How should I invest my savings?

[dante60093]

Wow!  Nice job with putting that much away.  I'm suprized no one has mentioned selling the house and using the equity to pay cash for a smaller one.  I would think that you could still get a pretty nice place in the Chicago area for 200k.  

With what you have saved you could be investing serious time with that young son of yours.

It just show's that lifestyle is a relative thing.  For some a double wide on a couple of acres in the country is their dream.  For others it would be a nightmare.

To maintain a 800K dollar house and the lifestyle that goes with it is something you will just have to add up and see how much its going to cost to maintain.

Two years ago I moved from an affluent area in St. Louis to a little town about 15 miles away.  I got a larger home with a bigger yard.  My taxes were much cheaper and the biggest difference was I didn't feel like I had to have the new Mercedes and bigger boat.  I sold the Mercedes and got a Jeep because that was the type of cars that were around here.  I know your not supposed to try to keep up with the Jones's but you do want to fit in.  

Hi dm,

My utilities (gas, electricity, water) were $2800 in 2003. Property tax is about $9100, insurance is $900. Average monthly cost: $1067. We love the area - it is the Kenilworth-Winnetka-Glencoe part of the Chicago northshore with one of the best school districts and with maximum real estate value appreciation. The median price here is similar to mine and teardowns on 60X130 lots are being purchased by developers for $600K or more and replaced with new construction.

You mentioned the most important thing to me - spending more time with our second grader. Which is why I am interested in opinions from folks posting in this forum. My idea of RE is: I can afford to give up my job - don't have to leave home for 12 hours anymore. And can be self-employed working out of the house so that I can spend more time with my son.

Two issues though: 1. Haven't homed in on a venture yet (maybe too risk-averse) and 2. Opportunity cost of salary+bonus.

Wonder if you were in a similar situation (probably better) as me and if you had to deal with similar considerations .

 

[dm]

I'm also 47, but my kids are 20+. The biggest regret I have was I missed alot of their growing up. I was working day and night. They got to spend their summers at the club and lake but I wish I would have spent more time with them.

I also played with the idea of doing something on my own but the fact is I make OK money. I did buy and sell some land from time to time. Everything seems high right now and I have a contract on the last three lots I own. I am retireing next year. I do plan on possibly doing some consulting, but I would get to chose the projects. It would just be for some extra toy money.

If you like where your at and can afford it by all means stay. I was planning on holding on to those lots I had but things have went up so fast I felt I should sell now.
I'm just afraid if rates start going up I may miss my chance. Of coarse these lots are not in the same league as your location. But I did make over 500% in two years.

 

[dante60093]

I'm not sure whether it was indicated if any of your portfolio is 401K/IRA?  What percent is tax deferred? That may lead you to some other options (REITS, preferred stocks, CMOs, etc) that pay higher interest/dividends.  

Also, I agree with dm,  downsizing to a smaller home may enable you to make a move much sooner and with less anxiety.  I currently have a $400K+ home and a $60K mortgage, and am considering downsizing to enable total ER in the next year or so.

Doug

I have about 17% in 401K and IRA (nontaxable) accounts. Half of that amount (401K) is in PIMCO Opportunity Fund managed by T Rowe Price.

Remainder is in a Schwab account in 6 mutual funds: DODGE & COX STOCK FUND, NB FOCUS FUND INVESTOR CLASS , OAKMARK GLOBAL FUND, OBERWEIS EMERGING GROWTH PORTFOLIO, ROYCE TOTAL RETURN FUND, RS INTERNET AGE FUND.

Should I consolidate the 6 funds into 1 or 2? Should I sell them and buy something else?

 

[dante60093]

.  I found I could always do better within
100 miles of home (this includes Chicago in my case).  
John Galt

Does this mean that you are a neighbor? I live in Winnetka. Are you close by?

LaSalle Bank is probably the most aggressive one around here with rates but even they are around 2% now. If you know of a local bank where I can do better than the Ford MoneyMarket or GE Interest Plus rates, would love to know about it.

 

[wabmester]

Any suggestions on how I can stay ahead of inflation without putting the principal at risk will be greatly appreciated.

The safest investments on the planet are treasuries. Over the last 50 years, long-term treasuries have had an average real yield (i.e., yield above inflation) of 2.51%. Of course, buying a long-term treasury at current rates may or may not give you that real yield, so what's a risk averse investor to do?

TIPS. Guaranteed real yield of around 2.5% for long-term issues today. No gambling involved. No need to hope for historical returns. No need to worry about inflation, the stock market, terrorism, global warming, or Alan Greenspan.

 

[eytonxav]

I have about 17Re: How should I invest my savings?

I have about 17% in 401K and IRA (nontaxable) accounts. Half of that amount (401K) is in PIMCO Opportunity Fund managed by T Rowe Price.

Remainder is in a Schwab account in 6 mutual funds: DODGE & COX STOCK FUND, NB FOCUS FUND INVESTOR CLASS , OAKMARK GLOBAL FUND, OBERWEIS EMERGING GROWTH PORTFOLIO, ROYCE TOTAL RETURN FUND, RS INTERNET AGE FUND.

Should I consolidate the 6 funds into 1 or 2? Should I sell them and buy something else?

There are many folks on here that can provide advice into how to allocate your portfolio and certainly I am not advocating putting a large percent of your portfolio into the following, however, REITS/preferred stocks are a reasonable choice for tax sheltered accounts as their interest/dividends is up in the 7-8% range. TIPS and CMOs are also good candidates for going into tax deferred accounts. Some of the mutual funds you are in look like good ones, and I'm not suggesting you change any of those, but just wanted to offer a thought on how to boost tax sheltered yield and remain relatively conservative.

One other question relative to your moving forward with your plan; will you walk away with any healthcare coverage from your corporate job? This will be a significant expense item to cover in the future, especially considering that costs typically increase >10%/yr. The healthcare issue caused me more concern than anything else when I elected to take an early retirement package last year.

Doug

 

[dante60093]

Re: I have about 17Re: How should I invest my savi

There are many folks on here that can provide advice into how to allocate your portfolio and certainly I am not advocating putting a large percent of your portfolio into the following,  however, REITS/preferred stocks are a reasonable choice for tax sheltered accounts as their interest/dividends is up in the 7-8% range. TIPS and CMOs are also good candidates for going into tax deferred accounts.  Some of the mutual funds you are in look like good ones, and I'm not suggesting you change any of those, but just wanted to offer a thought on how to boost tax sheltered yield and remain relatively conservative.  

One other question relative to your moving forward with your plan; will you walk away with any healthcare coverage from your corporate job?  This will be a significant expense item to cover in the future, especially considering that costs typically increase >10%/yr.  The healthcare issue caused me more concern than anything else when I elected to take an early retirement package last year.

Doug

Please recommend any specific REITs or preferred stocks if you would and I will check them out. Do they fluctuate a lot with the market too?

Have not looked at TIPs - again, if you know of a specific one, I will look int it. Afraid I don't know CMOs.

Re health care coverage, excellent point. I am in a slight ly different situation in that I am reluctant to quit unless I have a personal venture thought through and lined up that I can jump into - early retirement to me is "freedom from the need to be employed in my kind of job". What has held me back is that as yet I have not had a business plan robust enough to make the switch and secondly, concern about how much cash flow I would give up if I left the job. And the HC coverage is a significant factor - I was told by someone that for me to get comparable coverage for the two of us and our second grader, even though there are no preexisting conditions, premium could be $500/month.

Are you planning on any kind of post-ER business activity?

Do you know of a forum or thread where people who are working in companies are thinking about leaving and considering self-employment and are therefore discussing venture possibilities (on a small scale like consulting, home based business or small business?

 

[Bob_Smith]

Re: I have about 17Re: How should I invest my savi

Have not looked at TIPs - again, if you know of a specific one, I will look int it.

TIPS are US Treasury Securities. You can buy direct from the treasury here: (http://www.treasurydirect.gov/indiv/indiv.htm), or on the secondary market. They stopped selling 30 year treasuries, so the only place you can get those is on the secondary market and the most recent ones mature in about 27-28 years. I just purchased some on the secondary market through my Vanguard brokerage account that yield a little over 2.5% - they are at about 2.3-2.4% now. They recently started issuing 20 year TIPS that you can buy at auction. The process is very easy. You can also invest in TIPS through mutual funds, and Vanguard does have a TIPS fund. Here is a link to information about TIPS that might help: http://www.treasurydirect.gov/indiv/products/tips_glance.htm. Good luck!

 

[bobbee25]

If TIPS are 2.5%, how can they be good for a 4% SWR ?

 

[JWR1945]

bobbee25

If TIPS are 2.5%, how can they be good for a 4% SWR ?

Because there is a draw-down of principal. Most Safe Withdrawal Rate studies are based upon a hypothetical portfolio's ending with a final balance of zero (at least once among many possible outcomes).

The most frequently mentioned time period is 30 years. Using 30 years is helpful for analyzing the data. (It is a short period for many readers of this board.)

It you have a cash equivalent that matches inflation exactly (i.e., at a zero percent real interest rate), you can safely withdraw 3.33% of the initial balance (plus inflation) every year for 30 years.

Anything that always does better than matching inflation [without any dips!] has a 30-year safe withdrawal rate higher than 3.33%.

Have fun.

John R.

 

[wabmester]

It you have a cash equivalent that matches inflation exactly (i.e., at a zero percent real interest rate), you can safely withdraw 3.33% of the initial balance (plus inflation) every year for 30 years.

Anything that always does better than matching inflation [without any dips!] has a 30-year safe withdrawal rate higher than 3.33%.

JWR, how'd you come up with this number? I ran FIREcalc using 0% TIPS for 30 years, and it gave me a 52.3% success rate.

What does your hypothetical instrument do in years of deflation?

 

[John Galt]

JWR can speak for himself, but once again I am
compelled to stick my rather prominent nose in.

If you withdraw 3.33% (fixed) every year, it will last
30 years. Can not be otherwise. It is mathematics.

John Galt

 

[wabmester]

If you withdraw 3.33% (fixed) every year, it will last
30 years.  Can not be otherwise.  It is mathematics.

Ah yes, arithmetic.   Try this simple math.   You start with $100K and you want to withdraw an inflation-adjusted 50% each year for two years.

Year 1 inflation is -10% (i.e., deflation).   Year 2 inflation is 10%.   Net inflation for the 2-year period is 0%.

Year 1:  you have $90K after inflation adjustment and you withdraw $45K, leaving $45K

Year 2: you have $49.5K after inflation adjustment and you want to withdraw $50K (50% of initial + net zero inflation).   Whoops, you're short $500.

 

[charlie]

I ran FIREcalc too and found that you get 100%
success for 25 years using the CPI and 0 expense
ratio. For this case, the average remaining balance
was $41,809. It appears that you are on a very
steep slope the last 5 years, as would be expected.
for 28 years the success was 90.2% with $26,725
remaining and for 29 years the success rate was 72%
with 21,667 remaining (all assuming $100k initial
investment.)

Using Vanguard's TIPS fund, which currently has 1.6%
REAL yield, the success rate was 97.7% with an average
balance of $82,121 remaining. The only failing years
were '31, '32 and '33 during the depths of the great
depression when there was actual deflation.

I think this exercise just proves again that you can't
safely extrapolate a logical math approach to the
future as JRW suggested. Thanks for setting the
record straight, wab.

Cheers,

Charlie

 

[charlie]

CORRECTION!

I blew it on the Vanguard calculation. After running
FIREcalc again, the answer was 100% success for
30 years with $73,000 average balance remaining.

Cheers,

Charlie

 

[wabmester]

FWIW, I don't think FIREcalc's modeling of TIPS is 100% accurate. TIPS will always return the original principal, even if deflation would have otherwise eroded the principal.

Also, the treasury just auctioned 10-year TIPS last week. The real yield was 2.02%. 20-years will be auctioned later this month. Personally, I see no reason to buy via a lower yielding Vanguard fund.

 

[cute fuzzy bunny]

Some people feel highly compelled to create a mathematically organized structure around chaos. They'll twist, turn, change and ignore various bits and pieces to suit. Sort of like putting together a jig saw puzzle with a pair of scissors.

That having been said, tips are probably the best bond deal out there today. As mentioned in another thread, it seems almost all the other fixed income comes back to roughly 1%. At least you can get 2% with tips.

Certainly if conditions ever presented themselves that would allow buying new tips in the 4% or better range, I'd be all over them.

As far as eating down my portfolio and hoping I dont outlive it because I think I can predict the future of equities and dont like the way the tea leaves fell...well...I think I'll pass. Good asset allocation still seems prudent to me. Although that having been said, my holdings in US equities is only about 30% of my portfolio.

 

[unclemick]

I use the old pie chart based on my age - buy balanced index out the can - plan to take the SEC yield if/when I need the money. Shift asset allocation once every 10-15 yrs or so if I feel older and get around to it.

For putzing, I have my hobby stocks. Like fishing, camping, etc, it's a fun little hobby. Golf on the other hand - irritates, frustrates, reminds me of my lack of hand/eye coord. - so I avoid it entirely.

Investing can be stone simple (like VG Retirement Series) or like Wendy Wonk on page 125 of Four Pillars.

 

[Bob_Smith]

Also, the treasury just auctioned 10-year TIPS last week.  The real yield was 2.02%.   20-years will be auctioned later this month.   Personally, I see no reason to buy via a lower yielding Vanguard fund.

I agree wabmester. Plus, there's no way of knowing what the TIPS fund manager will do, or what that fund will yield in a few years. There's some additional security to be had by buying and holding to maturity. One can lock in a real return for 25+ years.

JWR, awhile back you said that long-term TIPS at 2.3% real yield to maturity would provide 4% plus inflation for 36.9 years assuming that you hold them to maturity and invest the balance at maturity in something that matches inflation (i.e., 0% real interest). Could you elaborate? FIRECalc comes up with something closer to 3.4%, and I think it assumes you can reinvest at 2.5%. I think wabmester may have a point about FIRECalc not handling TIPS precisely.

 

[cute fuzzy bunny]

Uh oh.

Now, while vanguards tips fund is inferior to 20 year tips sold today, wouldnt it "become better" as higher yielding tips are added when interest rates go up?

I could see locking in real tips held to maturity at higher rates. At 2% I'm hesitant to lock in when rates are headed up.

Or am I still not getting this?

 

[bobbee25]

1. It you have a cash equivalent that matches inflation exactly (i.e., at a zero percent real interest rate), you can safely withdraw 3.33% of the initial balance (plus inflation) every year for 30 years.

Would this indicate that with a tip at 2% you could withdraw & spend 5.33% and reinvest the inflation value ?


2. I am a nervous type, seems like a combination of TIPS, index and balanced funds are a good choice. Looking at Trowes Capitol Appreciation, Dodge & Cox balanced and OAkmark Eqty Inc.

 

[charlie]

Wab,

I checked the stats on Vanguard's TIPS fund and
found that 1) The avg coupon is 3.3%, 2) Yield to
maturity is 1.7%), 3) avg maturity is 10.7 years,
4) REAL yield is 1.6% and the expense ratio is 0.18%

How do you explain the discrepancy between the
TIPS fund at 1.6% real and new issues of 10 year
TIPS at 2.02%? You can blow off 0.18% due to the
expense ratio. Is the rest due to the lag in SEC
calculation? It would seem that an efficient market
would drive the NAV of the fund to compete with
new TIPS otherwise.

Cheers,

Charlie

 

[Bob_Smith]

I could see locking in real tips held to maturity at higher rates.  At 2% I'm hesitant to lock in when rates are headed up.

TH, the average real return on T-Bonds from 1926-2001 was +2.2%. But it was negative 1.2% from 1946-1965 and negative 4.2% from 1966-1981. That's a long stretch where inflation swamped yields. You might be able to squeeze out some additional real yield as rates rise, but maybe not. As inflation heats up it might stay ahead of rising rates keeping real yields down. All in all, I don't think a real yield of 2.5% is all that bad right now. I'm betting we won't see 3% for a long time, but who knows? I'm just going with my gut like everyone else.

 

[John Galt]

I understand how TIPS work, but frankly don't understand why people are so enthralled. They still
have a lot of built in uncertainty IMHO.

John Galt

 

[wabmester]

Now, while vanguards tips fund is inferior to 20 year tips sold today, wouldnt it "become better" as higher yielding tips are added when interest rates go up?

If yields go up, their NAV will go down, which makes it a wash (i.e., you basically get locked in to the effective yield at the time you buy if you hold for a period as long as the average maturity of the fund).

Of course, the yield changes somewhat as they buy replacements for maturing bonds and as they get new cash inflow.