Value Averaging our way to Semi-Retire

[Seeking Semi-Retirement]

Hello FIRE Community,

Over the past year and a half I have been on a journey to evaluate, plan and optimize my investment strategy. My goal is for my wife and I to transition from a work-a-day world to a semi-retired, self-employed lifestyle within 5 (now 4!) years. I am 1 year into my plan and wanted to get feedback from the community “pros” on my plan so far.


My story is probably similar to many in my demographic: I am a happily married 36 year old with 2 kids ages 4 and 8. I started both IRA and unqualified mutual fund investing (American Funds) through a family friend with Lincoln Financial in 1998 immediately after college (one point for starting early, minus one point for being in managed funds)! A couple years ago, I saw the light and have now made the switch to mostly DFA portfolio with some low-cost Vanguard index funds for 529’s and cash savings with a value averaging contribution plans.


Over the past year and a half I have been on a journey to evaluate, plan and optimize my investment strategy. My goal is for my wife and I to transition from a work-a-day world to a semi-retired, self-employed lifestyle within 5 (now 4!) years. I am 1 year into my plan and wanted to get feedback from the community “pros” on my plan so far.

My story is probably similar to many in my demographic: I am a happily married 36 year old with 2 kids ages 4 and 8. I started both IRA and unqualified mutual fund investing (American Funds) through a family friend with Lincoln Financial in 1998 immediately after college (one point for starting early, minus one point for being in managed funds)! A couple years ago, I saw the light and have now made the switch to mostly DFA portfolio with some low-cost Vanguard index funds for 529’s and cash savings with a value averaging contribution plans.

From 1998-2010 I bumped along without a comprehensive plan and had accumulated the following:

1. Dollar-cost average strategy for maxing Roth IRAs for my wife and I
2. 401k and Thrift Savings (I was in the Navy) contributions
3. Meeting monthly savings goals for contributions to unqualified mutual fund portfolio – first with American Funds then with SEI funds (both actively managed) through Lincoln Financial
4. Flex-term life insurance for my wife with Lincoln Financial and whole life (I had a dangerous job in Navy) insurance with Navy Mutual Aid Association for me
5. 529 Plans with American Funds for both kids (actively managed) through Lincoln Financial

In December 2010 I had come to realize that I would be better off with lower fees in passively managed index funds all around (in IRAs, unqualified accounts, 529s, etc.) and simple, cheap, term life insurance. After many discussions with my early-retirement-focused sister-in-law, a close friend at work (with big finance brain) turned me on to William Bernstein’s “Intelligent Asset Allocator”, and I knew for sure that my investments were far from optimized. While my rational brain knew that index funds were the most efficient vehicle for investment, I was still building up the nerve to overcome the inertia of shifting everything over to index funds and “unwinding” IRAs, 401k roll-over IRAs, unqualified accounts, and life insurance plans on my own.

At that time I was out of the Navy, but also struggling with a “good” problem of what to do with some additional cash that I got from stock award sales at work. I wasn’t sure if paying down the mortgage or plowing more money into the unqualified mutual fund accounts should be the priority for the “extra” cash.

From this point of realization and inquisition, I reached out to a Bernstein acolyte financial planner for help. He seemed like the right sort of person to help me – no commissions, charged by the hour, etc. Unfortunately, after I spent considerable time prepping for our conversation, he told me “I’m not sure I can help you, your situation is very complex..” Thanks for nothing. It was then that I realized that I had to do this stuff myself, so I did the math on the returns that I had actually experienced over the past 12 years on my own. I then compared my results to returns over the same period for similar Vanguard and DFA portfolios and queried some trusted friends as well.

Armed with this data and lots of questions for my Lincoln financial advisor for how he could help me reach my early retirement goal (which I knew he did not fundamentally appreciate) I managed to break up with him – cold-turkey. Based on study of Bernstein, Michael Edelson’s “Value Averaging” book and much discussion and deliberation, I developed:

1. An aggressive quarterly funded value path investment plan to achieve an early retirement goal of $1.01 million in 5 year funding plan based on starting point of $318K in June 2011 using DFA funds and Assetbuilder’s Portfolio 14 with all IRAs and unqualified investments.
2. Aggressive quarterly funded value paths for each child’s 529 plan (starting with $21.2K and $24.9K respectively) in Vanguard with stepped targets for two years funding period and down shifted risk during remaining years (9 and 14 respectively) until college funds are required
3. A capital deployment cash kitty in Vanguard tax free bond funds to feed value average funding plans with remaining cash from liquidated life insurance and other cash – this is also where I put, on average, about $2000 cash flow savings on a monthly basis
4. Additional $1k per month going to mortgage payment

One year into the plan and I have:

· $404K in DFA Funds through Assetbuilder’s Portfolio 14 on my value path to early retirement goal
· $44.7K and $50.7K respectively in 529’s with on value paths
· $78.4K in the cash kitty

As a safety factor I am not considering both 401k plans (mine and my wife’s) in this plan. Those investments will be gravy – hopefully. The purpose of this plan is to focus on rapidly building up enough in the DFA funds in Assetbuilder’s Portfolio 14 allocation to fund an early retirement period (my wife and I plan to work part time / self-employ for additional cash flow) between the ages of 40 and 60. At 60, again, hopefully; early retirement funds will not be significantly depleted – or may have even grown, and we can continue our early retirement lifestyle with additional financial security of 401k funds that have grown untouched over that 20 year period.

I would love to get feedback on this plan – it seems to be going well, but I am a big fan of “continuous improvement” and any suggestions that folks may have!

 

[ShortInSeattle]

Perhaps I missed something... How are you going to accumulate 1mill in your portfolio in 4 years from a starting place of around 400k?

Curious what your contributions and growth assumptions are.

SIS

 

[LOL!]

Questions:

Are you making the maximum possible contributions to the 401(k) plans? That is, $17,000 for him and $17,000 for her, plus any employer match. And if you are self-employed do you have that up to $50,000 each? And don't forget the Roth IRAs. It sure seems like you have it set up to pay lots of taxes that other folks do not pay. See e.g. http://www.bogleheads.org/forum/viewtopic.php?t=79510 and then in early retirement see http://www.bogleheads.org/forum/viewtopic.php?f=2&t=87471

Or are you only doing things in a taxable account at AssetBuilder?

And DFA funds have been taking it on the chin the past few years because Value fund investing has lagged growth and blend investing. So would you like to hedge your bets and drink a different flavor of Kool-Aid?

Have you checked out Bogleheads Investing Advice and Info ?

 

[LOL!]

Recent article to support contention that Value has been taking it on the chin: Why 'Value' Stocks Are Still Lagging - WSJ.com

 

[Nords]

Recent article to support contention that Value has been taking it on the chin: Why 'Value' Stocks Are Still Lagging - WSJ.com

Good article.

I'm waiting for international index funds to drop another 10-20% to become even more "valuable".

 

[Seeking Semi-Retirement]

The (aggressive!) Value Path from $400k to $1m in four years

ShortInSeattle,

Glad you asked - I have an extremely aggressive value average path to achieve a goal number of around $1.01m by the time my wife and I reach 40. If you are familiar with Michael Edleson's book "Value Averaging The Safe and Easy Strategy fir Higher Investment Returns", I will answer in terms of the variables he uses in his free excel spreadsheet value path calculator.

Edleson's sample value path calculator is referenced as Appendix to Chapter 5 of his book - it is available for free here:

http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470049774,descCd-DOWNLOAD.html

I have assumed the following:

1 - Our DFA Portfolio 14 with Assetbuilder will have an annual return of 14% which equates to a "r = 3.33%" in my quarterly funded value path. Actual 1, 3, 5 and "Since 3/1/2000" annualized returns for Assetbuilder's Portfolio 14 are here:

http://assetbuilder.com/our_portfolios/portfolio_details.aspx/model_portfolio_14

I am assuming that I'll see 14% from 6/2011 though my target Semi-Retirement goal date.

This is a point of contention with one of my friends, because he went back and calculated a CAGR from 3/2000 to 11/2011 and got a 9.42% annualized rate on Portfolio 14. This approach equates to a quarterly r variable of 2.28%.

To validate this he also extrapolated Table 10-2 in Edleson (page (180) that used the 10 year bond rate and fund beta to determine expected compound return. Using this method, with an assumed beta of 1.2 for Portfolio 14, quarterly r = 2.07%.

So based on this analysis, one might say that my quarterly return value of 3.33% is a bit to optimistic, but, I say, the 2.28% "historical" number suffers from 2008 "recency" of market bottom-out and overestimating "r" really just forces my value path line to a steeper slope and demands more aggressive savings to meet value path goals if actual returns are less than expected/planned.

2 - The second significant variable in the Value Path calculator is "g" the growth factor of not of the investment itself, but rather the increases in the actual contributions. Here I assume an annual g = 4.5% (quarterly g = 1.106%).

Here, again, is where my fellow Value Averaging friend and I disagree. He prefers to use the standard recommendation from Edleson of using the 10 year bond rate for g in order to keep contributions to the value path ahead of inflation. Using current 10 year t-bond yields quarterly g = 1.90%/4 = .48%.

I justify my higher g by estimating that from age 35 (now 36) through 40, I will be able to increase my contributions well ahead of inflation due to household budgetary discipline and incrementally higher annual cost of living and promotion salary increases for my wife and I. We will also have some additional cash flow from decreased daycare costs and more cash flow for retirement fund contributions as we complete funding plans for 529s in next 4 quarters.

3 - The initial funding amount for my plan or "Value now" in the spreadsheet was $320,055. That was my initial sum total of IRAs, and unqualified accounts all rolled into a Portfolio 14 allocation of DFA funds with Assetbuilder

4 - Finally the number of period to invest was 23 - that's 23 "quarters" for a just under 6 years of aggressive quarterly contributions.

Planned contributions to this value path start at $7,300 in quarter 1 and go up to planned final contribution at quarter 24 of $9,400. If you run the spreadsheet with the above variables you'll get the numbers for each funding period and a graph, etc.

The "trick" about Value Averaging is that you have to have the funds to deploy according to the plan to achieve the goal or "path" value at each funding period. If executed correctly, this method of periodic investing has the combined effect of Dollar Cost Averaging (buying more shares when prices are low, less when prices are high) AND portfolio balancing (buying only those asset classes that are below their targeted allocation percentages).

I accomplish this by having a significant "cash kitty" split equally between three short term tax exempt bond funds with Vanguard to fund the value path as required for each finding period. On a quarterly basis, I check the total value of my Portfolio 14 and transfer over the required amount to hit the value path from the Vanguard tax exempt funds - sometimes more than the planned contribution is required, sometimes no contribution is required because the Portfolio is actually performing far above anticipated "path".

This is not an insignificant action - I had to plow in 10 times my planned contribution in the first quarter of my value path last year when market was at low point of performance and pessimism! As you might imagine, it is not easy to do this. You have to trust the theory behind asset allocation, modern portfolio theory and value averaging to make those kinds of contributions when the market is down. Interestingly, the value averaging approach has unique ability to take advantage of overall market volatility and provides a rational reference point for periods when you might otherwise be influenced to act emotionally.

Indeed, you can take the Value Averaging mind-set full-tilt and actually sell shares of a portfolio when it is above value path, but this requires more sophistication and contemplation of tax effects, so I choose to execute a "buy-side only" value path strategy.

I hope this answers you questions about my contributions and growth assumptions. Looking forward to any feedback you may have!

 

[LOL!]

I'm bookmarking this thread because I believe it has a great future.

 

[Seeking Semi-Retirement]

Seeking Semi-Retirement's 401K's, Bogleness, and "Value" in Value

LOL!,

I am currently contributing up to the max company match level in my 401k which equates to about $14.6k going into my 401k annually and my wife's 401k contribution is only $7.5k annually. So no, we are not putting in the max $17k each into our 401k's.

The logic behind this strategy is that funds are not the best in either 401k plan (mine have loads of fees, hers are TIAA CREF). I am embarrassed to say that I have not done more detailed sensitivity analysis to determine if increased pre-tax contributions to 401ks would be smarter than my Super-duper value average plan where we are plowing loads of after-tax dollars into the DFA fund Assetbuilder Portfolio 14.

It's probably worth the time to "optimize" our 401k contributions with better understanding of the inherent benefits that those tax sheltered accounts can offer.

Our IRAs; roll-overs (from previous 401k's) and traditional IRAs (we had to reclassify our Roth's to Traditional IRAs due to hitting income thresholds for contributions, but will "re-classify" back to Roth's again this year due to tax code loophole!) are all part of the DFA fund mix in our Assetbuilder Portfolio 14. IRAs were used in a tax efficient manner when we transferred them in to have appropriate asset classes with higher turnover and expenses held within the tax sheltered accounts within the portfolio.

So Assetbuilder Portfolio 14 holds both our taxable and tax-advantaged/ tax sheltered accounts in the most efficient way possible.

I have not spent much time at all on the Bogleheads but I went to the posts you sited and will look around there for some 401k contribution trade-off analysis as well – definitely need to do some more homework there.

As for the current lack of value in value equities, I am convinced that, over the long term, there is more value in value. Take a look at the Fama-French paper (I know, they ARE the guys behind DFA…)

http://www.dfaus.com/pdf/Volatility_And_Premiums.pdf

This essay acknowledges that we don't know what will happen with regard to value and small stocks outperforming big and growth stocks in the future. However, we DO know that, since 1926, the equity premium had a mean of 5.95% and standard deviation of 17.85%, the size premium had a mean of 3.69% and a standard deviation of 14.16%, and the value premium had a mean of 5.29% and standard deviation of 13.94%.

I think that the WSJ article is just describing typical market volatility that we can see in the historical data. So with that historical data as a guide, I am comfortable drinking a flavor of Bernstein-Fama-French Kool-aid where (I believe) my risk with small and value factor weighted index funds is balanced with potential higher returns over others in the long run. As somewhat of a hedge, my “cash kitty” for funds waiting to be allocated to our value path are in Vanguard short-term tax exempt bond funds that have minimal exposure to general market volatility and subsequent interest rate exposure.

I certainly won’t argue that Value stocks are lagging Growth stocks right now, but I would suggest that it is not significant departure from historical performance and may even present a “bargain” for some.

 

[ShortInSeattle]

ShortInSeattle,.

I hope this answers you questions about my contributions and growth assumptions. Looking forward to any feedback you may have!

I'm not ashamed to admit that I understood very little of what you said, but I do absolutely wish you luck. I'm an index fund investor, so I probably don't have any useful feedback for you at this point.

Welcome.

 

[LOL!]

Seeking, you may wish to also read this thread with some comments about DFA:
http://www.early-retirement.org/forums/f28/are-dfa-funds-becoming-irrelevant-61306.html#post1192670

You may also wish to research "Back-door Roth". Another thing is that some 401(k) plans allow after-tax contributions and in-service rollovers of those after-tax contributions almost immediately in to a Roth IRA.

But frankly, while I believe in Fama-French up to a point, I also believe in reality as it unfolds before my eyes. Do you have a plan for when DFA Fund Assetbuilder Portfolio 14 fails to reach an average return of 14%?

Do you understand why the 3-year returns of every portfolio look fantastic? Hint: What happened 3 years ago in March 2009?

 

[PennStateCLJ]

Depending on your tax rates, you could be doing yourself a real disservice by not maxing 401ks first. How atrocious are the expense ratios? Any index choices? I also like LOL's suggestion of the back door Roth depending on if you aren't eligible for Roth due to your Magi.

What I've gathered from your post in layman's terms is that you hoard cash and then buy whatever asset class is undervalued quarterly, correct? What happens when your accounts are large and your re-deployment of cash is just a drop in the bucket compared to account size? I think you would have to focus more on re-balancing then. At least your not market-timing but purchasing what you believe to be under-valued. I think 14% annualized is a bit unrealistic. What does compound tax do to your scenario overtime? How would that change if you moved most assets to tax-sheltered?

 

[Nords]

I think 14% annualized is a bit unrealistic.

I think that's a very tactful understatement...

 

[gauss]

I remember reading that book back in the early 1990's -- back when the cover was blue.

I wonder if the 14% number is a carry-over from the original printing of the book.

 

[Seeking Semi-Retirement]

Summary and Refinement of our Path with Mr. Edleson

All,

Thank you all very much for taking the time to reply and provide feedback on our plan.

In summary, our Value Averaging Plan to get from $404K to $1M is to add the $78.4k in from our cash kitty over the next 48-60 months according to our value path. We also expect to contribute an additional $42k per year out of our monthly cash flow (our combined income is about $200k+/-year) for a total additional of $168k-$210k. The remaining $317k we need to hit the $1M goal would come from portfolio returns.


On Taxes – Our combined income is too high for Roths, but we are already executing LOL's suggestion about "back door Roths" – that's a nice loophole.

We are also interested in PennStateCLJ's questions about: "What does compound tax do to your scenario overtime? How would that change if you moved most assets to tax-sheltered?" How should I calculate ‘compound tax’ for my scenario? With limitations for contributions to tax-sheltered accounts, how could I shift more of my portfolio into those accounts? Can you elaborate on this?


On DFA and Value Funds - On using “14%” as expected return – I realize that this estimate is not likely, but using that number in the value average model forces me to save lots of cash every month to fund the value path. Its just a model. We may have the cash flow to stick to the value path despite a lower actual return from that portfolio. If we don’t, we will have failed valiantly and our savings will not be in vain – maybe it takes 6 or 7 years to get there…

If returns can’t make up the $317k we need to hit our goal in 4-5 years, then we’ll just keep working our day jobs until we get there. Also, on the “cost” side of our semi-retirement plan, we’ve recently re-financed the house down to below 3%, so our $1M target savings number might end up lower.


Key Questions: Is anyone else out there driving down a value path, using Michael Edleson’s book as guide, that they have planned out to retire or semi-retire in X years?

If you are, what does your portfolio look like? I am interested in others that may be on short (5-10 year) plans that optimize risk and return for that timeframe. I have chosen Assetbuilder (Portfolio 14) over construction of a Vanguard/ ETF proxy for all the asset classes that DFA can provide – what have others with similar goals chosen? I have also chosen Vanguard short term tax exempt bond funds for keeping “cash kitty” that funds the value path – what are others doing that have same value path funding strategies?


Thanks again for the feedback so far. I can see I have some tax issues to get smarter on and will continue to adapt and refine our plan.

 

[LOL!]

As noted in one of the links I gave, I have a small-cap and value-tilted portfolio without using any DFA funds and without paying any advisor fees. I use the funds available in our 401(k) plan and selected ETFs. I invest extremely tax-efficiently which means (a) no interest to tax, (b) qualified dividends predominantly (that is few if any ordinary dividends) in taxable account, (c) $3000 capital loss deduction against ordinary income, (d) foreign tax credit.

I compare the return of my portfolio against the returns of benchmark portfolios and I generally meet or exceed those returns. For example, I looked at the AssetBuilder 10 portfolio which is 30% bonds which is the same percentage of bonds in my portfolio. My portfolio has a similar 9-box style grid and actually slightly smaller average market cap than the Assetbuilder portfolio. I will now add the AB10 portfolio to my benchmarks that I compare to.

So it seems to me that
(a) It is easy to do-it-yourself without DFA funds, and
(b) One can avoid paying an advisor which then leaves more money in one's portfolio.

As for taxes, you shouldn't have to pay big taxes on your investments. Suppose I have one million dollars in a taxable account and a similar amount in tax-advantaged like 401(k)s. If the taxable account is invested tax-efficiently, then it might pay $20,000 in qualified dividends each year and get a $1500 foreign tax credit and $3000 capital loss or carryover. That is equivalent to taxable income of $17,000 in the 15% tax rate or $2550 in taxes less $1500 in FTC which is then $1050 in taxes. Unrealized cap gains are not taxed. So that's an effective tax rate of about 5.25% on the $20,000 of dividends each year even if you are in the highest tax bracket.

 

[PennStateCLJ]

Compound tax meaning any shares you own you'll pay tax on dividends this year, next year, the year after, vs. if it was all in a tax-advantaged account. This really matters if you're holding the bond holdings in taxable and if the mutual fund accounts/asset classes are actively managed.

Principles of tax-efficient fund placement- http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

It sounds like you're in a high tax bracket, unknown what your state tax rate is but say you're 28% federal and 5% state. That's $.33 of every marginal dollar that goes right to the tax man. I'd help offset this by maxing out the 401ks and erasing some of those highly taxed marginal dollars especially given your early-retirement plans.If her 401k is bad with high expense ratios- consider still maxing it out and taking out the $50,000 loan every time you could to avoid the high fees and put the money in low expense tax efficient index funds. You still preserve the tax deferred space in the 401k and avoid some of the high expense ratios. Think of it as a withdrawal and subsequent deposits.

By only using the buy side of this strategy I don't think you can expect the same returns. Reversion to the mean, which is what value-averaging is predicated on, works both ways. If you don't sell on the upside, you'll be riding the downside back down, bringing your annualized return down. This is also market timing which I'm not a big fan of, you don't know more than the market. Your trying to exploit little inefficiencies in the different asset classes. You'd have to keep track of each individual tax lot too if you decided to do the selling side as well which would create some tax nightmares for you.

The tax-exempt bond funds are only tax-exempt for the dividends. The capital gains you incur, you'll pay tax on every year, which of they are held less than a year will be short-term capital gains at your very high tax brackets. Plus the value path tells you how much you need to cash in, not how much you want to. This could be very tax-inefficient since most of your holdings are in a taxable account. If this was all in tax-advantaged account it would be different.

Compared to dollar cost averaging you could be missing out on the lowest point of each asset class. What if the low comes in the middle of the quarter while you're still accumulating your "cash-kitty" to buy? Have you considered using re-balancing bands such as +\- 5% off target allocation to take advantage of these little fluctuations. This is even more pertinent because of the recent big market fluctuations.

There are some good discussions on bogleheads.org about this stuff. Here's one, you can search for others-
http://www.bogleheads.org/forum/viewtopic.php?t=85583&mrr=1321165409

 

[hlfo718]

I became a boglehead around the 4th Q 2010 and have since moved most of our assets to Vanguard. I kept some play money on the side so I can feed the trading addiction.

Our goal is to retire in about 15 - 17 years. I will turn 41 soon and my wife is 46. We have just over 1mm at this point and our goal is to have about 2 - 3 million in 15 years.

We have and will continue to save most of our income but our asset allocation is pretty conservative about 30-35% stock and rest in bonds, CDs, and cash. We max out 401ks and index every month. We will go even more conservative in probably 10 years or when we have about 2mm. Since this is not indy 500 we figured we will give up some gains so we don't get hit like in 2008 again. My target annual return is around 1-2% after inflation.

Just keep what you have been doing and if Mr. market can give you 14% then great if not keep saving. You will get there soon enough.

 

[Nerdjenni]

Hi there - I also recently read Edelson and am trying to follow. A quick summary of my situation: I'm currently a few years to FIRE and able to sock away a lot of money each year (~$200K/yr) into my nest egg thanks to high wages of my Silicon Valley job. Right now, I have total net worth of $1.35M. Of that, $1.25M is invested into my AA with $100K in cash. FIRE goal is $2M nest egg by end of 2018, age 37 me, age 39 DW, and god-willing two healthy kids.

Anyways, my question is whether I should I invest all the money I'm socking away right now, or keep a big chunk in cash to invest slowly over time post-FIRE.

Right now, I've been taking my $200K/yr in savings and pretty much investing all of it straight away into my AA. But I know that in a few years post-FIRE, I won't be adding anything more to my nest egg (my goal post-FIRE is to make enough to annual living expenses so I'm not withdrawing from the nest egg, but I won't be adding to it).

Should I be holding back a chunk of my pre-FIRE savings in cash so that I can gradually put it into my AA over the course of my post-FIRE years? If so, how much?

How are you thinking about this? What does value-averaging look like post-FIRE when you're not adding to the kitty anymore? If I was retiring at "normal" age, I wouldn't worry about it. But as I'm trying to retire pre-40, feels like I should be trying to spread out risk by investing gradually over time instead of dumping the whole kitty into the market right away. What do you think?

 

[pb4uski]

I think you want to be in the market consistently with your AA but that your AA should be based on your stage in life. I was almost totally equities until my mid 40s (or 10 years before retiring) and at that point I started putting new money (contributions) into fixed income and ended up about 60/40 just before retirement, which is the AA that I have today.

Decide your retirement AA first... then assess your gap and invest the $100k and new money to bridge the gap. If your employer offers a stable value fund in your 401k that pays a reasonable rate of interest (2% or more) then look into that as it is a great fixed income alternative with no interest rate risk.

Once you retire, then you are just withdrawing and rebalancing.

 

[NgineER]

This has nothing to do with cost averaging in.

I found that after tax 401(k) contributions allows me to save an additional $11,000 in a Roth IRA annually. They are worth considering for you. If your company allows it, you can sock away after tax investments in your 401(k) and roll them over into a Roth IRA. IF allowed, you can contribute $53,000 including the $18,000 contributions and any employer matching.

 

[Nerdjenni]

This has nothing to do with cost averaging in.

I found that after tax 401(k) contributions allows me to save an additional $11,000 in a Roth IRA annually. They are worth considering for you. If your company allows it, you can sock away after tax investments in your 401(k) and roll them over into a Roth IRA. IF allowed, you can contribute $53,000 including the $18,000 contributions and any employer matching.

Yes I learned about this last year and tried to see if my company allows this. Unfortunately no go. Otherwise that would a great way to save more on taxes. I believe I'm already maxing out on all the tax-shelter options for wage-earners. We do max in my 401k, plus max in my wife's 403b and 457 (she works for the state), and we do max Roth back-door for both of us (since our incomes too high for Roth otherwise). If anyone has any other ideas, I'd love to hear them. Everything else is going into a regular taxed account.

 

[Seeking Semi-Retirement]

Hello Nerdjenni,

Here’s my take on your questions:

“Anyways, my question is whether I should I invest all the money I'm socking away right now, or keep a big chunk in cash to invest slowly over time post-FIRE.”

AND

“Should I be holding back a chunk of my pre-FIRE savings in cash so that I can gradually put it into my AA over the course of my post-FIRE years? If so, how much?

How are you thinking about this? What does value-averaging look like post-FIRE when you're not adding to the kitty anymore?”

So, for me, I have taken the approach of targeting a specific amount ($1M) in our AA using Value Averaging strategy to get to our early retirement transition. I have no intention of continuing any value path contributions post-FIRE. It’s about survivability of our nest egg from that point onwards, as we plan to scale back to part-time work and supplement our income with modest withdrawals from our AA to support our lifestyle. Indeed, the $1M target for us as an early retirement goal number is based on our lifestyle needs and projected part-time income (using FIREcalc model, etc.) after transitioning to early-retirement.

The answer to post-FIRE value path contributions is really a question of risk tolerance in my view. Bernstein covers this topic pretty well on pages 154-157 in “The Intelligent Asset Allocator” under the ‘Executing the Plan’ section of Chapter 8 when he covers value-averaging.

If you have the cash to plow into your AA, my view is to align your value path plan for getting the cash invested as rapidly as possible to achieve your FIRE goal. If you have a high tolerance for risk, and don’t mind the volatility, no need to hold back any cash from the value-averaging plan. Get your $100k in immediately and plan out quarterly or monthly or bi-weekly or ?? contributions for your ~$200k per year until you hit your target of $2M. For me, I only keep a cash safety cushion of $20k, the rest goes into aggressive value-path plan.

As Pb4uski suggests, you can take whatever cash you have on hand and “new money to bridge the gap” you have to add to your AA now to target a 60/40 split by the time you hit your $2M target. With this strategy you have an AA that is probably better for post-FIRE stage in life. When you hit value path target is $2M by end of 2018, you can shift to a survivability model (using FIREcalc model, etc.) to enjoy the lifestyle you want to have post-FIRE. With the right amount in your AA nest egg and the right risk profile, you should be comfortable with no significant additional contributions to your AA or value-averaging to speak of.

 

[Seeking Semi-Retirement]

FYI here’s an update on my plan.

About four years into our plan, this is where we stand:

• $668k in DFA funds through Questis (even better than Assetbuilder – Check them out at https://www.questisportfolio.com/)
• $93k and $104k in 529’s for kids – met value paths, no planned additional contributions
• $30k in cash kitty
• Also purchased rental home in my neighborhood, $60k down, $300 in free cash flow per month

 

[Nerdjenni]

Hi there - thanks for your reply. I'm sold on plan to put the money into market now and not hold back post-FIRE.

Also, would love your thought on this article I just read. Basically, this guy shows that VA hurts you because of the opportunity cost of leaving cash on sidelines. What do you think? I mean in our case, we're not going to be holding back the cash for long since in my case I'm only 3 years to FIRE and I don't think you're very far away either. So I think the downside is lower for us. But, it does make me think perhaps I should just straight up DCA and put in whatever cash I have as I get it. Your view?

Michael James on Money: Value Averaging Experiments