Author Topic: I've got questions, you've got answers! How's my plan looking?  (Read 2966 times)

sparky28

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I've also posted this to Reddit. I don't know if there is an anti-crosspost policy.
Howís my plan looking? Iíve been conscious of my spending for about 3 years, but never run the math by anyone else.
Single, 23 years old. Gross Income at 57k + 5k bonus.

Employee matches 401k 50 cents on the dollar for the first 6% (3%). They also add an additional 6% of gross income, no signing up required. Whoo! Iím personally contributing 14%, around $7.7k. Total employee match 5k annually (9%).

I contribute 10% (the max) of my gross income (but purchased post-tax) to my ESPP, (15% reduction in price, bought in lots twice a year) as I feel like itís a no-brainer. I work for a Fortune 500 company with strong financials and donít see it going anywhere anytime soon. Stock price has been increasing consistently YOY. My mentality right now is to hold on to them for the long term, even though Iím condensing my eggs into fewer baskets. Similar to my other investments, I would consider it even without the 15% benefit.
  • 3K in ESPP right now.
  • 15K in Roth IRA (just contributed this years 5.5k this week)
  • 10K in 401k (Was just eligible to contribute starting last year)
  • 105k in taxable accounts, invested. Source- saving a bunch over the years with scholarships during school. 13k is a gift of IBM shares from grandmother with a cost basis from back before World War II. I donít even know what decade. (gifted before she died, so that tax hit will be huge if I sell).
  • About 5k in cash. I know this is a slimmer liquid emergency fund than recommended, but Iím always itching to invest more and more. Having cash sitting around bothers me.
Zero debt. Yay.
Additional Income Ė Iím getting dividends of around 250 a month on average. Reinvesting them automatically, as Iím in ďasset growthĒ mode.

Spending: 1,200 a month and an additional $100 pre-tax for transit. So..1280ish? I don't think about the public transit at all.

Quick math says I have around a 65% savings rate, 1-(1200/(2244+600+430+250)).
As I understand the calculation, itís my spending/net income+401k+espp+dividends. But thatís probably not right.

My investing philosophy is focused on what the company does, and their dividend. In that way, I can ignore the swings of the market, and rely more on the specific value the company offers. Iím not just chasing after highest div yield, Iím currently mostly invested in the Ďaristocratsí currently, as Iím looking for the lowest maintenance, long-term growth.

I have multiple questions:
  • How should I be calculating my savings rate? I know itís not the end-all number, but Iíd love to be able to compare my rate to what I read on MMM.
  • How/should I look into selling by IBM shares? I donít see much downside holding onto, but that cash might be put into higher yielding dividend companies. As I type it out, that sounds dumb. Theyíre a good fit for my appetite.
  • How can I better optimize my allocation? I know Iím not maxing out my 401k, but thatís currently for piece of mind. By selecting the 30% or so percentage needed to get to the 17.5k, I take out possible money that I want more liquid, and invest in companies more to my liking. And to be honest, I havenít figured out if I have the income to max it and keep my spending consistent.
  • How long until I can be FI? MMM would give me 10.5 years at zero assets, so itís less than that.
  • Iím currently covering about 20% of my annual spending with dividends Ė whatís the best way to increase this?
  • Is solely dividend investing a good idea for FI? I hear about the 4% withdrawal rate, but by relying on dividends, arenít I in a way ignoring this because Iím not Ďwithdrawingí my current position, Iím just taking out the future position? Iím not sure how to really compare a dividend yield with the withdrawal rate. Especially since I have an average yield of 3% nominal, thatís definitely less than 4% real. How do I make that apples to apples?
  • Should I have different investing philosophies between taxable and IRA accounts? Is there a perk to putting dividend income in one or the other? How is dividend income treated in an IRA? (Iíve googled this, but havenít found anything that compels me to do so)
  • What else should I be looking at?

Any insight is much appreciated! Thanks!

thedayisbrave

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Re: I've got questions, you've got answers! How's my plan looking?
« Reply #1 on: July 19, 2014, 05:58:16 PM »
First off, awesome job - awesome savings rate, you are definitely ahead of most people your age.  I'm 24 and have a similar mind set so it's always finding people the same age who are thinking along the same lines :)

I think the best thing you can do for yourself right now is education.  There are a plethora of really great books out there.  Some would be: Random Walk Down Wall Street (Malkiel), All About Asset Allocation (Ferri), The Four Pillars of Investing (Bernstein), The Intelligent Investor (Graham), The Bogleheads Guide to Investing (LeBouef), Common Sense on Mutual Funds (Bogle). 

If you want simplified, low-maintenance, low-cost, you may find value in the Boglehead philosophy/style of investing which is to stick to index funds.  Not exciting (which is the part I struggle the most with) but it's the best bet and with time on your side, you're really able to benefit from the low costs.

Personally, I ignore dividend income completely, as it just goes right back into my investments. 

From what I've read online, many of those closer to retirement age favor high dividend investments.  I think they are important in a portfolio but you also don't want to be too overexposed in one area.  There are plenty of "income" investments that aren't necessarily touted for their "high dividends" - such as bonds, REITs, etc.  These are useful for balancing out the volatility of your portfolio as the general consensus is they perform differently than stocks - maybe not 24/7/365, but they are used as a buffer due to their low correlation. 

While you're at it, read up on "tax efficient investing" - you can get started here: http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement.  Basically, you want to look at your portfolio as a whole instead of within each account, and allocate accordingly.  Investments that throw off income should ideally be placed in a tax deferred or tax free account (401K, ROTH IRA, etc.) while US & International stock funds are best allocated in taxable. 

Sorry this post is kind of all over the place, but should provide some useful starting points.  Congrats again, you've made great progress already - keep it up! :)

sparky28

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Re: I've got questions, you've got answers! How's my plan looking?
« Reply #2 on: July 19, 2014, 11:19:02 PM »
Thanks for the reply!

I'm invested in about 10-15k of bonds and REITs, as I'm aware of trying to minimize my market fluctuation exposure. Then again, I could argue that since I'm focused on 'robust' companies, the market doesn't matter. But I wouldn't agree with that totally.

I've also read a bunch of those books, but they're definitely worthy of another reread.

One of my main issues is trying to optimize my tax deferrable additions when my plan is to retire in a decade or so. Transferring money via the 72t plan sounds like a hassle.

Since we're a similar age, what does your strategy look like?

Frankies Girl

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Re: I've got questions, you've got answers! How's my plan looking?
« Reply #3 on: July 19, 2014, 11:36:59 PM »
Thanks for the reply!

I'm invested in about 10-15k of bonds and REITs, as I'm aware of trying to minimize my market fluctuation exposure. Then again, I could argue that since I'm focused on 'robust' companies, the market doesn't matter. But I wouldn't agree with that totally.

I've also read a bunch of those books, but they're definitely worthy of another reread.

One of my main issues is trying to optimize my tax deferrable additions when my plan is to retire in a decade or so. Transferring money via the 72t plan sounds like a hassle.

Since we're a similar age, what does your strategy look like?


SEPP/72t is only one method of tapping retirement accounts before traditional retirement age. Do some searches for "Roth Pipeline" on here and in general. It's probably a great option for you to convert your 401k money into your Roth since you've already got a Roth started. Read up on that, and then probably consider trying to up your 401k contributions to take advantage of of the tax deferred growth, and lower your taxable income. It is possible to do the pipeline and in early retirement, pay no taxes at all... I know it's discussed on the Mad FIentist's site and that Go Curry Cracker utilizes this method as well, and it's definitely what I am aiming to use when I pull the trigger on ER.




thedayisbrave

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Re: I've got questions, you've got answers! How's my plan looking?
« Reply #4 on: July 21, 2014, 07:40:00 AM »
Thanks for the reply!

Since we're a similar age, what does your strategy look like?

You're welcome! My AA right now is 90/10 - and I plan on keeping it there for the next 5-6 years as I start full-time work.  My plan is to save 75-80% of my income each year, which is easily done for me since I'm still used to living on a college budget and honestly don't have many needs beyond food, transportation, utilities.  I'm hoping that by age 30 or so, I'll be in a position to re-evaluate and decide whether I want to transition to part-time work/semi- retirement (so I can focus on my real estate business) or keep hustling for a few more years.  At which point, I'll drop my equities to 80.

matchewed

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Re: I've got questions, you've got answers! How's my plan looking?
« Reply #5 on: July 21, 2014, 08:38:59 AM »
I have multiple questions:
  • How should I be calculating my savings rate? I know itís not the end-all number, but Iíd love to be able to compare my rate to what I read on MMM.

Consistently for yourself. All you need to do is make sure it works for you and you can see improvements when you make them.
  • How/should I look into selling by IBM shares? I donít see much downside holding onto, but that cash might be put into higher yielding dividend companies. As I type it out, that sounds dumb. Theyíre a good fit for my appetite.

Dividends aren't some godsend of investing. A company essentially sacrifices appreciation when they pay out dividends. Companies can cut dividends. There are a million posts about it on this board. Feel free to browse around. IBM is a fine company to own if you're looking to own individual companies (there are risks to owning individual companies). Check out this reply in a particular thread.

  • How can I better optimize my allocation? I know Iím not maxing out my 401k, but thatís currently for piece of mind. By selecting the 30% or so percentage needed to get to the 17.5k, I take out possible money that I want more liquid, and invest in companies more to my liking. And to be honest, I havenít figured out if I have the income to max it and keep my spending consistent.

You optimize your allocation by sticking to a pre-determined allocation with either triggers based on age or drift away from that pre-determined choice. Outside of that minimize expenses and choose an allocation that reflects your risk tolerance and reward expectations. Make an Investment Policy Statement. I would recommend maxing the 401k though. Mathematically it is generally superior in increasing your savings.
  • How long until I can be FI? MMM would give me 10.5 years at zero assets, so itís less than that.

Simplistic calculator for that.
  • Iím currently covering about 20% of my annual spending with dividends Ė whatís the best way to increase this?

Invest more money in dividend paying stocks. Is this a trick question?

  • Is solely dividend investing a good idea for FI? I hear about the 4% withdrawal rate, but by relying on dividends, arenít I in a way ignoring this because Iím not Ďwithdrawingí my current position, Iím just taking out the future position? Iím not sure how to really compare a dividend yield with the withdrawal rate. Especially since I have an average yield of 3% nominal, thatís definitely less than 4% real. How do I make that apples to apples?

As good as any other idea. Probably harder than some. You'd need to change your withdrawal assumption to 3%. If you want to live entirely off of dividends you'll need to determine what percent of your portfolio they're paying out and use that percent as your "SWR." Dividends pay out 2% and you have expenses of $45k? You'll need a portfolio of $2.25mil. Just understand some risks to a dividend centric FIRE plan. Taxation on dividends can will change in your lifetime. Companies can stop paying out dividends.

  • Should I have different investing philosophies between taxable and IRA accounts? Is there a perk to putting dividend income in one or the other? How is dividend income treated in an IRA? (Iíve googled this, but havenít found anything that compels me to do so)

Tax efficiency is probably your biggest consideration outside of cost efficiency when determining which investment vehicles contain which investments. Dividend "income" in an IRA is non taxable and is just a gain in the account. It is taxed at withdrawal as income.
    • What else should I be looking at?

    Understand the downsides and challenges your particular investment path has. Determine a FIRE budget (assuming FIRE is your goal).