Age 26 Status Check

[recursion49]

Good evening,

I'm a 26-year-old, recently married, and have a baby on the way (due in September 2015!). With the news of the baby and such, I thought I'd get a few suggestions from the folks here on how to improve my portfolio management, and maybe some advice on how to handle getting a baby into the mix!

We live in Minneapolis, where I work for a large employer in the state as a financial analyst, making $60k/annual, while she works retail $20k/annual. Our hope is to retire early, possibly in a different country (e.g.: Ecuador, Thailand, etc.) where our savings will stretch a lot further.

Age: 26

Cash: 4k
Savings Bonds: 2k
HSA: 9k
Roth 401k: 25k
Roth IRA: 15k
Individual Brokerage: 45k
Financial Assets: 100k

Car Loan: (13k) - 3% annual, 4 years remaining

We own a home free and clear, as my parents gifted a rental property to us during our wedding (value: ~$200k). I feel fortunate that we do not have any mortgages or student loans. However, we do have an outstanding car loan that we're working towards paying off as quickly as possible, mostly due to my general disdain of having a loan over my head.

My past investment philosophy of shoveling as much as possible into an investment to make money work for me has resulted in a shortage of cash. I recently began contributing $100/biweekly to an online savings account and $100/biweekly to EE Bonds, in addition to other cash savings from each pay period. Hoping to save up about $15k in cash before raising my contributions to investments again. The reason I picked EE Bonds instead of I Bonds is that they are guaranteed to double at the end of 20 years, which would imply a 3.5% guaranteed risk-free annual interest.

I have been working only for 2+ years since graduating college, but I regularly contributed to my brokerage accounts over the years, which was fortunate timing-wise, as I racked up nice gains as the stock market recovered from the crisis. These are mostly individual "value" stocks that I hope to capture above-average returns over time (doesn't everyone?). I am a buy-and-hold investor in non-speculative industries (Ford instead of Tesla), and so far, this has served me well.

I used to regularly contribute 15% to my 401k, though that has since been toned down to 6% due to the soon-to-be addition to our family, and I'm hoping to work my way back up to that rate over time. This gets us the full employer match (4.5%). These are currently placed in a mix of U.S. Large Cap, U.S. Small Cap, and International mutual funds.

I think there's value in continuing to max out my HSA - since medical costs are going to be a near-term issue (e.g.: prenatal visits, childbirth) and also a far-term issue (rising healthcare costs). I figure that the tax benefits of having an HSA outweigh that of a 401k, especially since I can draw from it as if it were an IRA after 65, while being able to fund my healthcare needs when required.

I do not have an exact retirement year planned out yet, but the wife and I agree that we do not want to work forever. We enjoy traveling the world, and have lived abroad for a while; relocating to a lower cost country is a desirable option for us. However, with a child inbound, we have had a lot to reconsider recently!

Just looking for some advice and suggestions for further improvements! Thank you very much!

 

[pb4uski]

First, welcome and congratulations... you are well on the road to financial independence and your parents' generous gift of housing gives you a big step up.

What I would suggest to you is to get all your financial information set up on Quicken and then do two things. 1) Use Quicken Financial Planner to see how your assets will grow over time and 2) use Quicken regularly to monitor your spending and your progress towards your goals. Given your financial background, it should be a piece of cake for you.

With a new marriage and a growing family (congratulations!) you may find that you no longer have the time to research individual stocks. I found that I just lost my interest in them so I went with a fully low-cost index portfolio and I continue to have that today.... in the long run it is easy and has provided good returns so I could ER.

At your age, I would hold off on more EE bonds and put that savings towards either your emergency fund or equity investments. At your age I was 100% equities and I still think that is the way to go, but I concede that Vanguard uses 10% bonds in their target date retirement funds for people your age.

Finally, if your DW has an interest in this by all means make her part of the process since you are a team. If she doesn't then that's ok.

 

[Totoro]

Our hope is to retire early, possibly in a different country (e.g.: Ecuador, Thailand, etc.) where our savings will stretch a lot further.

Assuming you are not going to retire in at least 10, maybe 20 years from now, don't count on low cost countries still being there. The world is converging pretty fast. You may be better off in the US in a lower COL area.

Having $400k is a very good start!

Hoping to save up about $15k in cash before raising my contributions to investments again.

For a number of reasons, have at least one year of living expenses in liquid reserves. I would never go below three years actually, many here do the same. That's emergency cash, not to be used for plannable big purchases.

I am a buy-and-hold investor in non-speculative industries (Ford instead of Tesla), and so far, this has served me well.

In your example, the car industry as a whole is rather speculative in my view.

Consider indexing or at least benchmark yourself across two dips before trusting completely in your own ability to outfox the market. If you haven't already, consider reading up on Bogle and check out the Bogleheads forum.

Just looking for some advice and suggestions for further improvements! Thank you very much!

Apart from the above, in financial terms: focus on widening the gap between income and costs. If you manage to build somewhat of a career for yourself, consider "FIRE"-ing your wife.

That's a <25% income drop even at todays income for full-time liberties - which has cost savings usually of its own. Of course, both of you need to feel comfortable which such a decision. It's not for everyone.

 

[bad_LNIP]

I share your desire to move to a lower COL area. I suggest you put a date on the calendar even if you have to move it. Someday or eventually never gets here. I think at your age you need to focus on accumulation and taking some risk. 1 year of cash seems inappropriate and grossly excessive.

I suggest you look at moving away from most individual stocks and look at etfs or closed end funds.

If you can do some traveling that would help narrow the decision. I have been to Ecuador and Costa Rica and s Korea. Asia is nice but that 14hr flight is a beast.

Sent from my XT1049 using Early Retirement Forum mobile app

 

[recursion49]

Thanks for the advice!

I think it's certainly true, that globalization is bringing the cost of living across the globe closer in line, and will give that a lot more thought. We definitely plan to travel more to vacate, while looking for a nice spot to live permanently in retirement. In fact, in two months, we plan to visit Puerto Rico!

We've been debating the idea of having the wife become a stay-at-home mom. Does anyone have an opinion about that? It seems like there's a fine line to toe in that area, because there's less stress on the sole breadwinner, so he/she can focus on career advancement, but also more stress due to the fact that a job loss would result in hardship? Probably some cost savings to be had if the wife stays at home (less eating out, etc.)?

I'll give Quicken a shot as well, though I certainly hope there's no need to keep upgrading to the latest version!

 

[dallas27]

You need to thank your parents for that home every single day. That is going to EASILY double your final wealth or SIGNIFICANTLY hasten your ER.

Very fortunate to have such parents, reward them however you can.

 

[bad_LNIP]

We've been debating the idea of having the wife become a stay-at-home mom.

Seems incompatible with early retirement, or certainly not as easy/fast. My view is that everyone needs to work until everyone is ready to retire. Two people can do it faster than one. The only thing that would possibly make sense mathematically is starting an at home day care vs working.

I'm curious how the stay at home conversation came up vs retiring early. Is she on board with retiring early?

I go with the "Everybody fights, nobody quits" approach to retirement ala starship troopers.

 

[recursion49]

Dallas27,

I definitely appreciate the gift very much, and I know how valuable it is to my early retirement plans. However, I find it hard to imagine how this will double my final wealth. I certainly enjoy not having to pay rent, though utilities, property taxes, and maintenance seem to easily offset most of the benefits. Maybe you could elaborate?

 

[recursion49]

Bad_LNIP,

Thanks for the response. I think something has to be said about the less tangible benefits of having a stay-at-home partner. For example, I could focus on my career more without having to worry about the home or child. At the same time, we'd be saving on childcare, which might be more beneficial than her current income?

 

[pb4uski]

....I'll give Quicken a shot as well, though I certainly hope there's no need to keep upgrading to the latest version!

Uploading vendor transactions sunsets every 3 years or so as I recall so many of us who relay on uploading just buy a new version every third year.

 

[bad_LNIP]

At the same time, we'd be saving on childcare, which might be more beneficial than her current income?

I agree you can save on child care, but if child care is that expensive, she could make a healthy amount caring for 2-3 other kids, right?

Dallas, it could double your wealth as an asset that can be sold at some point for some likely appreciated value. Alternatively, you could use it as a form of non-callable margin to invest in income producing funds (think REITs or CEF's throwing off 5-7% income per month). A free house can help a LOT.

Right now it is doubling your net worth, 200k house vs 100k financial assets.

 

[aaronc879]

We've been debating the idea of having the wife become a stay-at-home mom. Does anyone have an opinion about that? It seems like there's a fine line to toe in that area, because there's less stress on the sole breadwinner, so he/she can focus on career advancement, but also more stress due to the fact that a job loss would result in hardship? Probably some cost savings to be had if the wife stays at home (less eating out, etc.)?

Given your wife's low($20K/yr) income, I would say it makes sense to have her stay home. Childcare alone for an infant can cost at least $10K/yr. Add in the savings from less eating out and less fuel from commuting and I don't think it makes sense for her Not to stay home.

 

[recursion49]

it could double your wealth as an asset that can be sold at some point for some likely appreciated value. Alternatively, you could use it as a form of non-callable margin to invest in income producing funds (think REITs or CEF's throwing off 5-7% income per month).

Could you elaborate on how I would do that? It also seems like a risky proposition because the house would be at risk of a loss (i.e.: 2008) due to the leverage. I think, with the Fed due to increase rates soon, I'd worry that both home value and REIT value will drop. Also, when I look at VNQ, the annual yield is only 3%, so 5%-7% must entail some risks.. Does that seem worthwhile?

 

[recursion49]

Given your wife's low($20K/yr) income, I would say it makes sense to have her stay home. Childcare alone for an infant can cost at least $10K/yr. Add in the savings from less eating out and less fuel from commuting and I don't think it makes sense for her Not to stay home.

That's kind of my thought process as well. Post-tax, her income shrinks significantly, though the additional cash flow is always welcome.

 

[bad_LNIP]

Could you elaborate on how I would do that?

You do a home equity loan/loc and buy a diversified portfolio of CEF's or ETF's.

It also seems like a risky proposition because the house would be at risk of a loss (i.e.: 2008) due to the leverage.

The risk of loss on the house is the same regardless. If your house drops to 150k, regardless of investing in equities or not, you are down 50k on the house. Borrowing against it doesn't increase the risk of loss or rate of loss and if anything diversifies what would otherwise be an illiquid and concentrated asset. At least with stocks you can possibly increase in value/manage risks (hedging) or generate income (dividends). Not so much with a free/clear house.

I think, with the Fed due to increase rates soon, I'd worry that both home value and REIT value will drop.

I am leaning toward a rate increase later in the year, but I doubt it is going to be quite so catastrophic. Even if so, leave REITS alone and invest in the hundreds of other ETF/CEF's out there.

Also, when I look at VNQ, the annual yield is only 3%, so 5%-7% must entail some risks.. Does that seem worthwhile?

Well, there is risk in everything you do including nothing, but on a risk adjusted basis, 5-7% yields are hardly unnervingly high, that is usually 10-20% or so where a high yield suggests high risk. For example, O is yielding over 5%. So is MO. Both are pretty boring stocks.

There are lots and lots of CEF's that yield in the 5-9% range, although their capital gains may be a bit muted. That range of yields is pretty common and not abnormally high.

 

[recursion49]

I will definitely consider that. It has crossed my mind that I need to monetize my house. My fear with taking a home equity loan is that there might be a margin call, or that I might have an unexpected need for cash, resulting in a missed payment. Just a quick peek at home equity rates, and it looks like the prevailing is around 3%+, so I would have to make 4% to barely break even. I think I have my head in two places now!

I've always preferred the idea of purchasing REITs over actual ownership of property, since management and such are not something I'd like to preoccupy myself with. However, dividend stocks seem to be the most appealing.

Definitely a lot of takeaways there!