33 y/o, $235K income, $460K NW -- no mortgage, what's next?

[RockSplat]

Hi. I am looking for some advice and it's much appreciated.

I am 32, married and 2 kids (4 years and 1 year).

Wife's Job: $25,000
My Full Time Job: $95,000
My Side Business: $75,000-$115,000
Monthly Living Expenses: $2,500

Net Worth: $460,000

I'm looking to invest to generate a cash income to cover my monthly living expenses ($2,500). I am satisfied with 15% of our full time jobs to retirement. The only motivation I have to working a side job is to build up passive income. Been doing it for 3 years.

My goal was to pay off my mortgage. I met that goal now I need to know what to do next.

My main goal: Take $9,500 a month and invest to build passive income for today, not when I'm old. When I do that I can quit my full time job and focus purely on my side business. I don't like the corporate world and want out. If I build up passive income it would be a very safe transition.

I'm not looking to "retire" early, just work because I want to - not have to.

I don't plan to spend more than $2,500 a month. We live good with that $ and have no debt. 6 months emergency fund is always there along with savings to cover taxes each year.

I LOVE Vanguard. Been using them in the Target 2030 fund. Is there a similar investment I can make with them to grow the cash side of the house?

Maybe I'd eventually like to buy a business, move to another area and not worry so much about a loss of income. Anyway my goal is to make this money work for me. Again: not really interested in improving the non taxable retirement side. I work extra to build systems to create passive income. Example, in a way paying the mortgage off meant an extra $850/mo. don't need to come up with.

I considered Real Estate and rental property but I will be better in the long run keeping things simple. I will keep cranking way at ideas for businesses but they don't cost anything really and I've had success.

What should I do with the $9,500/month?

Financial Advisors scare me but that might be a consideration. If I can have just as much luck with a Vanguard fund then I'll stay there. I want to stay simple though -- is there 1 fund at Vanguard that would be safe and help meet these goals?

What about the Vanguard LifeStrategy Funds or Wellington?

Again -- as far as timing of holding $ I am not sure. Maybe forever but maybe I'll decide to buy a business for $100K and use some there at some point.

Thanks so much for the advice!

 

[FIREd]

Wellington is a fine choice (I am a long time share holder), but it is lacking in diversification. It does not invest in small caps and has very little exposure to international equities. If you really want to limit your choices to all-in-one funds, then target retirement funds might be the ticket. They do all the work for you (diversification, rebalancing, etc...). But some people find them controversial.

 

[jIMOh]

I would want to know what you mean by passive income.

Bonds?
Dividend stocks?
Real estate (collecting rent)?
mutual funds only?- Dividend, real estate, bonds.... many choices
each has different risks, so knowing what you want to do, vs what is available is step #1 I think.

Wellington, Wellesley and life strategy funds are all decent techniques with mutual funds to accomplish what you want. With $9500/mo I suggest looking into dividend stocks and possibly individual bonds.

Read this thread on dividend investing
http://www.early-retirement.org/forums/f28/dividend-investing-do-you-get-a-3-yield-37716.html

My suggestion would be to start buying dividend paying stocks. Using a method like Sharebuilder might be very cost effective with $9500/mo. Pick about 10 dividend payers, and buy a little each month ($950 worth is "a little"). In 9 years I believe the dividends would pay for the $2500/mo you are after. You might want to "rotate" stocks to point where some pay dividends Jan-April-July-October... and others pay Feb-May-Aug-November etc... to make sure you have some dividend income each month, but that is a detail you can decide later. You should not pick a company just because of the month it pays its dividend, but if you can spread them out, it provides added diversification.

The reason I would focus on dividends is that you have "unlimited growth" potential based on share price of the stock, and that provides for a lifetime income stream.

 

[RockSplat]

Wellington is a fine choice (I am a long time share holder), but it is lacking in diversification. It does not invest in small caps and has very little exposure to international equities. If you really want to limit your choices to all-in-one funds, then target retirement funds might be the ticket. They do all the work for you (diversification, rebalancing, etc...). But some people find them controversial.

Hello! I am in Target Retirement 2030 for retirement but looking to grow the non-retirement side. Hopefully in 5-7 years or so have a stream of income.

I like the idea of all-in-one funds since I don't want to spend much time at all. Any idea what fund to use since it's not retirement?

 

[Texas Proud]

I only WISH I could live on $2500 per month with two kids... maybe this is cash out the door (not including taxes etc.)...

Sure, you mortgage is paid... but for me insurance alone is over $10K... my wife loves to travel and there goes another $12K... food and other household goods adds another $12K... I am over your number and have not bought gas, paid utilities, paid income taxes, paid property taxes, fixed the car etc. etc... so, good for you on living small...


If you side business is doing so well, why not quite the job and focus on making it grow...

 

[RockSplat]

I would want to know what you mean by passive income.

Bonds?
Dividend stocks?
Real estate (collecting rent)?
mutual funds only?- Dividend, real estate, bonds.... many choices
each has different risks, so knowing what you want to do, vs what is available is step #1 I think.

Wellington, Wellesley and life strategy funds are all decent techniques with mutual funds to accomplish what you want. With $9500/mo I suggest looking into dividend stocks and possibly individual bonds.

Read this thread on dividend investing
http://www.early-retirement.org/forums/f28/dividend-investing-do-you-get-a-3-yield-37716.html

My suggestion would be to start buying dividend paying stocks. Using a method like Sharebuilder might be very cost effective with $9500/mo. Pick about 10 dividend payers, and buy a little each month ($950 worth is "a little"). In 9 years I believe the dividends would pay for the $2500/mo you are after. You might want to "rotate" stocks to point where some pay dividends Jan-April-July-October... and others pay Feb-May-Aug-November etc... to make sure you have some dividend income each month, but that is a detail you can decide later. You should not pick a company just because of the month it pays its dividend, but if you can spread them out, it provides added diversification.

The reason I would focus on dividends is that you have "unlimited growth" potential based on share price of the stock, and that provides for a lifetime income stream.

By passive income I mean basically getting actual cash (if I want it) from investments or I could simply re-invest. Basically building another paycheck if that makes sense.

Thanks for the dividend idea. Which vanguard fund should I go for? Looking for something that can be automated.

Thanks!

 

[RockSplat]

I only WISH I could live on $2500 per month with two kids... maybe this is cash out the door (not including taxes etc.)...

Sure, you mortgage is paid... but for me insurance alone is over $10K... my wife loves to travel and there goes another $12K... food and other household goods adds another $12K... I am over your number and have not bought gas, paid utilities, paid income taxes, paid property taxes, fixed the car etc. etc... so, good for you on living small...


If you side business is doing so well, why not quite the job and focus on making it grow...

Thanks, we do live simple. No debt or mortgage really got our expenses down. We like it that way. I am hanging on to the job since I feel that I can take that income and build other income through investing. What do doctors do with their extra cash?

By the way health insurance is provided through my employer. It would increase expenses but I figure if I get moving in the right direction on this then I can be on the right track.

Thanks!

 

[FIREd]

Hello! I am in Target Retirement 2030 for retirement but looking to grow the non-retirement side. Hopefully in 5-7 years or so have a stream of income.

I like the idea of all-in-one funds since I don't want to spend much time at all. Any idea what fund to use since it's not retirement?

Well, 2 things to consider:

1) How much risk do you want to take? The later the date on the target retirement fund, the more risky it is.

2) You are in a high tax bracket, so you may want to limit your tax exposure by selecting funds with low dividend yields. Generally speaking, the earlier the date on the target retirement fund, the higher the dividend yield and the higher the tax bite.

If I may suggest... Since you are in a high tax bracket, it's important for your portfolio to remain tax-efficient. Personally I would invest the money you have in retirement accounts in bonds because they are the least tax efficient. Then, on the taxable side, I would go with a mixture of Vanguard total stock market index and Vanguard FTSE all world ex-US index fund. You'd have 3 funds instead of 2, and it's a bit more work to re-balance but it is also a more tax-efficient arrangement.

 

[Texas Proud]

Thanks, we do live simple. No debt or mortgage really got our expenses down. We like it that way. I am hanging on to the job since I feel that I can take that income and build other income through investing. What do doctors do with their extra cash?

By the way health insurance is provided through my employer. It would increase expenses but I figure if I get moving in the right direction on this then I can be on the right track.

Thanks!

They pay for the whole family

If so, they you better price in the cost of health insurance in your budget when you leave your job...

You also might want to price in the cost of college education 14 and 17 years from now.. (good luck with knowing what that number will be).... let me warn you... probably more than you spend right now for everything..


However, your income is so high etc. that you will save up enough that it should not matter...

Questions... are you a fireman Seems that a number around here have side businesses and make a good living on the side... if so (and you do not live in Illinois)... you will probably get a decent pension...

 

[RockSplat]

They pay for the whole family

If so, they you better price in the cost of health insurance in your budget when you leave your job...

You also might want to price in the cost of college education 14 and 17 years from now.. (good luck with knowing what that number will be).... let me warn you... probably more than you spend right now for everything..


However, your income is so high etc. that you will save up enough that it should not matter...

Questions... are you a fireman Seems that a number around here have side businesses and make a good living on the side... if so (and you do not live in Illinois)... you will probably get a decent pension...

Yeah I have the kid college covered. I didn't included that since it's not really an expense. I'm thinking short term with all of this. I just need to get on track and put the income in the right place.

I work in the info tech field.

Is there a simple Vanguard target fund that I could jump in for the cash side? Life Strategy fund may be my best option here right?

I *could* go to a financial advisor for the cash side and leave the retirement in Vanguard. OR pay the $250 for Vanguard advice.

 

[RockSplat]

Well, 2 things to consider:

1) How much risk do you want to take? The later the date on the target retirement fund, the more risky it is.

2) You are in a high tax bracket, so you may want to limit your tax exposure by selecting funds with low dividend yields. Generally speaking, the earlier the date on the target retirement fund, the higher the dividend yield and the higher the tax bite.

If I may suggest... Since you are in a high tax bracket, it's important for your portfolio to remain tax-efficient. Personally I would invest the money you have in retirement accounts in bonds because they are the least tax efficient. Then, on the taxable side, I would go with a mixture of Vanguard total stock market index and Vanguard FTSE all world ex-US index fund. You'd have 3 funds instead of 2, and it's a bit more work to re-balance but it is also a more tax-efficient arrangement.

Can the Target retirement funds be purchased in non retirement accounts? I'm hoping to find a target or lifecycle fund for the cash side. Think I should go to a Financial Advisor for the non retirement side for a while until I get a plan together? I also have the opt of paying Vanguard $250 for advice.

I know theres an opt on Vanguard to mix and match a fund too. I wonder if it's possible to do something tax efficient that way? Just looking to set something up and schedule transfers. Very hands off is what I'm hoping for.

Thanks!

 

[Alan]

Can the Target retirement funds be purchased in non retirement accounts? I'm hoping to find a target or lifecycle fund for the cash side. Think I should go to a Financial Advisor for the non retirement side for a while until I get a plan together? I also have the opt of paying Vanguard $250 for advice.

I know theres an opt on Vanguard to mix and match a fund too. I wonder if it's possible to do something tax efficient that way? Just looking to set something up and schedule transfers. Very hands off is what I'm hoping for.

Thanks!

Yes, Target Retirement funds can be held in non-retirement accounts so could choose VTINX which is 40% Total Bond index, 20% TIPs, 5% MM, plus 24% Total Stk index and 6% Total Intl Stk indx.

Or you could use Wellesley which is 65% Bond, 35% Stocks.

 

[LOL!]

Get thee over to Bogleheads Investing Advice and Info and start reading the books suggested and the Wiki there. Click on "Getting Started".

You should probably want an investment portfolio that is very tax efficient. Your portfolio would not be in a single account, but spread tax efficiently among your tax-advantaged and taxable accounts. Do not take short-cuts and blow off thinking and planning this. Do not give your money to Madoff and others like him.

BTW, a cursory skimming of the previous responses shows a number of non-tax-efficient suggestions. You can do better than that.

 

[RockSplat]

Yes, Target Retirement funds can be held in non-retirement accounts so could choose VTINX which is 40% Total Bond index, 20% TIPs, 5% MM, plus 24% Total Stk index and 6% Total Intl Stk indx.

Or you could use Wellesley which is 65% Bond, 35% Stocks.

Yikes. I appreciate the advice, really very much but I'm thinking I should start thinking Financial Advisor as much as I've feared them.

I drank the index/Bogle kool aid but I think my situation is much more complicated now than it used to be.

I'm worried I will make a wrong decision.

 

[RockSplat]

Get thee over to Bogleheads Investing Advice and Info and start reading the books suggested and the Wiki there. Click on "Getting Started".

You should probably want an investment portfolio that is very tax efficient. Your portfolio would not be in a single account, but spread tax efficiently among your tax-advantaged and taxable accounts. Do not take short-cuts and blow off thinking and planning this. Do not give your money to Madoff and others like him.

BTW, a cursory skimming of the previous responses shows a number of non-tax-efficient suggestions. You can do better than that.

Thanks... I wish there was a simple mutual fund I could buy into to do the tax efficiency for me. I'm not fit for making those kinds of decisions and setups.

 

[REWahoo]

Yikes. I appreciate the advice, really very much but I'm thinking I should start thinking Financial Advisor as much as I've feared them.
...............
I'm worried I will make a wrong decision.

All the best in making the right decision in selecting a FA. There are some good ones out there - and some bad ones. Do your research to learn how to tell which is which.

 

[RockSplat]

All the best in making the right decision in selecting a FA. There are some good ones out there - and some bad ones. Do your research to learn how to tell which is which.

Thanks! I actually have a friend in mind but have put him off for years since it was simple while attacking the mortgage with non retirement $. Now I don't have anything to attack.

It's mind numbing to compare the cost of Vanguard to a managed wrap account and loaded fund. I guess there are times when it's good and times when it's bad depending on the situation. Please correct me if I'm wrong.

For years I did my own taxes then got a great CPA. He has saved me tons and even restructured my business type. Maybe the right FA is the same way. Maybe I'm much better off in that type of setup.

I do trust the guy but the price is what hurts. Maybe FAs truly do meet the value..

 

[LOL!]

Thanks... I wish there was a simple mutual fund I could buy into to do the tax efficiency for me. I'm not fit for making those kinds of decisions and setups.

If you are fit to breathe, you are fit to make those kinds of decisions. There is no one fund because you will not have a single account anyways. There are plenty of testimonials on the bogleheads site for all the help they give folks. The help there rivals and surpasses the help that a FA can give you. Seriously.

On the FA friend, you do not want to mix friendship and business. Indeed, if they value your friendship, they should refuse to do business with you.

 

[REWahoo]

It's mind numbing to compare the cost of Vanguard to a managed wrap account and loaded fund. I guess there are times when it's good and times when it's bad depending on the situation. Please correct me if I'm wrong.

It's good when they 'beat the market' and make you more money than you could by managing it yourself. It's bad when they don't.

Note that if you do a little homework, the latter happens more often than the former.

That said, when it comes to investing some folks are simply not wired for DIY. Sounds like you may have one of those schematic diagrams.

 

[RockSplat]

If you are fit to breathe, you are fit to make those kinds of decisions. There is no one fund because you will not have a single account anyways. There are plenty of testimonials on the bogleheads site for all the help they give folks. The help there rivals and surpasses the help that a FA can give you. Seriously.

On the FA friend, you do not want to mix friendship and business. Indeed, if they value your friendship, they should refuse to do business with you.

I agree with you. I can get a "financial plan" from Vanguard for $250. This would be flat fee and not necessarily "portfolio management". Perhaps that is my best bet if I choose not to be full blown CFP'ed?

 

[Alan]

On the FA friend, you do not want to mix friendship and business. Indeed, if they value your friendship, they should refuse to do business with you.

I agree completely. I had an FA friend who did a free analysis on my situation about 6 years ago and said I was doing great (used the word "Golden"). He reckoned he could probably eek out a little more return but valued our friendship and said he could introduce me to someone in his firm that could do a "boutique portfolio" for me, with annual fees of 0.9%.

That still sounded like too much money for too much risk and I declined the offer. We stayed friends up to the point I moved out of State end of 2007, and I really appreciated that he never tried to sell me on anything - we were just friends that met down the Irish Pub close to our office block now and then.

 

[plex]

If a friend is planning on putting you in a loaded fund, especially with a high expense ratio, they aren't your "friend". You can create an optimal portfolio just out of vanguard funds, for 1/100th of the cost. A financial adviser, especially one looking at loaded funds, may not even properly address tax efficiency concerns, which is a huge deal at higher incomes.

You can ask on the boglehead forum for some help creating a portfolio, you will have to let them know what taxable and non-taxable accounts you have. Once setup it should require very few changes, at least until your income situation changes, if your income goes down, your portfolio could very likely be made simpler.

 

[Alan]

I agree with you. I can get a "financial plan" from Vanguard for $250. This would be flat fee and not necessarily "portfolio management". Perhaps that is my best bet if I choose not to be full blown CFP'ed?

That's not a bad idea, imo. There have been several of us that have had VG plans done. (they are provided free if you have enough money invested).

have a look at these threads...

http://www.early-retirement.org/forums/f28/my-vanguard-financial-plan-results-19366.html

http://www.early-retirement.org/forums/f28/vanguard-financial-plan-23395.html

 

[RockSplat]

That's not a bad idea, imo. There have been several of us that have had VG plans done. (they are provided free if you have enough money invested).

have a look at these threads...

http://www.early-retirement.org/forums/f28/my-vanguard-financial-plan-results-19366.html

http://www.early-retirement.org/forums/f28/vanguard-financial-plan-23395.html

Just called Vanguard and they can do everything that my FA friend can do. I didn't realize they would look at outside investments and assets taking them into consideration. I'm taking that route. Thanks so much everyone!

I'll check out the links too.

 

[Texas Proud]

I agree with you. I can get a "financial plan" from Vanguard for $250. This would be flat fee and not necessarily "portfolio management". Perhaps that is my best bet if I choose not to be full blown CFP'ed?

I don't know if they still have it.... but VG used to have a questionaire that would put you in a certain risk category.... they would then 'recommend' funds for you to match your risk tolerance.... I would suggest you look this up first before paying $250 for something you can get free...


But... if your really feel that you can not do it... go the $250 route instead of hiring a FA and pay fees forever...