Today's post is from Jack, who gave us his reader profile a couple years ago. Here's his update:
Well, it's been about two years since I did the reader interview. I'll start by listing an overview of what's happened since:
- My wife and I welcomed our first baby into the family. Our little girl is a bit older than 1.5 years. Besides being a huge personal adjustment (goodbye sleeping in on weekends), she's been a huge monetary adjustment. First of all, we've started saving for college for her, with a 529 invested in a low cost Vanguard index fund. Additionally, since my wife works from home, we decided that a nanny would suit our life best. And finally there's the generally mont-to-month costs of a toddler. (More on this below.)
- We've crossed over the 1M, then the 1.5M net-worth (incl equity) barriers. 1.0e6 USD was a big deal for me. I felt like we were racing to a million, and I was scrimping and saving to get there. When we started to get close, I would check it multiple times a day, watching how individual choices in the stock market moved the needle. Once we reached a million, for the first time in my life, I felt like we had breathing room. I relaxed, and felt like we could weather any financial storms that came. Some of that money's locked up in 401ks, etc. that have penalties associated with them, but we keep a fair amount in cash (> 6month living), and liquid investments (>50% of net) that we can tap if needed.
- My career has leveled off. When I first started working at my company, I was kicking butt trying to get ahead. I wanted more money, more prestige, and more responsibility. Once I reached the extreme level of income I feel I have, I have slowed down. Partially, I was a little burnt out, partially I felt safer (see above). I took some personal time off from work recently to deal with my burnout, and came back with my batteries recharged. I'm hoping to kill it in the coming years; however long that may be (see below).
- We're getting close to the magic number for early-retirement. I have always felt that 2M (liquid assets) was a magic number. Based on the 4% Safe Withdraw Rate (SWR), and the fact that I'm sure we can live on 80k (pretax), we could be all set. Right now, I'm tracking that number as late 2014 or early 2015, but there are a lot of unknowns in that date.
Financially, there are a lot things on my plate:
- Our outflow is staggering. I know we could live cheaper. When I see that our expenses last year totalled approximately 100k (after tax), I am out of breath. Admittedly, that includes childcare and prepaying the mortgage (which I don't do anymore since refinancing at 3.5%), but it's still a ton of money. (Despite this, we still managed to save > 100k.) If you break down the spending, there are things we could do to cut expenses, but we've been more focused on growing our careers than cutting costs. So far, that's been the right strategy, but I think in the next year it might not be, because:
- My wife and I would like to have another kid. We've always felt one was too few, and she feels three are too many. Biologically, we need to get on this soon. I also think we're emotionally more prepared for it. If we have another kid, we're likely to have my wife stop working. This will save the nanny, likely save on taxes (AMT is a bitch), but we'll lose her salary and 401k (plus match). Overall, I think a second kid will cost us at least 45k/year net.
- I like to invest in individual stocks, and I'm running out of investment ideas. With the tear that the stock market's been on, we're up a staggering amount of money this year. I've been selling some shares as they get to what I think is, "fair value", but I'm running out of investment ideas. We live in an area where I don't believe it makes much sense to invest in real estate, most bonds are artificially depressed, and I don't believe in commodity investing, so largely, our cash cushion is growing. I'm investigating things like peer-to-peer lending, but so far haven't pulled the trigger.
- I want to start investment and retirement accounts for my child(ren). I believe in the power of compound interest. Besides the (~18k) we have in our child's 529, I'd like to start putting money away in an investment account. I want to grab some solid bluechips for her, and just let them sit there and drip for the coming decades.
- Early retirement is closer to a reality. My wife and I had always planned to work until we turn 45, at which point I had calculated that we could likely retire with about 2-2.5M in assets. Again, at our current rate, I see us having enough money in late 2014, or early 2015 -- a full 7 years ahead of schedule.
Our plan for early retirement has always been a working retirement (you have to do something with all that time). Likely I would teach, start a business, or work parttime at a library (or something similar). My wife hasn't decided what she wants to do. When I took my recent time off work, after I spent a week or so sleeping in, I found that my days were packed just getting stuff done, working on hobbies, and watching the little one. Frankly, I wonder if I'll have time to work with all the other things I want to do with my life.
Our problems are not, "how are we going to pay off this credit card," but "how can we continue to build wealth?" Our problems are first world problems.
We recognize that we didn't do it alone. We have had help from our family: with love, stable home lives and our educations mostly paid. We had a head start in life with that, but if you look at our net worth, it's largely been a factor of hard work and lucky decisions over the last decade. We started that decade with my wife's house and my small stock portfolio (about 100k total between us both), and grew it dramatically over the last decade. We focused on our careers and didn't give in too much lifestyle inflation (until we had a kid that is).
Charlie Munger (VP of Berkshire Hathaway) says that the first 100k is the hardest. I agree with him here. For us, it was hard for us to get to 100k, but once we got there, our careers were rolling, the compound machine was chugging, and we were off.
I don't really feel qualified to give anyone generic money advice, mostly because everyone's financial situation is different. However, I can say what worked for us: starting lucky, working hard, and sticking to it. When the market lost 50% of it's value in 2008-2009, we didn't sell, we bought more. When housing crashed, we looked to buy a reasonable home in the inflated property market we live in. When stocks run up, we look to pare our positions down. I would say we try to keep the long view in mind and wait for the opportunities when they present themselves.
I have no idea what people will ask; but I welcome any questions and will be as frank as I can.