Everybody Loves Your Money

Over and over I read about various people’s plans for retirement.  You know the one thing that they have in common?  They all have different approaches.  There is no "one size fits all" approach to retirement out there.  Rather than try to match someone else’s approach, I have laid out a number of my own possible scenarios:

1) Retire at 65 and do absolutely NOTHING

This is the least attractive scenario for me.  The magical number of 65 would (in theory) give me access to medicare if it’s still around.  It would also give me a longer saving horizon giving more of my money time to compound.  If I retire at 55 with $1 million, waiting until 65 could increase the number to over $2.3 million without contributing another cent.  That assumes I get 9% on my money, although that may be aggressive considering I’ll be less interested in the risk to get a 9% return.

I really don’t want to wait until I’m 65 to quit working.  Frankly, I don’t like work and would much rather pursue other interests.

Pros:

• Longer saving horizon
• More health care options
• Less risk in outliving my money

Cons:

• I’d have to wait until I’m 65
• Less quality years ahead of me
• Life is short
• Less time to pursue other interests

2) Retire at 55 and Do Nothing

This option sounds pretty darned attractive to me but I’m concerned I’d get pretty bored and I KNOW I’d annoy the heck out of my wife while trying to keep busy.  This option also carries a lot of risk in it.  While we are saving pretty aggressively, we aren’t saving aggressively enough to live on our money for 35+ years.  If things went well in the economy, we could probably pull it off, but I’ve proven to myself that I’m pretty darned risk averse and would like to have as much cushion as possible.

55 is a good age to stop working, but I just don’t know what I’d do with the time.

Pros:

• No longer a slave to a job I’m not too excited about
• More chance to try new things and explore the world
• Potentially many quality, healthy years ahead of us

Cons:

• What do we do about health care?
• How would we make our money last?

3) Retire at 50 and get a lower paid job in an industry that I am interested in

There are lots of jobs out there that I would love to do but the money is terrible.  We just couldn’t live on the salaries that these jobs pay.  I think this option is probably the most practical and interesting option of the 3.  If we scaled back our consumption and had our homes paid off, we could easily live on much less than we do today.  Our only bills would be taxes and ongoing living expenses like power, water, cable etc.  By retiring (aka switching careers) at 50, we could work less, and do work that was more meaningful to us.  This option would also give us access to health care options that we wouldn’t have if we sat at home.

We are on target to pay off our houses before we turn 50 and we don’t maintain any other debt so this option is actually quite achievable.  The only gotcha here is that our daughter will just be going in to college.  We are hoping to offset that by investing today in a 529 plan for her.

Pros:

• Pursue work that we enjoy
• Access to health care options
• More time for hobbies and other interests
• Use much less of our invested assets due to income from the low paying jobs
• More time for invested money to compound

Cons:

• Quitting your high paying job while your daughter is in college doesn’t feel too good
• May not have as much time to travel and enjoy "retirement"

When I was younger I used to think that the best thing I could do would be to buy a second home in Arizona.  Why?  Because some day I want to live there in the winter (aka: Be a Snowbird).  I was convinced that a key strategy to my investing and saving for the future was to lock in a low price on a place to live in Arizona today to get rid of the risk of unaffordable prices later.  I’ve since changed my mind.

Real estate in various parts of Arizona is dirt cheap these days.  Mind you, that comes from someone living in the Seattle area where prices are much higher.  In 2006 the median price of a home in the Seattle area peaked around $400K.  That has come down a bit since then but it’s still much higher than the price of many new homes in Arizona.  The median price of a house in Arizona in 2006 was half of Seattle’s.  I found brand new housing developments down there with houses starting in the $110K range.  During the real estate "run up" that we’ve experienced over the last X number of years, the prices in Arizona seemed to be going crazy.  Just like Vegas, reality is setting in though.

Over the years I’ve also realized that owning a second home isn’t a low cost endeavor.  Whether it’s used as a vacation home or a rental, there are many monthly costs to contend with.  Since long distance landlording (Hey, did I just make up a new word?) doesn’t sound very appealing to me, I’d most likely just sit on the property and let it drain my bank accounts.  For my personality profile, being a landlord just doesn’t feel like a good fit.

So what am I doing instead?  Well, for starters, I’m saving money.  On top of that, we have the second home out near the lake that we are enjoying during our younger saving years.  By my estimation, we’ll be able to sell it as we get closer to retirement age and use the proceeds to buy a place in Arizona.  Who knows.  By that time, we may decide to invest the proceeds of the sale and just rent a place there in the winter time.  The important thing for us now is to keep on task by saving and watching our spending so that we have all of the potential options open to us later.

You know how I love reading about the trials and tribulations of lottery winners.  Brad Duke is the example of someone that knew how to turn his lottery winnings in to a life long investment.  Unfortunately most other people aren’t that successful with their winnings.

Take Rhoda Toth as an example.  She won $13 million 18 years ago and has long since gambled and spent that money.  In 2006 she and her husband were accused of tax evasion and the trial just completed.  Unfortunately for her husband Alex has since died so it’s just poor Rhoda facing the music.

At her sentencing, she claimed that she had MS and couldn’t walk.   When the judge saw video of her walking around, he opted to sentence her to jail, rather than let her off with a smaller punishment.

Just think.  18 years ago she was on top of the world.  Now, she is facing jail time and is broke.  Had she invested that money all those years ago, she’d be dining in the same restaurants as Warren Buffet.  (Okay, bad example because we all know Warren eats in pretty darned normal restaurants, but you get the point.)

http://www.tampabays10.com/news/local/story.aspx?storyid=86972&catid=8

Congratulations to Frugal Zeitgeist for paying off her NY apartment.  She managed to do it in 6 years, 7 months and 3 days with no huge financial windfalls.  She took the route of sacrificing a few things along the way and applying everything she could towards the mortgage.   I noticed that she refinanced a couple years in to a 15 year 5.125% mortgage which also helped.  As I read through her posts it was obvious to me that she has learned the art of living below her means and sticking to her personal commitments.

CONGRATULATIONS!!

I also hope to pay off our mortgage but I’m doing it a little bit differently.  I chose to buy a second property and built a house on it.  By paying a good price up front, doing a lot of the work myself, and paying cash as we went, I have built up a sizeable amount of equity in it.  If all goes well, within 5 years I should be able to sell it and use the cash to pay off our primary mortgage.  That would mean we will have paid this mortgage off in 10 years, which isn’t quite as impressive as the Frugal Zeitgeist, but since this isn’t a competition, I guess it really doesn’t matter. 

Do you want to pay off your mortgage early?

(Thanks to MadameX for pointing me to the blog)

I have to confess something.  More and more these days I’m finding myself thinking about what it would take to check out of the rat race.  I don’t care about having the fanciest stuff, or the latest and greatest tech gadget.  I really want to have the option to just do absolutely nothing as much as I want.

I think it stems from a few things.  First is seeing how happy my friend who retired is.  Sure, he’s older than I am but that doesn’t change the fact that I would sure like to be in his lifestyle situation.  He did a lot of things right to retire around 50.  It’s unrealistic to think that I have done lots of things right that would give me the ability to retire at that age, or even earlier, for that matter.  Sure we are savers and have amassed a decent set of assets but not nearly enough to check out now.

I also keep thinking about all the posts that JD @ Get Rich Slowly has done on the 4 hour work week and reading about various people that have bucked the trend and are working on their terms.  Blogging for a living is a little scary and I can’t even begin to dream about that because I don’t have the readership, or revenues of some of the other guys that have actually done that.  The chicken in me also worries about what I would do if the income stream died off.  Frankly, it would be a lot harder to generate my current income level on my own than it is to just stay at my current job.

As I get a little bit older, I find myself wondering, "What’s the point of it all?"  I suppose this might be due to the fact that I’m not doing work that I’m passionate about.  I mean, do you know anyone that is passionate about doing process development and managing lots of customer expectations?  I don’t.  "Why don’t you do something that you are passionate about then?" you ask.  Well, probably because I don’t know what that is.  Frankly, I probably need the type of job where I’m out and about all day visiting customers.  I absolutely love dealing with people and working from home just doesn’t give me as much of that.

So, what are my options?  Well, I could sell everything I own and end up with a decent chunk of change that I could generate basic interest income off of.  It would probably give me enough to rent a modest apartment and buy basic necessities but the reality is that there are too many variables that could tank that plan.  I don’t have enough that I could take whatever life might throw at me and probably won’t for at least another ten years.  Even then, it would be a very modest lifestyle.

I’ve also thought a lot about selling our primary residence and living rent free at our lake house.  With the money I’m making online, interest income I could generate, and maybe a part time job, I could get by.  But then there is the issue of what kind of life that would be for my daughter.  Is it selfish of me to drastically adjust our lifestyle and potentially rob my daughter of opportunities later as she struggles to figure out how to pay for college etc?  That doesn’t really feel right either.

So, here I sit.  Wondering what the best solution would be for my family.  Wondering if I’ll live a long life and all of the working and saving now will pay off later.  Wondering if I’ll kick the bucket much sooner and then regret not having ever taken a big chance on another way of life.

No matter what happens, I am grateful for the lifestyle and way of life my family has today.  Don’t get me wrong.  If nothing changed for the rest of my life, I’m still very, very grateful for being where we are at.  I just can’t help but wonder what else there might be…….

It’s done.  I sold my 2006 Toyota Tacoma and am now driving a 2000 Toyota Tacoma.  While it was a bit stressful to do, I don’t regret it one bit.  The 2000 has only 55,000 miles on it and should last for quite some time.  I ended up getting about what I wanted for the 2006.  The check has cleared and the money is in our account.  We’ll be using a bit of the funds to get the sheet rock in the lake house completed.  Once that is done, we’ll do some painting and then we will be doing all the finishing work.  At this rate, I hope to have occupancy by early spring.

It’s nice to look at our net worth charts and see that cars are a very tiny portion of our overall net worth.  The less depreciating assets on the books, the better.  As the lake house is completed, I’m also looking forward to funding my 401K more aggressively.  In the past I was contributing up to the IRS annual maximum but have had to pull back from that a bit to use the funds on the lake house.  Currently we are only contributing 8% of my income, along with the company match of 6%.  Contributing 14% to your 401K is pretty decent but it puts us just shy of the IRS maximum so we’ll be trying to increase that soon.  I fully intend to roll all of next year’s raise in to the 401K each month.  That should easily put us over the mark.

I’d like to say I’ve learned my lesson on buying new cars.  I’ve had a couple episodes where I bought brand new cars, only to sell them less than 2 years later for a loss.  How does that saying go, “Fool me once………”.  Yeah, I don’t learn very easily when it comes to cars.  I think I need to recognize a couple things about myself.  First, I’m rather indecisive and can easily change my mind on something.  Second, I love cars and always will.  With this in mind, my new goal will be only to buy a car that I know I can sell later and break even on or make a bit of money on it.  Not easy to do, but also not impossible.

The hope, for now, is that we have two reliable cars that will go many more miles.  We have a Toyota Tacoma, like I mentioned above, and also a 2000 Honda Accord.  Both of these cars have strong resale values (a sign of quality) and also are known to be quite reliable.  We’ll be banking on that for the next few years.

Everyone likes an instantly wealthy person.  I have a special fondness for the newly rich.  No, I don’t have a business proposition for you.  Nope, don’t need a loan either.  I just care about you and your pile of cash.  I want you to be successful like my good friend Brad Duke.  (okay, he’s not my good friend and he doesn’t even know me, but I have a lot of respect for him.)  Good old Brad Duke is one of the few lottery winners that hasn’t had to go back to eating Top Ramen.

Why is it that lottery winners so often find themselves broke and depressed after only a few years from winning their loot?  Well, there are a ton of pitfalls they encounter.  Let’s look at a few of them.

Cousin Earl:

Just about everyone has a cousin Earl.  You know the guy.  Scraping by month to month on a low income from an entry level job.  You won’t even have the oversized 2 foot by 4 foot check in your hand before Earl calls.  “Hey good buddy.  I heard you won the lottery.  Can you help me out a bit?  If I can just get a little bit of cash, I can finally get myself out of this dead end future and on to bigger and better things.”  Earl most likely won’t boost himself up with your new winnings.  There’s a good chance that Earl will hire himself a few working ladies and buy a few rounds at his favorite watering hole.  Don’t give Earl a nickel.

Old high school buddy:

Geez.  You haven’t talked to old Bob for 20 years.  It was great to hear his voice.  I’m sure it was a coincidence that Bob called you two days after you won the lottery.  I bet he just saw your name in the paper and said, “Gosh, I haven’t seen him forever.  I’m gonna see what he’s up to.”  Except, Bob knows what you are up to.  You are up to your eyeballs in cash and he wants to get a little taste.  Tell Bob it was good to hear from him and you’ll give him a call in 20 years.

Concerned Citizens for the Preservation of Spam:

Spam (the meat byproduct) is an important part of our society.  Hell, it’s an important part of this world.  Of course that depends on who you ask.  If you ask the Concerned citizens for the preservation of Spam, they’ll tell you that there is a serious crisis.  Spam sales are down.  The security of our country is at risk.  I mean, if we had a huge man made or natural disaster and the assembly lines weren’t cranking out adequate volumes of Spam, we could all starve.  It’s all crap.  Don’t worry.  We won’t all die if they don’t build a museum of Spam history.  We’ll be okay if you don’t personally give some of your newfound wealth to Spam Incorporated.  Hint: Don’t get too caught up with the Spam theme.  If you win the lottery, you will be approached by every organization on the planet asking for money.  Tell them all to move on.  There’s no gravy for them in your gravy train.

Are you starting to get the idea?  Before you give a cent of the money away, think about how this money could benefit you in the future, as well as some well thought out charities or family members.  The key here is to get the money working for you.

Now, substitute lottery winnings with a few other windfall situations.  Inherit some money?  Same rules apply.  Just hit it big with the latest tech stock?  Same rules apply.  Is there a huge fountain of thick black oil coming up out of your lawn?  Same rules apply. 

Money is not a “here and now” thing.  If you win the lottery or come in to a large amount of money, stop thinking about the lump sum you are going to receive and start thinking about the income that lump sum is going to generate for you.  If you win $10 million dollars, it’s not really $10 million dollars.  It’s more like 5% of $10 million dollars each year for the rest of your life.  For all of you liberal arts majors (myself included) that comes to $500,000 every year for the rest of your life.

Okay.  Now that we’ve got all that out of the way.  If you recently won the lottery and have found any value in this post at all, please send a large donation to:

ELYM

PO Box 55543

Seattle, Wa 59102

Or better yet, leave a comment and I’ll contact you shortly.  (and by shortly I mean, the second I read your comment)

If you are a long time reader of ELYM you know that I tend to make some rather “out of character” moves now and then.  Usually these out of character moves have to do with automobiles.  If I was smart, I think I’d just sell everything and head on over to become an Amish man or a Mennonite.  At least in their culture, there is one kind of transportation; a black cart being pulled by an animal that poops right in front of you.  While the poop doesn’t sound too appealing, the lack of choice in vehicles might drastically improve my long term finances.

I bought another truck.  Before you pummel me and excommunicate me from the rather large “circle” of personal finance bloggers, please hear me out.  For starters, I have hated my new Toyota Tacoma since I bought it in 2006.  I think the quality sucks and Toyota just wasn’t able to make it right.  I’ve been driving it for about a year and a half and have watched it depreciate (although not as badly as many other brands).  With the huge commitment to build our lake house, I could really use the money that I’ve got wrapped up in the truck.  I paid cash for the truck originally so it really is a lot of money to have tied up in one automobile.

So here’s what I did.  A friend of mine announced that he had decided to buy a new truck.  He bought a 2000 Toyota Tacoma brand new back in 2000.  Ever since I bought the 2006 Tacoma, I’ve missed my old 1997 Tacoma.  More than once, I’ve wished I could go back in time and not have made the 2006 purchase.  Since I can’t do that, I’m doing the next best thing; cutting my losses.  I was able to buy the 2000 at a very good price.  It is 3 years newer than what I had before and has half the miles.  By my calculations, I should be able to get many years of loyal service out of it.  The best part is that if it breaks, I know how to fix it.

What am I doing with the 2006?  I’ve got it all cleaned up and have put it up on Craigslist for sale.  So far I’ve had a few “virtual tire kickers” and am hoping to convert them in to real tire kickers in the next couple days.  Once the sale is complete, I’ll have a TON more cash that we can use to finish up the lake house.  The sooner we get it done, the sooner I can start accelerating paying off the lake house completely.  Believe me, it will feel great to have one house paid for and the other with over 50% equity in it.  It’s all part of my master plan to build wealth in multiple ways.  This plan would be much easier to execute if I’d quit sandbagging myself by buying a new automobile during moments of weakness!

So, one million isn’t enough for you, right?  I know it’s not enough for me.  I know I need much more than that.  Will $2 million cover you in retirement?  If so, are you on the right path to meet that goal?  About how much money should you have at your age?

Age 65: $2138558

Assumptions:

You put away $4250 per year (notice you have to save a lot more than when you are saving for a measley one million $)

You earn 9% on your investments (yeah, I cranked it up 1% from last time)

Observations:

Notice how the money takes on a life of it’s own as you get older and your investment balance increases?  Your individual contributions tend to matter less and less as you get closer to age 65.  I love compound interest.

I always like to know if I’m on the right path and on schedule with my investing and saving.  I normally keep a spreadsheet of what my net worth needs to be at various points along my journey.  I use this as one of many tools to see if I’m making good decisions about saving, investing and avoiding purchases.  We each have a unique number that we are striving for.  Certainly, for a long time, one million dollars has been the “magic” number.  That’s not quite as magical as it once was but it’s safe to say that if you amass $1 million dollars at any age, you are doing much better than the majority of others.  So what amount of money do you need to have at each age?  Here’s a graph from age 21 up to age 65 with the dollar amounts you want to strive for at each age.  You can reach this number in multiple ways.  You could save more or compound your existing assets by changing your investment strategies.  You’ll find that some years you miss the mark and others you exceed it.  A changing market certainly will take it’s toll.

Age 65: 1,020,875

Now for the assumptions:

-You invest $2500 per year over your entire life

-You earn an 8% interest rate every year  (In practice, some years will be better, some will be worse)

I confess that I love playing with numbers like this.  Using this tool, I can quickly glance at my investment balances and compare that to the chart above to make sure I’m on track.  I actually use a different set of numbers based on my income and my current balances to see where I will be if I keep up at the same rate that I’m investing today.  Since I know I want to have much more than $1 million by the time I retire, I’ve got a more aggressive age vs net worth chart.

Want to create your own chart?  Go to:

http://www.money-zine.com/Calculators/Retirement-Calculators/401k-Savings-Calculator/

and punch in your own numbers!