10 Year Plan - Realistic ?

[atfourty]

Hi,
Here is my current situation :
Age 33, DW 30.

Current Assets :

Cash : 120K
Investments (Retirement + Non-Retirement) : 340K
Home Value : 220K
Company Stock : 200K

Current Debt : 155K; ( Remaining Home mortgage)

Current Income (Combined) = 155K (Gross)

10 year plan :
ASSETS
Cash : 120K + 50K/yr*10 = 620K
Investments : 340K + 30K/yr(invested @ 6%/year) = 1.2MM
Home Value = 325K (220K, appreciating @ 4%/yr for 10 years)
Company Stock = 268K ( 200K, appreciating @ 3%/yr for 10 years)
DEBTS
115K ( Remaining Home mortgage)

Can you please critique this plan, and let me know especially your thoughts on my assumptions - which i have tried to be conservative on ?

Thanks,

 

[eta2020]

So you will be saving 80k a year. Out of this 50k will go to cash and 30k to investments.

That is a lot of cash for someone who is only 33. And you already have 120k of cash.....

You should be putting more money to work.

 

[photoguy]

I would back load the cash investments. I.e. stick everything into equities and don't start saving extra cash until you are close to hitting your number. For equities I would invest in lower valuation sectors first.

6% real return on investments might be a little high. Or did you mean nominal?

Is your income of 155k stable? or do you expect to get significant raises?

 

[atfourty]

I would back load the cash investments. I.e. stick everything into equities and don't start saving extra cash until you are close to hitting your number. For equities I would invest in lower valuation sectors first.

6% real return on investments might be a little high. Or did you mean nominal?

Is your income of 155k stable? or do you expect to get significant raises?

I meant 6% nominal ( not accounting for inflation), i am hesitant to load everthing into equities as markets are at all time high,might re-visit after a significant pullback.;

Yes 155K salary is fairly stable, not really counting on raises, though

 

[dallas27]

Ya, that cash is going to drag on the portfolio eventually.


Sent from my iPhone using Early Retirement Forum

 

[eta2020]

Now you are doing great job given your age. But you can easily put 50k plus into investments:
Max out your 401k plus company match
Max out DW 401k plus company match
Max out your Roth or regular IRA
Max out DW IRA.

Now that is for sure more than 30k that you planned to put into investments.

That is given you both have access to 401k......

 

[Meadbh]

Even assuming a major market meltdown in the near future, there is no rationale for accumulating so much cash. If there is a market crash in the near future, it will be a good opportunity to buy equities with the cash you already have. But if a market crash happens five years from now, you will have wasted a lot of growth opportunities in the market. If you are truly afraid of equities, why would you not use some of the cash to pay off your mortgage? It would provide a better return and there is no uncertainty about it.

 

[Al18]

You'll never get rich off of CD's. In the past 4 years, my CD's (5 year ladders) have increased a total of 10%, while my stocks have increased 45%.

You may want to rethink your CD/stock allocation. If it were me, I would aim at putting 20K/year into CD's and 60K/year into the stocks.

 

[lrak]

In the past 4 years, my CD's (5 year ladders) have increased a total of 10%, while my stocks have increased 45%.

And during four years before that, your CDs would have gone up 20% while your stocks had decreased 30%?

 

[Animorph]

+1 to more in stocks. You'll be effectively DCA'ing in over 10 years anyway, so just do it.

And what's the importance of the 10 year period? Will you retire at that point? Is it a firm cutoff date or a bit squishier? Or just time to develop the next 10 year plan? If you are going to spend it all 10 years from now on a big yacht and sail around the world, then yes maybe some extra cash makes sense.

 

[brewer12345]

How about a dose of gritty realism?

A 10 year plan is all fine and well, but it is worth knowing that as you get within a few years of your goal the returns on your investments mean far more than what you save. That means that you can save until it hurts in the later years, but you will essentially be at the mercy of what investment markets do. Ask me how I know this...

 

[photoguy]

i am hesitant to load everthing into equities as markets are at all time high,might re-visit after a significant pullback.;

Market high is irrelevant -- most market highs are followed by another high. What you want to look at is valuations (e.g. P/E or PE10 or P/B etc.) which directly determines expected returns. Admitedly valuations for US stocks are now high but not necessarily bubble territory.

Do you have an asset allocation plan for your equities? For example, in my AA I have slices for international, value, small caps, emerging markets, etc. Some of these have significantly lower valuations than US stocks as a whole. I would put new money into the cheapest slices in your AA first.

Company Stock = 268K ( 200K, appreciating @ 3%/yr for 10 years)

If you only expect 3% nominal growth of the company stock, why don't you dump it and just invest in the broad market / indexes which you expect to have 6% return.

Investments : 340K + 30K/yr(invested @ 6%/year) = 1.2MM

Assuming you invest the 30k at the start of each year, I only get a total of 1.03M not 1.2M.

 

[pb4uski]

If you want to get rich you have to save and invest in equities. you are only covering half of the equation. Those savings need to be in equities to grow.

You currently have too much company stock, especially if you're only expecting it to generate a 3% return. Think Enron. Or a number of other former high flyers where employees had significant amounts of company stock and got burned badly.

 

[imoldernu]

Just thinking about the future gives you a big +

Go with the flow, and try
to stay ahead.

No guarantees...no miracles... just CYA and try to learn.

No advice... Directing you here:
http://www.early-retirement.org/forums/f27/sharing-23-years-of-frugal-retirement-62251-2.html#post1214041
for some outdated thinking that worked for My Dear Wife and me.

 

[atfourty]

Guys,
First of all thanks for all the reply;
But, i have a few follow up questions, someone pointed out why invest in company stock as it is only expected to appreciate by 3%, but i am expecting to get about 10% yield from it.

Also, would it be wise to pay off the house or start looking at maximizing 401(k)s first?

 

[Animorph]

Also, would it be wise to pay off the house or start looking at maximizing 401(k)s first?

Depends on what you would do with the balance, and what the interest rate is. Can you invest that mortgage principal in something that grows faster than the mortgage interest rate? Just looking at all that cash, you would probably do well to pay off the mortgage with cash, leaving your equity investments untouched. That way your cash is "earning" your mortgage interest rate, which should be higher than your cash is earning now. On the other hand, this is just another way to say more equities and less cash.

 

[photoguy]

Guys,
Also, would it be wise to pay off the house or start looking at maximizing 401(k)s first?

With your high income, I would max out the 401k contribution to reduce current year tax burden.

 

[HawkeyeNFO]

Also, would it be wise to pay off the house or start looking at maximizing 401(k)s first?

What's the mortgage rate?

 

[retirementguy1]

I agree with most commenters. Too much cash, invest in equities. I would not have more than 1 year of expenses in cash. You also have too much company stock. I would only hold 5-10% of investments in company stock. Deciding whether to pay off the mortgage is as much an emotional decision as financial. The feeling of having absolutely no debt payments is freaking awesome. You will need to decide that for yourself. Best of luck.

 

[walkinwood]

As good a plan as plans go.. but 10 years is a long time. Investment return is a major component of the plan and is absolutely out of your control.

So stick to your savings & investment plan and see where you are in 10 years. That's the best you can hope for & it isn't all bad. Even if you can't ER in 10 years, you'll be well on your way. On the other hand, you may get lucky and be able to ER even earlier than your plan.

All the best.

 

[cranberryjoe]

I agree with the others: at your age you're too conservative with cash and too aggressive with company stock.

My story about company stock: I was buying company stock with 30% of my maxed out 401k contribution each month, plus 10% of my salary was buying company stock in an ESPP. I also held a healthy amount of stock options. I liked how my 401k balance was growing and wasn't paying attention to rebalancing, so after the tech run up in the late 90's my 401k was more than 50% company stock . Then it all came tumbling down. Company stock lost >95% in a couple of months. It wasn't pretty.

Fortunately I kept my job (transferred to a spinoff company as the parent company imploded) and eventually recovered. Two of my co-workers were not so lucky. Both of them held 100% of their 401k in company stock. According to rumors they both had 7 figure balances that dropped to 5 figures. One of them was laid off after the crash, so he lost 95% of his 401k and 100% of his salary. Several years later he still didn't have a job. The other kept his job but never recovered.

You may be "expecting" 3% appreciation and 10% yield. Well, I was expecting my company stock to continue its high growth and dividend yields. As they say, past performance does not guarantee future results.

 

[mrfeh]

Hi,
Here is my current situation :
Age 33, DW 30.

Current Assets :

Cash : 120K
Investments (Retirement + Non-Retirement) : 340K
Home Value : 220K
Company Stock : 200K

Current Debt : 155K; ( Remaining Home mortgage)

Current Income (Combined) = 155K (Gross)

10 year plan :
ASSETS
Cash : 120K + 50K/yr*10 = 620K
Investments : 340K + 30K/yr(invested @ 6%/year) = 1.2MM
Home Value = 325K (220K, appreciating @ 4%/yr for 10 years)
Company Stock = 268K ( 200K, appreciating @ 3%/yr for 10 years)
DEBTS
115K ( Remaining Home mortgage)

Can you please critique this plan, and let me know especially your thoughts on my assumptions - which i have tried to be conservative on ?

Thanks,

Thoughts:

1. there's no way to know how your investments will perform; using average return X number of years is not a useful computation
2. similarly, there's no way to know how/if your home will appreciate in value
3. you have way, way too much in cash
4. you have way, way too much in company stock

I think you should spend some time educating yourself on the basics of investing. This is an excellent place to start:

http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit