Author Topic: New mustachian - fortunate start - need advise for a long term plan.  (Read 3684 times)

DanishDynamite

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Hello fellow mustachians. I need advise. Iíve been fortunate enough to earn a small fortune very early in my life. Iím sitting on a $1.8M stash at age 26. I acknowledge that I need as much help as possible to place this to its best long term potential. I want to ďretireĒ at age 30, and from what I can read here that should be possible. At 30 I will with 95% certainty have a 2M$ stash or a bit more.

Iím not sure where to start, so I guess ill start with the facts.
Where?: I live in Denmark and want to keep living here, which means very high taxes ( min. 40% tax on all income). I live in an apartment in the second largest city, where I also work.  Iíve been spending about 60k$ yearly so far, but can easily shave off a lot if/when necessary.

Where are my money now?:
My apartment is valued at about 715.000$ with no debt(maybe a bit too much of my stash here), and I rent out a room here to a good friend for 7500$ yearly. That covers almost all utilities/taxes/insurance on the place.

My old apartment(same city) is valued at about 450k$ with a 350k$ mortgage. It brings in 7300$ yearly after expenses+interest, but before paying anything off of the debt.

I bought an apartment for my mother valued 200k$, she lives there for free, but pays all expenses associated with living there. This made so much room in her budget to do other things with her life that is of great value for her, so this investment will keep in place.

800k$ in index funds. Following the 4% rule this would mean a yearly 32k$ return? Before taxes! So I guess I can expect roughly 18-20k$ after taxes

Iím strongly considering buying a larger property from some of my index$+ future income. With a ~70% financing, it seems to yield a higher return in the long run than the 4% from stocks/bonds.

Iím trying to suck in as much knowledge about investing as possible, as i understand the decisions I take in these years will have an exponential impact on my future financial independence. So here I am. Any suggestions on optimization, comments, ideas?

Thanks for reading
S

pom

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Re: New mustachian - fortunate start - need advise for a long term plan.
« Reply #1 on: June 17, 2013, 07:21:06 AM »
Hi DanishDynamite,

You definitely are in a great situation. My main advice is to keep the index funds. 4% is not the average real (after-inflation) return, it is the real return that you are almost certain to earn over a long period of time. Average stock return has been approximately 6% in the long run.

It is simply a matter of diversification; right now if either of the stock market or real estate go to hell you will do fine. Sometimes they go to hell at the same time but that is fairly seldom.

DanishDynamite

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Re: New mustachian - fortunate start - need advise for a long term plan.
« Reply #2 on: June 17, 2013, 08:44:36 AM »
Hi Pom

Thanks for your reply. Would you say that i would be too heavy into property if i bought a 1.5M with a down payment of 400k? I really like the idea of a steady yearly cashflow to live off, compared to the ups and downs of stocks.

Rebecca Stapler

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Re: New mustachian - fortunate start - need advise for a long term plan.
« Reply #3 on: June 17, 2013, 09:35:28 AM »
Hi Pom

Thanks for your reply. Would you say that i would be too heavy into property if i bought a 1.5M with a down payment of 400k? I really like the idea of a steady yearly cashflow to live off, compared to the ups and downs of stocks.

As an income property? Or one you would live in without renting it out at all?

DanishDynamite

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Re: New mustachian - fortunate start - need advise for a long term plan.
« Reply #4 on: June 17, 2013, 09:49:19 AM »
As an investment property. A fully paid 1.5M rental in my city would pay out about 67k yearly before taxes first year. What i think is diffrent i Denmark tho, is that we cant charge market rent. There's a maximum cap of how much rent one can charge called "Fair value", if you charge more than this, you risk getting dragged to court where the fair value is then estimated and enforced. This mechanism should be reflected in lower rental property prices i assume?

pom

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Re: New mustachian - fortunate start - need advise for a long term plan.
« Reply #5 on: June 17, 2013, 12:21:26 PM »
I tend to focus on the income from stocks, they do not go up and down much, actually they rarely go down. I currently receive about $12000 a year in dividends. In 2009 it went down 20% for that year but then rebounded since then.

Since I intend to never sell the shares, I only focus on the income generated. In my opinion, if you need to sell the stocks to live, sooner or later you will run out of it.

That is just my 2 cents.

mgreczyn

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Re: New mustachian - fortunate start - need advise for a long term plan.
« Reply #6 on: June 20, 2013, 02:27:19 PM »
The 4% from stocks is the withdrawal rate, not the rate of return.  In other words, it's a rule of thumb for how much you can take out every year without eating into your principle.  It comes from the nominal return on stocks being 6 - 8 % over the long term, with 2% or so going to inflation.  Thus, if you want to keep being someone with $1.8 million in today's dollars and you're invested in stocks, you would want to keep your annual withdrawal rate at or below 4%.

Something to think about is that over a long time horizon returns on real estate hover right around inflation.  So you are unlikely to see as good a return by buying property.  The exception is if you are highly skilled at real estate investing and can buy underpriced properties or improve property economically and get a good return that way.  Don't approach it as a passive investment, though.