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ER seven years away: The best option of a good situation.
Old 12-08-2008, 07:35 AM   #1
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ER seven years away: The best option of a good situation.

Hi everyone,

This may be slightly different from your average post; but please don’t criticize us… We’ve saved hard to be in this situation (no inherited money, and started loaded in college debt); and even so, I’m loosing sleep over where to go from here. I need some advice from people who have been in my situation.

Plan:
- Retirement in 7 years (at 40 & 42) completely self-sufficient, and able to contribute to our kids’ education. Additionally, we’ll have a costly hobby that combines expensive equipment and world travelling… adventure racing.

Situation:
- Age 35 & 33, with two kids 7 & 5.
- 2 incomes (about 160K total), including 1 military (retiring in 7 years with about a $40,000/year pension, and health coverage)
- No Debt

Chronic Savers:
- Emergency Savings: $ 70,000 in CD’s (no longer contributing to this)
- Combined $ 300,000 in Stocks (brokerage, retirement, and education): index EFT, and DOW dividend stocks: I thought they were full proof… until recently. The value has decreased by $ 200,000 in the last year!
- $150,000 in additional cash... My biggest question mark.
- Sufficient life insurance until age 55, and 53.
- Living far below our means at about 65K/year; thus saving about $ 95,000/year.


- Yearly, we contribute the maximum limits to the 401K, TSP, Roth IRA (x2), Education IRA (x2)
- We also contribute to 529K plan (1,000/month), and brokerage account ($3,000/month)

- Until now, we’ve been your typical ER investor, mostly with a diversified portfolio in stocks.
- No houses yet, but would like to buy our first (maybe more than one… as investment property) when we get back to the U.S. this spring.

Considerations:
- I’m loosing confidence in the market, and in our gov’t: debt, dept, dept… I don’t live like this, and don’t approve of this behaviour. U.S. credibility only does so far, if countries start loosing confidence in the U.S, then what?

Questions:
- What changes would you make in view of the 7-10 year time horizon for ER?
- Where would you put the $150K? Buy investment property? Dump them in stocks while they are low? Do something else?

Thanks,
John
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Old 12-08-2008, 08:25 AM   #2
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I would not dump stocks now- just hold and look for opportunities with new money.

You need a specific asset allocation to guide you through your next 7-10 years and retirement of another 40-60 years.

Because you want to purchase a house, I would probably set aside the 150k in cash for now (this year). Maybe go to treasury direct and invest in an individual bond which matures when you plan to make the purchase. You might be able to invest in TIPs to get best short term return.

You need to decide where to live before buying any rental property- owning a rental in a far away city might add some costs for managing which eat into your return.

The changes I would make is more in the planning than in the execution- I see a savings plan, but not an investment plan. I see good savings habits, but no plan for living off the portfolio and it's income stream for 40-60 years.
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Old 12-08-2008, 11:03 AM   #3
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My advice would be to NOT exit the stock market. To the contrary, you should probably keep easing money into equities, up to the point that you can sleep at night, at least. It's hard to imagine keeping up with inflation over the truly long haul without exposure to equities.

This is one of those moments when “cash is king.” It almost doesn’t matter what investment you look at; everything is on sale. If you would like to buy a house (and you have lost some confidence in stocks) perhaps you should look into that. You certainly have the cash for a down payment and, depending on the area, homes may be down almost as much as stocks. Personally, I’d think twice about an “investment property” as opposed to buying a home to live in, but that’s up to you.

It's common for people seeking a very early retirement to be overly-optimistic about that prospect. If you can really keep up those savings, and if that pension is fully COLA’d, and if you are committed to a lifetime of LBYM, it sounds like you are on track for a possible early retirement.

One big concern is your expensive hobby – that doesn’t sound compatible with such an early retirement unless you will somehow have far more in the way of savings than you seem on track for. You may need a "plan B" (e.g., a second career for a while) for a full-blown life of travel and adventure.

Best of luck.
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Old 12-08-2008, 12:20 PM   #4
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Everyone takes a different path, and with a military pension you can make ER without the market risk by increasing savings and decreasing expenses, then going with the surety of conservative investments that end up yielding around 6 pct over time. You can search this forum for a wide variety of viewpoints on the risks/benefits of this approach especially ivo inflation risks.

That said, your pending retirement probably wouldn't be possible via this route due to your high cost avocation, multiple kids, and pending housing costs. Market investing would probably be the only route for you.

As a recent (18 months now) military retiree, one warning to offer: your military pension will not come close to your income today, nor will it be close to 50 pct of final pay (even if you were under that program)--never mind 50 pct of the high-3. What eats your pension up? Here's the additional monthly bills you don't see now: dental $108, Tricare $40, SBP 6 pct of your retirement; for us about 10 pct of the retainer right there. You won't get BAH, glasses, or a lot of freebies that the active duty rightfully obtain (ok you get glasses, one pair annually of the birth control variety.)

You can do without some of the above, but at a cost later on. No SBP and term insurance? Good to go until you're over 50 or get sick and need to continue the policy. No dental, pay cash? Wait until your first post active duty dental exam and you get the bill for the work your Class 1 dental mouth needs. No Tricare? You'd be insane.

The GI Bill might be an interesting means of tiding over your transition to a career based on your avocation, while providing some measure of income that you otherwise might not have (40 months of E5 Married with Dep BAH) while paying for a graduate degree, perhaps in a sports related field if that's your deal, and providing summer months for the adventure racing.

Hate to be the black cloud behind the silver lining of the COLAed military pension, but most of the guys that retired with me 18 months ago are still working by necessity, and most of them for some DoD contractor that's about to go adrift. It doesn't have to be that way, but you got to be dedicated to some principles (especially LBYM) that are tough for some to swallow.
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Old 12-08-2008, 02:47 PM   #5
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That said, your pending retirement probably wouldn't be possible via this route due to your high cost avocation, multiple kids, and pending housing costs. Market investing would probably be the only route for you.
deepc,

I'll have to look further into how the military pension works. It sounds as though there are alot of cost that eat into it. These costs may also impact my life insurance precepts... I may need more than what a previously thought.

As for the investments, I'm still going to contribute at the currents rates into stocks (namely max. 401K, TSP, and about $3000/month in stock), but was thinking about putting the 150K into real estate to diversify.

Something for me to figure out: I will be buying a home to live in, but should I put only 20% down and finance the rest, leaving enough money for a real estate invesment property, or throw the rest back into the market. I know its a personal decision, but one I shoyuld make soon.

Thanks for the advise though
John
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Old 12-08-2008, 02:52 PM   #6
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JjIMOh,
Grep,
It may not have been clear, but I won't be dumping my stock portfolio. In fact, I'll still be contributing as before. My question was more about diversifying into real estate, not whether stocks were still viable. Understandably, when you loose half over what you've been saving over the last 8 years, you begin to questions your investment methods.
So, I'll ask again... with 150K in cash, and contributions remaining the same in the future, would you dump them into stocks, or diversify into real estate.
Sorry about the confusion.
John
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Old 12-08-2008, 02:55 PM   #7
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Quote:
Originally Posted by Pokeyjack View Post

Something for me to figure out: I will be buying a home to live in, but should I put only 20% down and finance the rest, leaving enough money for a real estate invesment property, or throw the rest back into the market. I know its a personal decision, but one I shoyuld make soon.

Thanks for the advise though
John
Welcome , Many on this board are retired with paid off houses once you have that major bill out of the way it's easier to live on a lot less .
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Old 12-08-2008, 03:58 PM   #8
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Welcome to the board, Pokey.

It sounds like you're doing everything you can with what you have. Good to see that you're maxing out the tax-deferred accounts.

As for your investments, the stock market is a much better value today than it was a year ago. It's on sale. If you don't think the sale will get better, then I'd put your $150K now into a high-equity asset allocation that you guys feel comfortable with. If, however, you feel that the sale could still get 10-20% better then put it in a month at a time over the next 6-12 months. Either way the stock market offers more opportunities now than it has for several years. The blue-light specials are flashing yet the customers are running away screaming.

If you're planning to ER in seven years to a life of adventure racing, is that compatible with being a landlord? I'm asking because you'll want at least five years of ownership to recover the purchase/closing costs, and most investment properties need 5-10 years to see decent appreciation. You might end up doing a beautiful job of timing the housing market or picking up a cheap foreclosure, or you might end up becoming what's euphemistically known as a "long-term investor". If you think the stock market is a risky place to lock up your liquidity, then wait until you're a homeowner. At a minimum you'll want to read (1) "Investing in Real Estate", 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions) and (2) "Landlording" by Leigh Robinson (7th edition or later). They're a much more balanced assessment than the "get rich with no money down" guys.

As another poster's mentioned, have you put an actual dollar value on your pension after the deductions for Tricare, SBP, and anything else? It's probably cheaper to go out of pocket for routine preventive dental care rather than insuring yourself, but if you're looking at a future of root canals & crowns (or racing damage repair) then you may want that insurance too. You don't say what service you're in but here's one calculator that attempts to put a tighter estimate on the pension check: https://staynavytools.bol.navy.mil/RetCalc/Default.aspx

Have you looked at your retierement expenses? For example, I don't think you'd be able to use Tricare if you're bitten by a piranha in the Amazon or whatever part of the non-U.S. world you're racing through. I suspect Tricare might even balk at paying for a retiree's malaria & yellow-fever vaccines. You will definitely pay for medevac flights, and by the time you need one it'll seem like a great bargain. And in any competitive sport there's a perpetual arms race to get the fastest, lightest, best... your "bare bones" budget might go up as much as 20-30% every year until you feel you're competitive.

Once you get good numbers on the income & expenses, then FIRECalc and FinancialEngines.com will be able to give you a better idea of how reality will affect your planning.

Would it be possible to turn the adventure racing into revenue through sponsorships or blog advertising or freelance writing? Do you actually have to race, or would you get the same satisfaction from coaching or consulting or somehow documenting the experience? Would you be better off as a trainer or an equipment supplier, like selling shovels to the Yukon Gold Rush miners?

I don't have your experience, but I have been ER'd for over six years. At the age of 48 and after five years of taekwondo I find that I'm much more content to teach & coach than I am to spar. The chances of becoming a national amateur champion at my age group actually get better with every passing year, believe it or not, and I'm competitive until I approach age 60, but the risks are rising faster than the rewards and I find that I have "better" things to do with my time.
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Old 12-08-2008, 07:19 PM   #9
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Originally Posted by Pokeyjack View Post
JjIMOh,
Grep,
It may not have been clear, but I won't be dumping my stock portfolio. In fact, I'll still be contributing as before. My question was more about diversifying into real estate, not whether stocks were still viable. Understandably, when you loose half over what you've been saving over the last 8 years, you begin to questions your investment methods.
So, I'll ask again... with 150K in cash, and contributions remaining the same in the future, would you dump them into stocks, or diversify into real estate.
Sorry about the confusion.
John
My opinion is accumulation occurs in the stock market thru investing. A person keeps investing thru the volatility based on philosophy.

Once a person has accumulated enough, using REITs or rentals to diversify and preserve capital makes sense.
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Old 12-08-2008, 08:32 PM   #10
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Grep,
So, I'll ask again... with 150K in cash, and contributions remaining the same in the future, would you dump them into stocks, or diversify into real estate.
Sorry about the confusion.
John
These are decisions that you have to make on your own.

Personally, if I had 150k in cash that I didn't need in the next 10+ years (and I do), and I had a rock-solid job that had essentially no chance of going under (and I do), I'd still want to hold onto it in a form that is close to cash. But that's just me, mostly because I already have enough in stocks plus I have a paid off house, etc., and I'm older and I wish to insure that I'm positioned to quit working if I want to.

If I were you, meaning younger, I'd want to put the 150k to work in diverse ways.

In real-estate, I would prefer owning a personal home over REITs and REITs over personally-owned investment property. Why not mentally put aside an appropriate amount for a 20% down payment on a home for you and your family to live in? Maybe you can score a 4.5% 30 year fixed loan. Coupled with depressed valuations, this seems like a safe bet.

In stocks, yes, I'd go ahead and ease another portion of that 150k into the markets in the form of super low-cost, broadly-based funds or ETFs. Valuations seem good enough to make a modest additional investment assuming that things will be better in the future.

Finally, I'd keep a chunk of the 150k in the form of TIPs or short term bonds or CD's or plain-old cash, just in case things go further south.

But don't listen to me. You have to decide for yourself.
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Old 12-09-2008, 02:50 AM   #11
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All,
Grep,

Thanks for the insight. I think that I'll sit down (again) tonight to dicsuss my wife. After reading the posts above, and other areas on the forum, we may decide to divvy the money up, and choose multiple investment avenues (buy a home to live in, and subsequently rent and invest the rest in stocks and REIT). However, I refuse to get into gov't bonds. Aside from that I've invested in what I condisered to be some of the safest investments short of cash (Dividend paying Large Cap); and those turned out to be a bust... If you can't trust companies like AIG, and other banks... potentially even GE;then where can an individual investor place money in a safe and fairly condservative way... It's a rhetorical question, Oh well.
People on this board have given me something to think about, and I'll let you know what I've decided.
Thanks, John
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Old 12-11-2008, 12:14 AM   #12
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I don't really have any new to add except that maybe you can save a bit of money by doing races like this

Primal Quest
Western US, June 21 – July 2, 2008 www.ecoprimalquest.com

instead of this

Adventure Racing World Championships
Brazil – 10/30-11/9/08
www.ecomotionpro.com

Welcome to the forum.

I was a wanna-be adventure racer for a couple of years. Did a couple of 24 hour races in CA. I drew the line at anything that involved sleep deprivation.

My only claim to adventure racing fame is that for 30 minutes or so we were a head of Robin Benincasa and her team. I've sort of lost track of the sport so I don't know if she is still racing? This was the year after she parted ways with Nike. I was in the kayak looking around and noticed that we were in front of them.

I think that we finished about 3 hours behind them

It didn't help that I made a couple of navigation errors that turned a 22 mile run into a 28 mile run

Happy racing,

MB
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