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Starting Over - Need Guidance
Old 04-07-2010, 04:11 PM   #1
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Starting Over - Need Guidance

Hello, everyone. My wife and I are starting over in life after unsuccessfuly trying to start a business. Our bankruptcy was filed today. Now, we are starting over. I have a steady job, but we have no retirement. I am the sole breadwinner, and we have two kids under the age of four.

How should I start saving/investing? I know that I need to do something, and my wife and I are committed to sacrificing in order to retire in 15 years (that's our goal).

Please help us with your guidance. Thank you to everyone.
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Old 04-07-2010, 04:13 PM   #2
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We are both 30 years old, if that helps with anyone's analysis.
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Old 04-07-2010, 04:23 PM   #3
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A bit more about us...thanks to the bankruptcy, we have no credit card debt or mortgage...back to renting. I do have steep student loans, though. I make $50k/year and enjoy what I do.
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Old 04-07-2010, 04:28 PM   #4
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Originally Posted by AZRunnerMan View Post
Hello, everyone. My wife and I are starting over in life after unsuccessfuly trying to start a business. Our bankruptcy was filed today. Now, we are starting over. I have a steady job, but we have no retirement. I am the sole breadwinner, and we have two kids under the age of four.

How should I start saving/investing? I know that I need to do something, and my wife and I are committed to sacrificing in order to retire in 15 years (that's our goal).
Welcome to the forum!

I think you have quite a challenge ahead of you to meet that goal.......

You're 30, want to RE at 45, have nothing saved and are a one earner household with a couple of youngsters. That's going to be tough. Just the same, you might as well put some numbers to the situation and take a look at the nut you have to crack.

At 45 you'll want enough income for you and DW to live comfortably for the rest of your lives and to launch your two highschool age children. How much is that? Then calculate how much of a FIRE portfolio you'll need to support that income. Then use any of the commonly available calculators to estimate how much you'll need to save annually to get there over 15 yrs.

If your income is large enough and your current expenses low enough that you can save and invest the required amount, well, there ya go! If not, come back with questions about increasing income or lowering expenses. This forum is fabulous for advise on those subjects.

BTW, at 30 yo DW and I were pretty much in your shoes. But it took us until 58 yrs old to reach FIRE. So I've been in the hole you're looking out of, but it took me much longer than 15 yrs to climb out.

Tell us some more as you work on the details.

I wish there was an "easy button" I could point you to.
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Old 04-07-2010, 04:37 PM   #5
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Thanks for the quick reply, Youbet. I know it's a tough nut to crack. I was originally just looking for places to put the money that we are able to set aside and invest (dividend stocks, cd's, etc). I'm glad that you asked all of these questions, because I was only focusing on what to do now vs. what we will need in 15 years (and we can extend that 15 year goal if need be). My thought at this point is that I want to build a stock portfolio (well, mostly stocks) that generate dividends for us to live on. Obviously, we would re-invest them until we retire, at which point we would take the dividends as our income. Also, I was planning on writing covered calls against the shares of stocks (out of the money) to generate extra cash to invest along the way. Does this sound too risky or crazy?
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Old 04-07-2010, 04:43 PM   #6
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Go to the library and get a copy of Personal Finance for Dummies. In your case I would also suggest you look at books by author Suze Orman; although she is not universally respected she has a good no-holds-barred attitude toward personal finance that might help you. You have plenty of time to work on a retirement plan at your age--you may not be able to retired early at age 45, but most people can't do that,, including many who started saving earlier than you and did not suffer through bankruptcy. So it might be better for you to plan on retiring at a later age but being very aggressive at savings and adjust your horizons later.
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Old 04-07-2010, 04:49 PM   #7
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Also, I was planning on writing covered calls against the shares of stocks (out of the money) to generate extra cash to invest along the way. Does this sound too risky or crazy?
Covered calls - All of the downside risk, none of the upside potential, and very limited compensation for it. Stay away from such nonsense.

too risky or crazy - Perhaps or perhaps not. Covered calls just aren't worth it in my opinion. Is a broker pushing you to do this to generate fat commisions for him ?
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Old 04-07-2010, 04:55 PM   #8
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The 5-step plan to Nirvana

Here's my top secret recipe for becoming financially independent.

1) spend way way less than you make.

2) Invest the difference

3) Invest in plain vanilla investments that are well know to everyone.

4) Take advantage to the max of workplace 401k and IRA accounts

5) Avoid debt like the plague


rinse and repeat for a decade or three.

That's all you need to do. Follow this plan and you are pretty much certain of financial independence.
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Old 04-07-2010, 05:00 PM   #9
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Never mind--you are more financially sophisticated it sounds like than I realized, so disregard my suggestions above . Welcome to the boards!
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Old 04-07-2010, 05:18 PM   #10
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I was originally just looking for places to put the money that we are able to set aside and invest
I'll echo the advise you received from MasterBlaster:

PHP Code:
3Invest in plain vanilla investments that are well know to everyone
And, again, get a rough idea of your goal (have one million bux by age 45, etc.) and start investing. Pay attention to details. A couple grand not spent added to a couple grand of extra income annually can make a big difference over a couple of decades.

This forum is great reading for folks looking for real life examples of folks actually doing it. Hang around and speak up every once in a while!
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Old 04-07-2010, 06:14 PM   #11
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If you wish to retire early, what you invest in is not going to make much difference as long as you don't lose money. More important will be your savings rate. You should strive to put at least half your gross income into investments. That only leaves half for taxes and expenses. Your income taxes should be zero which should help.
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Old 04-07-2010, 08:51 PM   #12
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Welcome to the forum.

I am a firm believer in one step at a time. At this moment, you should be aiming to maximize your savings. Record every penny that you spend & analyze regularly to see where you can trim while still enjoying your life. That will take a fair bit of energy and focus. After doing that for a few years, you can then try to forecast when you'll be able to retire.

Read the financial books recommended in this & the bogleheads forum.
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Old 04-07-2010, 09:03 PM   #13
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We are almost the same age, I am 33, and we make almost the same amount ($54k for me).

You may want to consider not aiming for full retirement but for ESR, i.e. early semi-retirement. So, in other words, you could be able to move from full-time work to part-time work. Or, you could consult for half the year and have the rest off. Or you could change careers to something you enjoy a lot even if it is full-time and pays lower. My goal is to have these options by the time I hit 45.

I believe that I will be able to ESR if I can bring in enough money from my investments to cover half of my living expenses. The idea of saving enough to fully retire seems impossible to me, but ESR seems achievable. So, I changed my focus to ESR and it has helped me stay on track. For me, the goal has to be realistic or I lose desire/confidence to keep going for it.

Anyway, good luck!

EDIT: Maybe this information will be useful just as a comparison.

I am "hardcore" LBYM. From my $54k income I invest $24k, which is 44% of my gross w2 income. I have been saving similar percentage for many years as my income has grown.

My living expenses are around $30k a year for everything. So, to achieve ESR I need $15k a year. Since I would be taking withdrawals at such a young age, I figure I would take no more than 3% a year. So, my goal is to save up $500k by age 45. My portfolio is currently $175k. So, I have $325k to go in 12 years.
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Old 04-07-2010, 09:11 PM   #14
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You might take a look at:

Millennium Edition Generation-X Retirement Calculator.

Very roughly speaking, you'll need to save 30% of your income and bank all of your pay raises to retire in 15 years. College savings for your kids, if you choose to do that, would be in addition to the 30%.

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Old 04-07-2010, 09:48 PM   #15
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To retire in about 15 years, there are two approaches, stick to vanilla investments for both:

1) Concentrate on savings (reduce expenses): Save 40-45% of your gross and invest all additional non-inflation increases in income and live on 20k/year (or 22k/year, and plan on living on the inflation adjusted equivalent of 20k/year when you retire).

2) Concentrate on savings and significantly increase income: Increase your income 40-45% very soon, invest all additional non-inflation raises, and live on 30k/year. This could probably be done if you went dual income.

Or you could do something in between. Anything else I think would be unrealistically difficult to pull off.

I used the Millennium calculator to determine these scenarios (took me about 3 minutes). It accounts for taxes, inflation, and the effect of using solid vanilla investments. Kids wouldn't get any help with college under either scenario.

Under either scenario, you will probably have to live pretty frugally for it to work, but it is doable. Getting your expenses under control is everything. With the recent health reform, these sorts of budgets became a lot more realistically possible for those in your income range. Understanding the health care subsidies will be important in determining what your retirement budget will be, and possibly even what your non-retirement budget will be, if you do self-employed work.
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Old 04-07-2010, 10:26 PM   #16
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Welcome to the board, AZ. I think.

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Also, I was planning on writing covered calls against the shares of stocks (out of the money) to generate extra cash to invest along the way. Does this sound too risky or crazy?
Doesn't this seem a bit like going from zero to Mach 2? You're carrying some debt, you don't even have any savings, and you're already looking at selling options on shares you don't yet own.

A majority (perhaps a vast majority) of the board's ERs got that way by saving-- not by owning their own businesses or by cashing in options or by brilliant investing. They didn't use covered calls, either. They set a budget that matched their values, they saved a huge percentage of their paychecks, they developed an asset-allocation plan that they could stick to, and they invested in low-cost index funds. They bought & held as long as possible to minimize taxes. They maxed out their 401(k)s and IRAs, they learned a lot of DIY skills to save on home/auto expenses, they did most of their shopping on Craigslist or other bargain basements. Sometimes they even gave up shopping and did without. They spent a lot of time tracking their spending & investing with spreadsheets, Quicken, FIRECalc, and other financial/retirement calculators. A few of the extremists went without modern material entitlements like cell phones and cable TV. They also debated whether to scoop up cheap real estate, if that matched their interests, and whether to support any of their kid's college expenses (let alone private schools). None of that may be as interesting as pricing options, but judging from the board's demographics it apparently works a lot better than selling options.

Maybe you should start with those basics and acquire a few thousand of those shares you're considering using as covered-call collateral. It'll certainly give you time to study up on the subject... after you develop the budget and the asset-allocation plan and get out of debt, of course.

The problem with covered calls is that you're giving up some of the chance of future long-term capital gains in exchange for a little bit of cash that'll be taxed as short-term capital gains. You'll also be going up against professional options traders in a market that's illiquid, subject to extremes of psychotic hype, and so volatile that it defies consistent mathematical modeling of that concept.

For the next 15 years, your ER will be built on consistently buying shares (to your chosen asset allocation) whether the market is going up or down. When the market goes down, you'll cheer about getting cheap shares. When your assets unexpectedly explode in value, you'll harvest those gains by rebalancing back to your asset allocation. If you hit a stock or a fund that goes up 20-30% in a year, you'll keep all the profits. But if you've been selling covered calls on those assets, then you'll wave bye-bye to at least a third of those profits and you'll pay short-term cap gains taxes on your own remainder.

Having said all that, I write OTM covered calls against a few shares of our ER portfolio to generate extra cash. Spouse and I started doing it as a way to force ourselves to take a little cash off the table, because we're reluctant to rebalance. I only write against shares that we've owned for more than a year (long-term cap gains). I read McMillan's textbook along with a half-dozen others, I read a number of website tutorials, and I followed a few options traders' discussion boards/blogs for a few months. The McMillan book was the most worthwhile reference of the bunch.

If you're planning to write OTM covered calls, then don't needlessly give away your upside. Write just a few contracts on the shares that you'd have to sell to rebalance, and write the strike price at or a little above your rebalancing price. (Ideally that strike price is also 10-15% out of the money, but good luck finding that.) Think about writing them in the early part of the year to take advantage of summer seasonal slumps, if you believe that's a reliable indicator. If those shares don't go zooming up in the next few months then you're happily pocketing a little extra cash, woo-hoo! If they do zoom up past your strike then you were going to sell them at that price anyway, dammit, and never would have owned them above the strike price.

I've been writing covered calls at an $85 strike on Berkshire Hathaway "B" shares for Jun & Sep. (We've held these shares since 2001-2 at a split-adjusted price of about $41-$46.) I sold a few more at $90 to some poor fool for Sep, and if I turn out to be the poor fool then I'll be selling a lot more than the shares that get called away. The contracts are covered by shares that I'd be selling anyway to rebalance if the stock reached that price.

Next month or two I'll take a look at the Oct/Nov prices and think about selling more, or not. This stock is new to the options market, pricing is still pretty volatile, and a lot of newbies are making the market more liquid than usual. I think I know how the share price will move over the next six months and if I'm wrong then I'm rebalanced.

I've also sold covered calls at a $60 strike on the iShares small-cap value ETF (IJS) for Aug. I started selling the calls when the share price was in the mid-50s and I couldn't believe that it'd go much higher. Today it closed above $66 (even ex-dividend), so we'll have to see if the price is still there in Aug. I've already sold some shares at $66 to rebalance and we don't mind getting exercised on the additional shares at $60. But I'll be much happier selling those covered calls when the market flattens out a little... gaining this much share price in just a couple months seems a little richly valued.

Selling covered calls seems like a pretty straightforward way to make money, but your profits are barely linearly proportional to the effort you expend for them.
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Old 04-08-2010, 02:09 AM   #17
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It seems to me there's an 800 pound gorilla in the room. Maybe we should talk about it. As you know, this is a forum for folks who want to retire early. I suppose "retiring early" could be considered its own goal, but I think it's important for YOU to know why you want to retire (so) early. I'm not against anyone retiring at 45 (or heck, 35 if they can - and want to). I just think it's important for YOU to have a clear understanding of your goal. Please don't try to retire at 45 because it seems 'hip' - hey, there's a forum for just about every taste out there.

And, by all means, if you already hate your j*b, get out and try something you could love. Life is too short to live it in the future. I did some of that and I regret it. I ended up with golden handcuffs and it took a long time to take the key out of my desk drawer and use it.

If you haven't surmised from the answers you've received so far, early retirement is difficult, demanding, time-consuming, fraught with danger and often stressful in its own way. I'm not trying to discourage you from retiring early. I just want you to be certain that it really is the goal you wish to go after and not just a "dream" of freedom. I hope that you have (or will) carefully examine yourself, your couple-ship (if that's a word) your family - then be sure EVERYONE wants to go on this trip with you. If, for instance, your wife isn't on board, it probably ain't gonna happen. (Remember, if momma ain't happy, no one's happy!)

No need to tell us what your thinking is. (It could be very personal, though we'd still love to hear your thoughts if you want to share.) But, YOU really need to understand where you are coming from. You're taking on a HUGE challenge. It would be a shame if you did a great job of meeting that challenge and then found out it wasn't really what you wanted in the first place. I sense (forgive the psychoanalysis from the peanut gallery) that you got burned badly with your business. Don't let that color all your thinking. Make this huge decision on the basis of some cold, hard thinking and not on emotion (for the most part, anyway).

Hope I haven't been a downer. Just saying...

As always, YMMV.
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Old 04-08-2010, 04:26 AM   #18
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AZRunnerman you are in for some good news and likely...a reality check.

Good News: You have recognized that you have a goal of Financial Independence at a much younger age than most. Even better, you are thinking about a plan to get there. You are still a young lad and have plenty of time to FIRE.

Reality Check: Unless you somehow increase your earnings substantially (or somehow receive a windfall)... your goal of 15 years may be difficult to achieve. Perhaps it is not impossible...


One lesson that you have learned is about starting a business. Here is a fact: Most Small Businesses Fail! Many proprietors that have what they might call a small business really just own a job. Nothing wrong with that at all. And my comment is not intended to demean that course of action. But, if you are just earning wages (as opposed to entrepreneurial profits) with a business it is difficult to achieve FI in a short period unless you are very high on the wage scale!

You have a fundamental question that you need to ask yourself about your career: What is your goal? Do you intend to be an entrepreneur or have a professional career? Make a choice and focus your efforts on achieving that goal. Being an entrepreneur is about taking risks and it is very common for one to fail several times before achieving success. If your goal is to be a high paid professional (i.e., Work), you should try to determine how you can maximize your wages and benefits. You can achieve a high wages at a job if you are dedicated and determined... but it will be hard work.

This decision is critical. It will be the compass by which you will set your course on FI.

If your choice is high paid worker, the formula for FI is relatively simple. If you have patience, the right time horizon, and are determined and disciplined... you can do it. You just need to set your expectations properly and for goodness sakes do not take excessive risks with investments. The secret to success is growing rich slowly (which usually leads to a higher probability of success).

FI at 45 might not be attainable... but do not give up. Break your future out into different milestones (e.g., 45, 50, 55, 60, 62, 65). Create a plan, LBYM and Invest your assets prudently and keep track of your progress. If you do not achieve your preferred goal of FI at 45, readjust your target for 50.

IMO - 15 years may be difficult... 20 to 25 years is much more likely.

This forum has a lot of sage wisdom posted, so taking some time to read the posts will be helpful. As always, take any post you read with a grain of salt and further research ideas through self education before you commit to a course of action.
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Old 04-08-2010, 05:11 AM   #19
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AZRunnerman you are in for some good news and likely...a reality check.

Good News: You have recognized that you have a goal of Financial Independence at a much younger age than most. Even better, you are thinking about a plan to get there. You are still a young lad and have plenty of time to FIRE.

Reality Check: Unless you somehow increase your earnings substantially (or somehow receive a windfall)... your goal of 15 years may be difficult to achieve. Perhaps it is not impossible... If


.
In truth the only way to retire in 15 years is to get lucky, be extraordinary frugal, or make 200K but live on under 75k. A bankruptcy by age 30 while still having student loans is two strikes against you.

If you a want a bit of a reality check try running FIRECalc. I did a couple of quick and dirty runs, if you managed to save 20K on your 50K salary and plan on living on 30K (in todays dollar) you got a roughly 50/50 shot of not running out of money by age 85.

I think you need to walk before you run. So get your financial house in order, get an emergency fund, pay off the student loans, save up for a down payment, establish a educational IRA or similar vehicle for saving for college.

Most of all be very thankful that you enjoy your work, invest energy in that and try and increase your income.

Retirement is great but it is far from everything. I retired before I was 45 but I'd gladly have kept working for another 10 year if I had a wife and two kids who needed my support.

Oh and don't sell covered calls before you have you first million. I am possibly the biggest cover call fan on the forum, but I didn't write my first one until I was millionaire.
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Old 04-08-2010, 07:41 AM   #20
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If you're serious about retiring at 45 it's going to take alot of portfolio RISK ... perhaps more than you can stomach (after 1 failed business). Owning your own business is certianly one way to do it.

Did you learn enough from the first failure not to repeat?
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