moment or conversation that led them to begin investing.  For me, I began developing an interest in long-term investing after exploring career paths.  My first real exposure to the concept of investing came in the form of an unpaid internship at a boutique sized investment bank in Los Angeles.

Hours upon hours were spent inputting data into excel spreadsheets and creating charts and graphs for marketing presentations.  Lunch breaks at my desk and heading home at 7pm quickly became the norm.

There was a silver lining came at the end of each day though.  The asset manager I was interning for would take me aside into the client entertainment room for a game of pool and a draft beer.
I know… not too shabby.

This veteran of the industry gave me several reading assignments each month, and we’d always take the time to discuss my findings.  Ben Graham’s The Intelligent Investor, Bill Schultheis’ The Coffeehouse Investor, and The Four Pillars of Investing by William Bernstein are a few of the titles I remember.

I’m very grateful for the time my boss took to share these books with me, as they really ignited a passion I never knew I had.  Not to get rich; although that’s a nice byproduct.  The real passion that was ignited within was a desire to become financially independent, or no longer reliant on an employer.

One of the “gems” he would constantly remind me of was to START NOW.  “Put anything you can away RIGHT NOW.  Gather up $1000 and throw it into a target date retirement fund at Vanguard, and focus on nothing more than increasing the % of your total income saved over time.  Build your net worth ALWAYS.”

He was a very successful asset manager, and I’m sure he was near the top of the industry in his line of work, but he’d always remind me that you need to focus on “saving now, and saving as much as you can afford.”

It wasn’t until I reached my mid-twenties that I realized that dollars stash into retirement accounts in the early part of your career are FAR MORE valuable than dollars invested later in life.

Let’s take a look at an example of a 25 year old investor that puts $5000 into an IRA each year until he turns 35, and not a dollar more.  We’ll compare that result to 35 year old investor that doesn’t begin funding an IRA until age 35, where he begins contributing $5000/year until age 60.  You might think that the 35 year old investor contributing to their IRA for 25 years would end up with far more than the 25 year old investor doing this for only 10 years, but let’s take a look at what happens when compounding increases an investor’s returns over time:

Begin at 25/8% Return

Begin at 35/8% Return
Age
Investment
IRA Balance

Age
Investment
IRA Balance
25
$5,000
$5,400

35
$5,000
$5,400
26
$5,000
$11,232

36
$5,000
$11,232
27
$5,000
$17,531

37
$5,000
$17,531
28
$5,000
$24,333

38
$5,000
$24,333
29
$5,000
$31,680

39
$5,000
$31,680
30
$5,000
$39,614

40
$5,000
$39,614
31
$5,000
$48,183

41
$5,000
$48,183
32
$5,000
$57,438

42
$5,000
$57,438
33
$5,000
$67,433

43
$5,000
$67,433
34
$5,000
$78,227

44
$5,000
$78,227
35
$5,000
$89,886

45
$5,000
$89,886
36
$0
$97,076

46
$5,000
$102,476
37
$0
$104,843

47
$5,000
$116,075
38
$0
$113,230

48
$5,000
$130,761
39
$0
$122,288

49
$5,000
$146,621
40
$0
$132,071

50
$5,000
$163,751
41
$0
$142,637

51
$5,000
$182,251
42
$0
$154,048

52
$5,000
$202,231
43
$0
$166,372

53
$5,000
$223,810
44
$0
$179,682

54
$5,000
$247,115
45
$0
$194,056

55
$5,000
$272,284
46
$0
$209,581

56
$5,000
$299,466
47
$0
$226,347

57
$5,000
$328,824
48
$0
$244,455

58
$5,000
$360,530
49
$0
$264,012

59
$5,000
$394,772
50
$0
$285,132

60
$5,000
$431,754
59
$0
$569,981




60
$0
$615,580




Total Investment:      $55,000

Total Investment: $130,000
Portfolio Value:         $615,580

Portfolio Value: $431,754 

As you can see, the aggressive youngster that decided to skip morning coffee runs and expensive bar tabs ended up with a 30% larger nest egg than the investor that delayed until the age of 35.

Now I know many people in their 20s are focused on other priorities, and that’s fine.  Getting married, paying off student loans, buying a car, and saving for a down payment are all expensive and deserve our full financial dedication.

But what if we decided to take the frugal path, and route money that might have gone toward a lavish wedding and honeymoon, or a brand new car into our retirement accounts?  I know several people that paid less than $250 for exchanging vows at the county courthouse and later enjoyed a potluck barbeque with family saving over $20,000!

Buying a new car is one of the most expensive mistakes many people make.  By buying a 2 to 3 year old vehicle, we’re able to get a 30% discount on the purchase price, a possible savings of over $10,000!

Take a moment to think of some ways you may be able to “delay gratification” and send excess funds into your retirement accounts!  I know you’d like to be in a position more like the left hand column above than the right.


TB

Apr 26, 2016

How a Drug Bust Got a Student Thinking About Money


Saw a very interesting story on CNN this evening.

A college student was awarded $4.1 million dollars in a settlement relating to mistreatment by the DEA.  The student was arrested along with 9 others in a raid of a home on April 20th, otherwise known as "Four Twenty" by recreation marijuana smokers.
The DEA agents discovered:
  • 18,000 pills of extasy
  • 10 ounces of Marijuana
  • Guns
  • Thousands of rounds of ammunition

Allegedly, the student was locked in a dark, windowless cell for 5 days and nights and was forced to drink his own urine to survive.  He shared a shocking story during the interview, literally trying everything he could to survive.  He was unsuccessful in his attempt to strike the ceiling sprinkler to get access to water, as well as getting the attention of anyone outside his cell by sliding his shoestrings beneath the door.

The interview did not share details of what would have led to the lapse of responsibility by the jail facility to care for their inmate, but it sounded to me like he was just forgotten about!

In a last ditch effort to survive, he consumed his own urine and carved a goodbye note to his mom in his arm with a piece of glass.  It turns out the urine actually saved his life, as he was immediately admitted to a hospital with severe kidney failure.  Doctors during the settlement deliberations confirmed the patient's tactic for survival and not long after, the prosecution won the large 7 figure settlement for their client.

The takeaway from all of this, however, came at the end of the interview.  The back and forth between the student and the news anchor regarding the $4.1 million settlement really reignited my suspicion that most people have NO IDEA what to do with a windfall.

CNN News Anchor: "$4.1 million is quite a bit of money.  Do you have any plans?"

Student: (5 second awkward pause) "I'm going to lock it up, protect it from myself."

CNN News Anchor: "So, does that mean you're going to save it?"

Student: (another 5 second awkward pause) "Um, um yes.  I'm going for the retirement."

I suppose it wasn't the worst response he could have made.  I mean, after all, he was involved in a HUGE drug sting.  Maybe he was still stoned?  He could have said he's planning to toss hundred dollar bills out the top of a limo in Vegas? 

This is great evidence of the lack of financial knowledge many people have.  Students in high school receive very little training on how to manage their money, and this student who is an ECONOMICS major, is "going for the retirement."

Well Mr. Student, good for you!  Now pick up a book about managing your finances.

Its interesting enough to note that this student was never formally charged with any crimes.  I guess the DEA felt guilty enough to let him off the hook in addition to giving him $4.1 million dollars.

To be honest?  I don't think he'll have a dollar left of it by his 40th birthday.

What are your thoughts?  Are most of the people you know oblivious to their finances?  Share your thoughts!

TB

Apr 1, 2016

How I Use Mint

Mint.com is an exceptional website designed to help people keep track of spending, budget, and set goals while occasionally marketing various financial products to users.  On the whole, the user experience is outstanding, and is a site I use several times a week.

Here's What I Use

The "dashboard" screen when you log in consolidates all of your financial accounts (and property) into one place, giving you an up to date look at your personal balance sheet.  I have many accounts which I use for different purposes, so I definitely like this screen the most.  For example, the "cash" section in the upper left provides the balances for any checking or savings accounts in one simple to read area.  Mint also gathers any data on account "titles" from your banks, for example, I use Capital One 360 (formerly ING Direct) and each of my accounts have names such as:
  • MBA Savings Account
  • Vacation Account
  • New Car Account
  • Home Down Payment Account
  • Wedding Account (Thanks to Mint, this one is paid for with zero debt)!
I really like how Mint takes all of this data and consolidates it in one place for you.

Beneath the cash section is your credit liabilities, providing the user a nice snapshot of what you owe on any loans, lines of credit, and credit cards so you can manage  checking account balances accordingly.

Just below credit and liabilities are investments.  This gives you the same type of snapshot, but for taxable and tax advantaged accounts.  I also have my savings account in a short term bond fund at vanguard, so this is found here also.

Another great feature is the way Mint tracks your spending.  In the middle of the page, it provides a "budget" section with a color coded bar which gives you a feel for how you are doing on your monthly budget targets.  I only budget groceries, restaurants, and gas, but you can personalize this as much as you want.  All you need to do is click on the word "budget," set a monthly target, and categorize your spending in the "transactions" section as you go.



I also really enjoy the "goals" section.  I am currently saving for a trip, a new car, and retirement, so each of these goals has a target, target date, and monthly savings target.  It really gives you a lift when you hit your monthly savings goals!

Lastly, Mint.com will send you a weekly "financial summary" email detailing each of your budget categories, as well as a snapshot of account balances and total net worth figure.  Watching your net worth figure rise is a big motivator to save, as the progress you make adds up!

...and What I Don't Use

Some of the areas I don't use are the upcoming bills notification and portfolio movers and shakers.  I don't really pay attention to my portfolio holdings, except to re balance to my target allocation once/year.  The ways to save section offers products from 401k and credit card companies to potentially save the user money, but I don't really use this.

Overall, this is an outstanding site and I'm sure many of you use it already.  However, if you don't definitely try it!  I was a little concerned before signing up about the safety of my financial information, but Mint is REALLY on the ball with this important area, and all sign-in information to your various accounts remain fully confidential.

Give it a try, you may find that it completely reshapes your spending and saving habits!!!

Cheers,

Tortoise Banker

Dec 9, 2015

Setting Up a Budget: For New Couples


This is a guest post from Little House in the Valley who blogs about tips for smaller living. Many of her topics include little house plans, becoming financially savvy, and learning to do more with less.  Little House and I are involved in a larger personal finance blogger’s network called the Yakezie.com, a community of finance bloggers selflessly supporting others with the common goal of sharing our finance experience and knowledge.  As part of that support, we frequently swap posts to help broaden our readership.

The Basics of Budgeting
Why budget? Many people live day-to-day without any sort of financial guidance. People have inaccurate balances of how much money they actually make (bring home) and many are unclear on how much they spend and on what. Yet, when two people meet, fall in love and become a couple, it's a good excuse to get serious about your finances. Income, expenses, banking and credit all come into play here.
The expression, "Two heads are better than one," definitely applies in the case of budgeting. Instead of working in isolation, a couple working together towards the same financial goals can achieve much more. However, before you can set any financial goals, you need to know how much money you have to work with and how much in expenses or debt you need to pay off. Budgeting is the first step in becoming financially responsible and independent.
The word "budget" sounds about as interesting as doing chores around the house. Nevertheless, budgeting is really quite simple; a budget reflects the money coming in and going out. You track your income and expenses for a period of time, then set realistic goals based on the information you've collected. As you track your money, use this as a starting point to discuss areas where you might be spending too much and common financial goals you'd like to work on.
Getting Started
Now comes the dirty work; it's time to track income and expenses. Tracking income is the easier of the two, but make sure you've accounted for all income streams including any supplemental income, credits or extra cash. You'll also be pleasantly surprised that by combining both of your incomes, you have more money to work with before and after expenses.
The harder part is the latter: Tracking Expenses. If you're combining households, some costs have gone down for one of you (or possibly both). Take this time to also discuss each other's bills, especially debts like credit cards, student loans and any other debt either of you have.
Now for the nitty-gritty: Calculating Expenses. There are a couple of ways to do this; one is manual, the other more automatic. The manual approach means collecting receipts or tracking every single expense, then entering it into an Excel spreadsheet or writing it by hand in a log of some kind. It can even be a simple legal pad which is definitely more tedious, but still effective.
The automatic approach will still mean entering in all receipts, but doing so in a program like Quicken or Budget Pulse which will tally everything up for you as long as you've categorized your entries (groceries, eating out, insurance, etc.). Both programs, one is software the other a website, will create graphs and charts giving you a visual of where you spend your money. There are also free, online tools you can use to manage your finances. Quicken has a product called Mint that can do a variety of things along with educate you both further about your money.
This is also a perfect time to discuss who will do the work. At this stage it is highly recommended that you both play an active part in the actual tracking and monitoring of your money. Married couples who manage their money together are typically more financially successful.
Now What?
So you know how much you make and how much you spend. The next step is actually setting your budget based on the figures you've gathered. Maybe you've found you are eating out too much and the two of you have decided to cook at home more often. In the "restaurant/dining out" category, you'd set your budget for a little less than what you've been spending. However, in the "groceries" category, you'd round up a bit to balance out eating at home more often. Below is an example of a budget including categories:
 
 For recurring expenses that don't fluctuate, set the amount to the realistic figures. It's always a good rule of thumb to set your budget to reflect your actual expenses and for the sake of sanity, round up not down on the more variable ones. If your cell phone bill is always $68.90 a month then put $69.00 down in the budget. The first month or two, you'll want to follow your expenses and compare it to your budget; tweak the budget as needed.
Hey, this sounds like a lot of work!
For many people with reliable incomes and stable expenses, much of the work load is in the beginning in the form of tracking money coming in and going out. Once you get into the groove and hopefully continue tracking expenses, the budget can be reviewed only a couple times a year.
The Benefits
The greatest benefit is that you and your partner will have a good understanding of your income and expenses.  Together as a team you can set future financial goals and create a plan to achieve those goals. Those goals might include paying off debt, saving for a house, or building an emergency or slush fund. Now you have a starting point.

Aug 20, 2015

Principle 3: Tough Love...Pay Cash

The amount of damage paying interest to a bank can do to any solid financial plan is devastating.  I sit with folks everyday that have way to much debt already, and for some reason are considering more.  The best advice I can give you is to PAY CASH FOR EVERYTHING. Period.  Below is a little bit of tough love, and additional details for your to reflect on.

Exceptions to Paying Cash

Though exceptions like a house and an education exist, it is nearly always best to save up the appropriate amount of cash to make a purchase versus using a loan.  This may seem like common sense or even laughably simple to some of you, but I have a feeling someone out there needs to hear this.

In the rare borrowing exceptions like buying a home, be conservative with your mortgage.  Put a minimum of 20% down and borrow no more than 2 times your annual income with a 15 year fixed rate mortgage (30 if you must).  Aim for payments to be no more than 1/4 of your take home pay.

Buying a bigger home isn't an investment, its a lifestyle choice and a very expensive one at that.  As soon as possible, set up an automatic additional "principal only" payment through your mortgage company, and watch your net worth explode and your remaining balance disappear.  Having a paid off home is a wonderful feeling, not to mention the deep sleep you'll begin to feel once you own your home "free and clear!" Pay cash.  *Optional-stick your last mortgage bill to the fridge with a big PAID stamp on it.

Steer Clear of Home Equity Loans and Lines

Pay for improvements with cash and find a way to look the other way when you see shiny new toys.  One of the biggest reasons we experienced the credit crunch and global financial meltdown was because people looked at their homes as ATM machines and pulled out all of the equity to do projects or buy new things.  Fight the urge.  Pay cash.

College and Education

Urge your kids to pick an "in-state" school or a less expensive school known for the program or subject they are interested in.  The name brand is not nearly as important as what they learn while at school.  Hopefully you funded a 529 plan while they were growing up.  Pay cash.

Buying a Car

Get a reliable 2-4 year old car with high gas mileage and solid consumer reviews.  Look up the suggested retail on Kelly Blue Book and try to find a gem on either Autotrader, Craigslist, or the like.  Taking a look at some local dealerships with attractive warrantees is a great place to start as well.  See my in-depth guide to car buying herePay cash.

In General

Avoid revolving debt or monthly payments like the plague.  Consumer debt is no good, and if you are wondering if you should take out a loan to buy something I already have the answer for you and it's easy. It's no.  Pay cash, live within your means and get back in the game!

With love,

TB (Pay cash).
Take Me to Principle 4: