Monday, July 30, 2018

Retirement Q&A Sessions

In the past month, I've been approached by 3 different individuals or groups (family and co-workers) asking for some personal finance advice. Most of the requests came somewhat out of the blue, but it was interesting to me to realize that to some people I have become a trusted resource for this information. I had the chance to speak with each of these groups and was surprised to hear some of the same questions pop up, so I wanted to share those questions as well as my answers.

1. You have a great interest rate on your house (3.75%) - why pay it off when you could do better in the market? Isn't that what smart investors do?

As part of my retirement plan, I am attempting to save 25-30x my annual expenses. By eliminating my mortgage payment, I drastically reduce the amount I'll need to be able to retire. If I were only paying my minimum mortgage payment of ~$1,200/mo (principal and interest) and planned to keep that amount throughout retirement, I would need an additional ~$400k before I could retire. 

I also foresee a day when I might want to start an entrepreneurial venture and having extremely low fixed costs makes that feel more palatable. I know that I would never feel comfortable leaving a high paying job while maintaining large fixed expenses so paying off the house at least gives me the option to take other measured risks. 

Lastly, the problem with trying to 'make the spread' between debt and an investment is twofold. First, that only works over a long period of time and ignores the volatility that could wipe you out entirely. If this were such a good idea, why don't you trade stocks on margin? Same thing, right? Second, in corporate finance models for NPV or WACC, one of the underlying assumptions is that the corporate entity exists in perpetuity. Since I don't plan on having an income in perpetuity, I shouldn't use the same models lest I inadvertently extend my working years beyond my desired retirement date. 

Other ways of building wealth could possibly work, but the approach I'm taking with my mortgage always works. 

2. I know everyone says that I can't time the market but hypothetically if I could, what types of investments could I use to avoid downturns in stocks?

I shouldn't be surprised to be asked this so much, but I still am. After nearly going blue in the face explaining how it is impossible to successfully time the market, multiple people came back with a response along the lines of: 
"That's nice, and I get what you're trying to say. But I really think this time is different. I can't really explain why, but I just feel like I'll be able to tell before the next downturn happens, since I've read a couple of books about the 2008 crash, or have a different perspective than most people, or ..."
When faced with someone who can't be convinced of their own naivete, the best that I can do is to have them answer a few questions (which they generally hadn't thought of before), then recommend they read Simple Wealth, Inevitable Wealth

One of the main arguments I have with this question is this:

- If you sell and go into cash, when will you get back into the market? If you are relying on your gut for signals to buy and sell, you will more than likely not feel right getting back into the market until after the market is higher than it was when you sold out. Sitting in cash while others around you are 'losing' is like being wrapped in a warm blanket. It's very comfortable, but that same comfort can also smother your returns as you lose purchasing power to inflation or the inability to ever get back into the market. 

If none of that works, we'll just have to agree to disagree.  

3. Should I be investing in Roth or Traditional 401k?

Even though I am personally investing in a traditional pre-tax 401k right now, I suggest using Roth in nearly all situations. The reason I'm not doing Roth right now is to maximize my take-home pay for the short-term while we finish paying off our house. Once we're done with that goal (less than three years from now), we'll switch back to Roth and increase our contributions and even do some additional Roth conversions. 

For me, this argument really boils down to having more money in retirement. Given the choice between $1M in Traditional IRA's and $1M in Roth IRA's, the Roth is the obvious choice. Sure, you have to pay the taxes early but once I'm done paying off my home, the only thing left for me to do is to build wealth. The more I can contribute or convert to Roth IRA's the more I'll have in retirement. 

Since my plan is to max out all retirement savings accounts possible after my home is paid off, by choosing the Roth option, I am effectively saving more towards retirement. If I invest $18,500 today, it will grow to the same amount whether it is in a Roth or a Traditional, but if it's Roth I get to keep it all versus having an unknown percentage as 'phantom money' that will be taxes due. Our own human nature is such that when we look at account balances of $100k we think 'Hey, I've got $100k' whether it is Roth or Traditional. In reality the only way $100k in a retirement account is actually $100k is if it is in a Roth.


Overall, it was fun to have these chats as it's a topic I'm passionate about and something I genuinely want people to do well in. Hopefully, those who seek me out will at least glean a little from our talks, but it would be really awesome (and entirely possible) if it changes their course in a larger way. 

Monday, July 23, 2018

June 2018 Net Worth Update - Up to $809k

June was a pretty quiet month for us. We didn’t travel anywhere and also didn't do any major home repairs (just a little bit of paint). With the kids out of school, it has been nice to just spend time together. Financially we continued our normal cadence of investing and paying extra on our mortgage, allowing our net worth to increase to $809,000


In June, our cash balance crept up over $21k. The majority of this is in a savings account where we like to keep at least $20k. I also net out our cash with credit card balances since we pay them in full every month.  


In June we made another big mortgage payment, reducing our outstanding balance by over $2,700. We should be completely done paying off the mortgage within 3 years, and to stay motivated I try to celebrate the small wins like when we hit new increments of $10k, $25k, or $50k. Homes in our neighborhood are now selling for well over $500k, so the estimate here feels conservative.


Our investments have not changed, shocker right? I met with some co-workers recently and compared investing styles and returns and they were surprised that even though I spend much less time than many of them on researching investments and trading, our returns are very similar (in some cases, mine were better). 

I have a demanding job and rarely have time during market hours to focus on my portfolio. Since I don’t want to delegate portfolio management, a passive investing approach works best. I’ve used many different trading strategies but so far have not yet found a positive correlation between returns and the time I spend managing my accounts. 

Thursday, July 5, 2018

May 2018 Net Worth Update

May was a great month in many different ways. We went on a long-awaited European cruise from Barcelona to Venice, I finished reading 11 books (!), and our net worth increased by over $22k to $801,743.


Our cash balance in May was pretty flat, which was a little surprising considering that this included our hotels in Europe and all our food/souvenirs. Most of our trip was on a cruise ship and those expenses we paid way before May, but we still spent more than a normal month. We don't have any expensive trips planned for a while, so shouldn't have any problems keeping our cash in the $20-25k range.


We continue to make big extra payments on our mortgage and knocked another $2,700 off the balance in May. This was roughly $2,000 more than the minimum payment, so we're still on track to have the house paid off in 2021. The extra payments we make are manageable in our budget, but can be a stretch during some of our more expensive months. Some similar houses in our neighborhood have been selling for over $500k, so this house value sounds reasonable even though the jump in home price from one month earlier looks big.


Talking about our investments sometimes feels like a bit of a broken record. Yet again, we are sticking to our plan. Why fix something that isn't broken though, right? I add regularly to my 401k, which remains 100% invested in stocks. Our other investments are nearly 100% stocks, with small amounts in bonds and REITs. More than 99% of our investments are in retirement accounts that won't be touched for over 10 years and we are comfortable with the volatility that comes with stocks.