Ten year early retirement update

[73ss454]

CFB you are a brave man. I don't even want to lend friends and family money no less someone on the internet. Buy hey, whatever works I guess.

 

[cute fuzzy bunny]

CFB you are a brave man. I don't even want to lend friends and family money no less someone on the internet. Buy hey, whatever works I guess.

Yeah, its a lot more risk, but consider it against renting a property. Lot of risks there too.

But my take is "What else is there?". Aside from the stock market, nothing else really is paying in reasonable compensation for the assumed risk. I do feel like we're being herded out of safer investment options due to the low interest rate environment. Maybe thats to make it easier to fleece us of whats left of our money. I need some income, and so far this looks like a good way to generate some.

 

[W2R]

Yeah, its a lot more risk, but consider it against renting a property. Lot of risks there too.

But my take is "What else is there?". Aside from the stock market, nothing else really is paying in reasonable compensation for the assumed risk. I do feel like we're being herded out of safer investment options due to the low interest rate environment. Maybe thats to make it easier to fleece us of whats left of our money. I need some income, and so far this looks like a good way to generate some.

A combination of Wellesley (and Wellington or whatever) and LBYM won't work out for you?

Guess that approach isn't your style, but several of us are perfectly happy using it. I am thinking that perhaps as you grow older it might have greater appeal.

 

[cute fuzzy bunny]

A combination of Wellesley and LBYM won't work out for you?

Guess that approach isn't your style, but several of us are perfectly happy using it. I am thinking that perhaps as you grow older it might have greater appeal.

Yep, I've got plenty of dividend payers, but the bond market pays next to nothing and I imagine it'll get clobbered if and when interest rates do get raised. That makes wellesley less appealing. I'm thinking about diversity. I've had good cd rates until now, my last penfed 6.25 cd's is maturing. Had a little income from the wife too, which was poorly correlated with the stock market.

Now I need income, and diversification.

LBYM? I'm going to try and live on about $20k a year, with a paid off house, but in one of the more expensive places to live. My electric and water bill last month were $1000 total. My taxes, insurance and minimum bills I can't avoid are about $11k a year. My spending over the last 7 years has been about 3-4k a month, now its going to be less than a grand. If I get any more LBYM I'll have to use a smaller font.

 

[FIREd]

I have tried the Lending Club thingy. As long as I was diligent with promptly reinvesting the cash, my returns were just shy of 12% per year. I just thought that managing and researching hundreds of notes was just too much work to generate what was supposed to be passive income. Since I am not starving for income right now (DW is still working), I am in the process of closing my account. But overall, it has been a positive experience.

 

[Lsbcal]

Another welcome back CFB, from another rabbit guy. Darn, thought I might be closing in on your 22k+ posts here. No chance now.

You have had quite a time of it in your personal life and health wise. Sounds like you are emotionally and physically in A+ shape now -- well maybe A- ?

One comment on the money side of your OP:

...(snip)...
Investing wise, I ducked that 20% drop last year, selling in july and buying back in in august. I'm feeling a little concerned with the way things look right now, as any time we seem to get near S&P 1600 we crash back below 1000 soon after, the situation in europe still looks crappy, and we've all decided to not "pay our bills" here in the US, hoping that all the bad stuff will just go away. I don't think it'll heal on its own and I don't think avoiding the 800lb gorilla thats still hanging around is a good idea. So I may check out of the market again soon...just looking for another 100 points or so on the S&P. Sadly except for stocks and the LC deal, you can't make money right now.
...

You may have the timing ability I lack. Or it could have been luck in the past. I seem to recall you were kind of wishing you had followed the moving average technique in 2008. But maybe my memory is faulty there.

I don't have any idea how far this market will go. I'd just consider that we could be in another 1980's type market and be optimistic. So far this market has had about the same rise as the 1980's one. But then again, history does not repeat. If I sold it would be because of very specific conditions that have occurred in the past, some combo of (1) inverted yield curve, (2) excess valuations as measured by PE10 when adjusted for recent decade's wide swings in earnings, and (3) SP500 gains in last 12 months much lower then short Treasury bonds.

 

[Purron]

Yeah, its a lot more risk, but consider it against renting a property. Lot of risks there too.

But my take is "What else is there?". Aside from the stock market, nothing else really is paying in reasonable compensation for the assumed risk. I do feel like we're being herded out of safer investment options due to the low interest rate environment. Maybe thats to make it easier to fleece us of whats left of our money. I need some income, and so far this looks like a good way to generate some.

I've rented a property for the last 15 years and am glad to have that behind me. It is risky. And a PITA.

It's worrisome how this interest rate environment is herding folks into more risky investments. Something we just don't hear about much from the talking heads on TV. Oh, and not David Byrne of the Talking Heads. I have a feeling he'd make more sense than the so called experts who stopped making sense some time ago.

 

[cute fuzzy bunny]

You may have the timing ability I lack. Or it could have been luck in the past. I seem to recall you were kind of wishing you had followed the moving average technique in 2008. But maybe my memory is faulty there.

I don't have any idea how far this market will go. I'd just consider that we could be in another 1980's type market and be optimistic. So far this market has had about the same rise as the 1980's one. But then again, history does not repeat. If I sold it would be because of very specific conditions that have occurred in the past, some combo of (1) inverted yield curve, (2) excess valuations as measured by PE10 when adjusted for recent decade's wide swings in earnings, and (3) SP500 gains in last 12 months much lower then short Treasury bonds.

I seem to have a knack for getting wiggly when the market is peaking.

I'm going with a simpler set of metrics. Its that the bulk of the federal government is being pressed to make things look as good as they can for the election, and things still don't look very good. Plus after 4(?) boom and bust cycles in the last 12 years, I'm ready to assume we're going to keep cycling up and down until the economy heals. The economy won't heal until we pay our bills. Most of the "good" stuff in the last 12 years was due to buying on credit, buying things we couldn't afford and then asking for a bailout, and by running the deficit up.

Valuations look okay, and we should have plenty of room to go higher...and we might. But I'm looking for what we did to fix the underlying issues or pay down the debt, and...I'm not seeing it.

 

[Lsbcal]

Interesting macro theories you have CFB. For myself I'd only trade on these potential correlations if I could abstract the ideas using monthly data (from the Fed maybe?). Using maybe government expenditures, SP500 results, etc. Then I'd have to convince myself that over several decades the data backtests OK. However, I'd guess the data is pretty scanty at best on this sort of macro picture.

 

[Nords]

Yeah, its a lot more risk, but consider it against renting a property. Lot of risks there too.
But my take is "What else is there?". Aside from the stock market, nothing else really is paying in reasonable compensation for the assumed risk. I do feel like we're being herded out of safer investment options due to the low interest rate environment. Maybe thats to make it easier to fleece us of whats left of our money. I need some income, and so far this looks like a good way to generate some.

Well, if you're going to take more risk for your income then you'd hope to be properly compensated for that risk-- otherwise it's just chasing yield.

Yep, I've got plenty of dividend payers, but the bond market pays next to nothing and I imagine it'll get clobbered if and when interest rates do get raised. That makes wellesley less appealing.

I guess it'd be good to know how Wellesley fared the last time bond yields were this low and inflation followed. You'd hope that they'd be at least as diversified as us average retail investors.

Now I need income, and diversification.

Maybe a boring dividend-paying mutual fund or ETF could also fill that diversification role. Clif's mentioned several times that even during 2008-09 when dividends were being cut like crazy, his overall dividend income only dropped 10%. I can't tell if Lending Club's borrowers would continue to repay 90% of their loans if the economy turned foul.

The problem with high-return funds like Lending Club is that it takes a fairly large asset allocation to move the needle, yet it's considered very risky/concentrated to buy into a large asset allocation.

 

[cute fuzzy bunny]

Well, if you're going to take more risk for your income then you'd hope to be properly compensated for that risk-- otherwise it's just chasing yield.

I didn't think 12% was that bad. Where else can I get that return without selling copies of dvd's on the street in Hong Kong?

I guess it'd be good to know how Wellesley fared the last time bond yields were this low and inflation followed. You'd hope that they'd be at least as diversified as us average retail investors.

I admit, I haven't looked. With rates running near zero for years, and sure to go up, the bond market can't help but be spanked when that happens. Low yields, almost certain chance of capital reduction...eh...whats to like?

Maybe a boring dividend-paying mutual fund or ETF could also fill that diversification role. Clif's mentioned several times that even during 2008-09 when dividends were being cut like crazy, his overall dividend income only dropped 10%. I can't tell if Lending Club's borrowers would continue to repay 90% of their loans if the economy turned foul.

I have several of those. And I'm sure the default rate could run to 20 or even 30% if we have another dip. And I'm not ruling that out.

The problem with high-return funds like Lending Club is that it takes a fairly large asset allocation to move the needle, yet it's considered very risky/concentrated to buy into a large asset allocation.

Ugh. Its hard to move a strawman this heavy this early in the morning. Its about 3-5% of my holdings. I've got 1800+ notes when they show data that 800+ is enough diversification. It takes a few minutes a day to do and I like it. This was simply an exercise of "Hmm, I have a mess of 6.25% cd's maturing, and I already have plenty of emergency cash and highly liquid, highly diversified investments...what do I do with this that could produce some reliable income and a decent return without a big effort?"

Looks to me at this point that I could draw 1200-1400ish a month for 5 years from 50k with good reliability and consistency. Only bugaboo is if we crash into the ground again (and we might) in which case the defaults might outweigh the interest earned.

All that having been said, if I could deduct losses I'd put about 1/3 of my money into this. Even if I only eke out 6%, I'd be thrilled.

 

[cute fuzzy bunny]

I admit, I haven't looked. With rates running near zero for years, and sure to go up, the bond market can't help but be spanked when that happens. Low yields, almost certain chance of capital reduction...eh...whats to like?

2.54% yield right now, lost 30% of its value in the 2007 dip. 6.xx% return per year average over the last 5 years. Last time we had inflation and rising rates, it lost almost 25% of its value. Which makes perfect sense considering the 60-65% short-intermediate bond load.

Part of the yield is qualified dividends, and of course during dips if you hold on you'll eventually get your money back, but the dividend is anemic and the modern era return given the cyclic nature of equities lately and the persistent low interest rate environment just makes wellesley and its ilk a bad buy right now.

But if interest rates rise, I'll be licking my chops. Getting 10-12% for an A borrower instead of 6 and 25-30% for the D/E borrowers without any significant underlying issues causing borrowers to default at a higher rate? Yummy.

Biggest threat to this is the big banks. They've driven legislation in several states to make this illegal.

 

[Texas Proud]

CFB, why can you not deduct losses

Or are they offset with interest earned?

 

[brewer12345]

One of the thingsthat worries me about Lending Club and its ilk (which I personally would not touch with the 10 foot pole of your choosing, but different strokes) is that things are likely to become extremely messy if the sponsor (Lending Club, etc.) goes belly up. These are all start-up type organizations, so that is a non-trivial risk.

 

[cute fuzzy bunny]

CFB, why can you not deduct losses

Or are they offset with interest earned?

I'm not sure why, but the losses just go poof. You cant deduct them or subtract them from the interest earned. And its ordinary income.

 

[cute fuzzy bunny]

One of the thingsthat worries me about Lending Club and its ilk (which I personally would not touch with the 10 foot pole of your choosing, but different strokes) is that things are likely to become extremely messy if the sponsor (Lending Club, etc.) goes belly up. These are all start-up type organizations, so that is a non-trivial risk.

All notes are written by an actual bank. So if LC went belly up, there'd need to be a way to consolidate and deliver the interest to me, and they have an established plan for that, if it should happen.

"Lending Club is a financially sound, well-funded, established company led by a seasoned management team. Notwithstanding, to protect investors and borrowers we have taken steps to ensure continuity in the unlikely case Lending Club stops servicing the loans for any reason. Specifically, we have entered into a backup servicing and successor agreement with Portfolio Financial Servicing Co. (Portfolio Financial Servicing Company | PFSC | Excellence in Portfolio Management) that would ensure the servicing of all issued loans."

LC takes a percentage of each payment as a service fee...generally its a penny per payment. I think they've taken about a hundred bucks from me in six months. So it'd be lucrative for pfsc to continue servicing the existing loans.

 

[Texas Proud]

I'm not sure why, but the losses just go poof. You cant deduct them or subtract them from the interest earned. And its ordinary income.

Where did you learn that they went poof From what I know about the tax code (and I admit that I was a tax accountant a LONG time ago), you could deduct losses on money lent as long as it was a legit loan... and a loan to a third party where there are collection attempts seem to fit that bill...

 

[cute fuzzy bunny]

Where did you learn that they went poof From what I know about the tax code (and I admit that I was a tax accountant a LONG time ago), you could deduct losses on money lent as long as it was a legit loan... and a loan to a third party where there are collection attempts seem to fit that bill...

Yes, once the loans are officially "charged off", then its a loss against the income. But they might bounce in and out of 'late' if there are occasional or partial payments and take quite some time to reach a charged off state. They'll also try to establish a payment plan, which might extend the loan well past the 3 or 5 year original term. So...eventually I'd be able to deduct the loss, just not until its completely written off, even though its obvious thats going to happen.

I have only one note that charged off, and frankly I'm miffed about it. The loan was for $12k, I had a $25 slice of that, and the borrower declared chapter 7 bankruptcy 2 months later. Seems like fraud to me, but they wrote it off as "not worth pursuing". Eh, it only cost me $25 to learn what happens when that occurs!

 

[Texas Proud]

Yes, once the loans are officially "charged off", then its a loss against the income. But they might bounce in and out of 'late' if there are occasional or partial payments and take quite some time to reach a charged off state. They'll also try to establish a payment plan, which might extend the loan well past the 3 or 5 year original term. So...eventually I'd be able to deduct the loss, just not until its completely written off, even though its obvious thats going to happen.

I have only one note that charged off, and frankly I'm miffed about it. The loan was for $12k, I had a $25 slice of that, and the borrower declared chapter 7 bankruptcy 2 months later. Seems like fraud to me, but they wrote it off as "not worth pursuing". Eh, it only cost me $25 to learn what happens when that occurs!

OK, so I guess you are miffed that a bank can take a charge for possible loan losses, but you cannot until it actually is charged off... makes sense to me... but I think that is more of being an accrual basis vs cash basis...

I guess if you need to book the loss, you can sell it...

 

[cute fuzzy bunny]

OK, so I guess you are miffed that a bank can take a charge for possible loan losses, but you cannot until it actually is charged off... makes sense to me... but I think that is more of being an accrual basis vs cash basis...

I guess if you need to book the loss, you can sell it...

Its real fun if you take the loss and then later they come back and pay on the loan to clean up their credit. I'd have to refile for the year where the loss was taken. Of course, barring a multiyear audit, they'd likely never catch it...or care about the buck or two.

 

[sailor]

Its real fun if you take the loss and then later they come back and pay on the loan to clean up their credit. I'd have to refile for the year where the loss was taken.

I thought, you would not need to refile at all, just include it in your income in the year it was received?

Publication 525 deals specifically with Recoveries and 550 with Bad Debt deduction:

From IRS web site:
( Publication 550 (2011), Investment Income and Expenses )

Recovery of a bad debt. If you deducted a bad debt and in a later tax year you recover (collect) all or part of it, you may have to include the amount you recover in your gross income. However, you can exclude from gross income the amount recovered up to the amount of the deduction that did not reduce your tax in the year deducted. See Recoveries in Publication 525.

sailor
PS: Good to see you back CFB

 

[cute fuzzy bunny]

Thanks for the info. Of course, taxation has to be as complicated as humanly possible.