Early Retirement Extreme Forums

Early Retirement Extreme Forums » Money Questions

1. 

   joer1212
   

   Apprentice
   Joined: Mar '12
   Posts: 34

   Hello, everyone, this is my very first post on this site. Hope you can give me some good advice.
   Here's my situation:
   I am a 42 year-old single male (no kids) with a full-time job as a New York City subway train operator (a.k.a. 'motorman' or 'train driver'). I've had this job for a little over 3 years.
   I currently earn about $75,000 a year.
   Since I started this job I made a goal for myself to retire by age 50. My reasoning was that if I could accumulate at least 500k in about 10 years, I could live off the interest of this principal for the rest of my life.
   Now, don't get me wrong, it's not that I don't enjoy my WORK, I do. I just don't enjoy my JOB. In fact, I don't enjoy ANY job. It's simply too smothering, and I love my free time too much to hand 2/3 of it to any employer.
   Right now I have 74k (face value) in 4 corporate bonds:

   (1) 20k in Goldman Sachs; 6.3% annual interest
   (2) 12k in Selective Insurance Group; 7.4% annual interest
   (3) 30k in Pactiv corp. (Teneco); 8.3% annual interest
   (4) 12k in Sara Lee corp; 6.1% annual interest

   I also have another $29,000 in cash at my local HSBC bank.
   I have no debt whatsoever, so my net worth is currently about $103,000.
   Last year, between my salary and my investment income I made $81,000, before taxes.
   I have no car and no cable tv. I have a $35/month cell phone plan, and a $49.95/month internet bill. I also pay about $30/month for electricity.
   Now, for my living situation.
   I live by myself in an apartment of my parents' 3-family house. I live virtually rent-free. I've offered to pay at least 50% of market value rent to them, but they simply refuse to take my money. They are fairly well off, and really don't need it.
   I have a close relationship with my family, so I won't be going anywhere any time soon.
   I calculated that my annual living expenses is about 17k. I like to travel twice a year internationally, so this jacks up my costs, otherwise I could probably get by with about $12,000 a year.
   My question is, what is the fastest way I can reach my financial goal? Please keep in mind that I will never be touching my principal, only most of the interest (the rest will be reinvested to offset inflation).
   I am getting some decent interest on my corporate bonds, and my initial plan was to just keep buying these until I had half a million's worth, but I have read some books and articles and have expanded my investing knowledge a bit.
   There are many options, and I am confused and paralyzed as to what to do.
   These are some of the options I am aware of:

   *Corporate bonds (pros: stable, reliable income. Cons: BBB bonds may be too risky, and I may get a better overall yield elsewhere with similar risk. Higher grade bonds yield too little).

   *Dividend-paying stocks (pros:potential for great growth. Cons: a dip in their share value can undermine my retirement income).

   *Mutual funds, stock/bond index funds, etc (pros: safety in numbers; low risk of default. Cons: yields may be too low precisely because of its safety).

   *Reits,ETF's (pros and cons same as stocks).

   *Municipal bonds (pros: tax-free stable income. Cons: yields are too low).

   *Annuities (pros: I MAY be able to get a higher annual income from these than is possible with other vehicles. Cons: you must forfeit your principal, and they don't pay THAT much more to do this. Also, risk of insurance company default).

   *Purchasing real estate & collecting rent(Let's not even go there. I DON'T want another job after I retire. Plus, people move out, don't pay...the headaches are anathema to everything I am trying to accomplish).

   *Starting a business (no comment).

   Maybe you guys have other ideas?

   FYI: I SHOULD get SSI when I am 65, plus I will get a partial pension from the MTA at 62. The problem is having enough money from my retirement savings to live off the interest between 50 (at the latest) and 62.
   I don't ever plan on getting married or having kids. No, thanks.

   Posted 1 year ago #
2. 

   secretwealth
   

   Expert
   Joined: Jun '11
   Posts: 1,499

   Greetings, joer, and welcome to the club! I'm also in NYC, and let me thank you in advance for running such an affordable public transport system--I love the MTA (for the most part).

   I think of all the options you've posted, funds are the best option, but why do you have to choose? Why not buy some dividend-yielding stocks, some bond funds, and even a couple of REITs? Diversification is the key to asset protection, after all.

   Posted 1 year ago #
3. 

   cls
   

   Novice
   Joined: Dec '11
   Posts: 8

   I am also in NYC and a big fan of the MTA (mostly).

   I get my internet service from Time Warner for $29.99. I have their cheapest option and it's more than sufficient for streaming Netflix, Hulu etc and general web surfing.

   Posted 1 year ago #
4. 

   DutchGirl
   

   Master
   Joined: Sep '11
   Posts: 479

   @Joer: I am wondering how you feel about just digging in a little bit on your acquired assets. If you can live on your pension plus social security plus some profit coming from your savings from age 65 onwards, why not use say 100k of your 400k stash from age 50 to 65? That would give you say $12k per year from the $300k that you're not touching, plus about $7-8k from the $100k that you are slowly using. This way, you would "only "have to save up $400k instead of $500k, and I think it is still pretty secure. Even if social security AND your company's pension fail exactly when you turn 65 and don't pay you anything, that would still leave your $300k stash to live on. Granted, then you can't make exiting trips anymore, but as I said this is only from age 65 onwards and assuming both the pension and social security show total failure.

   Posted 1 year ago #
5. 

   joer1212
   

   Apprentice
   Joined: Mar '12
   Posts: 34

   Thanks for the feedback, guys.
   secretwealth's idea of simply purchasing a variety of asset classes is something I was aware of, but I was wondering if I could do a little better if I concentrated my assets in the best-performing vehicles. The thing is I'm not sure which the best-performing vehicles are.
   Stocks could return annualized yields of 15% for the rest of my life, or they can return 2%. It's a gamble.
   BBB rated corporate bonds will, on average, return 6.5% annually, but there is a risk of company default, plus I may do better elsewhere with similar (or less) risk.
   To address Dutchgirl's comment:

   "why not use say 100k of your 400k stash from age 50 to 65?"

   Well, if I do this I would be PERMANENTLY reducing my income. While I CAN live on very little, more money earning me interest is certainly preferable.
   Keep in mind that I can only safely draw some of my interest to live on. The rest has to be reinvested to offset inflation.
   Also, I still think it's kind of scary for me to just drop my job, where I earn so much. I'm very insecure about this to begin with (as much as I want to), so I want to make sure that once I make the big decision to quit my job, I have as big a nest egg possible earning me money. I don't like the idea of barely eking by with limited money, and feeling shaky and insecure about my future. Sure, I live on only 17k a year now, but I have the security of knowing that, should I need it, I have much more money that I can draw on in reserve. Once I quit my job it will be gone forever. I will have no safety net, nothing to fall back on but the interest that my principal yields.
   Also, as I get older, I may have unexpected medical costs and other scary surprises. So, at the risk of sounding anti-earlyretirementextreme, the more money I have earning me interest, the better.

   Posted 1 year ago #
6. 

   Dragline
   

   Master
   Joined: Aug '11
   Posts: 959

   "secretwealth's idea of simply purchasing a variety of asset classes is something I was aware of, but I was wondering if I could do a little better if I concentrated my assets in the best-performing vehicles. The thing is I'm not sure which the best-performing vehicles are."

   The truth is -- nobody else knows either! If investing were that easy, you could be a millionaire in just a few years. The reason to diversify income streams is precisely because you DON'T know which one will be the best in the future.

   If you do not diversify, you will either do a lot better or a lot worse, but you won't know until the future arrives.

   Now, you had asked the question "what is the fastest way I can reach my financial goal?" The fastest way would be to invest in highly risky assets such as options -- but you might not get there at all if you did something like that, and probably wouldn't sleep very well either. The most reasonably safe way to do it is to invest in the bonds you have along with some stock and reit-type funds. I would focus on reducing the fund expenses, though, so you would want to look at things like the Vanguard funds or the stocks themselves.

   You might look through the investment trade log for some ideas, especially those focused on the dividend-paying stocks and reits. It wasn't clear when your bonds mature, but a very basic portfolio might keep half in bonds and half in interest-bearing stocks or reits. Going into the stock market whole hog is a bit difficult to recommend right now, though, given the recent run-up. I would "ease in" to whatever you decide to do, but would not keep a lot in straight cash with short-term interest rates as low as they are at the moment, unless you think you might need that money in the next one or two years.

   Best thing to do is read as much as you can until you feel confident, or at least comfortable, about a strategy before pulling any triggers. There are many ways to make money, but infinitely more ways to lose it.

   Posted 1 year ago #
7. 

   dot_com_vet
   

   Master
   Joined: Jan '11
   Posts: 376

   Vanguard does have a fund designed for those in retirement:

   Vanguard Target Retirement Income Fund (VTINX)

   That would certainly offer *major* diversification. I'd be curious if anyone on here is using a fund of funds like that to live on.

   Posted 1 year ago #
8. 

   secretwealth
   

   Expert
   Joined: Jun '11
   Posts: 1,499

   dot_com_vet: I'm not in one of those funds, but I do remember reading somewhere (sadly, I can't remember where--it was in a textbook, though), that the utility of diversification effectively disappears at one point--i.e., there is a certain number of holdings one needs to lower risk, but beyond that there isn't a significant drop in risk relative to the level of diversification.

   If anyone knows what I'm talking about, please clue me in--I've forgotten the details, sadly.

   Posted 1 year ago #
9. 

   Hoplite
   

   Master
   Joined: Dec '10
   Posts: 489

   @secretwealth,
   I think what you mean is diminishing returns of diversification:

   http://www.investopedia.com/articles/01/051601.asp#axzz1qqLXhglW

   Much of the diminished return is based on the limited number of stocks, sectors and asset classes; corrolation and overlap become unavoidable thus failing to reduce risk.

   I have not been in a timed fund such as VTINX, but I do use the Vanguard STAR "fund of funds" for instant mutual fund diversification across 11 mutual funds in stocks (domestic and international), bonds and cash reserves:

   https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/productoverview?fundId=0056

   Posted 1 year ago #
10. 

    joer1212
    

    Apprentice
    Joined: Mar '12
    Posts: 34

    Secretwealth, you hit the nail right on the head.
    I could have simply taken the easy route and diversified my portfolio, investing in various asset classes, and then forgotten about it and go fishing.
    The thing is that over-diversification can dilute my yield, and this is the last thing I want when I need as much as possible to reach a specific financial goal within a specific amount of time.
    To dot_com_vet:

    "Vanguard does have a fund designed for those in retirement:

    Vanguard Target Retirement Income Fund (VTINX)"

    The trouble I have with funds is that they simply yield too little annual interest. They also tend to be volatile like the stock market.
    The funds that DO yield a lot are offset by high fees and loads, which completely neutralizes their benefit. You just can't win.
    Dragline Master makes a good point:

    "The truth is -- nobody else knows either! If investing were that easy, you could be a millionaire in just a few years. The reason to diversify income streams is precisely because you DON'T know which one will be the best in the future.

    If you do not diversify, you will either do a lot better or a lot worse, but you won't know until the future arrives".

    I guess I, essentially, have 3 choices:

    a)Diversify and take the good with the bad, and hopefully it
    will average out to enough annual yield to retire on.

    b)Take on more risk, and continue investing in individual BBB-rated corporate bonds. This will provide an average annual yield of about 6.5% that will be steady and dependable, provided that no major holding goes bankrupt.

    c)Invest in BBB corporate bonds and some dividend-paying stocks. I can throw in some REITs, too. This will give me some diversification without diluting my portfolio too much.

    By the way Dragline Master, my bonds mature between 17 and 32 years.

    Posted 1 year ago #
11. 

    dot_com_vet
    

    Master
    Joined: Jan '11
    Posts: 376

    Joer1212, thanks for the detailed response!

    Where does one go shopping for corporate bonds? - Ignore, tons of them at the Vanguard Bond Desk, something new to research. :-)

    Posted 1 year ago #
12. 

    KevinW
    

    Master
    Joined: Aug '10
    Posts: 576

    It seems like you're asking how to invest, which is a popular subject around here, with many competing viewpoints.

    +1 on the suggestion to read more before making substantial changes.

    And an emphatic +1 on the suggestion to eventually diversify into multiple asset classes. When you're 100% invested in one asset, you run the risk of being wiped out if that asset blows up. Think stocks in 1929 or leveraged real estate in 2008.

    I use the permanent portfolio, but it's not for everyone.

    Posted 1 year ago #
13. 

    m741
    

    Master
    Joined: Jan '11
    Posts: 730

    Just a question, with a fairly high-paying job (80k/year is pretty good given your situation), and low expenses, how have you accumulated just 100k? Is this because you've only been working the subway job for a few years and hadn't saved anything prior?

    Assuming you started from zero, and accumulated 100k in 3 years, you would accumulate an additional 300k or so over the next 8 years (42-50). That's getting into retirement territory, yielding roughly 16k year, enough for you to live on. so if your goal is to retire by 50, that seems achievable.

    Posted 1 year ago #
14. 

    Hoplite
    

    Master
    Joined: Dec '10
    Posts: 489

    @secretwealth,
    I think what you mean is diminishing returns of diversification:

    http://www.investopedia.com/articles/01/051601.asp#axzz1qqLXhglW

    Much of the diminished return is based on the limited number of stocks, sectors and asset classes; corrolation and overlap become unavoidable thus failing to reduce risk.

    I have not been in a timed fund such as VTINX, but I do use the Vanguard STAR "fund of funds" for instant mutual fund diversification across 11 mutual funds in stocks (domestic and international), bonds and cash reserves:

    https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/productoverview?fundId=0056

    Posted 1 year ago #
15. 

    joer1212
    

    Apprentice
    Joined: Mar '12
    Posts: 34

    "Just a question, with a fairly high-paying job (80k/year is pretty good given your situation), and low expenses, how have you accumulated just 100k? Is this because you've only been working the subway job for a few years and hadn't saved anything prior?"

    Well, there's this nasty little thing called taxes, plus the fact that I started from -$12,000 (debt). To top it off I've only been at this for less than 3 years, and I didn't start my job at top salary. The first two years I made about 56k/yr.

    Posted 1 year ago #

RSS feed for this topic

Reply

You must log in to post.