Reader Profile Update: Jack

Here's our latest Reader Profile Update. Many of you asked for this type of post -- a progress report on where past Reader Profile readers are these days financially. I think you'll really enjoy this. (BTW, if you do enjoy it, you can submit your own update, hint, hint.) :)

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.

Comments

[Limey Junior]

Doing very well. How come no more real estate??

[Jack]

I live in a very high cost of living area on the east coast. I don't think direct investment in real estate makes sense in my market, and I feel the complications of adding real estate in a different market would be too much for us to handle with our lifestyle.

I've looked at REITs, but I only really invest in things I understand, and I don't know enough to understand their structure.

[BH]

We are in a very similar situation in terms of networth and age of first child. What is your goal number and monthly contribution for your child's 529 plan? Do you think $2m will be enough for retirement once you have 2 kids. I used to think so, but then baby # 1 arrived.

[Jack]

We contribute about 10k/year to 529. I've recently decided that what we should be doing is opening a joint trading account with 40k before doing the 529 as this would allow my daughter to accumulate a little wealth and would be under the UGMA limits.

My retirement goal is 2.5M (net, including equity, 2M without equity). I look at retirement as a "light working" retirement. I figure I'll have a low stress parttime job, that takes up some of my time, and possibly finances the family vacations, etc.

I'm pretty confident that 2.5M is enough. Frankly, even living in a high cost of living area on the coast, I think we could do it with that number. We'll probably relocate to someplace cheaper (like Oregon, or Maine), which I fell will dramatically increase our odds of 2.5M being enough.

[BH]

But once you retire, which sounds like it will be well before your daughter goes to college, your income will be relatively low, so I wonder if it is possible that she would qualify for some financial aid. I've heard that a child's 529 plan is a ding against financial aid. Just wondering if you've considered and researched this issue and if that has to do with your decision to open a joint trading account, or if you are aware of other investment vehicles that wouldn't count against the child when applying for aid. I anticipate being in the same situation as you at that time - lots of assets but relatively low income. I've heard that if you own a business you can pay your child through the business and put the 'salary' in a roth IRA which can then be used for college or toward buying a first home. I haven't researched though.

[Jack]

I have spent more time thinking than researching. I believe that by the time my daughter goes to school, the rules will have changed at least once, possibly twice, and who knows what they'll be; therefore, what good is researching to N-th degree. I work under the following assumptions:

* "That which cannot continue, won't." The cost of college education is rising at an incredible rate. It is unsustainable, and clearly a bubble brought about by states cutting funding to public institutions, and the inability for people to BK out of student loan debt.

* If worse comes to worst, I can always get another job. I am voluntarily entering retirement. There's no reason why I can't start a business or get a job in the future. So, if I have to (for her sake), I will.

It may be naive of me, but I believe that between the ~60-80k I expect to make off investments, plus 10k for part time work will easily provide for my children's education.

[Apex]

@Jack,

"clearly a bubble brought about by states cutting funding to public institutions"

So based on that reasoning the bubble in costs exists only at public universities right?

[BH]

Yes, I agree. We plan to be in a very similar position. What I wonder is if we are oversaving in the 529 plan. If income is 60-80k, would our child qualify for financial aid, but for the 529 plan? Then we've 'waisted' a bunch of savings. If that's the case, is there some other way to save for college that doesn't count against our child's aid application (assuming lots of assets but low income). What is the ideal total amount saved in a 529 plan for college beginning in about 16 years? $100,000? Less/more? Maybe it will all change over the next 16 years. But I don't want to be 'punished' for being a saver, either.

[Jack]

@Apex:

I think you forgot your *sarcasm* tag. I believe the price of private institutions is being pushed up to continue to offer elite status over the public ones. In other words, they charge more because they can.

@BH:

I agree, but frankly I don't think there's anyway to know. I project we'll have anywhere from 100k-200k for each child saved. I can't say what that will mean in the future. And if I have to, I'll withdraw the money from the 529 and take the penalties. There's no way to predict the future. You can only do the best you can.

[M]

Two thoughts:

1) What are your thoughts/budget on health insurance and expected costs in your semi-retirement...would you be able to get a group rate for a family?

2) I've seen the 4% rule applied and modelled for 60 year olds....does it give the same probablility of portfolio survival for someone at 40?

[Apex]

@Jack,

I thought you might argue that. I have to say that is not very compelling. Your arguments do not follow basic economics. Raising the prices of your product because your competitors raised the price of theirs does not result in a static demand curve let alone an increasing one like we have had in education. Raising the prices of all competing products in a product set results in lower demand.

The only thing that can allow continual increase in prices is shrinking supply or increasing demand. Since we don't have shrinking supply that leaves increasing demand. Everyone raising their prices does not create increasing demand. That is econ turned on its head. Increasing demand lets everyone raise their prices.

The question is why is their increasing demand that is undeterred by increases in price. Answer that and you will have your answer.

[Jack]

@M:

I subscribe to the MMM theory of health care: Get a high deductible plan, pay out of pocket. I also believe medical tourism (through the US and world) will increase in the coming decades. I am not scared of paying my due.

You're right, the 4% rule is a "worst case" rule for 30 years of retirement. It just so happens that picking a SWR less than 4% increases the odds dramatically. Additionally, the year in which you started saving and the year in which you retire also play a large role. I can't predict the future, which is why I generally use a 3% SWR (2e6*0.03), hence my ~60k/year figure in a previous comment.

For an interesting discussion, I'd recommend reading the Trinity Study on SWR, and the updated study.

@Apex:

It's been years since I took economics in college. I'm guessing that you're arguing that there's an increase in demand for education, pushing up prices universally. Without studying the figures, I'd have to say that's true. I'd also assume you're saying that we don't have a static demand curve. Both are likely true.

I don't have the answers. If you do, I'd love to know. :)

[BH]

Just a thought (you’re probably already doing this) – you can use an HSA like an additional retirement plan. We max it out the HAS every year but never withdraw from it - there is a double (or triple depending on how you view it) tax benefit in that you deduct it going in and never pay taxes when it goes out, plus it grows tax free. Ours is invested in in index funds. So while it’s only a bit over $6k per year, it adds up, and if you have some catastrophic event in early retirement and have a high deductible plan, you're covered.

On education, the cost of education is too high, clearly. It is worth it to figure out how to allocate assets in a way to qualify for aid if you anticipate a relatively low income (like, less than $100k adjusted). $100-200k per kid is a lot of money.

[Apex]

@Jack,

I don't have any exact answers. I have some suspicions of partial culprits but it is likely complicated and multi-faceted. I don't think there is going to be any magic bullet solutions as I suspect the causes are varied. I suspect the same thing with health care too by the way. I was merely suggesting that your statement that started with "clearly" might not be so clear.

[Anita]

I commend you for having a plan and sticking to it. Keep up the great work!

[Adam G]

Very interesting conversation. I am only 30 and far from retirement but it's great to see success stories like this. My goals are similar...to have 2 kids and still retire early by using HSA, Roth IRA, SEP IRA, etc. Anyway, I'm sure I'll share more in a "reader profile" soon enough. Thanks for sharing yours.

[Joe]

Jack - just an fyi - if you do consider real estate make it close to home. I am going thru a nightmare scenario where a rental condo in FL has water damage. the condo manager refuses to accept responsibility (leaking roof) had to contact ins. co and now "red flagged". My ins company says they are only responsbile for wind driven rain. have to find a lawyer now and and sue the heck out of people 4 states away.
good luck to you and your family.