• 02:29:58 am on March 6, 2009 | 20
    Tags: , , , , , , ,

    Flying on Auto Pilot…

    It’s interesting, as Jeff points out, the different views that each of the 7MITs have towards so-called ‘tax-advantaged retirement accounts’ … for example, Jeff views them as ‘investing’ and almost sees his investments in real-estate as ‘distractions’ from his investing strategy … I’m not here to pass judgement on any of this: rather, I want to throw it to you for your ideas?

    _________________________

    I find it very interesting how different and at times how similar our approaches to personal finance are.  Sometimes, almost everyone is singing the same tune…European luxury vehicles for all my friends (well almost all us), while at other times we are on completely different pages.

    Take our discussion about retirement accounts.  Some have chosen different savings methods while others have signed up for the full meal deal and drank the tax-deferred retirement account kool-aid.  I’m a kool-aid drinker.

    I’ve been drinking the kool-aid since I was 23.

    I can still hear my father telling me right after I graduated from Aviation Officer Candidate School, “You better start saving for retirement.”

    So start I did.  And I’ve been at it ever since.

    I’m not sure how to react to those who say they don’t need/want to use Uncle Sam’s tax deferred retirement accounts.  I appreciate the “damn the torpedoes, full speed ahead” approach, but I think there is a place for these types of accounts in preparing for the later stages of life.

    I do not intend to imply that I have this thing squared away.  I’m part of this experiment not because I have the answers, but because I know I can do better.  My pendulum is probably too far to one side in that I may be relying too much upon my retirement account savings and the promise of a government pension.  As you’ll see below, my non-tax-deferred savings strategy is a bit…oh, let’s call it lacking.

    I haven’t always saved a ton, but I’ve saved.  I am a classic buy and hold long-term investor.  I squirrel a way a little at a time, each and every pay check.  Yes, I’m one of those dollar-cost-averagers.  And lately I’ve been averaging down, which is a good thing.  My program is on auto pilot, managing my money and investments automatically, whether I remember to or not.

    Let’s hit the details of how I’ve been investing and saving.

    My investment and savings vehicles include two traditional and two Roth IRAs, a 401K, two 529 college savings accounts, one brokerage account for individual stocks and a money market account for my cash savings.

    On a monthly basis, my wife and I set aside the following:

    • 401K – $675 (no employer matching)
    • Roth IRAs – $833
    • 529s – $800
    • Money market savings – $1350

    That totals $3658 set aside each month.

    The annual numbers look like:

    • 401K – $8100
    • Roth IRAs – $10000
    • 529s – $9600
    • Money market savings – $16200

    That totals $43,896 set aside annually which is approximately 38% of my gross income.

    It’s enlightening putting all the numbers down on a single sheet of paper (or electrons since we’re on the Internet).  Now I know why I haven’t been able to afford my own airplane.  I’ve been saving too much.  😉

    My money is invested predominately in mutual funds in these tax deferred accounts.  I have experimented a little with individual stocks but I typically tend to lose there.  Heck, lately I’ve lost in my mutual funds as well, but who hasn’t. 😦

    For many years I went about investing completely on my own and had mediocre performance.   As much as I want to believe investing is a pastime for me, I have to admit that I’m no expert.  In 2004 I started subscribing to an investment newsletter and now follow an aggressive growth model portfolio they have put together.  My overall performance has improved dramatically but I’ve been hit pretty hard just like everyone else lately.

    My portfolio is made up primarily of low cost index funds (a total stock market index, a NASDAQ 100 index, and an EAFE international index fund).  I also have a couple aggressive growth oriented funds that are actively managed (read higher fees).  These funds are the Baron Partners fund and the Meridian Growth fund.  Additionally, I have a few shares of Garmin.

    The high water mark was in the fall of 2007 when my investment accounts topped $220K.  However, it’s now back down to around $125K as of Feb 09.  While that downturn of $95K is disappointing, my Net Worth has increased more than $100K since the Fall of 2007 because of my recent real estate purchase.

    While real estate has kept my Net Worth moving forward.  It kicked my financial airplane off auto-pilot.  I stopped all the investing activity listed above in early January and redirected it to the money market account so I could “pad” my cash to get through the financial and life upheaval that comes with a move.  I’m antsy to get my investing back on track and will slowly start re-engaging the auto pilot as my life and finances settle into their new groove.

    I have some ideas on changes I need to consider moving forward, but want to hear what you think first.

     

Comments

  • Scott 6:05 am on March 6, 2009 | #

    Jeff, you certainly have done a great job so far! I think Adrian would probably tell you just like he told me: “I’m not worried about whether or not you reach a number, i’m just concerned about you reaching THE NUMBER”.

    And a follow up to that, I might add that out of your entire post, this is one of the things that caught my eye the most:

    “While that downturn of $95K is disappointing, my Net Worth has increased more than $100K since the Fall of 2007 because of my recent real estate purchase.

    While real estate has kept my Net Worth moving forward. It kicked my financial airplane off auto-pilot. I stopped all the investing activity listed above in early January and redirected it to the money market account so I could “pad” my cash to get through the financial and life upheaval that comes with a move. I’m antsy to get my investing back on track and will slowly start re-engaging the auto pilot as my life and finances settle into their new groove.”

    Interesting how the moment you jumped a little out of your comfort zone, your net worth jumped up 100k DESPITE the losses on the retirement account! (Get my drift)

    You see, I heard a man once say “Maximum growth occurs on the border of order and chaos”.

    😉

  • Jeff 7:54 am on March 6, 2009 | #

    Scott,

    Thanks for the comment. I think you’re on the money concerning the difference between reaching “A” number vs. reaching “THE” number. My annual investment planning and projecting analysis yields a post 65 retirement life of leisure with an income of more than 100K per year and a pretty high final “number.”

    The big difference between what I’ve been doing and what we are doing here in this experiment is time…and speed.

    While my efforts are going to get me to where I need to be comfortable later in life, I don’t think they are going to get me to my number within ten years. Good point Scott.

    Real estate has been part of my plan since late 2007. I just haven’t executed until now. I started to move forward with it during the summer of 2008, viewing several residential properties in the Kansas City area. However, the Navy put those plans on hold when they gave me orders to Boston. Coincidentally that happened right in the middle of my REI trip to KC.

    No one said this would be a comfortable climb to the top, so I understand your points of view. Also, I think the economic times we are in now are becoming fertile ground for the fortunes of the future.

    In addition to more real estate, I’m brainstorming a list of individual stocks to start running through a Rule #1/Buffet value analysis.

    There’s a blue light special on many great companies for those who are bold.

    Thanks again, Jeff

  • Scott 10:29 am on March 6, 2009 | #

    Jeff, another thing I would make sure and consider is; How much is a 100k per year lifestyle worth when you are 65 years old? (after 25 years of inflation from now) and does this allow you to live your life’s purpose?

    Sometimes I think the fear of that reality pushes us a little farther into the territory of the uncomfortable to make us achieve our goals.

    Just another thought to help.

  • Josh 1:03 pm on March 6, 2009 | #

    Jeff, I agree 100% about companies going for fire sale prices right now.
    The more dramatic the economic downturn the better the opportunities are and the greater the return when things recover.
    As I listen to the news and people around me, everyone is all doom and gloom, but I’m honestly more excited then ever to be investing right now.

  • Jeff 2:46 pm on March 6, 2009 | #

    Scott, I should be able to live comfortably. Maybe not jet set around and fulfill the life purpose stuff, but i won’t have to worry about bills or being a burden to my children.

    That’s what my current path has me on right now. Several million by the time I’m 65.

    Achieving my number for a life purpose fulfillment is a different matter all together….one I hadn’t started to analyze and plan for until this exercise.

    Josh, as Buffet and Benjamin Graham, before him, would say…”There are times when Mr. Market prices things incorrectly.”

    I’m with you, I think this is one of those times.

  • Adrian 7:03 pm on March 6, 2009 | #

    @ Jeff – Specifically, what do your current plans call for you to have saved by the time you are 65 (total nest egg, and draw-down per year)? What do those numbers look like after 4% or 5% inflation is taken into account (i.e. brought back to today’s dollars)? And, how will that compare to your pre-retirement expected salary?

  • Jeff 9:19 pm on March 6, 2009 | #

    @ Adrian – Great questions and ones that I could normally answer very quickly. Unfortunately my files are still in a box somewhere. 😦

    Not trying to cop out on you, but that’s the truth of the matter. My specific answers to that question are in a box right now.

    Off the top of my head, I want to say that my projections (they were based upon a monte carlo analysis that considered below average and average market performance) were showing between 8-13 million in investment assets by 65. I think I used a 3% inflation factor and that the 100K was in today’s dollars…..I think.

    Unfortunately, that’s all just a good guess, because the analysis is buried in boxes. I’ll dig it out when I can get a chance and give you more specific and accurate answers when I have the papers in front of me.

    @ All – We still haven’t really breached the subject of what I should be doing differently. Scott touched upon my need to continue to break free from my comfort zone and Josh and I mentioned the idea of individual stocks.

    But how? Via tax advantaged retirement accounts? Individual non retirement accounts?

    Right now I’m thinking that I should continue to work the real estate angle and begin moving from residential to commercial properties.

    I think that I should begin changing the focus of my stock investments from mutual funds to individual stocks. As and initial step I could keep the low cost index funds that I’m in and replace my higher fee aggressive growth funds with individual stock investments within my retirement accounts.

    As a second step I could begin to take the large amounts of cash that go to my money market and begin funneling some of those funds (maybe half) to individual stock investments.

    Thoughts?
    Thanks Jeff

  • Adrian 10:35 pm on March 6, 2009 | #

    @ Jeff – By the time you add this year’s ~$45k to your current ‘savings’ (not incl. RE) then that gives you ~$200k right now.

    If all you do is continue to contribute ~$45k p.a. (inflation adjusted @ 4% p.a.) then I figure you for about $6 Mill. in 25 years.

    In ‘2009 dollars’ that’s approx. $2.25 Mill. … so, there’s your $100k p.a. retirement – give or take.

    But, this ONLY happens if you continue to increase your current rate of ‘savings’ at least inline with inflation.

    Sooner or later, though, I think you will be faced with two big tests:

    1. Is the $100k enough for you to live comfortably (this will depend very much on what happens to your lifestyle b/w now and then)?

    2. Do you keep plowing money into the long-term ‘backup’ plan, or do you divert some/all to RE and/or your Growth Engine?

    Let’s assume that you decide to hedge your bets and in three years time start to put only half of the $45k p.a. into your ‘retirement savings plan’ (a.k.a. backup plan), and divert the other half to your RE and/or Growth Engine Strategies.

    Well … your retirement plan drops from $2.25 million like a Jumbo with 4 (?) dead engines to … well, $747k [pun intended]. Hardly enough to stoke your boat’s motor with gas …

    The point?

    At some stage, I think that most people have to make a realistic choice b/w focusing on their high-wire skills or spending so much time/energy stringing up their safety net that they forget that there’s a show on 🙂

  • Josh 11:28 am on March 7, 2009 | #

    I like the last paragraph Adrian, well said.

    Jeff, loss the mutual funds man,

  • Jeff 7:39 am on March 8, 2009 | #

    @ Adrian – Point taken, I can see my tightrope, I’m trying to figure out how to mount the wire.

    @ Josh – Baby steps my friend. The non-index funds in my portfolio will be the first things to go once, I have finished my company research. I’m going to take steps in this direction, but I’m not ready to go full bore. I’ve had success to this point (albeit with my safety net 🙂 ). I just don’t want to throw the baby out with the bath water is all.

  • Diane 8:20 am on March 10, 2009 | #

    Not that I’m an expert, but I’m with Josh on your losing the mutual funds (they diversify risk, so they make less for you) and the folks who recommend them. I think if you can do the research required to learn about individual companies (i.e., USE the data in the books you’re reading that tell you how to pick a solid company with a solid management), then you should be making your own choices, not paying someone else to do it. Particularly since you do not know the ethics of the guys doing it (unless that’s you) and there are enough people in the mix already (CEOs, CFOs, etc).

    Beyond that (managing your own investing in stocks), I have to bow out of the discussion and listen.

  • Jeff 4:18 pm on March 10, 2009 | #

    Diane – Taking the aggressive growth funds out of the mix does exactly what you point out. It removes those who are doing the picking. The other funds in my portfolio are pure indexes. No picking involved, just total market returns save for minor fees.

    I intend to try and put the resources you mention to work, but that’s going to take time. I’m not going to take the entire portfolio and put it into the first stock that meets value investing criteria. I understand that diversity limits returns, but I’m not ready to stomach the risk of putting everything on black with my first pick…especially with my track record on individual stocks.

    AJ – I know I owe you answers to those questions, but it will have to wait for now. As I mentioned previously the files that contain those details are still in a box (in Boston, MA) and I am now on a two week business trip (in Pensacola, FL). I should be able to find the answers sometime after March 20th when I return to Boston.

    Sorry.

  • Adrian 4:28 pm on March 10, 2009 | #

    @ Jeff – That’s cool … just something for you to mull over, Jeff.

  • Retirement Accounts: 7 Case Studies « How to Make 7 Million in 7 Years™ 1:45 am on March 11, 2009 | #

    […] Jeff – Here is an example of a reasonably well-salaried government employee who has one foot in each camp: his Grandpappy once told him to invest in his 401k so that he does, as well as have a couple of residential properties. How much money – in today’s dollars – does a high-saving guy expect to accumulate by the time he reaches 60? Is it worth the wait? […]

  • Charles 5:21 pm on March 13, 2009 | #

    My suggestion would be to look at the final results of your investment choices instead of focusing on the tax benefits. You could invest $30K in a tax deferred account and make 8% in a year ($2,400) or you could use the $30K in a non-tax deferred option ______ (fill in the blank) and make more than $2,4000 after taxes. Which one will get you to your number on your date?

  • Adrian 7:11 pm on March 13, 2009 | #

    @ Charles – Well said! 🙂

  • Diane 9:10 pm on March 13, 2009 | #

    Jeff – say hello to the McQuire’s for me! You’re in my home town!! I assume you’re getting a vehicle in Boston, btw, to do your business, but don’t recall that coming up in any of the posts…

    Regarding when you pick an individual stock, I would agree that you don’t put all your money in that stock; you probably want 3-5 that you can track easily and as you feel more comfortable with stocks, you will know what you want to do as far as $/% of your monies in each one.

    I did Dogs of the Dow initially when I started out, and that worked well for me then, but I don’t know that I’d bet on them now from one year to the next.

    What do you think about the Aerospace Industry, particularly with the release of information recently that the Obama administration is going to remove the Tanker from the Five-Year Budget Plan that the President is putting out this year? My guess is that it may take until the Congress resolves the next budget this fall before it can be predicted well…and of course that won’t happen until Jan 🙂
    But, as an investment, the bet might be that the industry will drop (and effectively go on sale if one believed it would return) and then adjust and stabilize when congress works out details later – OR – will they do that sooner than later?

  • Jeff 9:30 pm on March 13, 2009 | #

    Diane – I didn’t know your were a Pensacola girl. I’ve spent a fair amount of time here in the past. I went to Aviation Officer Candidate School there at NAS Pensacola in the early nineties and did my primary flight training at Whiting Field in Milton. I lived here for only about a year in 1992-1993.

    Haven’t hit McGuire’s yet, although I did drive by last night. Maybe this weekend. 😉

  • Jeff 4:42 pm on March 24, 2009 | #

    @ Adrian – I’m home in MA for a few days….So here’s the numbers that I promised you.

    Based upon my last analysis using Fidelity’s Monte Carlo retirement planner I’m on track to have the following by 67:

    3.1 Million (13,639/month) if the market performs poorly

    7.6 Million (24,487/month) if the market performs on average.

    That’s a bit less than I stated above. Shows you how good my memory is these days.

    The one question I can’t find in my answers is whether these answers are in 2008 dollars or 2037 dollars. I’m pretty sure I assumed about 3-4% inflation and normally I’d request my answers in “today’s dollars” on these type of exercises, but I can’t determine that for certain with the print outs I have from that analysis.

    I’ll run the numbers again when I have more free time and see if I can provide more clarity.

  • Adrian 6:04 pm on March 24, 2009 | #

    @ Jeff – Just wait until you see how good your memory is when you get to 67 😛

    If you assumed circa 8% stock market return (pretty much ‘guaranteed’ for that long a period) then I would agree with your approx. $3 Mill. in today’s dollars.

    Can you wait until 67 to live off $13,600 a month (I think that’s already $1k a month over ‘safe’)? Is it worth keeping this ‘backup plan’ going for this lifestyle by this date? Is it worth ‘risking’ your primary plan – whatever that turns out to be – to keep this going?

    Only questions that you will be able to answer as this ‘grand experiment’ progresses …


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