Hi, This is 40 year old and wondering

[NextInLine]

Hi all,

First time poster, long time reader. I’m big fan of Nord, RichinTampa, and the like for their analytical though, and sound comments.

My wife and I are 40. My dream to retire as early as possible was inspired by reading endless success stories on this site. We have a 5 year-old twins. I came to this great country when I was 22 (growing up in communist society, I appreciate the political system here very much, I know it's not perfect). Work full-time to fund my education. Start an entry “professional” job in 2002 with $48K salary. Along the way I got my master degree and with that currently get pay twice as what I started. If I keep working, I can retired with a nice pension at 58 YO, and a sizable 401K. But my goal is to retire earlier than that. But doing so I would give up pension and health insurance.

As most of first generation immigrant, we always LBYM, and save as much as we can.

We have a house worth about 500K, with 13 years $135K mortgage. We are refinancing to 10 year 3.6% rate. I expect the monthly payment ~ $1700. In 2008, at the high of foreclosure wave in our area, I bought a 3 year old home at an auction. I paid about 200K what it appraised by county about $344K. Since then, we manage to pay off the 2nd home. It’s been rented out for $1500/month. We could get a bit higher, but reluctant to raise the rent because the tenant is very good so far. Beside the mortgage, there’s no other debt. Given the current economic situation, it’s unlikely that value of both houses would go down substantially.

At work, I put 15% of my salary to 401K, employer match 5%. I put them in index 34% in C fund (S&P500), 33% in S fund (small cap), and 33% in I fund (international). Currently, it accumulates about $135K. My wife has her own business, generates about $50K a year. I had put about $8K into Roth, but had stopped years ago. Also, my kids 529’s have about $8k. The 401k is the only thing we put in regularly.

We expect major repair and upgrade on the house we live in (new roof, leaking toilet, tree root into sewage pipe, kitchen) would cost about $20K. We already save for this.

Even thought I have read a few books about value investing, I’m pretty novice about investing. I got burn in 2000 tech bubble, and still got cold feet ‘til this day. I also know that the smart investing in stock market has more chances than most for achieving FIRE.

My questions to you:
- What would you invest your $3K/month given my situation listed above? I open to more risky investment since I have most of my net tie to real estate.
- Would you change my 401K mix?

 

[green night]

I would raise the rent or sell the rented house. 344,000 is getting 18,000. After taxes,insurance and annual repairs .... you have what 12,000 tops?

You should be able to get a better return than 3%. With that said, I consistently talk myself out of buying rentals.

 

[Meadbh]

I would raise the rent or sell the rented house. 344,000 is getting 18,000. After taxes,insurance and annual repairs .... you have what 12,000 tops?

You should be able to get a better return than 3%. With that said, I consistently talk myself out of buying rentals.

They bought the house for $200K and the actual investment would be the appropriate figure to use when calculating ROI. Assuming they paid cash, and clear $12K per annum after expenses, the ROI would be 6% (12,000/200,000). However, if they put a deposit on the house and are using the rent to pay the mortgage, we need more details to calculate the ROI.

Welcome to the forum NextInLine!

 

[walkinwood]

Hi all,
My questions to you:
- What would you invest your $3K/month given my situation listed above? I open to more risky investment since I have most of my net tie to real estate.
- Would you change my 401K mix?

Welcome to the board.
I suggest that you read a few of the books in the ER FAQ if you haven't already. I'd start with William Bernstein's Four Pillars of Investment & move on to one of Bogle's or Swedroe's books They'll give you a good start on your asset allocation & also the location of assets (taxable vs tax deferred). You'll be more inclined to stick to your plan if you understand it fully and these books will give you that depth of knowledge.

All the best.

 

[Nords]

Welcome to the board, NextInLine!

Have you put together a cash/emergency fund of several months' expenses? Admittedly you're unlikely to run out of cash soon because of your two jobs and your tenant, but it might be nice to have another $5K-$10K in the bank for emergencies beyond the repair fund you've already projected.

I think your TSP mix is fine, and if anything you'd want to max it out. You could put additional savings into Roths or conventional IRAs using stock funds with a company like Vanguard.

Have you projected a budget for college savings and for your eventual ER? That'll give you a set of numbers to run through FIRECalc to help with your ER decision.

I would raise the rent or sell the rented house. 344,000 is getting 18,000. After taxes,insurance and annual repairs .... you have what 12,000 tops?
You should be able to get a better return than 3%. With that said, I consistently talk myself out of buying rentals.

There's a lot of niggling details to calculating the cash-on-cash return, including what he'd have left if he sold the place and had to pay taxes on the sale.

"Should" doesn't account for the rental market, the local cost of real estate, and the lack of buyers. Our rental is yielding between 3.5-4.5% because Hawaii land is so expensive. I felt pretty stupid in 2007, with my 6.25% CDs, but I'm feeling a lot smarter today. If I had a good tenant in a rocky market then I'd be reluctant to raise their rent or sell the place too.

Let's not underestimate the value of tying up large chunks of equity in illiquid assets, either, which would keep landlords from leaping back into tech stocks.

Having said all of that, it helps to keep an eye on neighborhood rents and start boosting yours when you're 5-10% below the curve.

 

[NextInLine]

Welcome to the board.
I suggest that you read a few of the books in the ER FAQ if you haven't already. I'd start with William Bernstein's Four Pillars of Investment & move on to one of Bogle's or Swedroe's books They'll give you a good start on your asset allocation & also the location of assets (taxable vs tax deferred). You'll be more inclined to stick to your plan if you understand it fully and these books will give you that depth of knowledge.

All the best.

Will check them out. Thanks walkinwood

 

[NextInLine]

I would raise the rent or sell the rented house. 344,000 is getting 18,000. After taxes,insurance and annual repairs .... you have what 12,000 tops?

You should be able to get a better return than 3%. With that said, I consistently talk myself out of buying rentals.

344K was appraised 2 years ago. Similar house in the neighborhood sold for $250K recently. I just paid off this house. After tax, insurance, budget for repairs I would get a little more than 6% ROI. I plan to raise rent about 3% when the two year term up this eyar.

 

[NextInLine]

Welcome to the board, NextInLine!

Have you put together a cash/emergency fund of several months' expenses? Admittedly you're unlikely to run out of cash soon because of your two jobs and your tenant, but it might be nice to have another $5K-$10K in the bank for emergencies beyond the repair fund you've already projected.

I think your TSP mix is fine, and if anything you'd want to max it out. You could put additional savings into Roths or conventional IRAs using stock funds with a company like Vanguard.

Have you projected a budget for college savings and for your eventual ER? That'll give you a set of numbers to run through FIRECalc to help with your ER decision.


There's a lot of niggling details to calculating the cash-on-cash return, including what he'd have left if he sold the place and had to pay taxes on the sale.

"Should" doesn't account for the rental market, the local cost of real estate, and the lack of buyers. Our rental is yielding between 3.5-4.5% because Hawaii land is so expensive. I felt pretty stupid in 2007, with my 6.25% CDs, but I'm feeling a lot smarter today. If I had a good tenant in a rocky market then I'd be reluctant to raise their rent or sell the place too.

Let's not underestimate the value of tying up large chunks of equity in illiquid assets, either, which would keep landlords from leaping back into tech stocks.

Having said all of that, it helps to keep an eye on neighborhood rents and start boosting yours when you're 5-10% below the curve.

I always have 3 months of emergency fund in the MM account. The projected college cost is about $55K for each kid when they ready in 13 years. I could max out my TSP this year that would come to about 2%. Plan to keep the rental which give me ~6% ROI. Betting on the real estate market already bottom out. My rationale for that is cost of building a similar house is more than what I paid for. The real ROI comes in 5-10 more year down the road when I sell the rental. I have my Roth in Vangard.

I'm ready to have $3k/month to invest in taxable account. Any suggestion for Vanguard stock fund would be appreciated (more than average risk, 10-15 horizon).

 

[Nords]

I'm ready to have $3k/month to invest in taxable account. Any suggestion for Vanguard stock fund would be appreciated (more than average risk, 10-15 horizon).

Ah, now see, that's a trick question.

At this point we're all supposed to leap in with our recommendations for Vanguard's total stock market fund or (psssst) Wellesley. Someone else will wonder why we're not considering actively-managed funds, and pretty soon the Permanent-Portfolio guys will be duking it out with the high-dividend crowd. While way off in the wilderness a lonely voice cries out "Buy gold!!"

The best answer is way back up in Walkinwood's post-- read Bernstein's "Four Pillars" or Bogleheads or Swedroe's retirement/investing books and decide what works best for you. Then you'll have both the understanding and the commitment to stick with a DCA plan. You might still go with a Vanguard TSM index fund but at least you'll appreciate the reasoning behind that informed decision.

At the very least I'd wait until January, after the mutual funds have made their big year-end distributions. Otherwise your Nov/Dec deposits will come back to you in the form of taxable income.

 

[NextInLine]

Ah, now see, that's a trick question.

At this point we're all supposed to leap in with our recommendations for Vanguard's total stock market fund or (psssst) Wellesley. Someone else will wonder why we're not considering actively-managed funds, and pretty soon the Permanent-Portfolio guys will be duking it out with the high-dividend crowd. While way off in the wilderness a lonely voice cries out "Buy gold!!"

The best answer is way back up in Walkinwood's post-- read Bernstein's "Four Pillars" or Bogleheads or Swedroe's retirement/investing books and decide what works best for you. Then you'll have both the understanding and the commitment to stick with a DCA plan. You might still go with a Vanguard TSM index fund but at least you'll appreciate the reasoning behind that informed decision.

At the very least I'd wait until January, after the mutual funds have made their big year-end distributions. Otherwise your Nov/Dec deposits will come back to you in the form of taxable income.

Thanks Nord,
I picked up "the 4 pillars" by Bernstein, I still have way to go before I can gather the nerve to dive in.

I would love to see some examples of the "set and forget it" type portfolios.

 

[verygoodthings]

I agree with Nords advice to educate yourself, but in an effort to give you a generic answer, you can check out the Bogleheads lazy portfolios. I think these are kind of what you mean by "set it and forget it".

Lazy Portfolios - Bogleheads

I feel like they exist to answer a basic question like you posed.

As for the Four Pillars, I gave that book to an intelligent female friend of mine for Christmas, and she hasn't made any progress on it. She claimed to have the desire to learn more about investing. Depending on the person, it could be a bit heavy. I'm now using the little book of Common Sense Investing as a recommendation for people seeking to take the first few steps.

 

[verygoodthings]

Oh yeah, and welcome to the board. I am new here myself.

 

[NextInLine]

I agree with Nords advice to educate yourself, but in an effort to give you a generic answer, you can check out the Bogleheads lazy portfolios. I think these are kind of what you mean by "set it and forget it".

Lazy Portfolios - Bogleheads

I feel like they exist to answer a basic question like you posed.

As for the Four Pillars, I gave that book to an intelligent female friend of mine for Christmas, and she hasn't made any progress on it. She claimed to have the desire to learn more about investing. Depending on the person, it could be a bit heavy. I'm now using the little book of Common Sense Investing as a recommendation for people seeking to take the first few steps.

The 80/20 portfolio is very tempting, because it in line with my risk tolerance. However, heard some "experts" predict of a bond bubble about to burst because interest bound to raise. What do you think? to hold of bond for a while?

 

[FIREINDUS]

Welcome NextInLine.
I'm kind on the same boat, even after reading some of the books noted above. Knowledge and implementation are actually not the same looks like

The following summarized things for me:
FundAdvice.com - The Ultimate Buy-and-Hold Strategy - 2010 Update

Also, look for LOL's tutorial about using the Instant X-ray in this site; with that, I have also figured out which asset classes we are now in and need to invest...BUT, in each asset class, with the many options available, not sure what to do. Even have 10k+ sitting there in the IRA general account.

Maybe we can find another tutorial to help choose the type of investment in each asset class.... the search continues...Good Luck!

 

[verygoodthings]

Hey, saw that link to fundadvice. That website is actually set up by Paul Merriman and his company (Merriman advisors?).

He has a podcast you should check out. Its very easy to listen to, he speaks almost too slow, and he goes over all different topics of investing.

 

[verygoodthings]

Be aware, he is doing this podcast and fundadvice.com website to promote his advisory. His firm does 1% AUM.

He is a DFA advisor, and routinely brags about their funds.