Author Topic: Seeking advice  (Read 1358 times)

Waiting.for.FI

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Seeking advice
« on: April 22, 2020, 04:17:27 PM »
Hi,

I am new to this site, and am thoroughly enjoying reading the many insightful articles! 

I have a question based upon a few articles that I have read so far:

I am 46 years old, and plan on retiring in another 5 years, since I would like to spend more time with family after 24 years in Corporate America! 

I currently have the following split: 40% in stocks (401k), 10% in bonds (401k), 40% in an investment property, and the remaining 10% in my personal property.  The 401k portfolio is worth $475k and real estate is worth $500k. 

Given the current real estate market conditions, I am taking a very proactive 'wait and see' approach, and plan on investing in the near future.

Since the majority of my real estate portfolio is heavily concentrated in a relatively flat part of the US (Connecticut), I plan on doing a cash out refinance and holding on to that money for now.

Given all of this to be case, and my goal of retiring in 5 years, I plan on using most of the cash from the refinance to invest in properties over the next 3 years, until after the market has stabilized, which I currently believe to be in another 2 - 3 months from now.

I only have one income stream, as my wife does not work, and have several months in reserves for the rental and emergency purposes.
However, since I am a novice, and not an expert, I would love to hear everyone's thoughts on changes that I should be making to my portfolio!

Thanks in advance for your personal insight - it is truly appreciated!
« Last Edit: April 22, 2020, 04:19:16 PM by sheikhag »

reeshau

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Re: Seeking advice
« Reply #1 on: April 23, 2020, 01:24:23 AM »
You have gotten a lot of views, but no responses yet.  You are asking some big questions, and hinted at some motivations (retire in 5 years) but you haven't really given enough detail to give a credible answer.  I suggest you look into posting a case study, and ask your questions again.   It may seem like a lot of detail, and you may get a lot of input on things you don't explicitly ask about, but that's part of the usefulness of the exercise.

https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/

Just a few points to start:
You talk about retiring in 5 years, and you live in CT.  Yet, your portfolio is $1M, which the 4% rule of thumb would say could bring you $40k per year.  Is your current spending at or below this level?

Speaking of the portfolio, what date did you do your valuations?  That does not usually matter, but this year is an exception.  If that was your year-end 2019 401k statement, then I would simply say your appreciation from that point to your hoped-for retirement date won't be much at all.  If it is a live view, great.  If it was the Q1 statement, even better, because March was, generally, lower.  I would also say you should generally keep your primary residence out of consideration of your portfolio, unless you explicitly intend to cash out on it somehow:  sell it and move to LCOL or rent. 

Laura33

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Re: Seeking advice
« Reply #2 on: April 23, 2020, 06:17:34 AM »
@reeshau has very good advice -- we need a lot more information to be helpful.

The one big-picture thing I'd add is to stop thinking so much about the "right" asset allocation, or when is the right time to be in or out of a particular asset class (which, btw, is better known as "timing the market").  You have much bigger questions to iron out first.  Such as:

1.  How much do you spend now?  Is that based on tracking how much you spend, or are you just assuming?  If assuming, please start tracking everything now.  You will be surprised how much money is just disappearing on stuff you can't even remember.

2.  How will that change when you retire?  What are you thinking for medical insurance?  Any hobbies, travel, plans to move to a new area, etc.?

3.  What other big expenses do you see happening after you retire?  E.g., do you still have kids at home, and if so what are your plans for college or other future kid expenses?  Do you have a pot of money set aside for home repairs, car replacements, etc. -- or if not, are those expenses accounted for in your future budget?

Once you get a sense of what your annual spend will be when you retire, you can start figuring out how much you need to have invested, and how much more you need to be saving between now and then.  That's the only way to tell if you're on track.  Generally, the rule is to multiply your projected annual spending by 25 to tell you how much you need to have to fund your retirement.  Since part of your money is in rental property, you'd first subtract the net rental income from your annual needs, and then multiply the remainder by 25.  (As noted above, do NOT include the value of your home in that -- the 4% rule is based on your invested assets only).

There are many other ways you can tackle this to refine your analysis (for ex., to include things like SS/pension, if you have them).  But until you've done the first part, it's hard for us to give you any advice; for all we know, you could be good to FIRE now, or you could be on track to need to work for another 20 years.  It all depends on your lifestyle.

Finally, if you are looking to rely on real estate to provide an ongoing income stream, do a LOT of research on identifying a good rental, and on figuring out how much you should assume for things like ongoing maintenance and vacancies and such.  Managing real estate is a full-time job, so spend some time investigating that while you still have your salary coming in before you jump.

Waiting.for.FI

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Re: Seeking advice
« Reply #3 on: April 23, 2020, 08:35:48 AM »
Laura33 and reeshau - both of you have some great points, and I will attempt to answer all of your questions. 

Here are the responses to some of your questions:

- I have a fairly detailed spreadsheet that tracks all of my current spending, and this figure amounts to about $60k/year, without getting into all of the related and unnecessary detail.
- I am assuming that this is what I will be spending in retirement, even though I know from my own research that this figure will likely decline the further I am into retirement.  (I believe I read a related post on JD Roth's site related to retirement expenses.)  I have not factored in medical care expenses, as I am assuming that I will be eligible for some type of government subsidized medical care - medicaid for low income earners, and medicare for senior citizens (eventually).  However, the medicaid part is an assumption.  Would love to hear your thoughts on this topic!
- I have 1 kid in college, and another will be in college in another couple of years.  Both are planning on loans to fund their education, and I will be contributing about $40k to each of them.  Those funds have already been set aside, and are a part of the $1 million net worth. 
- I would never try to time the market, as I done too much research and have been doing this for too long.  Timing the market, and picking winning stocks, is a fools game!  My core strategy is to invest in very low fee index funds and have an 80% total stock market index and 20% total bond market index allocation in my 401k and Traditional IRAs.
- Although I stated it below, I think I've already solved my own problem through a lot of research, and running multiple simulations on sites such as Personal Capital and Fidelity.  Being invested with all of your funds into index funds is not the answer for me, and diversifying the portfolio across index funds and real estate, along with other asset classes is generally safer, depending on how much you are educated in those asset classes.
- I have more than 1 years of experience managing my own rental and have read many books, blog posts, articles, and spoken to multiple investors to know that real estate is the way to go for me personally and this is the path through which I will achieve FI sooner than just continuing to contribute to my retirement accounts, which will take a lot longer to reach FI.
- There was another point made below about not including your personal property, which is a great point.  I made sure to only include what I actually own in the total net worth calculation, even though almost half of it is not liquid, hence the need to do a refinance and invest in other properties.

Thanks for taking the time to provide feedback!
« Last Edit: April 23, 2020, 08:37:23 AM by sheikhag »

reeshau

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Re: Seeking advice
« Reply #4 on: April 23, 2020, 04:36:44 PM »
OK, it seems like you have thought to another level of depth.  I still assert It's not enough info to really give advice.  I also echo @Laura33 's comment about there not being one right way.  So, just some further observations and questions as food for thought:

You call out that you have traditional IRA's, but what is your 401k?  Do you have a plan to access that before 59 1/2?

My quick research shows CT's HUSKY D has an income maximum for a family of 2 of $23,336.  Unless you have a lot in Roth or taxable accounts (where you are only taxed on gains) your budget is going to squeeze mightily to fit into that.  Granted, with 2 kids flying the next, I am sure your budget will go down when they are out of college.  This is all just a quick readthrough--I don't know CT for shit.

https://portal.ct.gov/HUSKY/How-to-Qualify

Fortunately for you, HUSKY D does not have an asset limit, although other qualification options do.  Be alert for changes to the program, with states blowing their budgets to fight the pandemic.

Don't be as afraid of the ACA as an alternative:  there you have income minimums and maximums,  it your target would fit.

Also, if you go on Medicaid your kids will have to get their own insurance.  Medicaid sends them out at 19, while ACA allows student coverage until 26.

I still worry about yuour thinking on your main residence, to cash out to access equity.  Some do.  But 1 year into landlording, you haven't yet faced the prospect of losing the house you are leveraging if you run into business problems.  Many tales of woe came from 2008 for cash-out refis; most just to blow money, rather than invest.  But when you don't have work as a backup, It's higher stakes and may spook you. (Would you go back to work--would you be able to, if things blew up?)

Finally, one positive(?) thought.  At your age and with your experience, would you take a voluntary buyout if one came in the next year?  You might want to put some time thinking of that alternate scenario, so you can take advantage of it (if you decide you want to) if and when it appears.

 

Wow, a phone plan for fifteen bucks!