A Plan to Start Out - Help please!

[Jane_Doe]

Dear Forum Members,

I would appreciate you input on my plan for our retirement nestegg. I have had all this rumbling around in my head and decided to go ahead and post here for your insight. Here goes:

Our Background:
Husband is 52, I’m 44. Been married for 24 years. Two kids - one in third year of college, younger one in senior year high school. Plan to sell our current bar business sometime after next June, will be able to either just collect rent on that (we own the building) along with other rentals and be comfortable but a little tight, or we may sell our property and then we will have enough to pay off mortgage, possibly build second home (somewhere warm!) and live off the interest/dividends of the remainder. DH and I are not keen on the stock market as you will see in our asset allocation below! Believe it or not, the 20% for us will be plenty of risk exposure to start out. I am thinking of letting it climb to 25% as time goes on, but start out with the 20%. I have fuigued a good basic budget, and have been trying this past year to STICK with that budget to get used to having a “fixed” income - not easy all the time!!

I have been reading here on this forum since last Feb., soaking up info. (Thanks, Dory!) I know the basics, have good common sense and good financial habits. DH and I are somewhat LBYM, but do enjoy the perks (I am not planning on giving up cable TV, etc. when we retire!). Very little debt, good credit, etc. Kids are not money suckers (both work and are good students). We have always been self-employed so we have no other source of income- very little in IRA‘s since we always invested any extra money into real estate. I am not figuring Social Security into my budget figures - that will be bonus money. We have figured in capital gains taxes on the sale of our property. We have health insurance - private policies through Blue Cross/Blue Shield with high deductibles. I like high deductibles - hate paying insurance! Please excuse my meandering through this - I just want to answer some of the basic questions ahead of time.

My (DH trusts me to do this!!! : ) Plan:

Invest in 80% Fixed Income and 20% Equities (to start at least, while we get our feet wet and used to this)
Draw 3% of whatever portfolio balance is each year (instead of x% of starting balance & adjusting yearly for inflation) - seems easier, and our budget should have plenty of room for some down years. I may even be able (hope/plan to, I should say) to set aside a couple of years worth of spending money as a cushion (YES, I know, I really am conservative!) This money would not be included in the portfolio figure, neither would any real estate be included.

On Firecalc, a 3% rate works (over 95% survival for 60 years - I‘m figuring on as if I live to 100) with CPI or PPI rates figured in.


My Homework:
Am reading as much as possible on investing and financing. Have ordered on Amazon Ben Graham’s book “The Intelligent Investor” and also ESR Bob’s new book, “Work Less, Live More.” I tried to wade thru the library edition of “Four Pillars” and it is just too much for me to absorb right now. I may try again to read that after I get thru the others, or after we sell our business and my mind isn‘t quite so cluttered! I have put the “Coffeehouse Investor” on my short list as well. I plan on reading through that (coffeehouse) website in the next week or so to get a feel of their take on things before I order the book.

To figure out the best investment choices, find things that feel are less volatile for our portfolio -
For fixed investments, I’m thinking of muni’s, TIP’s, I Bonds (isn‘t there a limit on how much you can buy of these?), maybe a Vanguard bond index, possibly some Wellesley (as part of Fixed and Equity - it’s 40/60, right?). Our accountant told me we could just put it all in muni’s earning 5% and live off of that - I haven‘t read anything about anyone doing that here, so I figure that is probably not a real % rate. (BTW, he's really a good guy and is NOT a schiester! Have used him for tax returns and tax advice for about 20 years.)
For the equities portion, I am looking at Wellesley, Berkshire-Hathaway, Vanguard index funds, and will want some exposure to international somewhere (Tweedy-Browne?). I will diversify the funds.
I’d like to keep a tight rein on the expenses (duh!) and don’t want to chase performance, but want to try to pick some good steady no-brainers. I am not real keen on the idea of the Vanguard (etc.) target retirement funds as I want a little more control than that.

If/when we sell our property, I plan to have money sit for awhile if necessary in a money market, etc. until I have figured out a good game plan. For example, I know I will need to dollar cost average rather than lump sum it when we first start out.

If you all can just start pointing me in the right direction and critique (nicely, please! ) my plan, I would greatly appreciate it!

Boy, this is a long post! Thanks to you all for reading it! and any help or advice you can contribute will be greatly appreciated!!

Sincerely,
Jane Doe

 

[jj]

Great post. You're obviously a planner, and cautious with it. Over the next 60 years inflation might be your biggest worry. But, if you have enough to only take 3% why mess with more volotile investments? We go round on this question... I too, look forward to seeing others' takes on this one.

jj

 

[Nords]

Jane, Taylor Larimore on the Vanguard Diehards board says "There are many roads to Dublin."  Setting aside all the details below for a minute, you and your family are too conservative & thoughtful to screw this up.  There may be a few detours & surprises but your plan seems ready to put into action.  You should stop analyzing and start doing.

DH and I are not keen on the stock market as you will see in our asset allocation below!  Believe it or not, the 20% for us will be plenty of risk exposure to start out.  I am thinking of letting it climb to 25% as time goes on, but start out with the 20%.  I have fuigued a good basic budget, and have been trying this past year to STICK with that budget to get used to having a “fixed” income - not easy all the time!!

I am not figuring Social Security into my budget figures - that will be bonus money.  We have  figured in capital gains taxes on the sale of our property.  We have health insurance  - private policies through Blue Cross/Blue Shield with high deductibles.  I like high deductibles - hate paying insurance!

20% is the low end of the allocations recommended in Four Pillars.  You're setting up a good portfolio with low volatility, which you seem to prefer.

Plan:
Invest in 80% Fixed Income and 20% Equities (to start at least, while we get our feet wet and used to this)
Draw 3% of whatever portfolio balance is each year (instead of x% of starting balance & adjusting yearly for inflation) - seems easier, and our budget should have plenty of room for some down years.  I may even be able (hope/plan to, I should say) to set aside a couple of years  worth of spending money  as a cushion (YES, I know, I really am conservative!)  This money would not be included in the portfolio figure, neither would any real estate be included.

You seem to have plenty of budget room for bear markets.  So if you're not using up all of the 3% withdrawal every year, then over the next five-ten years you'll build a cash stash out of the leftovers.  You may not need to set aside anything initially if you can still sleep at night.  I wouldn't stay at work just to start ER with a big cash stash.

My Homework:
Am  reading as much as possible on investing and financing.  Have ordered on Amazon Ben Graham’s book “The Intelligent Investor” and also ESR Bob’s new book, “Work Less, Live More.”  I tried to wade thru the library edition of “Four Pillars” and it is just too much for me to absorb right now.  I may try again to read that after I get thru the others, or after we sell our business and my mind isn‘t quite so cluttered!  I have put the “Coffeehouse Investor” on my short list as well. I plan on reading through that (coffeehouse)  website in the next week or so to get a feel of their take on things before I order the book.  

The more you read, the more Four Pillars will be in context and a familiar (faster) repeat of what you've already learned.  It may be a panacaea but it's not the only book.  Vanguard Diehards also has a similar reading list and any two or three of them is equivalent to the whole lot.  Reading more than that means you're really enjoying yourself.  Or else you're just sadomasochistic.  

To figure out the best investment  choices,  find things that feel are less volatile for our portfolio -
For fixed investments, I’m thinking of muni’s, TIP’s, I Bonds (isn‘t there a limit on how much you can buy of these?), maybe a Vanguard bond index, possibly some Wellesley (as part of Fixed and Equity - it’s 40/60, right?).

The VH website also has a good I bond tutorial.  Keep in mind that the thread was started over five years ago and the Treasury's program keeps changing, so read all freakin' 141 posts before you get excited about buying I bonds with a rebate credit card.

The current Treasury limit is $30K paper and $30K TreasuryDirect (electronic) I bond purchases per year per SSN.  That means you & spouse can buy $120K/year if you're in a hurry.  If you add your kid's SSNs as co-owners then that limit goes up by another $60K/year per SSN.

There are lots of tricks & traps with both I bonds & TIPS.  Wab has a good thread on this board about buying TIPS in tax-deferred accounts.  Others prefer to hold their TIPS through a Vanguard fund to receive the dividend stream while letting their managers do all the wheeling & dealing.

Brewer or Saluki can tell you how to buy munis if you don't already know.  But I suspect the fact that we need people like Brewer & Saluki to interpret means that it's best to buy a low-cost (Vanguard again?) muni fund.

TH swears by Wellesley.  It seems to be as close as you can come to Coffeehouse one-stop shopping.  

For the equities portion, I am looking at Wellesley, Berkshire-Hathaway, Vanguard index funds,  and  will want some exposure to international somewhere (Tweedy-Browne?).  I will diversify the funds.

If you want to avoid volatility then you might not be very happy with Berkshire.  It may be America's tenth-largest mutual fund in terms of size & diversification but the single-stock risk is much higher than anything else on your list.  In just the last nine months, a very quiet year by comparison, it's swung as much as 12%.  Take a look at a 10-year chart of Berkshire, pick out a few of the deeper valleys (especially 1998-2000!), and think about how you'd feel if it lost 50% of its value in two years again.  It's a good investment but the volatility might keep you from being able to sleep at night and thus you might want to keep it under 10% of your portfolio.

I've been happy with Tweedy, Browne Global Value over the last 10 years but it's also up over 80% off its 2003 low, and it was a pretty painful ride getting down to that low.  While everyone crows excitedly over its record this year, the same bunch of managers has been a lot less stellar with their American Value fund.  Add in TBGVX's relatively high 1.39% expense ratio and this fund will test your commitment to the philosophy of Graham & Dodd.  This is the first taxable fund that we're liquidating in retirement and I'm considering converting our IRA Tweedy holdings to an international index ETF.  (In the meantime we're very happy to sell off the taxable account's gains for our annual spending cash.)  So if you find a cheaper way to get international exposure then let me know.

 

[brewer12345]

Stay away from munis. You won't be in a high enough tax bracket to come out ahead.

 

[Jane_Doe]

Wow guys - quick response - how gratifiying!

jj- Thanks, hopefully we can learn and muddle through together!

Nords -
Thank you so much for all the insight. I am going to cut and paste then print out so I can keep all my notes straight and make sense of it all.. (I know, a little (!?!) a*al here!)

Unfortunately, we have to wait until at least next summer for some changes in the liquor law that will make our business much more sellable, then after that we can also look into finding buyers for the entire property. However, again with waiting longer probably being more prudent since we are really close to getting hooked up to public water and sewer which will also have a great impact. It is REALLY hard to wait - the future figures look really good on paper right now, but we won't sell out until it makes us totally FI. Meanwhile, after we sell the business we will more or less just be landlords and have enough basic income just not a lot of extra. If we don't sell the property for a while, we will most likely find another source of side income. My DH is FULL of ideas!

So, all is hypotetical until I get my greedy little hands on the cash money!


I know the 20% is the lowest end - that's why I picked it!!!! DH won't sleep (or let me alone either!) if we have too much swinging up & down. He is the type to look at the DJIA 3 times a day! A little type A! I actually am much better that way, but I have to live with him, and he has worked very, very hard over the years and deserves to feel comfortable in his "old" age.

I appreciate the heads up about B-H funds - I really had not checked too far into them. I think the Vanguard funds will have to do. I will also have to learn more about ETF's as we progress. I have the time, anyway!

As for reading - call me a masochist, but I actually do enjoy reading some of this stuff! However, I draw the line at Bernstein's book! I tend to read every word so I will have to make myself skim his book for content instead of trying to read the whole darn thing.

Again, the rest of your advice, I'm going to have to absorb a little more. I have found that my days of having a great memory and quick intellect are gone. It takes much more time for me to "get" it anymore. Part has to do with doing too much, stress of the business, etc. Hopefully will get a little better when we ER.

Brewer - Just curious - at what point does it make sense to get into muni's? I really don't know my tax bracket (sad but true!) - just generally pay what the accountant tells me at the end of the year (NOTE: Real Estate write-offs as well as business write-offs confuse the straight forward way to figure it out.) Not trying to be coy, I really don't feel comfortable posting actual figures online since this is a public forum.

Thanks, guys! I hafta go -will check back in later!

Jane

 

[brewer12345]

It doesn't matter what your bracket s today; it matters what your bracket is after retirement. Unless you get above the 25% bracket, it doesn't pay for you to look at munis. I would be surprised if you managed that.

 

[Jane_Doe]

Brewer - I checked the irs online this am for tax brackets. It said that if you earn over 59,600 you go into 25%. We are definitely going to be over that. We have 6% state tax as well, so that may play in if we end up with something instate.

I have bookmarked:
http://www.bondheads.com/
http://bondsforlife.com/
http://www.nasdbondinfo.com/asp/bond_search.asp
but haven't yet riffled thru them yet for info. It really is all pretty overwhelming. Is there a good beginner's book on muni's and bonds in general that you can recommend?

I am leaving tomorrow on a family trip, but again, I figure I have lots of time to learn and figure this stuff out before we have the money in hand. I got ESR Bob's book so I will read that while traveling.

Thanks for all your help! Jane

 

[brewer12345]

Brewer - I checked the irs online this am for tax brackets.  It said that if you earn over 59,600 you go into 25%.  We are definitely going to be over that. We have 6% state tax as well, so that may play in if we end up with something instate. 

I have bookmarked:
http://www.bondheads.com/ 
http://bondsforlife.com/
http://www.nasdbondinfo.com/asp/bond_search.asp
but haven't yet riffled thru them yet for info.  It really is all pretty overwhelming.  Is there a good beginner's book on muni's and bonds in general that you can recommend?

I am leaving tomorrow on a family trip, but again, I figure I have lots of time to learn and figure this stuff out before we have the money in hand.  I got ESR Bob's book so I will read that while traveling. 

Thanks for all your help!  Jane

If I were you, I would do a sample tax return based on what your expected retirement income will be. Don't forget the effects of exemptions, deductions, etc. that reduce your taxable income before you get to $59.6k. Depeding on your specific situation, your income could be a lot higher than $59.6k, but your taxable income could be below it.

I'd say you are probably a candidate for I bonds, T-bills (no state income tax), and maybe some preferred stocks (some have dividends taxed at 15%).

 

[Martha]

This website is pretty handy for doing rough calculations of tax liability and determining your bracket:

http://www.dinkytown.net/java/Tax1040.html

 

[Jane_Doe]

Thanks Martha! I will go check it out now! Jane

 

[Brat]

Jane, my mother has muni's in her portfolio.  One concern I have is liquidity. 

The value of bonds fluctuate with interest rates, you are fooling yourself if you think holding a bond creates stability in your investments.  Muni's are not risk free (my parents owned some WOOPS), although many are insured today. 

 

[brewer12345]

Jane, my mother has muni's in her portfolio.  One concern I have is liquidity. 

The value of bonds fluctuate with interest rates, you are fooling yourself if you think holding a bond creates stability in your investments.  Muni's are not risk free (my parents owned some WOOPS), although many are insured today. 

Depends on the credit quality and duration of the bonds in question. General Obligation bonds have extremely low historical default experience for pretty much any given rating. The bigger problem is that munis are often way long maturities. Low coupon 30 year bonds have a high duration and get whipsawed by interest rate moves. Stick to 5 to 10 year maturities and high quality (A rated or better) munis and you'll be OK.

 

[soupcxan]

It doesn't matter what your bracket s today; it matters what your bracket is after retirement.  Unless you get above the 25% bracket, it doesn't pay for you to look at munis.  I would be surprised if you managed that.

Do munis make sense if you're in the accumulation phase, you've run out of room in your tax advantaged accounts to hold bonds, and you're in the 25% bracket? Talking about the Vanguard intermediate muni fund, specifically.

I take full advantage of the 401k match and my roth IRA, but I also like to keep some funds available in case I need them for school, home buying, etc...and would rather not have to deal with the penalties/restrictions on a retirement account.

 

[brewer12345]

Do munis make sense if you're in the accumulation phase, you've run out of room in your tax advantaged accounts to hold bonds, and you're in the 25% bracket? Talking about the Vanguard intermediate muni fund, specifically.

I take full advantage of the 401k match and my roth IRA, but I also like to keep some funds available in case I need them for school, home buying, etc...and would rather not have to deal with the penalties/restrictions on a retirement account.

There is an easy way to tell. Take two investments: A is taxable, B is not. Both have identical credit risk, maturity, duration, etc. divide the yield on B by .75. If the result is higher than the yield on A, buy the tax free bond. Otherwise stick with taxable.