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It's Time for Me to Start!
Old 09-15-2011, 03:02 PM   #1
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It's Time for Me to Start!

We just submitted over $18,000 in payments to pay off our remaining student and auto loan debt, leaving us with only our mortgage as debt. I originally planned to have all this debt paid off by January, but I did better at work than I was planning for ("Don't confuse hope for a plan", right? ), and we were able to pay everything off easily this month.

Given that, it means it's time for us to fully begin investing in our retirement fund. I wanted to lay out our step-by-step plan below and get any feedback you may have for me. Anything you're concerned about or disagree with? Why?

Background Threads
25, Married, a kid, and optimistic
Feedback on My Allocation and Direction
401k->IRA->72t (SEPP) vs. Roth IRA
Picking Individual Assets for "Ultimate Buy & Hold"

Our Plan
  1. I will begin putting the maximum amount of money into the ESPP at work. This should equal to about $1250/month for 3 months, and I will get $225-300 extra when cashing out (after taxes). So, I reduce my cashflow by about $1250/month, but will get it all back plus an extra $75-100/month every 3rd month.
  2. On average, we will be saving about $2500/month, but because of ESPP, I actually think of it in 3 month chunks. So we'll be saving at least $7500 every 3 months in addition to the ~$700/month that goes into my 401(k).
  3. Each time that I cash out my ESPP, that means it's investment time. I'm using a modified "Ultimate Buy & Hold" strategy and will currently have an AA of approximately 75/25. My assets and funds will be as follows:
    1. Short-Term Bonds: VBSSX / VCSH (Inside 401k / Vanguard)
    2. Intermediate Bonds/Total Bond Market: PTTRX / BND (Inside 401k / Vanguard)
    3. Total Stock Market: VTI
    4. International Small/Mid: VSS
    5. Total International: VXUS
    6. Small Value: VBR
  4. My 401k will consist completely of Bonds (VBSSX/PTTRX), and if any additional bonds are needed to hit the 25/75 AA, I will buy those in my Vanguard account (VCSH/BND) during rebalancing time.
  5. The first $5000 I invest each and every year will go into a Roth IRA. After that it all goes into taxable accounts. (Once my wife gets a job, make that the first $10000)
  6. Since most of my bonds are part of my 401k, and I'm investing every 3 months, I view myself as being on a 15-month cycle of investing then re-balancing. This is my current schedule for the next year:
    1. Oct 11: Total Stock Market
    2. Jan 12: International Small/Mid
    3. Apr 12: Total International
    4. July 12: Small Value
    5. Oct 12: Rebalance
    6. Jan 13: Start again
Notes
  • With a bit of luck (assuming similar historical returns, not getting fired, etc) I should be able to save up $2mm-2.5mm by the time I'm 45. That's ~$65k/year as my starting SWR in 2031.
  • None of these savings or calculations include stock awards, bonuses, or my spouse's potential income. Any of those factors will be invested just like all the other cash, but I haven't included it in my retirement calculations.
  • I don't know everything, and will obviously have a much better feel for my possible expenses and what my SWR will be closer to retirement, but I'm 20 years away.
  • We'll also be putting $325/extra a month on our mortgage. Enough to get it to be paid off approximately 9 years early, and to get our PMI paid off in ~4 years (I know, yuck, I've learned).
  • We also have $16k of emergency savings, but would like to increase to $30-35k, and we'll be putting ~$200/month into that, so it will slowly increase.
  • I have about $7000 in Sharebuilder/ING accounts in various good or bad stocks that I know nothing about (made 65% in 2 years on WTW and ETH, but have lost on plenty of others). I think I will cash out these stocks when the time seems opportune and play around with dividend growth stocks, see if I can't learn something and make some money that way.
So...what do you think?
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Old 09-15-2011, 03:31 PM   #2
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Quote:
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So...what do you think?

Without analyzing it in any detail, I think:

1) CONGRATULATIONS for getting that debt paid off early! You didn't mention credit card debt, so I am assuming you pay that off each month. If not, then paying off credit cards would be pretty urgent.

2) Anything you can and will do towards retiring early puts you a giant step ahead of your contemporaries.

3) For me, well, it was just simpler. All I did was just contribute the maximum to the TSP (=401K) while paying off all my debts (mortgage last) with whatever I could scrape together after that, and then made a game out of saving more than I thought possible each month until I retired.

3) Your idea of increasing the emergency fund is a good one. I should have done that but didn't. I lucked out, but thinking about what could have happened is enough to turn my few remaining grey hairs white like the rest of my hair. Also I'm sure that Suze Orman would have those who follow my bad example tarred and feathered and ridden out of town on a rail.

4) As for asset allocation I always tried to invest with diversification in mind, although I was almost entirely in equity funds until about 2006 when I started moving more into bond funds in preparation for retirement in 2009. Again, I lucked out because the crash of 2008-2009 did not happen in 2005-2006.
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Old 09-15-2011, 04:46 PM   #3
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Look like you're doing well! I'm 29 and also in the accumulation phase with a substantially similar plan as yourself. Figured I would share a couple of the things I've ran into over the last couple of years.

Does your ESPP allow you to immediately liquidate them as soon as it's exercised? Mine does not and it caused an interruption due to a sudden drop in price before I could sell. I've kept that lot on the books waiting for it to become a qualified disposition.

I also agree with your thoughts on the emergency fund. I sleep much better knowing I have one in place as I have had to use it to extract myself from a poor w*rking environment. Knowing that I'm covered reduces stress in general.

I also trade a few stocks and tend to favor dividend stocks. Some may discourage that practice, but I find it keeps me more engaged. I feel I do a lot more research and have gained a better understanding of various companies because of it. Two things I've learned are don't be affraid to hold cash, and no one's ever been hurt by locking in a gain. I would never let this get to be a significant part of my portfolio and treat it as more of a hobby. Beats going to the casinos.

It's good that you've started after-tax investing in addition to utilizing the tax-advantaged as that will be essential to your accelerated retirement. Have you paid much thought to the tax implications of what you're holding there?
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Old 09-15-2011, 06:39 PM   #4
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I think you are doing great - congrats!
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Old 09-15-2011, 10:03 PM   #5
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It's almost like you haven't put any thought into this at all.

NO, just kidding! Keep up the good work. But, don't forget to live a little.

I started/did similar things, just not as complicated (fewer funds, smaller $$$ overall, etc.). I put extra toward getting that PMI eliminated, but I think it still took me more than 4 years.

Your life may change drastically (not all at once, but it's amazing how life creeps along with the smallest of twists and turns; as you look back, they compound tremendously) and you will tweak things or eliminate your "mad money" stock funds, or not.

I skimmed your linked threads and just wanted to add that you may want to consider adequate insurance. Disability, death (term, maybe a little whole life or something), car, home, etc. I don't know if you've already covered that. That's a whole 'nother can o' worms.

I'm 34, and as a fellow, random, internet forum contributor, I'll commend you and say you're way ahead of the pack.

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Old 09-15-2011, 11:43 PM   #6
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Thanks everyone!

Quote:
Originally Posted by FocusedInfinity View Post
Does your ESPP allow you to immediately liquidate them as soon as it's exercised? Mine does not and it caused an interruption due to a sudden drop in price before I could sell. I've kept that lot on the books waiting for it to become a qualified disposition.
I don't think so. After 20-30 minutes of looking, I couldn't find the details, but I've seen them before. I believe there's a 2-3 day wait. There's definitely some risk there for me, but I think I'll get more gains than losses in the long-term, especially because my company is not volatile at all. Some would describe it as "stagnant"

Quote:
Originally Posted by FocusedInfinity View Post
It's good that you've started after-tax investing in addition to utilizing the tax-advantaged as that will be essential to your accelerated retirement. Have you paid much thought to the tax implications of what you're holding there?
Yeah, based on some links I got in earlier threads, I chose to put the bonds in tax-advantaged accounts (like all bonds in my 401k), and equities are in my taxable accounts. The Roth will be a mix. Is that what you meant?

Quote:
Originally Posted by CCdaCE View Post
I skimmed your linked threads and just wanted to add that you may want to consider adequate insurance. Disability, death (term, maybe a little whole life or something), car, home, etc. I don't know if you've already covered that. That's a whole 'nother can o' worms.
I'm fortunate and have great disability, death/dismemberment, and life insurance through work. If I die in a car crash, I think my wife would get something like $500,000+ (it's been a year since I made the changes, can't remember exact #s). We also have car insurance, home insurance, health/dental...and I can't remember if we have any other. Is there something I should be considering that I don't have?

I know that health insurance when I retire may be an issue, but who knows if my wife will have a job then, if Obamacare will have completely changed, etc.
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Old 09-16-2011, 11:15 AM   #7
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That's all that comes to my mind on the insurance issue.

-CC
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Old 09-16-2011, 12:00 PM   #8
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It sounds like you are off to a great start. The only comment I have is that it appears you are looking at the future value of your investments in nominal terms as opposed to real terms. It also appears that you are assuming about a 9-10% nominal return. I would consider this a bit optimistic, but I may have missed some numbers in your post. You certainly have a good overall plan and are definitely on the right track, but just keep in mind $2.5 million in future dollars is not the same as $2.5 million in today's dollars.
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Old 09-16-2011, 05:17 PM   #9
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Originally Posted by ATC KH View Post
It sounds like you are off to a great start. The only comment I have is that it appears you are looking at the future value of your investments in nominal terms as opposed to real terms. It also appears that you are assuming about a 9-10% nominal return. I would consider this a bit optimistic, but I may have missed some numbers in your post. You certainly have a good overall plan and are definitely on the right track, but just keep in mind $2.5 million in future dollars is not the same as $2.5 million in today's dollars.
Good question. I used the calculators on Financial Calculators from Dinkytown.net! to help me estimate this stuff, and made the following assumptions (IIRC):
  • 3% pay increase each year
  • 3% inflation rate
  • 7% rate of return on investments
I don't think that quite got me to $2.5mm, but it got me over $2mm.

And yeah, also I think that my SWR should start at ~$65k in 2031, but it could end up being even higher. So I decided to assume that it would be equivalent to half of that in terms of today's money. So if I had no mortgage payment, would I be OK living on $37.5k/year today? I think the answer is yes.

Am I making some assumptions I shouldn't?

I also know that I'll start to get a better feel for things as I get closer to retirement, and that it will take a bit of "luck" as I say. Assuming certain rates of return, and maybe even getting fortunate with my bonuses and pay my wife receives (none of which I factor in, but could be $10k-$80k/year depending on performance and her job...all of that should be "pure profit")
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Old 09-17-2011, 11:46 AM   #10
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The numbers I was going off of were $23,000 in current savings and annual contributions of $38,400/yr. Given your assumptions for inflation/investment growth, I show you ending with a portfolio of about $1.2m real or about $1.8m nominal in 20 years.
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Old 09-17-2011, 01:16 PM   #11
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The numbers I was going off of were $23,000 in current savings and annual contributions of $38,400/yr. Given your assumptions for inflation/investment growth, I show you ending with a portfolio of about $1.2m real or about $1.8m nominal in 20 years.
So, depending on where I calculate things, I get different values.
  1. Using this calculator on dinkytown, and changing the % of contributions, I get something in the following range.
    1. $2,064,668 - $2,553,712
  2. This calculator gives a number closer to what you gave me: Retirement Calculators - CNNMoney
    1. $1,834,171
  3. Another calculator, AARP Retirement Calculator - Retirement Planning. Is your retirement saving on track? , puts me here:
    1. $2,025,514
  4. Another one: SmartMoney Retirement Planner - SmartMoney.com
    1. 2,166,000
  5. And finally, my spreadsheet:
    1. $2,238,357
So, yeah, I understand none of those values are quite $2.5m. It's anywhere from on target to $700k short. I'm willing to re-evaluate things as I get closer, and if I have to retire at 48 instead of 45...I suppose I'll live.

I also suppose I'm counting in the following things when I say "with a bit of luck", not all need to happen, but I assume some will.
  • I can work part time doing something I enjoy after retirement
  • My wife likes to work, and may continue to do so after I retire
  • I continue to get bonuses and stock awards
  • My annual raises are > 3% (which has been true so far)
  • My wife gets a job at any point in the next 20 years
I've always kind of understood that I'm really only on track for ~$2mm right now, and that $2.5mm is my goal. See the attached image of my simple "trend to retirement" graph in Excel. It's not perfect, and just assumes linear growth, but I have 2 lines there, and I *absolutely need* to be above the red line, and want to be above the blue line. Green is where I'm at currently. I should add a 3rd line to represent the $2.5m number, as I just realized this spreadsheet is a bit out of date.

Does that answer your concerns, or am I just making excuses?
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Old 09-17-2011, 03:25 PM   #12
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Does that answer your concerns, or am I just making excuses?
I don't have any concerns; I think you are definitely on the right track. If I am using the same numbers as you, I just feel that your expectations are very optimistic--especially if you are thinking in 2011 dollars. You may find this calculator helpful: Online Monte Carlo Retirement Planner
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Old 09-19-2011, 04:46 PM   #13
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It's almost like you haven't put any thought into this at all.

NO, just kidding! Keep up the good work. But, don't forget to live a little.

I started/did similar things, just not as complicated (fewer funds, smaller $$$ overall, etc.). I put extra toward getting that PMI eliminated, but I think it still took me more than 4 years.
I had me a spreadsheet in 1992, when I was 27, that had it all figured out: We could retire when I was 44, DW a couple years older. We saved, paid off a house, but also had fun and traveled. We are still in our "starter" house because we like it and it is plenty for us. We have no kids.

Well, if you haven't done the math yet, I'm 46 now. We haven't retired but we probably could. In the last 19 years we've both taken a couple of years off at different times to pursue advanced degrees, we've bought a nice place in Hawaii, and we've traveled a lot. The new plan is to retire in about 5-6 years from now, actually DW will do it sooner. In the meantime, we are having fun, the need to save is greatly diminished so we "live a little", or maybe a lot sometimes. Last weekend we splurged to fly out to watch our favorite NFL team play for example. We still live beneath our means but we are having fun living a little less far beneath it right now.

My point is, you are in great shape. Our plan early on got us ahead of the curve and allowed us to do a few things we did not even contemplate at the time. Stick with your plan but don't be afraid to modify it as your desires change. And don't become a slave to your plan if opportunities present themselves. Part of the reason we have not retired yet is because we both like our jobs! I know saying that is blasphemy around here. But we'll stick with them a few more years until things start to suck or we just can't wait any longer to move onto the next fun phase. In the meantime, we're having a blast knowing we can walk away any day.
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Old 09-19-2011, 11:52 PM   #14
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That makes sense DoingHomework. I could see how that could easily happen, and I do like my job, but I hate working...if that makes sense. We'll see how I feel in 20 years. I could grow to like working, or I could get "Stockholm Syndrome" with it

I can definitely see how I might want to work a few extra years to make the pre and post retirement years a bit more comfortable, like you have done.

Thanks!
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Old 09-21-2011, 12:37 PM   #15
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Studbucket,

I'm currently 24 and have the same feeling. I like my job, but don't really like working. It's all about the financial freedom to continue working if you CHOOSE or stop. I like that excel sheet and now that I've seen it I'll probably try to duplicate it (Excel junky).

As far as your calculations, I usually just use moneychimp.com compound interest calculator to give me a rough idea. After reading some of your posts, it's funny because I see the same thoughts I have. I also never use my wife's future income as a factor (especially since I am military and she is not and it is difficult to find a job when you move every 3-4 years). I also don't include any raises, which I know I will get and will contribute almost the entire raise to my retirement.

In my opinion, being on the beginning road like you and I are, having the "big picture" plan is key. There are so many variables and what-ifs that will come up over the next 20-25 years you can't possibly plan for those. As long as you have a realistic overall plan that pads for possible "down" periods it's all you can do. If things work out better, great. If not, then hopefully you are one or close to being on track.

Anyways, good to hear from someone else in mid 20's with the same ER ambitions.

Good luck!
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Old 09-21-2011, 06:30 PM   #16
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Quote:
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Studbucket,

I'm currently 24 and have the same feeling. I like my job, but don't really like working. It's all about the financial freedom to continue working if you CHOOSE or stop. I like that excel sheet and now that I've seen it I'll probably try to duplicate it (Excel junky).
Me too. I'm not amazing with Excel, but proficient enough. Studbucket was kind enough to email me a copy of the spreadsheet after a PM, I'd bet he'll do the same for you if you don't want to have to reproduce it.

I added it to my... 10 other various retirement spreadsheets (just went and counted).

Also I'm another one that likes their job, but not working. Know exactly how you guys feel.
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Old 09-21-2011, 06:54 PM   #17
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I will send him a PM. You're right, save some time!
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Old 09-21-2011, 10:22 PM   #18
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Thanks for the thoughts!

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As far as your calculations, I usually just use moneychimp.com compound interest calculator to give me a rough idea.
Thanks! That calculator puts me at roughly $2.3m, so that's just another number to use for comparison
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