5 million at 24

[CybrMike]

I'm selling my company and will be getting about 5 - 5.5 million. I will no longer have a job or any income coming in. My yearly expenses not including my house (which I could pay off) is like 120 - 150K.

I'm not sure what I'm going to do for the next few years but have been studying bonds and preffereds quite a bit the last 6 months and I would like to play things pretty conservative.

I've put together some portfolio scenarios and it seems like I could get 8% a year or so in bonds & preffereds (and a bit of real estate) which comes to like 400K+ per year, minus 120K or so for taxes. I modeled my expenses out with inflation and it seems to get me out past 2050 without dipping into the principal and much further if I re-invest the extra income along the way.

Does 8% sound reasonable for a mostly bonds and preffereds portfolio? Anything I'm missing?

Does anyone know good people/companies to talk to who manage this kind of thing? I would definitely like to talk to someone before I set my portfolio up, as I'm no expert on bonds and preferreds.

 

[wabmester]

Congrats on the sale!   That's got to be a mind-blower at 24.

Is that $5M net of taxes?   Are you getting cash or a stock swap?

In any case, I'm not sure where you came up with 8% for bonds/preferreds.   Even junk bonds aren't yielding that high these days.

If you were smart enough to create $5M of value at your age, you're smart enough to learn how to invest it.   Start with a copy of Bernstein's "Four Pillars of Investing."   Avoid financial advisors and brokers like the plague unless you need to do something fancy like a zero-cost collar on a large block of stock.

The religion around here is that you can safely withdraw 4% from your pile (with inflation adjustments) each year if you invest in a reasonable mix of stocks and bonds.

 

[Nords]

My yearly expenses not including my house (which I could pay off) is like 120 - 150K.

I'm not sure what I'm going to do for the next few years but have been studying bonds and preffereds quite a bit the last 6 months and I would like to play things pretty conservative.

Does 8% sound reasonable for a mostly bonds and preffereds portfolio? Anything I'm missing?

Does anyone know good people/companies to talk to who manage this kind of thing? I would definitely like to talk to someone before I set my portfolio up, as I'm no expert on bonds and preferreds.

Welcome to the board, Mike.  

You have an interesting portfolio-withdrawal challenge ahead of you.  Most of us are ER'd in our 40s & 50s, so planning for six or seven decades of ER is a stretch.  You, on the other hand, are going to have to beat inflation for a very long time.

I think there are few, if any, posters here with annual expenses in your range.  You may find out that you're spending less and needing less yield/total return.

Because receiving 8%/year, even before taxes, let alone for a bond/preferred portfolio, sounds like it carries a high junk/default risk.  Brewer12345 and a couple other posters are experts on this, but if 8% could be achieved that easily then we'd all be doing it by now.  It might be unrealistic to expect much more than 5-6%.

Very few of us, if any, use a financial advisor.  But there are bond experts here...

 

[CybrMike]

Is that $5M net of taxes? Are you getting cash or a stock swap?

5M is after taxes, all cash.

Just logging into scottrade I see several preferred securities that are returning 8% or higher. I've also seen a bank (millenium bank i believe is the name) that will pay 7.75% on a 7 yr CD if you agree to not to withdraw the principal before the 7 years. I'm also a member of epreferreds and it seems there are several investment grade preferreds in the 8% range.

If I can get 6% on 60% of the portfolio and 8% on 40%, it works out to be like a 7.72% return.

Heck, I've got at least 15 NNN real estate deals in front of me that return 8% or more.

I'm no newbie to investing, just a newbie to bonds and preferreds really and it seems like there are quite a few folks on here that depend on bonds for income, so I thought this would be a good place to ask

 

[wabmester]

Just logging into scottrade I see several preferred securities that are returning 8% or higher. I've also seen a bank (millenium bank i believe is the name) that will pay 7.75% on a 7 yr CD if you agree to not to withdraw the principal before the 7 years.

Oh yeah, these guys:

http://www.mlnbank.com/prem_cds.html

Foreign bank. No FDIC. And rates 3% higher than anybody else. Can you say "red flags?"

As a savvy investor, you know that you don't get high returns without high risk. Personally, I think you'd be better off with a well-diversified portfolio of "known risk" investments if you're in it for the long haul.

 

[brewer12345]

There are indeed bonds and (especially) preferreds that yield 8% and more (there are stocks that pay out that much, too). No doubt NNN deals are available at that kind of yield, and you could almost certainly find real estate that would yield that much. However, you should probably come to terms with something here and now: if you find something with an 8% yield or better, it is not a low/no risk investment. There is nothing wrrong with many or most of these investments. Most of them will make their stated 8% (or better), but you will be exposed to some risk (default, interest rate, inflation, volatility of valuation, etc.). So no, you can't "play it safe" and get your stated return.

Having said that, there is nothing wrong with taking some risk in your portfolio to get higher returns. You will be getting $5MM and need $150k annually, which is about a 3% withdrawal. That is very doable overr a very long time with a diversified portfolio. Should you buy some NNNs, preferreds, bonds, etc.? Sure, but you should also have some domestic and foreign equities, some commodities, some real estate, some traesuries, etc. Don't be so obsessed with safetyy; it will hurt you in the long run.

 

[wildcat]

My only question for CybrMike is what took you so long to become a millionaire? Slacker

 

[justin]

I can't believe I'm going to say this, but $5 million ain't what it used to be.

If you want to risk your principal in 8% yield stuff, that's fine. You have to understand that it's risky. You could lose lots of principal and be back building a $5 million businesses from scratch. Or you could do just fine.

I would assume at the most that you could take 4% from your portfolio each year and allow it to grow to cover inflation That will yield $200k pretax from your $5 million. Unless you can somehow dodge taxes, you're looking at a tax bill of up to $45,000 or so for the feds, assuming you have a substantial portion of your income coming from non-exempt bond interest or nonqualified dividends. Then you may have state and local taxes (don't know where you live, but you may want to consider finding a tax haven state to "live" in on paper). After taxes, you'll probably have just enough to cover the upper range of your expenses ($150k).

A 4% withdrawal rate would scare me personally since you'll need to live off your nest egg for 50-75 years (I'm about your age - 25). If you use a 3% withdrawal rate instead, you have only $150k pretax income. After taxes, you'd probably end up close to your bottom range of expenses ($120k).

Taxes are hard to estimate since there are 1000 ways to structure your investments. Plus, if you have a lot of income that is taxable but you reinvest, you'll pay tax on it even though you don't get to spend the income.

You must keep up with inflation for the next 0.5 or 0.75 centuries. Getting a 7.75% nominal yield on a 7 year CD means at the end of the 7 years, you're left with your principal investment that is worth only 81% of what you put in originally (in today's dollars) if you assume a 3% annual rate of inflation. 3% of that 7.75% return is to compensate for inflation.

Congrats on the $5 million. That is a great accomplishment. Stick around and you can pick up some great tips here.

 

[Jarhead*]

$5,000,000.00 after taxes at age 24.  That's an amount usually associated with Rock Stars, Professional Athletes, etc. etc.  With their limitated "real life" experience, they can figure out a way to sabotage themselves by lifestyle choices, (and many do).

This board has a very high percentage of engineer types that are ultra-conservative, both in life-style and investment choices.  Following
advice that you receive here, I would be hard put to imagine a scenario where you would not be able to meet your income requirements.

However, my guess is that, at age 24 your challenge is going to be spending the considerable amount of extra time on your hands in a non-destructive way.

A further guess is that after a few years, at your age, and the fact that you made your income in business, you'll eventually get back in the saddle again in one form or the other.

In any case, if you don't mind, I would be very interested to hear "how you did it". (It's raining today and no golf for me.)

 

[Cut-Throat]

This board has a very high percentage of engineer types that are ultra-conservative, both in life-style and investment choices.  Following
advice that you receive here, I would be hard put to imagine a scenario where you would not be able to meet your income requirements.
In any case, if you don't mind, I would be very interested to hear "how you did it". (It's raining today and no golf for me.)

Me too!  - I would guess with a moniker Like CybrMike, he's probably one of the engineer types that you referred to.

I also agree, that many are very conservative with their estimates of SWR. The 4% was a historical worst case. Going forward, I don't see things that bad. They actually looked far worse to me in 1974.

 

[justin]

Let me guess how CybrMike made his millions. Founded a dot com in 1999 at age 18, the stock price went to $1 billion over the next year, then he lost $995 million in the great tech crash, and here he is!

 

[HFWR]

I should be so lucky...

 

[lazyday]

$5M at age 24, I'd say calls for a good financial planner. It's not just about investment choices, but budgeting, tax planning, estate planning and more.

Tricky part could be finding someone competant and not corrupt.

Might want to run the investment advice (and fees) by this board before commit your $. I suspect that someone competant in other financial aspects may or may not also provide the best investment advice.

 

[BigMoneyJim]

$5M at age 24, I'd say calls for a good financial planner. It's not just about investment choices, but budgeting, tax planning, estate planning and more.

Not sure I agree there. Too many sharks. I have to wonder if he'd be better off putting it all in Vanguard 's Admiral Treasury MM fund for a few months or so until he's fully comfortable with his investing decisions instead of hoping to find a FP who will treat him right. Not that those are the only two choices, of course.

Tricky part could be finding someone competant and not corrupt.

Have to agree there.


I just went back and reread his first post. He did ask for a reference to an FP or advisor of some sort. Aside from the self-help advice of some regulars on this board I wouldn't know who to send him to except perhaps a tax attourney (not a specific one or firm), but I expect he's already talked to one as part of selling the business.

 

[wabmester]

Well, it is a dot-com, and it was founded in 2002, but its not public. I can perhaps share more in a couple months.

CybrMike, I've know a bunch of tech millionaires, so let me give you some tales that you're sure to ignore, but years from now you'll say "wow, that old phart Wab was right."

Several of them repeated their success.   I'm actually pretty amazed how many times lightning struck twice.  So, if you're an empire builder, go for it.   Many of them followed exactly the same formula, and it worked again.

Many of them got greedy.   They let it ride too long.   You're obviously not taking that path, but you are chasing yield, which is a lesser but similar sin.   Some of the greedy bastards figured that their wealth put them in a new class and opened up a vast array of new improved investment opportunities to them, like private placement.    Those tended to get screwed the hardest.

The happiest ones decided that all they really wanted in life were some kids, a ranch, and the ability to pursue their passions.    A couple of them even became more wealthy in the pursuit of their passions, but they weren't chasing dollars.

You've got many paths before you, grasshopper.   Choose wisely.  

 

[laurence]

Park the money in a money market and read up and really think about it for at least six months. You shouldn't invest that kind of money hastily. Heck, if you threw that in Emigrant Direct throwing off 4% you've got 200k a year, you could probably find hovel to rent on that until you were sure what you wanted to do. Locking up your money, even if it is a legit deal and the risk is acceptable, is probably not what you want to do right away. At first you might say, "All right! Mai Tai's and Pina Coladas on the beach forever more!", then six months later you may get the itch again. Anyone that driving at 24 does not strike me as lazy/laid back. Just idle thoughts from a 31 year old worth 10% of that!

Oh yeah, screw you congrats!

 

[lazyday]

To be honest, I know little about planners or advisors. Met one at a party once.

Just seems common sense to me that getting that much money that quickly and that young, there's all sorts of mistakes even a smart person can make, and not just investment choices. Most people make those mistakes before amassing a fortune.

I do think people here are wary of advisors for good reasons. Like outrageous fees and horrible advice.


Maybe CybrMike, you could post a question on diehards.org. There's some advisors there. I don't suggest choosing those advisors, but maybe one could explain the benefits of an advisor, or how to pick one. For example, I've read the advice to choose one who belives in using index funds.

Once read an interesting article by an advisor who had several very young millionare clients, and the special problems they had. Sorry don't recall where I got the link. Maybe Journal of Financial Planning.

(I may have "advisor" and "planner" confused)

 

[Mountain_Mike]

I would open a Vanguard account and park most of the money there, in several diversified funds. I would also set up some $100,000 CD ladders in different banks and credit unions.

One thing I would slso look into if I had this "problem" would be tax free municipal bonds or bond funds.

Others have given good advise. Park the money in a safe place. Educate yourself. Buy a ranch Do something you love doing, not for the money.

 

[lazyday]

Heck, if you threw that in Emigrant Direct throwing off 4% you've got 200k a year, you could probably find hovel to rent on that until you were sure what you wanted to do.

Careful, I don't think FDIC goes that high.
There are short term treasury bills at Treasury Direct, though, with about the same rate today.

 

[Danny]

Mike, figure out what you need to be self-sustaining.
Give the rest to young forum members so they can more quickly reach what you already have.
just my 2 cents

 

[just_hatched]

Mike, figure out what you need to be self-sustaining.
Give the rest to young forum members so they can more quickly reach what you already have.

"If I give you a fish, it will feed you for a day, ... "

 

[Nords]

If I teach you how to fish.........You'll move to Montana

Seen on a blog:
"Build a man a fire, and he'll be warm until the wood runs out. Set a man on fire, and he'll be warm for the rest of his life!"

 

[dex]

I'm not going to read all the responses so far.

Here is the simple story from a person who worked from $1.25/hour cleaning bathrooms at a supermarket (they stunk and I was glad to have the job) at the age of 15 to the age of 50 and having a net worth of $1.5m at 51.

If I was 24 years old with $5.5m I wouldn't tell anyone. I would go to Las Vegas or Utah and become friendly with the most buxom (or not) woman I could meet. After that...is life.

 

[Mr._johngalt]

I'm not going to read all the responses so far.

Here is the simple story from a person who worked from $1.25/hour cleaning bathrooms at a supermarket (they stunk and I was glad to have the job)  at the age of 15 to the age of 50 and having a net worth of $1.5m at 51.

If I was 24 years old with $5.5m I wouldn't tell anyone.  I would go to Las Vegas or Utah and become friendly with  the most buxom (or not) woman I could meet.  After that...is life.

Well dex, without slamming what you would do, I must say I am a little
skepical of the whole 24 yrs. old with 5.5 million $ story. Not saying it has not/
can/not be done. Just doesn't smell quite right to me.

Elvis has left the building................

JG

 

[dex]

MRGALT2U
I don't disagree with you. The story is a bit much; these are crazy times - just look at housing prices.

Then again. Remember when you were 24. Just imagine what you would/could do with 5.5m?

Such numbers were never in my mind. I always thought I would have to work until Social Securty kicked in. That is what makes RE so difficult to me.

Maybe this post put things into perspective. It isnt about your age ... it is about how you perceive it - 24 or 42 what is the difference??