FIREd at 37 with Net Worth of approx 5MM comments/criticism welcome

[LOL!]

The OP is actiing like those microcap things never lose money and like hedge funds never lose money. With assets like that, there is less need to take risk even though there may be ability and willingness to do so.

And what are "private investments"? Is that commercial real estate or something with even more risk?

I would dial back the risk myself and unload microcaps and hedge funds as soon as I could and invest more conservatively. Sometimes folks will say, once you've won the game, why keep playing?

 

[Meadbh]

To put it another way, you have accumulated an excellent net worth that, if managed well, can sustain you for the rest of your life (Congratulations!). Capital preservation and income generation should be your primary goals from now on. Currently, your portfolio is very growth oriented, which is fine during the accumulation phase. During the withdrawal phase, growth remains important, particularly with a long time horizon, but the extreme growth tilt (and accompanying volatility) of your current portfolio risks derailing your primary objectives. This is a particular risk should you run into an adverse sequence of returns in the early years of retirement.

 

[MooreBonds]

Now to the 90+% stock allocation. I think you are completely crazy unless you plan on going back to work. Take $5m as the portfolio. That gives you in excess of $4.5m in stock type investments (I don't think you can count your position in NLY as a bond-like investment). Five years ago in the last crash you would have seen that position reduced by approximately 50%. Yes, you would lose $2.25m. That would leave you with $2.75m of which a draw of $156k pa would constitute almost 5.7%. You can draw less but even a 4% withdrawal on the reduced stash would only be $110k. Do you really want to go this low? I repeat, you have won the game. Look at reducing your stock allocation to at most between 50-60%. You should be investing with the mentality of a 57 year-old.

I respectfully disagree with your sentiments of having 90% stock allocation as crazy. Don't forget that even the S&P 500 ETF currently yields just over 2%, so it wouldn't take a giant effort to get an average yield on your portfolio close to 3% and have it grow over time.

I'm 36, hoping to retire at some point over the next 10 years, and plan on a SWR of sub 3%. I am currently about 86% equities and 14% 'fixed income', with an overall portfolio yield of 4.2%. (I'm hoping to be able to live off of <3%, so my excess yield will simply reinvest and provide additional safety factor).


The equities portion has a decent international/emerging market component for capital growth, along with some MLPs, REITs, and BDCs to juice up the yield AND have some decent dividend growth.

The fixed income is 1/3 in I-bonds with an average fixed rate of 3.3%, and 2/3 in mostly preferred stocks with an average current yield of of 7.4%.

Based on my portfolio, I don't need to consume my portfolio to live off of, so I'm not uneasy with 86% of it in equities. If the market drops 50% again, I'm sure some companies will cut their dividends...but I'm not expecting a 50% slash in dividends. And even if that were to happen - those I-bonds will come in handy to supplement things for a few years. Yes, I realize that the preferred stocks are flat with their coupons, but they have a high enough yield to spin off income while the capital growth part of my portfolio grows over time, and will allow me to (eventually) sell off a little bit of that if need be to add to fixed income.

So, perhaps over time I will naturally increase my bond holdings, but I'm not seeing myself jumping up to a 50% fixed income allocation - unless I were in my 70s, rates were 6%-8%, and I only needed 2% to live off of.

 

[Gatordoc50]

I would ladder my bond portfolio with treasuries, tips, government agencies. All ten years or less. Possibly short term AAA munis. If long term treasuries get to be 5 % or higher, I would go heavy on those. I would also limit my hedge fund investment to 10%. One thing that I've done is gifted to my children over the years. Nothing spectacular but enough to get them interested enough to learn about investments. Got the snowball started.

 

[daylatedollarshort]

If it were me I would do as some other posters have suggested and also just focus on a capital preservation portfolio and not take any risks. You've more than won the game. If I had your nest egg at your age, I would focus on minimizing taxes and not losing money to inflation.

It is one thing to lose 20K in a week in stocks when you are younger, have a high household annual income and many years ahead.

But when you get older and have saved up a sizable nest egg, a stock crash hits and all of a sudden gee, you can't make that money up by working another month or so. Now you'd have to work a year or two or maybe more to make up what you lost in stocks in a day or a week.

If I had life to do over I would have changed our investments to a capital preservation portfolio around 7 years ago, moved to a smaller house with less upkeep and less expenses, called it good enough, and just worked at hobby jobs for the rest of our lives like we do now.

You have a great nest egg, but you could improve the number of years of living expenses you have saved by lowering your annual household run rate, since at your age you have a lot of decades of retirement to fund.

You probably don't need to cut expenses in order to retire, but we cut out a lot of stuff we either no longer needed or missed, like eliminating life and disability insurance, not buying fast food because we had more time to cook at home, switching to LED bulbs, and weather stripping. Even if you don't need to cut expenses in order to retire, if you can lower some expenses it is still money that can eventually go to your kids or to the local food bank instead of insurance, fast food and utility companies.

 

[MichaelB]

I think 37 is still an age where someone can take on risk and still be able to recover if it ends poorly. A 60 year horizon is just too long to focus on capital preservation, IMHO. Way too much will happen, and new opportunities will arise.

 

[daylatedollarshort]

I think 37 is still an age where someone can take on risk and still be able to recover if it ends poorly. A 60 year horizon is just too long to focus on capital preservation, IMHO. Way too much will happen, and new opportunities will arise.

I guess it depends on your priorities, risk tolerance and how much money you need to have a happy life.

Personally, I would rather avoid the "ends poorly" option as much as possible.

 

[sonomaguy]

Mostly from feedback in this thread I have made the following changes to our asset allocation:

1. sold a small amount of emerging markets (really only part of the portfolio with a tax loss).
2. Sold all of our long-term fixed income (TLT) exposure
3. used all sale proceeds plus existing brokerage cash to purchase BIV and BND

Changes I plan on making

1. Withdraw 75k from the microcap hedge fund (request is in, done quarterly)
2. Use existing cash to purchasee more BND and some TIPS (bring overall cash position down to 100k or so.

3. step back and re-evaluate again.

current brokerage allocation looks like this:

 

[obgyn65]

To the OP: you are all set. Well done.

 

[jerome len]

You've done well, you know that. What you haven't told us is how you like to live. If you like to camp and walk trails, you'll probably be fine.....If you like to fly 1st class and travel the world, you'll need some more money

I wouldn't worry about too much in the 529 accounts. My DW and I are bright, so are my kids and every one of them has gone or will go to private colleges....50k a year....one of them them wants a phd.....7 years at 50k a year today.

I really don't know how we can help. When I was your age I was worth a couple million, then years later 6 or 7 million but my goal was 10m. Today, I love the good life and really appreciate all I've been given. Most important is my health....nothing if I'm not able to enjoy it......my family.......they truly give me joy......and my portolio.....it's invested conservatively and will oullast DW and myself. These are all your choices.....you have done very well and the best advice is your advice to yourself.

 

[sonomaguy]

One year update. Some progress

In my continuing interest to hold myself somewhat accountable I am posting a one year update, for comparison purposes and to solicit any comments or suggestions this wonderful community might have.

now 38 and married with two children ages 11,12 and live in California.
I would love opinions/criticism on asset allocation/porfolio construction and future methodology, or anything else that might standout enough for you to comment.

Current expenses down slightly to 12k/month, all included.

Our current balance sheet is as follows:

Taxable brokerage account: 3.38MM
Roth brokerage acct: 285k
Roth microcap hedge fund: 280k
Taxable microcap hedge fund: 730k
529 for 11 year old: 148k
529 for 10 year old: 152k
Traditional IRA husband 13k
traditional IRA wife 11k
SEP IRA 14k
treasury direct/paper bonds: 33k
private investments: 360k
Cash 220k
House value owned outright 1.1M

Total NW: Approx 6.5MM


Asset allocation has continued to trend towards lower risk when I can make changes that maximize tax efficiency and as other opportunities arise. I sold 75k from the hedge fund last year and will sell another 75k this year. Bond holdings have increased and overall duration has decreased. The private investments are extremely illiquid but I was able to ratchet down some over the past year and will continue to do so as the opportunity arises. IRAs are exclusively in fixed income, the hedge funds and private investments are certainly risky assets, and below is a snapshot of the brokerage allocation (I would love to be able to depict the entire balance sheet but am not able to aggregate this chart at ameritrade).

 

[urn2bfree]

I would get out of the hedge funds as they are two things I do not like: high expense and active management.

Hedge funds skim off 20% of the profits and charge 2% per year management fee. They are for suckers as far as I can tell and this blog,post explains in more detail why:
http://assetbuilder.com/andrew_hallam/how_i_failed_a_hedge_fund_manager


Sent from my iPad using Early Retirement Forum

 

[Totoro]

[-]+1 on the hedge funds.

If it is 2%, you are paying 20k in fixed fees alone to these guys.

Assuming you'll keep up with the overall stock market at say 7%, that's another 1.4% tacked on (20% performance fee), so 14k.

34k payment for a performance which will leave you off worse than general indexing is a perfect example of "heads I win, tails you lose".

Everyday I'm surprised this is still legal.[/-]

[Edit: never mind, I see the fees are lower in your earlier post at 1% with a hurdle of 10%]

 

[45th Birthday]

I agree with ratcheting down the illiquid stuff, which is over 20% of your net worth. I have none of that stuff with a significantly larger nw. I think those types of investments are appropriate only for institutions and individuals with nw > $100 million.

 

[sonomaguy]

Agreed on the illiquid investments and partly on the hedge fund. I withdrew 75k from the hedge fund last year and am doing another 75k this year. Presumably, 75k per year going forward might be where I stay, depending. As hedge funds go, this one is relatively benign on the fees side (certainly not cheap). 1/20 with a 10% hurdle, approx 20MM TOTAL AUM so the attention of the PM is extremely concentrated. He will find microcap arb situations with very high yet low risk returns (yes I realize this sounds like a fairytale or sales pitch but its definitely not a sales pitch and it might be a fairytale but I believe it and it has held true for a long time now. No I don't know why he hasn't grown the fund significantly I think he likes it small) This is simply because nobody else is looking in this space or they are too small to do anything for anyone else or too sophisticated for any individuals. If there is anyplace to add value/alpha in the US, the microcap space is it.

A further breakdown on the private investments (and unfortunately an explanation on why it will be difficult to decrease quickly).

Approximately 300k of the 360k total is equity we purchased in a private company called Laundry Locker, based in San Francisco. The only way to access that investment would be a liquidity event for the company - public offering or getting purchased being the two most likely. For now it looks like a winning investment, but of course the risk is very high and anything can happen.

The remaining 60k is loans to friends and family. The paper is quite reliable in my opinion, and actually there is a high chance 50k of it gets repaid within the next 12 months.

The Roth portion of the hedge fund I think I will keep hopefully for a very long time. The taxable portion it would be great to withdraw 75k per year to re-allocate and still watch it grow. We shall see.

 

[clifp]

Not many people retire both earlier and richer than I did. Congratulations.

You are obviously a very sophisticated investor and also sounds like very successful. I suspect you enjoy investing, so keep doing what you are doing and have fun. There is more to investing than index funds, and you've figured that out.

My only caution, which I learned the hard way during the great recession is there is cash and bonds and then there are CDs. I found that during the great recession that stocks were so cheap I wanted to buy more, so anything I could sell bonds, money in a money market etc. to buy stocks I did.

Still there was a sinking feeling in about Feb 2009 when I realized I had no cash left. I looked at the mirror, "Clif you idiot, you retired early with millions and if the market continues to declines you are totally hosed, you basically won the game and then lost it, buy playing to aggressively" Now obviously buying stocks in late 2008 and 2009 was the right thing to do in hindsight.

So my advice is start looking for CD deals (PenFed typically has one in Dec. Jan) and put at least 2 years worth of expense which looks like 250-300K in 5+ year CD ladder. You'll hate the interest rate, and every year there isn't a monster bear market, you'll hate how much money you've lost because the money should been stock or bonds..

Don't worry about it, this is your emergency fund, in cause the financial market collapses again. You'll think twice about paying the penalty to break a CD early to buy stocks, or some other high risk, high reward investment. But you'll sleep better during that next crisis. Knowing I've got 2 years in the bank, lets me not worry about my overall AA, or investing in start ups etc.

 

[dallas27]

Wow, what would you charge to teach me how to do whatever you do? Im 37, but you have 10x worth.


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[Travelwanted]

Agreed on the illiquid investments and partly on the hedge fund. I withdrew 75k from the hedge fund last year and am doing another 75k this year. Presumably, 75k per year going forward might be where I stay, depending. As hedge funds go, this one is relatively benign on the fees side (certainly not cheap). 1/20 with a 10% hurdle, approx 20MM TOTAL AUM so the attention of the PM is extremely concentrated. He will find microcap arb situations with very high yet low risk returns (yes I realize this sounds like a fairytale or sales pitch but its definitely not a sales pitch and it might be a fairytale but I believe it and it has held true for a long time now. No I don't know why he hasn't grown the fund significantly I think he likes it small) This is simply because nobody else is looking in this space or they are too small to do anything for anyone else or too sophisticated for any individuals. If there is anyplace to add value/alpha in the US, the microcap space is it.

A further breakdown on the private investments (and unfortunately an explanation on why it will be difficult to decrease quickly).

Approximately 300k of the 360k total is equity we purchased in a private company called Laundry Locker, based in San Francisco. The only way to access that investment would be a liquidity event for the company - public offering or getting purchased being the two most likely. For now it looks like a winning investment, but of course the risk is very high and anything can happen.

The remaining 60k is loans to friends and family. The paper is quite reliable in my opinion, and actually there is a high chance 50k of it gets repaid within the next 12 months.

The Roth portion of the hedge fund I think I will keep hopefully for a very long time. The taxable portion it would be great to withdraw 75k per year to re-allocate and still watch it grow. We shall see.

Hey Somomaguy-

Congrats on your success. Few questions for you if you don't mind. I am a tad older and bit higher nw but overall fairly similar status.

1-How did you have the faith to make the leap? My nw is about 2m higher running similar monthly expenses. The calculators look good but...

2-How are you spending your time? Part of my fear is will I get bored?

3-How have you handled this with your kids? Meaning, yours are of the age they obviously know you are retired. Just looking for guidance as my kids are younger.

I'm planning on pulling the trigger dec2015. I already have part-time july2015 in place. The whole thing just makes me a tad nervous. Thanks!

 

[sonomaguy]

Not many people retire both earlier and richer than I did. Congratulations.

You are obviously a very sophisticated investor and also sounds like very successful. I suspect you enjoy investing, so keep doing what you are doing and have fun. There is more to investing than index funds, and you've figured that out.

My only caution, which I learned the hard way during the great recession is there is cash and bonds and then there are CDs. I found that during the great recession that stocks were so cheap I wanted to buy more, so anything I could sell bonds, money in a money market etc. to buy stocks I did.

Still there was a sinking feeling in about Feb 2009 when I realized I had no cash left. I looked at the mirror, "Clif you idiot, you retired early with millions and if the market continues to declines you are totally hosed, you basically won the game and then lost it, buy playing to aggressively" Now obviously buying stocks in late 2008 and 2009 was the right thing to do in hindsight.

So my advice is start looking for CD deals (PenFed typically has one in Dec. Jan) and put at least 2 years worth of expense which looks like 250-300K in 5+ year CD ladder. You'll hate the interest rate, and every year there isn't a monster bear market, you'll hate how much money you've lost because the money should been stock or bonds..

Don't worry about it, this is your emergency fund, in cause the financial market collapses again. You'll think twice about paying the penalty to break a CD early to buy stocks, or some other high risk, high reward investment. But you'll sleep better during that next crisis. Knowing I've got 2 years in the bank, lets me not worry about my overall AA, or investing in start ups etc.

clifp - Thanks for taking the time to lend your comments, they are much appreciated.

I often debate internally between tax efficiency and asset allocation. Unfortunately for me, a large part of my net worth is in traditional accounts without tax shelter, and because of tax loss harvesting and our strong market for the last 4-5 years all of my equity holdings in traditional accounts have significant unrealized gains. Thus far I have chosen to simply let them go because that is very efficient from a tax management perspective. So I basically have equities with large cap gains and short duration bond holdings in these accounts.

In my sheltered accounts, I have mainly longer duration/higher risk cash flowing securities (PCY, JNK, NLY, VCIT)

My current plan is too simply continue to ratchet down overall portfolio risk while still maintaining a very high level of tax efficiency, so basically all dividend income, any other proceeds, etc will be re-invested into VCSH effectively and then go from there.

Would you consider VCSH an ok proxy for a 5 year CD ladder?

 

[sonomaguy]

Wow, what would you charge to teach me how to do whatever you do? Im 37, but you have 10x worth.


Sent from my iPhone using Early Retirement Forum

I wish it were that simple but my "knowledge" isn't anything that someone can replicate. Mainly I have been fortunate to have two successful careers at the right time, along with some success in small business entrepreneurship. I'll continue to participate on this board in my own small fashion, so that would be your best access to my thought process but there are plenty of people around here with a lot more to offer.

 

[sonomaguy]

Hey Somomaguy-

Congrats on your success. Few questions for you if you don't mind. I am a tad older and bit higher nw but overall fairly similar status.

1-How did you have the faith to make the leap? My nw is about 2m higher running similar monthly expenses. The calculators look good but...

For me, it was something that basically occurred naturally as my second career was a bubble that burst. I went from making 7 figures a year to low 6 figures while working harder. Some of my largest earning years were 2007 to 2010 and I was fortunate enough to dump that money into our markets at a very opportune time. If your networth is 2m higher with similar expenses I don't really think its a matter of faith anymore. You are a virtual lock in my mind to be successful financially for FIRE. Whether you want to or not depends on other factors as well as I can see by your follow-up questions.

2-How are you spending your time? Part of my fear is will I get bored?

I do have some days where I am slightly bored, but they are rare. I get to spend a bunch of time with my children during a formative time period for them. I take them to school, contribute at managing our household with my wife, coach my son's soccer team, continue to monitor our portfolio, examine and participate in small business opportunities periodically (though this serves the purpose of capturing my attention, from a portfolio perspective is not ideal from a risk/AA standpoint). I serve on the board at my local country club, and am an avid cyclist and golfer (those two things are extremely effective at soaking up the hours in a year).

3-How have you handled this with your kids? Meaning, yours are of the age they obviously know you are retired. Just looking for guidance as my kids are younger.

They are starting to understand the landscape of the situation for us and it's an ongoing process. They've seen me work pretty hard in the past but now see me work very little or not at all. It's not something we know the answer on, other than to recognize the issue and do our best to instill a sense of work ethic and LBYMs, and doing our best to discourage any sense of entitlement.

I'm planning on pulling the trigger dec2015. I already have part-time july2015 in place. The whole thing just makes me a tad nervous. Thanks!

I partly retired 8 years ago at 29, and fully retired approx 2 years ago and both decisions I'm extremely happy with. Current job satisfaction is a huge part of the decision, but if its anything less than above average I would say you can't go wrong

answers above

 

[2B]

With $5MM you can certainly retire at 37 but I'm concerned with your spending rate of $13K/mo (assuming this covers any taxes and medical). I think you're asking too much from a conservative, balanced portfolio. I haven't read the thread carefully but I don't know if you've included repairs, replacements, kid needs, etc. in all of your calculations. The biggest problem I see is you don't have a conservative, balanced portfolio. Those hedge funds need to go. You aren't so loaded that you can afford the risks and fees associated with that crap. You may be doing well but research shows that broad market indexes significantly beat the hedge fund average. Some hedge funds may do wonderful but that's the exception. You need to get out of the illiquid stuff.

You're doing great in amassing $5MM at age 37. You probably won't be looking too good in a few decades if you don't reduce your risk and control costs. Have you considered leaving Taxifornia? That could really reduce your housing costs and taxes.

I'm not sure what VCSH is but it's unlikely to be a CD equivalent unless it's guaranteed by the federal government to be worth what you need on the day you need it.

 

[jim584672]

13k/month expenses
Wow, that will almost last me a year. ER includes both frugal types and lavish types I guess.