Author Topic: Investing For The MMM Lifestyle  (Read 6161 times)

Patryn

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Investing For The MMM Lifestyle
« on: February 15, 2012, 02:22:06 PM »
I am looking for advice on how to start investing to become independently wealthy.  Using MMM’s definition this means my passive income from investments will generate more income then my expenses.

I am currently in my low 30’s and single.  I make approximately $70,000 per year and I will finish paying off my mortgage in a couple months.  After that I will be completely debt free and will have approximately $2,300 per month to save and invest.  My approximate spending / bills per month would be $1,500.

I currently have a 401k with an approximate balance of $55,000 with a .06% expense cost which is invested 100% in a total stock market index fund.

I plan on maxing out a ROTH each year after finishing the mortgage and then putting the rest in taxable funds because I don’t want all my money tied up in a 401k which I won’t be able to access until well after I want to retire.

My main question is should I purchase additional total stock market index funds for my ROTH and taxable account as MMM recommends?  I remember a post on ERE that Jacob regretted not setting up his investments in a way that would generate the most passive income possible at the beginning.

I am not interested in trying to beat the market or single stock picking but I was curious if anyone would recommend dividend aristocrat / champion type funds over a total stock market fund for someone who wants to retire very early and live off the investment income.  Or are there other funds that are more useful for the MMM goal?

Thanks a lot for your suggestions and advice!
« Last Edit: February 15, 2012, 03:07:57 PM by Patryn »

foodguy

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Re: Investing For The MMM Lifestyle
« Reply #1 on: February 15, 2012, 03:01:49 PM »
I am looking for advice on how to start investing to become independently wealthy.  Using MMMís definition this means my passive income from investments will generate more income then my expenses.

I am currently in my low 30ís and single.  I make approximately $70,000 per year and I will finish paying off my mortgage in a couple months.  After that I will be completely debt free and will have approximately $2,300 per month to save and invest.  My approximate spending / bills per month would be $1,500.

I currently have a 401k with an approximate balance of $55,000 with a .06% expense cost which is invested 100% in a total stock market index fund.

I plan on maxing out a ROTH each year after finishing the mortgage and then putting the rest in taxable funds because I donít want all my money tied up in a 401k which I wonít be able to access until well after I want to retire.

My main question is should I purchase additional total stock market index funds for my ROTH and taxable account as MMM recommends?  I remember a post on ERE that Jacob regretted not setting up his investments in a way that would generate the most passive income possible at the beginning.

I am not interested in trying to beat the market or single stock picking but I was curious if anyone would recommend dividend aristocrat / champion type funds over a total stock market fund for someone who wants to retire very early and live off the investment income.

Thanks a lot for your suggestions and advice!

Simply because your funds are in a 401k doesn't mean they aren't accessible until 59.5.  Check out IRS rule 72t.  Though the calculations are complex and probably require an accountant, it is technically possible to get at the money without incurring the penalties.

Depending on how early you want to retire and what sort of balance you are shooting for, consider tax-exempt municipal bonds for regular brokerage accounts.  While they may not be appropriate given your young age, they do avoid taxes.  Otherwise, there are tax-advantaged mutual funds that attempt to minimize capital gains.  Those may be your best bet for any regular brokerage account, that is a non-tax advantaged account.

Passive income, while a good consideration on some level, might not be completely appropriate given your age either.  You have time to be very aggressive and seek growth funds.  You can recover from any wild swings in the market, if you stomach can handle losing 50%.  :-)

Ben

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Re: Investing For The MMM Lifestyle
« Reply #2 on: February 16, 2012, 09:11:10 AM »
Congrats on the home payoff!

A few things from my perspective:

1. The good thing about passive income is you get the money without 'selling' anything. The bad thing is you have to pay taxes on that income even if you don't sell anything. This can slow you down a lot for the years where you are reinvesting those dividends (especially if your income is high), but doesn't matter once you are living off of that income.

2. Don't forget: you will need to have enough money to live after you hit 59, too. It prob makes sense to tackle that first, to have your tax-advantged money growing as long as possible- I would max out your tax-advantaged accounts (either ROTH, regular IRA, or 401k since your company's program is good, low expenses, etc.). Once it's built up to where you believe it will grow to a large enough nest egg (over the next XX years before retirement) that you will be able to have a 3-4% SWR from 59 on, I would then target the passive income.

3. You're on the right track with index funds tracking large segments of the economy. You may want to read a bit about portfolio theory, and mix in international funds, bond funds, etc. A dividend/value fund as a portion of your investments would likely be appropriate since you will be tapping into your investments early. REITs (Real Estate Investment Trusts) might be another good source to diversify your passive income if you want relatively labor-free dividends without being tied to just one portion of the economy.

Again, taxes could take a big bite out of the gains from high-dividend funds if you are working AND receiving a lot of passive income- but some of that just comes with the territory of being independently wealthy! I think I'd take a different perspective than Jacob, but he has clearly done this already and I have not.

4. In conclusion, a variety of higher-dividend funds should probably be a strong component of your investment/early retirement strategy, but I think you would want them to be one of the last pieces you put in place. Depending on how EXTREME your early retirement is, this will matter more or less (e.g. if you are going to retire in the next 4-5 years, the tax difference doesn't matter too much. If it is closer to 15+, tax-advantaged compounding will matter a lot more).

Hope it's helpful!

Ben

Patryn

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Re: Investing For The MMM Lifestyle
« Reply #3 on: February 16, 2012, 01:42:50 PM »
Thanks a lot for the replies so far!

MMM said he was going to write an article about 401k accounts and "how much is too much" and I'm anxiously awaiting it.  My thought process is if I put a ton of money into it and then don't touch it until I'm 59.5 and have been living without it for 15+ years then it would just be a bonus.

A very nice bonus indeed but what if it delays your retiring by a few years.  Then is it really worth it?

I like the Roth because you can take out the principle with no strings attached but the 401k seems a lot more restrictive.  I did read about the 72t rule which is very interesting and seems to turn your 401k into an annuity until you are 59.5.

If you were to focus on just S&P 500 funds like MMM recommends and then have 5 years of expenses in a mixed stock and bond fund would the goal be to live off the dividends from the stock and bond fund or are you selling a piece of that fund every 3 months / year / whatever in order to pay your bills?

I'm trying to figure out the ideal situation to be in from an investment standpoint to actually start living off those investments.

MMM

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Re: Investing For The MMM Lifestyle
« Reply #4 on: February 16, 2012, 08:46:12 PM »
Hey Patryn,

It looks like the wise readers have already answered your question as well as I could - I would continue to max out tax-deferred accounts while you're still earning the big bucks, and put the rest into various investments depending on your style (could be as simple as Vanguard's VBINX and a REIT if you are lazy, or a more advanced and risk-tolerant portfolio if you have read The Intelligent Asset Allocator).

You mentioned an article you were waiting for - it already exists! http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

judgemebymyusername

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Re: Investing For The MMM Lifestyle
« Reply #5 on: February 20, 2012, 04:25:12 PM »
On top of what the others have said, I recommend you check out this link http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

Basically, you should consider what funds you hold in what accounts. In short, you want bonds and funds that throw off more dividends to sit in your Roth IRA. Then you can place your stock index funds in a taxable account for 15% long term capital gains.

smedleyb

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Re: Investing For The MMM Lifestyle
« Reply #6 on: February 20, 2012, 06:22:45 PM »
Patryn,

First off bravo on the mortgage and the high savings rate.   

As far as specifics, I think an all-stock allocation is satisfactory given your age and the current rate of return on fixed income.  I would max out the IRA (continue investing that money in index funds), but focus the rest of your savings on building up cash in a taxable investment account.  Keep that powder dry for the next significant market correction (and yes, they always come).  I think it's prudent to be patient because it seems risky to deploy all your liquid cash in a market which is up 100% in the past couple years.

Take this as one Mustachian's perspective on the game of investing, but it's my belief that the next 2-4 years will afford an amazing opportunity to go "all in" the market and let that money ride for the next 20 years.  We are entering the 13th year of a sideways trending market;  the pundits grow louder every day, proclaiming the death of the dollar, or that we are Japan part deux, etc.  The negativity is thick, zombies and vampires are everywhere, but that negativity breeds the next generation of opportunities.  Chaos gives way to opportunity. 

In this next bull market, stock-pickers will be amply rewarded.  I'm not talking about investing in index funds or market ETFs; I'm talking about the dirty work of combing through financial statements to find companies poised to explode their earnings in the next bull market -- a bull that I believe will be overwhelmingly driven by green technology.   So build cash, do some research, and unleash the hounds at precisely the moment when it feels horribly wrong and utterly foolish to be buying stock.

Just my two cents. 

Good luck!



Ben

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Re: Investing For The MMM Lifestyle
« Reply #7 on: February 22, 2012, 09:52:35 AM »
Smedleyb,

I think the optimism is great, and I hope you are right! But do you know of any evidence that some people can do better than chance at predicting the market? Or I guess more accurately, that we can identify those people/factors ahead of time?

Ben

td

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Re: Investing For The MMM Lifestyle
« Reply #8 on: February 22, 2012, 10:37:10 AM »
Not completely passive, but landlording seems more lucrative than stocks at the moment.
Also you might consider owning at least some Series I bonds. They are pretty rock solid investments.

smedleyb

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Re: Investing For The MMM Lifestyle
« Reply #9 on: February 22, 2012, 11:53:16 AM »
Smedleyb,

I think the optimism is great, and I hope you are right! But do you know of any evidence that some people can do better than chance at predicting the market? Or I guess more accurately, that we can identify those people/factors ahead of time?

Ben

Βen,

In my experience, investing involves two variables: price and time.

e.g., gold was hot in the 70's, peaked in 1980, and then did nothing for years.  Yet during the late 90's, early 2000, you had all the time in world to scoop up gold in the $200 an oz. range.  Funny because all that was desired then was stocks, especially tech and financials, which have performed horribly since, even though gold is up 9 fold during the same time-period!

Along this time-axis, you can plot gold's rise in various stages: skepticism -- nobody believes it's worth anything, hasn't moved in years, etc.;  acceptance -- the idea that maybe there is something of value after all, to much money printing;  frenzy -- sell the kids on Ebay to buy as much yellow metal as possible!

This is just a rough schema of the emotions speculators/investors go through.  It works on the back-side or downside of the speculative frenzy as well, the process whereby that asset class goes from loved to hated.  It bottoms not just when it finds a certain price on the downside, but also after the passage of time has caused it to become under-owned and unloved. 

On the flip-side, beware of what is obvious today. 

Thus, when a particular asset class goes sideways/down for a long period of time, when people have given up hope that their "investments" will ever go up again, it starts to peak my interest as a speculator/investor (I think we're all a little of both).  It says to me much of the risk has been priced out of that asset class, and that it's time to start "selectively" accumulating. 

But as far as stocks go, with the S&P 100% off it's lows because of supercharged government spending and rampant liquidity injections by the Feb, I say build up a pile of cash and wait for the "right" time to put that stash to work (in addition to continuing to invest month by month in a general index fund).   

Again, just one humble mustachian's opinion in the effort to maximize returns.