Onward!

Photo credit: Maggie’s World

This is the last of our transition posts!

IMHO – where H = humble as well as honest – it starts to get VERY exciting / challenging – interspersed with long periods of boredom – from here …

…. so, let’s make this a last-but-best post: Mark knows his path (i.e. real-estate and small businesses). How do we help him on his way? C’mon, be creative!

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Onward! That reminds me of my former co-worker. He is a happy go lucky guy who is very smart and he is currently in his 3rd or 4th retirement now.  How that works? Work really hard a few years, save some and spend carefully, hit a jackpot with a start up and retire temporarily. I might adopt some hybrid approach in the near future, hopefully. Too much of either one; work or retirement, is not healthy.

We have just concluded a bunch of MM101 exercises. Most of them are really helpful; I’m particularly fond of the 20% Rule and the 25% Income Rule. Maybe because I like numbers and I got an elephant stamp out of that exercise with my old home. I do need to rework it for my new home. Nevertheless, the other MM101 exercises are equally important.  It is MM101 principles that got me here at this point.

Like a few of the 7 millionaires in training, I started some MM201 activities like converting my old home into a rental property and making attempts to launch a mall business. The rental is not cash flowing a whole lot and I’ve made some significant improvements on the property. The way I look it is the experience that I’ll gain from this activity. It will help me in my future real estate acquisitions too.

Let’s review my original number and date here. It is $5 million in 10 years and the required compound growth rate is about 40%.  I should be looking at:

Real-Estate together with Stocks and Small Businesses

So far, I’ve started on a small rental. I’ll be launching a small business soon investing in Tax Liens and that will bring in more real estate exposure. I did hire an accountant to help me draft out a business development plan and I’m happy with the outcome. The next steps are flawless execution according to the plan. How do I do so far? I must say, I’m not moving forward enough! My current obstacles are my home, assembling furniture and furnishing the new home;  and a very busy social calendar – trips, concerts, parties. It is time to make a choice. I can still do it all but there will be some sacrifices.

Flying on Auto Pilot…

It’s interesting, as Jeff points out, the different views that each of the 7MITs have towards so-called ‘tax-advantaged retirement accounts’ … for example, Jeff views them as ‘investing’ and almost sees his investments in real-estate as ‘distractions’ from his investing strategy … I’m not here to pass judgement on any of this: rather, I want to throw it to you for your ideas?

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I find it very interesting how different and at times how similar our approaches to personal finance are.  Sometimes, almost everyone is singing the same tune…European luxury vehicles for all my friends (well almost all us), while at other times we are on completely different pages.

Take our discussion about retirement accounts.  Some have chosen different savings methods while others have signed up for the full meal deal and drank the tax-deferred retirement account kool-aid.  I’m a kool-aid drinker.

I’ve been drinking the kool-aid since I was 23.

I can still hear my father telling me right after I graduated from Aviation Officer Candidate School, “You better start saving for retirement.”

So start I did.  And I’ve been at it ever since.

I’m not sure how to react to those who say they don’t need/want to use Uncle Sam’s tax deferred retirement accounts.  I appreciate the “damn the torpedoes, full speed ahead” approach, but I think there is a place for these types of accounts in preparing for the later stages of life.

I do not intend to imply that I have this thing squared away.  I’m part of this experiment not because I have the answers, but because I know I can do better.  My pendulum is probably too far to one side in that I may be relying too much upon my retirement account savings and the promise of a government pension.  As you’ll see below, my non-tax-deferred savings strategy is a bit…oh, let’s call it lacking.

I haven’t always saved a ton, but I’ve saved.  I am a classic buy and hold long-term investor.  I squirrel a way a little at a time, each and every pay check.  Yes, I’m one of those dollar-cost-averagers.  And lately I’ve been averaging down, which is a good thing.  My program is on auto pilot, managing my money and investments automatically, whether I remember to or not.

Let’s hit the details of how I’ve been investing and saving.

My investment and savings vehicles include two traditional and two Roth IRAs, a 401K, two 529 college savings accounts, one brokerage account for individual stocks and a money market account for my cash savings.

On a monthly basis, my wife and I set aside the following:

• 401K – $675 (no employer matching)
• Roth IRAs – $833
• 529s – $800
• Money market savings – $1350

That totals $3658 set aside each month.

The annual numbers look like:

• 401K – $8100
• Roth IRAs – $10000
• 529s – $9600
• Money market savings – $16200

That totals $43,896 set aside annually which is approximately 38% of my gross income.

It’s enlightening putting all the numbers down on a single sheet of paper (or electrons since we’re on the Internet).  Now I know why I haven’t been able to afford my own airplane.  I’ve been saving too much. 

My money is invested predominately in mutual funds in these tax deferred accounts.  I have experimented a little with individual stocks but I typically tend to lose there.  Heck, lately I’ve lost in my mutual funds as well, but who hasn’t.

For many years I went about investing completely on my own and had mediocre performance.   As much as I want to believe investing is a pastime for me, I have to admit that I’m no expert.  In 2004 I started subscribing to an investment newsletter and now follow an aggressive growth model portfolio they have put together.  My overall performance has improved dramatically but I’ve been hit pretty hard just like everyone else lately.

My portfolio is made up primarily of low cost index funds (a total stock market index, a NASDAQ 100 index, and an EAFE international index fund).  I also have a couple aggressive growth oriented funds that are actively managed (read higher fees).  These funds are the Baron Partners fund and the Meridian Growth fund.  Additionally, I have a few shares of Garmin.

The high water mark was in the fall of 2007 when my investment accounts topped $220K.  However, it’s now back down to around $125K as of Feb 09.  While that downturn of $95K is disappointing, my Net Worth has increased more than $100K since the Fall of 2007 because of my recent real estate purchase.

While real estate has kept my Net Worth moving forward.  It kicked my financial airplane off auto-pilot.  I stopped all the investing activity listed above in early January and redirected it to the money market account so I could “pad” my cash to get through the financial and life upheaval that comes with a move.  I’m antsy to get my investing back on track and will slowly start re-engaging the auto pilot as my life and finances settle into their new groove.

I have some ideas on changes I need to consider moving forward, but want to hear what you think first.

201K

Photo credit: krodinjw

Mark’s experience (50% losses in his 401k; 75% losses in his Roth IRA) prove that it’s not the 401k or the Roth IRA that is the problem, it’s what you put IN them that counts … in Mark’s case, he’s prepared to wait 20 to 30 years to cash them out … presumably, these are ‘backstops’ for him in case his plans to reach his Number don’t pan out?

As Mark asks: what can we learn from all this?

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As an employee, the 401K program is definitely one of the easiest “savings” vehicle.  It is automatic, you don’t see the money when you get the paycheck and the employer matches too.  However, it is tightly tied to the stock market;  it goes up and down over the years; depending on your investment choices.

Currently, I’ve 2 retirement accounts, 401K and Roth IRA.  I’ve been contributing to the 401K account for the last 8 years at 10% of my salary. It was bad during the first couple of years where we experience the dot com bust, good to very good the next 5 years and an almost disaster the past 1 year. It is amazing that in 1 year, you go loose so much on paper.

As of writing, the 401K is valued at $64, 600. It is down probably around 50%, just like the Dow Jones Industrial. It has a good mix of large cap, mid cap, small cap, and international mutual funds. Am I concerned about the return? Yes definitely. Am I underwater? Yes, on paper. But am I breaking sweat about it? Not really.  I don’t need the money now and it still got 20-30 years to recover before I can start withdrawing. Will it recover or produce decent returns by then? Probably. I’ll just continue what I’m doing right now since it is automatic and it is getting an employer’s match at 6% up to $750 per quarter. That is a maximum of $3,000 that I get every year.

The Roth IRA was a pet project of mine. I enrolled in an advisory service to auto trade calendar options. It was doing well for 2-3 years until the sharp reversal the past year. It is valued only at $4,200 right now, mostly in cash. There are huge losing positions in there. The losses in this account is about 75%.   Lesson learned for sure and I did learn a few things; a rather expensive education for me

What can we learn from all this?

From what I can gather, Diane has made some good decisions (e.g. pay cash for a car instead of a loan); get an MBA … but, hasn’t really been able to financially ‘cash in’ on it, and is now either looking for work – or, ‘semi retired’ – and currently drawing down from her retirement accounts. Have I got that right? If so, what could/should Diane do?

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Quick post to answer Adrian’s questions about our retirement accounts.

What I got ain’t much. My first retirement was a real retirement and when I resigned my position to become a SAHM, I withdrew its cash value and put it in an IRA, as well as withdrawing a thrift savings plan (more akin to a 401k I guess) and putting that in the IRA as well.

Since the cash value of what I withdrew was about $22k, plus $3k from the TSP, it wasn’t worth as much in cash as it is as a retirement plan. This is important because it was a federal government retirement. Leaving meant I could not get the exact same retirement plan if I went back to the government, but if I did get reinstated later (going back), I could “buy back the years” into a retirement plan by returning the cash. This would add the years I’d worked back into the years towards my retirement and it would be a retirement plan, not a 401k. Tho I know that’s changed a lot for the US Govt in the past decade.

This money later got used to buy my current vehicle because when my prior vehicle finally ran itself into the ground, we did not have headroom between income and expenses at that time (two young boys) for a car payment. It was a choice of paying off the house (mortgage) or buying the vehicle.

My last post should have revealed that the vehicle cost $28,100. We chose to leave the mortgage alone and pay cash for the vehicle because the rates between the two would be quite different (our mortgage was at a good rate, plus was tax-deductible.) That action probably saved my financial skin during the later divorce, actually, so let’s not try to second-guess it now. That did not wipe out the IRA either.

However, that was in the years 1999-2000, so we luckily ended up pulling out the money at a time when the market had run up quite a bit (remember the New Year’s toasts to QualComm?) and right before it semi-crashed in March/April 2000. I believe at one point the value of $13k went down to $9k, but because it was a divisible property, I didn’t really mind that it was less than it was (I figured it would go back up later, and it did.) I was investing in stocks at this time I think; perhaps some mutual funds.

Off to get the MBA and acquire a lot of debt – credit card and student loans. Received some cash from division of the house, paid off the living expenses (credit card debt) then went to work and started rebuilding a retirement, this time a 401k.

I worked some OT and because of the great support staff in our home office, was able to set up to have all my OT money put into the 401k and keep building it.

I invested in stocks of companies I was familiar with and was watching, then delved into some international funds – again where I knew something about the infrastructure and planning in those countries (international consulting in Supply Chain Management was the major focus of my MBA) as well as something about most of the companies/industries where the funds were placing their money.

I made about 33% in 2007, then watched one (a US cable company’s) stock tank as a result of a Jim Cramer episode (it was a good pick, but now it had the attention of those who are fad shoppers and he – not understanding their market position – downgraded it with telecommunications stocks, so speculators started selling out….or something.) I had dabbled a bit with REITs overseas, but wasn’t seeing a good return on that, and eventually limited it to a couple of stocks and Intl Mkt funds, then last summer when they dropped 17% in a week, and in preparation for my move to NC, moved everything into cash – about $66k? – and left it there. I didn’t have time to work the investments (keep up-to-date) and could not risk losing value at that time in my life.  All told, this was only for about 4 years.

Now, I am using the IRA (all is now in IRAs again) to pay off Credit Card debt, child support payments, etc. (see prior posts on what I am covering), so it is dropping rapidly and I will make a huge withdrawal soon to pay off any remaining 2008 taxes as well as prepare for 2009 taxes. Then, who knows?

All I know is that I realized last year (2007-2008) that at age 47, saving 10% of my income with a 50% match up to 8% by my company, fully-vested from day one, I was not going to be able to save enough money – even with 33% growth each year, assuming I could assume that (which we all know I can’t) – to be able to afford to retire one day.

I still have the option of returning to work for the govt, if they hire, but where I am in NC, there is not the kind of work I used to do (cost analysis/operations research) for the government, and so I would have to move again to regain that retirement.

Needless to say, I am in a state of transition…let’s not think about the names that has been called in mythology…change is always such.

Oh, there’s also some stuff in a State Teacher’s Retirement Fund – which I should transfer somewhere else – for a year’s substitute teaching I did.  Very small. — And some years (working) which took money for social security, so there may be something there for my old age.  Being at the tail end of the baby boomers, I try not to think of that as a back-up plan, you know?  Same goes for my xh’s retirement, which I may have already traded for less aggravation from those quarters, but it might exist;  just not something I am counting on.

Really Bad Decisions

Who knows? Lee might be racing for bottom rung on the 401k ladder … but, he also knows that his path to wealth lies elsewhere. That, in itself, is a good thing

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How about hearing the worst first?

For 27 of the 40 years I worked in church related ministry, most but not all of the churches I worked for had a retirement plan where I would pay $52.50 per month and they would match it.  Now remember not all those churches were part of that plan, I “could” have done it myself but decided not to more time than not.  The last 13 years I have been self employed and put “nothing into retirement”  I didn’t even have a savings account. I literally lived check to check. I ended up with less than $50,000 in a retirement plan that I am now drawing approximately $435.00 a month.

My wife had a $10,000 in a retirement plan from a previous employer but was used for downpayment of a house years ago.  She has been working for companies that have very small retirement plans and I’m not exactly sure what they are.

LESSON LEARNED:  If I could do this all over again I would put more into retirement and faithfully do so regardless of what the employer did.  I would also have a savings account

401K? No way!

First cab off the rank – Scott – weighs in with a barrage of reasons why he does NOT have a 401k, or the ‘doctor equivalent’ thereof …

… I can’t judge Scott badly because:

a) He has a strong saving ethic and a positive and – apparently – rapidly improving net worth, and

b) I have no 401k, either, to show for 5 years of living and working in the USA

Perhaps some of you can steer Scott down the ‘path of the retirement righteous’ better than I?

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Well the next area for each of the 7 MIT to look at when analyzing our financial health and how well we are on track to generate our required compound growth rates (and hence, reach our Number by our Date) is in the area of retirement accounts. In this exercise, we are taking a strong look at how well we’ve put money away to date in traditional retirement accounts, such as 401k’s, Roth IRA’s, etc… as well as approximately what percentage of our income do we invest in these vehicles, do we get an employer match, how has this investment performed for us thus far and whether or not we have lost money recently due to the current economy.

I must first start by saying that very gladly I have absolutely NO retirement account, never opened one, never participated one bit and don’t really plan on participating in an actual retirement account at all during this lifetime, unless I get to the point where an adviser shows me that I might get a slight tax advantage from using one, instead of ponying up a little extra of my hard earned money for Uncle Sam, instead of for my life’s purpose. I know to many of you, this probably sounds like about the most foolish statement concerning finance that you have ever heard and probably think of me as a fool. Well, a fool I am!

Back a few years ago, when the end of school was near for me and I was beginning to face a different set of challenges and ways of thinking.  Basically switching gears from thinking scientifically, clinically, drowning my mind in research and cutting through how I was going to properly assess patients and get the desired clinical results to help them with their health challenges, to thinking about things like; finance, my debt, what it was going to cost to get into practice, how to run a small business practice, etc..  Needless to say, when you’ve been thinking about nothing but anatomy, physiology, biochemistry, injuries and the like for the past bazzillion years, it’s tough to make the switch in your mind and do it right so that you can indeed be financial successful.

I think this is one of the major pitfalls that young doctors coming out of school make. Not only is it hard to switch those gears in your mind from the science of the human body, to the science of money, but you’ve been raked through the coals for so long mentally and you’ve been so financially drained and broke for so many years that I believe this is the cause for most doctors to get into the typical doctor finance situation. The situations where as they start to earn money (not to mention serious income), they go bananas, break the 20% and 25% housing rules, live waaaay above or at least the maximum of their financial means, purchase expensive toys, cars, etc…and get nowhere in the process financially speaking.

In other words, they’ve had to live on absolutely nothing for so many years, while the same age friends and peers have already joined the work force, began to make some decent money, purchased some decent houses, cars and toys and taken a vacation or 3. I believe this is the cause for the new doctor spending bonanza. I found myself starting down this road right out of school and immediately put the brakes on!!

I began talking to as many financially successful doctors as I could, read just about anything on finance I could get my hands on, subscribed to several blogs on money, take seminars and just about anything else I could do to start creating the transition in my mind. It worked. It was a hard switch to turn, but it did indeed work and the rest is history. Since that time, we’ve gone from a whopping net worth of negative 225k to a positive 152k in just a few short years, but more importantly, I can already see the wealth snowball building faster and faster for the next few years to come. I believe we’ve paved a very nice, clear Money Making 101 runway and have begun a very smooth takeoff and ascent to begin Money Making 201.

So concerning a retirement account, well, we’ve spent so much time and energy the past few years paying off debt that of course we didn’t bother to open one up. It also helped that I never had a traditional ‘corporate’ job, that was supplied with a 401k option. So it never really came up in my mind. However, as I read my way through several books, blogs, popular finance magazines and websites, the topic kept coming up over and over about how smart it was to invest the 10-15% of your paycheck into a tax-deferred retirement account, possibly get an employer match and finish like a winner with a mil or so in that account at age 65!

Somehow the thought of this didn’t sit well in my brain….I kept getting images of me at 65, in really scary looking  plaid golf pants (and I don’t even play golf. Don’t ask how I got this image in my head) a strangely unstylish looking white hat, heading over to the ATM machine to check the limited funds I had available to rent the car that we would need to drive across Yellowstone National Park for the 30th time, because we couldn’t afford to do the Fiji trip I always wanted to do. Nope, there were not enough funds in that intelligent 401k that every author told me I had to invest in, to withdraw safely without worrying about the remaining years of my retirement, anyway.

Needless to say, when I snapped out of that dream, I began to question retirements accounts and other investment tools of the poor. I would be found regularly scoffing at retirement accounts in front of friends, on blogs, to family members, etc… and be looked at like a fool. But I’m sticking to my guns here and saying that I’m passing up the retirement account.

I believe that life is short, too darn short to stick away 10% into a retirement account, earning 7-8% if you’re lucky and don’t get picked apart by fees and the myth of diversification. Not to mention the fact that you can’t touch that money for the next 100 years without being penalized, or whatever the cutoff age is now.

No thanks, I’ll make my own decision concerning my own money Uncle Sam! And even more importantly,  I’ll have a few swings for the fence and all the glory it can provide you if you connect right!

So there you have it! No retirement account in the past, present or future for Scott. My retirement account comes to the tune of about 40-50% of my net household income per month going into appreciating assets that include a mixture of real estate, small businesses and stocks, with a higher percentage of that income going to all of the above as my income increases.

Now, I guess I need to plan on thoughts for a better wardrobe for my mind in my dream retirement…..hmmm, lets see here…

Photo credit: Duckscrossing

You can’t get there from here …

No, Lee, Ryan didn’t go AWOL … just slipped into the ‘think tank’ for a little longer than expected

Ryan explains what this means in his opening, but with this photo, I was as keen as you to find out! He knows that he has a big task ahead of him, and I will say that developing/selling some intellectual property (be it via a unique business model, invention, process, or whatever) WILL be his path to success, because it’s the only one likely to give him the ‘home run’ he needs, given that Ryan’s annual compound growth rate is well into ‘boom or bust’ territory …

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“You can’t get there from here.” This New England saying never made sense to me until I came up with my number! Can one get from 100K net worth to 16 million in under 9 years?!?! There is certainly no road map to go from, but there is no doubt it can be done.

Short of winning the lottery or getting a huge inheritance from some long lost uncle, it’s going to take a lot of planning, hard work, and a little luck. Fortunately for me (and the others following the 7m7y experiment), luck favors the prepared mind. Without getting too philosophical, basically what I’m saying is that if you want a million bucks (or a billion for that matter), it’s not likely it will fall on your lap without any effort from you. However, if you’ve set goals, come up with your number, researched, planned, put the hours in, and made it a priority, is it still luck when your an “overnight success”?

That is why the 7 MITs are putting up these posts showing how we think our journey might look to get to the destinations that we’ve dedicated the last few months defining. We all now know where we are right now. Those who have completed THE TASKS on 7m7y.com now know where they need to get to. And now we just have the MINOR chore of filling in the in between stuff.

My “in between stuff” will HAVE TO include starting my own business because my compound growth rate is 85% (see Scott’s post for a great explanation of this). Starting a saleable business is something I’ve always wanted to do anyway. Actually, I already own my own company, but as a medical device distributor it is unlikely that I would be able to sell it for the type of return I need to reach my goal of 16 million, so I don’t really consider it saleable.

I also want to develop some Intellectual Property. I’m in the operating room every day, so I constantly try to be aware of inefficiencies, improvements and things that are lacking. My business may start from some IP that I develop or I may just sell it after it’s patented.

Lastly, I believe my road map will also include, to a smaller degree, stocks and real estate.

So, I’ve chosen my vehicles, packed my bags, and I’m ready for this trip to start. Did anybody bring the GPS navigation?

In Summary…

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Josh is the first to review his Number … if you will recall, his Lee’s List pretty much encapsulated his Number, as well. However, I’m sure that Josh is glad that he reviewed his requirement, calculations, and assumptions again as the issue of inflation came up, causing Josh to revise his Number upwards by a lazy mill. or so …

In order to summarize and finalize the necessary fund amount’s needed for my Life’s Purpose I used ebay to find the cost of a used 911 turbo, REMAX.com to find the apartment I want to live in, in the correct place more importantly, and some good old guestimation for the traveling. As per Adrian’s instructions, I tried to minimize what I would really need in order to consider myself successful in realizing my life’s purpose.

With a humble $100,000 a year the necessary expenses such as food, shelter, clothes, etc. should be taken care of.

The $130,000 a year would pay for expenses directly relating to my Life’s Purpose of solving real world problems that I have a passion for.

The $10,000 would cover hobbies and personal interests’, and of course let’s not forget about the Porsche coming in around $65,000.

This comes down to approximately $4,865,000 to cover a $240,000 per year lifestyle, assuming 9% return on investment in order to compensate for 4% inflation at the same time as living off the remaining 5%. The 4% used for inflation is very important because if the principle remained static I would eventually be a millionaire living in the poor house because over the course of the 70+ years I have left to contribute to society, $240,000 per year would soon seem like $24,000 a year in today’s dollars. Also I forgot to mention this will occur at the age of 31, which is around 7 years from now.

Check out this site for quick compounding interest calculations.

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Well, it didn’t really take very long, but my FIRST sales site is up and running … feel free to visit, and sign up to receive my 2nd eBook for FREE (don’t buy the 1st eBook mentioned in the ‘sales letter’ … it’s also available FREE to all of my readers, here).

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Ryan also has an altruistic Purpose that mainly requires time. But, he also recognizes the need for philanthropy – not to mention a little personal ‘financial maintenance’ (read: debt reduction) …

In one of the most effective and enlightening self-improvement exercises I’ve ever done, I’ve calculated my “number” and put a lot of thought and research into determining what the things I need to achieve my goals and life purpose.  Now separating what things are needed for my goals, and what is necessary for achieving my life purpose is proving to be a little bit more dicey.  With my purpose being to “build relationships that build dreams”, I suppose I technically could do that now, in my spare time.  The biggest problem with that is, with two small kids and a lot of hours on my “day job”, spare time, is a lacking resource.  So, to truly effect the lives of others in a major positive way, I feel I need to replace my income and be debt free (~$225,000/year and a $660,000 mortgage).  However, I can subtract about $45,000/year because I won’t have a mortgage payment.

This would certainly give me a lot more time to devote to helping others, but it would be a lot easier to get things moving on the philanthropy front if I had some funding to devote to giving people a hand up.  I think $5000/ month ($60,000/ year) is a good start and if more is needed, fund raisers and other tactics can be employed at that time.

So it appears that, setting aside the dreams (some materialistic, some not) of my family and myself for now, to achieve the purpose of building dreams (for others), I will need (approximately and minimally), $5,460,000 in today’s money.

($225,000 – $45,000 + $60,000) * 20 + $660,000

Josh’s Life Purpose

My life’s purpose was formulated mostly by imagining sitting with my grandchildren and trying to impart some kind of wisdom that would help make their lives as fulfilling as I hope my life will be. So I deducted that my life must be fulfilling if I was going to somehow guide my grandchildren toward the same existence (and maybe do some bragging). So the obvious question is, what would make life fulfilling enough that I would be proud and eager to share it with my grandchildren.

For me fulfillment comes when I’m solving real world problems. Not mathematical or philosophical problems, but finding answers to situations that need to change. Working toward the answers is when I feel tireless and most fulfilled. I would like to be in a place where I can work on whatever problems I feel most passionate about.

My ideal life is simple… infinite freedom to do, go wherever and whenever I choose to. The target number I’m settling for, will in no doubt suffice for these adventures as well as take inflation into consideration.