Author Topic: Early Retirement with Assets to Invest -- how ?  (Read 4966 times)

gneiss

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Early Retirement with Assets to Invest -- how ?
« on: August 29, 2014, 05:46:14 PM »
I would appreciate a check on my thinking.  Iíve been reading and enjoying MMM, feeling the kindred spirit of this community, as Iíve been living my whole life in alignment with these philosophies.  However, I find myself in a very new financial situation Ė a family inheritance put us in position where we have choices with our finances.  After much reading and thinking and figuring, Iíve put together the following financial plan, and thatís where Iíd like you fellow Mustachians' thoughts and comments.  Iím trying to be brief so I donít waste anyoneís time, so if you need more information, just ask.  Thank you, for your time and suggestions.   
We are a family of 3 Ė My hubby is 61, I (wife/mom) am 51, and our son is 13.  All of our parents have died within the last 5 years, and the (un-expected and generous) inheritances have settled.  Hubby is retired from the Federal Government, after paying off our home with inherited monies.  I have worked in the Environmental field for over 30 years, albeit as a sole-proprietor on a project by project consultant basis since my son was born 13 years ago.  I/we have been working together on putting together a financial plan with our monies to ensure security in our later years, our son gets through college, and that we can also spend and enjoy some of our money today (on life experiences, travel, etc.).  Bottom line is we want to be financially responsible for our old-age, main bread-winner (hubby) is retired, sonís college years 5-9 years away (heíll start college in 5 years, go 4 years or more) and I feel like our big expenditure years are now while our son is home and in college.   
Hereís our Current Financial Assets and Percentages in each of my categories:     
Rental Property (inherited)   $420,000   58%
      
Cash (need for next 5-6 yrs.)   $138,333   19%
      
Safer Stocks or Bonds (5-10 yrs horizon)   $119,046   16%
      
Longer term investments > 10 yr. horizon)   $48,136   7%
      
   Total = $725,515   100%
 
My biggest question has to do with my categories and percentage of monies in each.  Thereís a philosophy that says you shouldnít put ANY monies into the stock market that youíll need within 10 years; and then another philosophy that says you could at least try to invest to beat inflation but not take too much risk, etc.   
Based on our income/expense spreadsheet that calculates this draw every year until Iím 90, I feel we do not need to take much risk other than to beat inflation and not lose money.  Weíd also like experience in the market to be able to invest wisely when sell the rental house (by my income/expense spreadsheet, approx. 12 years from now). 
Hubby and I have talked about this at length, and we do not want to look at or manage our money daily Ė we want to have a plan (asset allocation), monitor how itís doing, and make adjustments when needed, hopefully at the most once or twice a year.       
Particulars: 
The rental property ($420k) is in a very desirable location and will appreciate yearly (at least at the rate of inflation).  The current renters have been with the house for over 20 years, and there are no problems.  Current renters may want to be there indefinitely Ė they are in their early 60ís.  We have a year to year contract with them.
Cash ($138k) is/will be held in basic savings account (currently earning 0.12%).  Based on our income/expense spreadsheet, we are going to need to draw between 20 Ė 25k from our savings acct. for these next 10 years.  Our yearly draw from savings drops precipitously after the college years. 
The 5-10 year horizon monies ($119k Ė monies needed in 5-10 years Ė should be like $125k, but we only have $119k right now) are currently sitting in cash in retirement accounts.     
The > 10 years monies are actually just my (wife/mom, age 51) Roth/Ira accounts, and donít want to touch Ďtill Iím 59Ĺ, which is roughly 10 years from now.  They, too, are sitting in cash. 
These assets do not include our residence, which is paid for, and values around $300k.  We donít plan to move from here until we absolutely have to. 
Should we invest any of our monies in the market to at least beat inflation?  Should we be more aggressive with some and/or safer?  If so, how much and for which time horizon?  With these answers, the next question would be to determine specific investments/stocks/bonds/REITs/indexes/etc. within each of these categories.   
Iíve been tracking about 25 index funds in different sub-categories for about 6 months now, and even though the market is at a high right now, at least for the longer term investments, weíre ready to start investing. 
Since I have my head in these numbers all the time, Iím not sure if Iím providing all the information you need to respondÖ..thanks again, for any comments.               


Ybserp

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #1 on: August 29, 2014, 07:39:27 PM »
Are you making money on the rental property? I don't see where you say what your return after expenses for that property is. (If you are losing money on it, regardless of how much the property value might be rising, the rent either needs to go up or the place needs to be sold.)

Are you willing to work as a landlord into your retirement years?

gneiss

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #2 on: August 29, 2014, 08:32:07 PM »
Yes -- there is no mortgage on the property, so yes, we make money from the property and it adds to our (stable) monthly income stream and cashflow.

However, I don't think we've ever looked at our return on 'investment' for the property.....we might further our dilemma of what to do with all that cash right now if we sold it.....       

And yes, we can be landlord's in retirement....thankfully.     

waltworks

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #3 on: August 29, 2014, 09:56:25 PM »
Wander on over to the RE board sometime. If your place is worth $420k, it better be renting for a LOT (ye olde 1% rule) or it should be sold ASAP.

Without a lot more detail it's hard to give much advice but you are way, way too invested in RE, especially if it's a single property. You probably need to diversify better. Cash on hand seems extraordinarily high as well to me but depending on your income/expenses, who knows.

-W

gneiss

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #4 on: August 30, 2014, 08:34:44 AM »
thanks -- I'll peruse the RE section !

Cottonswab

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #5 on: August 30, 2014, 11:56:59 PM »
It seems as if you are considering all of the right things, but need a more structured approach for making decisions in an orderly manner. 

For large near-term (<5yrs) expenses that cannot be funded from your normal monthly cash-flow, you should write investment plans that explain how you will fund those specific expenses.  Each plan should have it's own individual asset allocation, depending on when you expect the expense to be incurred.  At the end of each plan, you need to have 100% cash.

Any assets that are not needed to fund these near-term expenses should have a separate investment policy that has a main objective of maximizing long-term return on investment of your remaining assets.   

I would consolidate your 5 to 10 year portfolio, 10+ year portfolio, and rental property into one "bucket".  Compare the expected return on investment of the rental property with that for the stock market, bond market, and real estate and make a conscious decision to either keep the property or sell it, and reinvest the proceeds into something with a higher expected investment return. 

Once you have made a decision on the real estate asset, split the liquid assets according to your investment policy that maximizes total return.  There is plenty of guidance out there on the internet for developing asset allocations that maximize long-term total return with liquid assets (stocks, bonds, REITs, etc.). 

Sdsailing

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #6 on: August 31, 2014, 12:13:33 AM »
Wander on over to the RE board sometime. If your place is worth $420k, it better be renting for a LOT (ye olde 1% rule) or it should be sold ASAP.



On what basis should this property be sold asap?   OP has a cash flow from a property that was inherited, i.e. At no cost.  I see no reason to sell.

not_a_trex

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #7 on: August 31, 2014, 08:17:54 AM »
There are two rules of thumb that are commonly cited in RE on this forum: the 1% rule and the 50% rule. The 1% rule says that a good investment has a monthly revenue of 1% of the purchase price of the house. Since gneiss didn't buy the property I'm going to use the estimated value ($420k) as the purchase price and say that $4200 is a good monthly revenue. But then there come the expenses. The 50% rule of thumb says that 50% of incoming revenue will go towards expenses (property taxes, repairs, etc). That means that $2100 of that $4200 is already gone. So, according to those rules of thumb, a good investment should be netting ~6%. Or in this case $25200 a year.

But there are opportunity costs that go with continuing to own the house. That money could be put towards other investments. The stock market has an average return of 7% over the long term. So if you could somehow put all of that money in stocks (and avoid taxes) then you would theoretically have a better return than continuing to maintain the house.

Now that I think about it this actually puzzles me a little bit. Typically RE investors purchase investments with a loan or some other way to acquire leverage in buying the property. Assuming the house would follow the 1%/50% rule it looks like the property would be a poorer investment compared to stocks if the purchase was done outright. I am of course ignoring appreciation and tax benefits of owning the house, but does my conclusion make sense? Or am I missing something when I say stock returns would be ~7% and the real estate return would be ~6% if purchased outright?

waltworks

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #8 on: August 31, 2014, 08:19:49 AM »
It's $420k that should be working for the OP. If the house is only renting for, say $1500 a month, then you'd be better off in all sorts of investments, depending on your risk tolerance.

The fact that the OP didn't *pay* for the place is irrelevant. The question is whether there is a better use the equity/capital could be put to.

-W

Wander on over to the RE board sometime. If your place is worth $420k, it better be renting for a LOT (ye olde 1% rule) or it should be sold ASAP.



On what basis should this property be sold asap?   OP has a cash flow from a property that was inherited, i.e. At no cost.  I see no reason to sell.

TomTX

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #9 on: August 31, 2014, 08:50:43 AM »
That asset allocation looks VERY cash-heavy. But if that makes you happy, at least be smart about it.

Also, I am puzzled why you have it in an account earning 0.12% when it is EASY to get an account earning 0.85% or better. That's a thousand bucks per year you are throwing away by using a local crap savings account.

Or, set up a "ladder"* of 5 year CDs to earn more than 2%. There's another thousand bucks plus every year.

Bankrate.com can guide you to these higher rates quite easily.

Alternately, you can put $5k per year per person into inflation-adjusted savings bonds (i-bonds) - the money is available after 12 months, and is available penalty-free after 5 years. This is about the "safest" investment I can think of - other than the risk of missing out on growth in stocks.

*The money you will need in 5 years, you put in a 5 year CD. Then next year, you open a new 5 year CD, the existing one has 4 years left. Repeat every year, until you have one maturing every year, and you start a new one every year.

Hotstreak

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #10 on: August 31, 2014, 09:42:25 AM »
Make sure to go read this post from Mr. Money Mustache:
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

You will probably want to sell that rental house (unless, like others have pointed out, the rent is $4,200 or more per month).  With the money from the sale, plus your current savings/investments, you should be able to draw about $29,000 per year, adjusted up for inflation, for as many years as you live!

Have you factored in social security payments?  Go here to see how much you can expect (http://www.ssa.gov/retire2/estimator.htm).  Those payments alone may pay for the majority of your expenses.  If you post more details about income sources (and amounts), and expenses, you will be able to get more personalized advice from the forums :).

larmando

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #11 on: August 31, 2014, 09:52:17 AM »
There are two rules of thumb that are commonly cited in RE on this forum: the 1% rule and the 50% rule. The 1% rule says that a good investment has a monthly revenue of 1% of the purchase price of the house. Since gneiss didn't buy the property I'm going to use the estimated value ($420k) as the purchase price and say that $4200 is a good monthly revenue. But then there come the expenses. The 50% rule of thumb says that 50% of incoming revenue will go towards expenses (property taxes, repairs, etc). That means that $2100 of that $4200 is already gone. So, according to those rules of thumb, a good investment should be netting ~6%. Or in this case $25200 a year.

But there are opportunity costs that go with continuing to own the house. That money could be put towards other investments. The stock market has an average return of 7% over the long term. So if you could somehow put all of that money in stocks (and avoid taxes) then you would theoretically have a better return than continuing to maintain the house.

Now that I think about it this actually puzzles me a little bit. Typically RE investors purchase investments with a loan or some other way to acquire leverage in buying the property. Assuming the house would follow the 1%/50% rule it looks like the property would be a poorer investment compared to stocks if the purchase was done outright. I am of course ignoring appreciation and tax benefits of owning the house, but does my conclusion make sense? Or am I missing something when I say stock returns would be ~7% and the real estate return would be ~6% if purchased outright?

Yes, I think you're missing something: 7% in stocks includes "inflation adjusting" and is *not* a safe withdrawal rate (the most commonly cited is 4%). The 6% in the example there is a safe withdrawal rate, as the rest of the 50% (in the 50% rule) accounts for operating costs and repairs, which are to keep the property in line with value (and thus keep up with inflation on the capital and more importantly allow for inflation adjustment in the rent).

Of course the better return of the house is due to higher localized risk, which is why REITs return far less. Exactly as an index returns far less than a single "winner" stock, but the single winner stock is a lot more risky as it could be a loser tomorrow.

As for selling vs keeping it I have no hard line opinion, as that depends on how you value the risk/opportunity of it, whether you think stock market valuation has an effect of perspective returns (over a medium ~10y timeframe, for example). Keeping the house and investing the return is a way to diversify slowly: it might be good in some situations.

I have another note on rental returns: I fully agree with the 50% rule, but have some doubt about the 1% rule. It seems to me that any rational player, when faced with paying 1% of a property price every month or just buying it, would buy it (as mortgage interest + repayment rate + repairs is usually far less than 12%, obviously), unless they (a) have no money and a horrible credit/job situation and can't get a mortgage, or (b) plan to stay very short, and have no will to rent it later (although it would create a great rental yield) and thus are willing to pay the price short term. So by adhering to the 1% rule, is one not exposing themselves to worse tenants, with more risk of default/eviction/vacancy than by choosing something less extreme but with a more demand in an area (== shorter vacancy times and more choice of tenants)?

gneiss

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #12 on: August 31, 2014, 09:58:35 AM »
It seems as if you are considering all of the right things, but need a more structured approach for making decisions in an orderly manner. 

For large near-term (<5yrs) expenses that cannot be funded from your normal monthly cash-flow, you should write investment plans that explain how you will fund those specific expenses.  Each plan should have it's own individual asset allocation, depending on when you expect the expense to be incurred.  At the end of each plan, you need to have 100% cash.

Any assets that are not needed to fund these near-term expenses should have a separate investment policy that has a main objective of maximizing long-term return on investment of your remaining assets.   

I would consolidate your 5 to 10 year portfolio, 10+ year portfolio, and rental property into one "bucket".  Compare the expected return on investment of the rental property with that for the stock market, bond market, and real estate and make a conscious decision to either keep the property or sell it, and reinvest the proceeds into something with a higher expected investment return. 

Once you have made a decision on the real estate asset, split the liquid assets according to your investment policy that maximizes total return.  There is plenty of guidance out there on the internet for developing asset allocations that maximize long-term total return with liquid assets (stocks, bonds, REITs, etc.). 

Excellent advice -- investment goals/policy for each category we decide will help guide our plan.  I will continue researching and clarifying these categories and investing goals for each.  Where I'm most conflicted at the moment is what you commented on also -- combining the "need in 5-10 year category" with the "> 10 year category" and invest for total return on investment.  Perhaps when I go through this process further, and look at possible scenarios at the level you suggest, these categories will become more clear to me.  I think my category confusion comes from being "in early retirement" and "having the highest need/draw from our assets within these next ten years (w/ kiddo still home and college within 5-10 years) at the same time.  I really appreciate your comments and it clarifies a lot !  Thank you !         


Sdsailing

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #13 on: August 31, 2014, 10:04:45 AM »


I am well aware of the rules of thumb for what makes a good real estate investment.  By your reasoning, any time you buy a rental at a good price, and then have appreciation in the value of the house you would need to sell.  That makes no sense.


There seems to be an assumption that the stock market will continue to do well.  That is short ter memory.  Real estate is an excellent hedge against a downturn in stocks.

larmando

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #14 on: August 31, 2014, 10:09:02 AM »
Make sure to go read this post from Mr. Money Mustache:
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

You will probably want to sell that rental house (unless, like others have pointed out, the rent is $4,200 or more per month).  With the money from the sale, plus your current savings/investments, you should be able to draw about $29,000 per year, adjusted up for inflation, for as many years as you live!

I wouldn't be so fast: the 4% drawdown works mostly for a very stock heavy approach, which might or might not be the best at their age. And even optimistic approaches suggest techniques like "hold your age in bonds", which in their case might return quite less than their rental, considering today's bond yields. MMM&others can afford a very stock heavy approach as they have a very long term (they're in their 30s/40s, not 50s/60s) and they have other very strong income generating abilities (even while retired they have income from part time work they enjoy, which is great, and they can "bring it up" as needed).

They have a lot of money, so they can afford being more conservative with it: so what if the potential return is less, if it can help them being less at risk while living the lifestyle they want and save for their child too?


gneiss

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Re: Early Retirement with Assets to Invest -- how ?
« Reply #15 on: August 31, 2014, 10:28:14 AM »
Make sure to go read this post from Mr. Money Mustache:
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

You will probably want to sell that rental house (unless, like others have pointed out, the rent is $4,200 or more per month).  With the money from the sale, plus your current savings/investments, you should be able to draw about $29,000 per year, adjusted up for inflation, for as many years as you live!

Have you factored in social security payments?  Go here to see how much you can expect (http://www.ssa.gov/retire2/estimator.htm).  Those payments alone may pay for the majority of your expenses.  If you post more details about income sources (and amounts), and expenses, you will be able to get more personalized advice from the forums :).

Thank you ! I'll re-visit that post.  You should see my yearly income/expenses spreadsheet that gets him to age 100 and me to age 90! - haha - so yes, we've factored in SS.  And that's where I calculated the need of 20-25K from our assets for the next 10 years.  I've factored in EVERYTHING I/we can think of (my hubby and I worked on this together, and feel comfortable with the numbers and estimates and rates we've used to future forward. We're also tracking the real numbers after each year and monitoring and adjusting as we go.     

I appreciate your comments and am following the RE advice/suggestions :)  Have more work to do there for sure. 

Make sure to go read this post from Mr. Money Mustache:
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

You will probably want to sell that rental house (unless, like others have pointed out, the rent is $4,200 or more per month).  With the money from the sale, plus your current savings/investments, you should be able to draw about $29,000 per year, adjusted up for inflation, for as many years as you live!

I wouldn't be so fast: the 4% drawdown works mostly for a very stock heavy approach, which might or might not be the best at their age. And even optimistic approaches suggest techniques like "hold your age in bonds", which in their case might return quite less than their rental, considering today's bond yields. MMM&others can afford a very stock heavy approach as they have a very long term (they're in their 30s/40s, not 50s/60s) and they have other very strong income generating abilities (even while retired they have income from part time work they enjoy, which is great, and they can "bring it up" as needed).

They have a lot of money, so they can afford being more conservative with it: so what if the potential return is less, if it can help them being less at risk while living the lifestyle they want and save for their child too?

Make sure to go read this post from Mr. Money Mustache:
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

You will probably want to sell that rental house (unless, like others have pointed out, the rent is $4,200 or more per month).  With the money from the sale, plus your current savings/investments, you should be able to draw about $29,000 per year, adjusted up for inflation, for as many years as you live!

I wouldn't be so fast: the 4% drawdown works mostly for a very stock heavy approach, which might or might not be the best at their age. And even optimistic approaches suggest techniques like "hold your age in bonds", which in their case might return quite less than their rental, considering today's bond yields. MMM&others can afford a very stock heavy approach as they have a very long term (they're in their 30s/40s, not 50s/60s) and they have other very strong income generating abilities (even while retired they have income from part time work they enjoy, which is great, and they can "bring it up" as needed).

They have a lot of money, so they can afford being more conservative with it: so what if the potential return is less, if it can help them being less at risk while living the lifestyle they want and save for their child too?