New to the board, my financial stats

[MarkinVegas]

Hello, all. I've new here and just thought I'd introduce myself and give some stats about myself in order to get some input on my early retirement plans.

Age: 35

Salary: $37,000 a year

Other income: $950 per month from two roommates in my own home, mortgage payment $1500 per month
$900 and $925 per month on two rental homes in
Arizona, mortgages $799 and $845 per month,
respectively (going forward, I'll probably match my
rental income per month, when you figure in vacancy, HOA
dues, and repairs)
$660 per month interest income on $160,000 in savings

401K: $38,000 (I had been contributing 40% of my pay toward this. I
recently stopped contributing in order to pay down my mortgage.
I will probably contribute in the future, just not as high a
percentage of my pay. There is no match from my employer.)

Roth IRA: $18,000 (I had to stop my contributions this year because
I will make too much in 2007 in order to contribute. A $90,000
capital gain on the sale of a rental property added to my
wages make me ineligible this year.)

Equity: about $130,000 in my own home, $57,000 and $64,000 equity
in rental homes in AZ

I want to be able to retire in 10 years. I am also going to school to get my master's in accounting and financial management. It will take me another 3 years to graduate, and I will owe about $35,000 in student loans at that time. I am not married and have no kids.

What are everybody's thoughts? Am I in good shape? Any criticisms?

 

[MarkinVegas]

Gosh, no replies yet. I should add that I owe $193,000 on my primary residence, and $123,250 and $135,450 on my two rental properties. My current plan is to pay down the mortgage on my primary residence by $1,000 per month by making extra principal payments and to contribute 10-20% of my wages to my 401K every year. When next year comes, I will contribute to my Roth IRA and back down either the extra principal payments or the 401K. I know that I could pay off one of the three mortgages in one big payment, but I think I would be better off in the long run investing the $160,000 in savings in a standard diversified portfolio. Does anybody disagree with this plan?

 

[Rich_by_the_Bay]

Does anybody disagree with this plan?

Mark, have you tried running your numbers through FIRECALC yet? Might prove interesting.

You might get more interesting replies if you focused your questions on specific issues. Not that many here will go through your entire scenario, do the calculations, guess your expenses and needs, and come up with a comment. Once you've done your FC analysis, identify what your specific questions are and I bet you'll get more advice than you asked for.

A common rule of thumb is to accumulate about 25 times your anticipated retirement expenses in today's dollars, then withdraw at 4% a year. The devil, of course, is in the detail.

 

[RunningBum]

I want to be able to retire in 10 years. I am also going to school to get my master's in accounting and financial management. It will take me another 3 years to graduate, and I will owe about $35,000 in student loans at that time.

That part doesn't make much sense to me, taking the time and expense to get a masters and only use it for another 7 years. Maybe "to be able to retire" doesn't mean you really will. Or maybe you think the degree will help you in your real estate investments and management, but I'd think more focused education would help better than all the effort of getting the formal degree. Otherwise it seems like you aren't getting enough value out of it. Just a thought.

The rest looks very impressive. I like your idea of investing the extra money rather than paying off mortgages right away as a diversification from real estate. Plus it makes you more liquid.

 

[ats5g]

Hi Mark,

I think it's probably a better comparison to compare paying off the mortgage vs. investing money in a fully taxable account. Unless I had an adjustable mortgage rate, I'd definitely contribute to the Roth and 401(k) first, and then think about paying off the mortgage vs. investing in a taxable account.

There was a recent thread about this. The "standard diversified portfolio" may or may not return better than paying off the mortgage, we just can't know what the future holds. One may get lucky like accountingsucks could've done, or one may get unlucky.

Anyway, I think a more apples-to-apples comparison would be to compare the return from paying off the mortgage to buying a bond in the taxable account. IMO, a mortgage is just a negative investment in a long term nominal bond [if you get a fixed rate mortgage], since you're just issuing a 15, 20, or 30 year bond. If the after tax interest rate on the mortgage is greater than the after tax interest rate on a bond, pay off the mortgage first.

If you've got $160,000 in cash, why are you taking out student loans?

- Alec

 

[megacorp-firee]

Mark, your info is too general to give any opinion other than 'sounds good'.
IMO to get the assessment you want you need to do the following:
1) inventory your financial assets
2) figure out what your Asset Allocation should be
3) see how your assets fit into your AA
4) run a spreadsheet to with estimated growth of your portfolio to see where you will be in 10 years
5) determine what you will do when you FIRE
6) estimate how your new lifestyle will cost you (be sure to include health insurance, which I have found to be one of the biggest retirment costs)
7) see if your portfolio will support your FIRE (rule of thumb use 4% SWR, maybe a little lower since you are FIREing so young).
wash, rinse, and repeat

good advice from Rich, about asking specific questions.

Hope this helps.

 

[Nords]

Gosh, no replies yet. Does anybody disagree with this plan?

A belated welcome to the board, Mark. I guess we've all been standing around shuffling our metaphorical feet and nodding at one another. The other guys type faster than I did, but here's my opinions & questions.

If you haven't already done so then read this post, particularly paragraph 2: http://www.early-retirement.org/forums/516211-post1.html . When we start asking questions concerning posts like yours, previous posters have tended to get defensive and huff off. (Still there, AirJordan?) So no offense intended for what follows, but we're less than optimistic. If you bear with us the analysis promises to be productive.

You've listed your accumulations, not an inappropriate focus for the accomplishments of your life, but there's a whole lotta data here and not much info. What's missing is our understanding of your net worth, your asset allocation, your ER plans, and your ER expenses. Let me break it down:

Salary: $37,000 a year
Other income: $950 per month from two roommates in my own home, mortgage payment $1500 per month
$900 and $925 per month on two rental homes in
Arizona, mortgages $799 and $845 per month,
respectively (going forward, I'll probably match my
rental income per month, when you figure in vacancy, HOA
dues, and repairs)
$660 per month interest income on $160,000 in savings

Equity: about $130,000 in my own home, $57,000 and $64,000 equity in rental homes in AZ

I owe $193,000 on my primary residence, and $123,250 and $135,450 on my two rental properties. My current plan is to pay down the mortgage on my primary residence by $1,000 per month ...
I know that I could pay off one of the three mortgages in one big payment...

Sure, and I'm counting $37K/year + $400/month net home + 0 rental + $660/month interest = $49,720/year.

But what would really put all these numbers into context is learning how much you're putting into your ER portfolio now, how fast you expect your asset allocation to grow, and what you project your ER expenses to be.

Will the roommates still be generating the income for you when you ER? What's your after-tax equity (not just the equity cited in the quote) and is it counted as part of your ER portfolio? Will you still own these three properties in ER, and if so what do you see as their cash flow? Or will you be liquidating some/all to downsize or relocate, and what do you see as their after-tax equity contribution to your ER portfolio?

What's the interest & remaining terms on the mortgages you're paying down? Which type of investor & mortgagee are you, one who feels comfortable arbitraging the mortgage for higher investment returns, or one who seeks debt-free comfortable sleep at night?

...investing the $160,000 in savings in a standard diversified portfolio.

There is no such thing as a standard diversified portfolio. Some investors tout 80% stocks/20% bonds for your age, others think of 50/50. What asset allocation have you chosen? How does the $160K fit into your overall AA?

401K: $38,000 (I had been contributing 40% of my pay toward this. I
recently stopped contributing in order to pay down my mortgage.
I will probably contribute in the future, just not as high a
percentage of my pay. There is no match from my employer.)

What's in each account is only a part of the picture. What's the overall asset allocation of your ER portfolio? What's the AA in this 401(k) account, particularly company stock or other employee compensation (stock options)? What's the annual expense ratio of this account? Is it worth contributing if you're not getting a match, or could you do better with a taxable index-fund account?

Roth IRA: $18,000 (I had to stop my contributions this year because I will make too much in 2007 in order to contribute. A $90,000 capital gain on the sale of a rental property added to my wages make me ineligible this year.)

Have you started a conventional IRA? Is the $90K part of your ER portfolio's $160K cash total, or has the $90K been invested in some other asset?

It will take me another 3 years to graduate, and I will owe about $35,000 in student loans at that time.

What's their interest rates? Any other debt?

I want to be able to retire in 10 years.
What are everybody's thoughts? Am I in good shape? Any criticisms?

I'm not sure that there's a need for a business degree in ER. Is business school worth the three years and the debt load when you're planning to ER in just a decade? Could you boost your portfolio with other earnings by skipping business school, or will the degree boost your subsequent earning power and pay for itself before you ER?

It's very hard to determine your current net worth with the data provided, and you haven't given any information on your current asset allocation or your expected returns that will produce the final product that will fund your retirement.

To reach your 10-year goal you need to be able to project the size of your ER portfolio in 10 years, its asset allocation in 10 years, and your ER expenses in 10 years.

Will you be getting a pension or living off your 401(k) & savings? How will health insurance be funded? Can you project your healthcare expenses?

Don't get me wrong-- you've done a fine job of getting to where you are today. However you appear to be sitting in the middle of the road to ER with a pile of possessions scattered around you lacking a coherent plan on how to make them take you to where you want to go. These annoying questions are all intended to help you gather it all back together, whip it into shape, and put it to work for you.

 

[MarkinVegas]

Aaaahhhh! Replies!

Thanks for the replies. I just typed a long response and lost it. Suffice it to say that I have a lot more work to do to figure out if I can retire early (and even if I want to, since I'll probably get bored.) The former question can more appropriately be answered by a financial planner.

 

[Nords]

Thanks for the replies. I just typed a long response and lost it. Suffice it to say that I have a lot more work to do to figure out if I can retire early (and even if I want to, since I'll probably get bored.) The former question can more appropriately be answered by a financial planner.

Well, we're here to answer those questions that otherwise you'd have to pay a financial planner to answer for you. Unfortunately your answers may go through some changes as you become more educated and experienced, and the original answer that you paid all that money for may no longer suit you.

If you haven't already, you might want to read Bob Clyatt's "Work Less, Live More" and William Bernstein's "Four Pillars of Investing". They'll take you through largely the same process as a financial planner would, but for a lot less money. And for a library copy the cost will be zero.

Once you're feeling comfortable on the "Can I ER" question then we'll deal with the boredom issue. I think we can refine your thinking a little in that area too...

 

[Coach]

Mark, you're clearly a bright guy, willing to work hard, who knows how to manage his money. Take aim at becoming your own financial planner. It's a great investment.

Coach