JoeNCA's ERE Journal

Where are you and where are you going?
JoeNCA
Posts: 81
Joined: Sat Aug 28, 2010 7:58 am

Post by JoeNCA »

Goals for 2013
1. Increase after-tax cash position
The goal for this year is to achieve minimum 50k in after-tax cash.
Main reason is to prepare for any upcoming investing opportunities in stocks, bonds or real-estate. While saving in pre-tax will provide more leverage, it limits shorting, which maybe necessary. In addition, I have enough in pre-tax cash position. Bulk of my savings (at least half) will continue earn > 4% in interest while this process ensues.
Stocks:

While market is entering into a new bull market cycle, it is at an all-time high and I will be watching for signs of a crash.
Bonds:

Rates have risen in-significantly but With the existing federal debt, I do not see rates moving much higher anytime soon.
Real-Estate:

I see 2008 all over again, and expect same mistakes to be made near future. Should the interest rates rise at the same time (unlikely), I maybe looking to purchasing a house.
In my eyes, there is bubble everywhere. Since I'm hardly invested, augmenting cash position is my best option. And I will be able to react.
2. Secure readily accessible credit lines
I will be securing readily accessible credit lines just incase there is a need. Doubt I will need it.
3. Sell more stuff
Have been selling off excess items since ERE and this will continue. Most of the expensive items have been sold off. Now down to trivial items, which require more work for less return but they do add up.
4. Health
I have slacked off a bit in the health department, and I will be making positive adjustment(s) to balance this again.
5. Vacation / Travel
May be able to take a whole month off for vacation this year for the first time and it will be spent outside of the U.S.


JoeNCA
Posts: 81
Joined: Sat Aug 28, 2010 7:58 am

Post by JoeNCA »

Observations on rate of return
PRETAX:
Based on CPI data, a rough rule of thumb for purchasing power decline is 50% every 10 years.
Rough rule of thumb on income tax is 50% for single payer.
So half of a half is what you keep after inflation and income tax in 10 years.
Meaning you'll need 4 times the original amount you start with to keep up with purchasing power decline and income tax levy. X(1/2*1/2) = Y -> X*(1/4) = Y -> X = 4Y
Rate of return needed, using rule of 72:
You need to quadruple the money in 10 years. So you need the first 5 years to double, then the next 5 years to double that to 4 times.
Rate = 72/5 years = 14.4%
Add 4% withdrawal rate = 18.4%
Therefore, ROR for pre-tax account should be at least 14% - 18%
AFTERTAX:
Need to deal with purchasing power decline of 50% every 10 years - meaning you need to double every 10 years.
Using rule of 72:
72/10 years = 7.2%
Add 4% withdrawal rate = 11%
Therefore, ROR for after-tax account should be at least 7% - 11% except,
There is the capital gains tax (35%) so ROR should be at least 10 - 15%
Thoughts:
So 14% is the magic number that satisfies both pre-tax and after-tax.
An ideal aftertax account is Roth IRA or Roth 401K without capital gains tax and least burdensome (7-11%) but trades off leverage
Minimum ROR of pre-tax account can be adjusted by withdrawal but the trade off is standard of living - what's acceptable? - but you gain leverage/"free" money
Gamble in pre-tax - I would use "free" money for high risk/high gain
Ratio of Cash : Roth IRA : Roth 401k : 401k ?


George the original one
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Location: Wettest corner of Orygun

Post by George the original one »

> Rough rule of thumb on income tax is 50% for single payer.
Too rough, even for California. If you're earning $50k, then your effective federal tax rate, including payroll taxes is 21%. California income tax looks like 9.3% for $50k. So that's 30.3% effective rate for single person.
Granted that you'd be paying property tax, say $3k/yr which is roughly 6%, but since you'd be retired, you wouldn't be paying the payroll taxes, so it's still going to be 30% effective rate.
I'd go with a 33% rate for your tax rule-of-thumb... IMHO 50% is waaay too conservative for someone on an ERE income in the USA.


Dragline
Posts: 4436
Joined: Wed Aug 24, 2011 1:50 am

Post by Dragline »

Yes, you have created a kind of GIGO exercise that doesn't really tell you anything about your own situation. If you really think that you need to make 14+%, you are basically saying that Warren Buffett does not do well enough. Does that make any sense at all? Chuck those numbers right away and take a different pill.
First, don't use rules of thumb that may only apply to other people. For example, you do your taxes and know how much you pay. Is it really 50% (highly doubtful -- we're talking overall, NOT marginal) and if so, what have you done to minimize it?
And note that that number will go down when you retire, because no more FICA and taxes on dividends and capital gains are lower than for income, which is unlikely to change.
Second, your purchasing power will also depend on what you choose to consume, not what everyone else consumes.
In reality, you don't need to do this calculation, because many others have already done it and analyzed it to death. Go read some Todd Tresidder, Mr. Money Mustache and the ERE book itself -- you need to save about 25 times your expenses -- and maybe up to 30 if you you are younger. Or less if you are much older (read Kotlikoff).


JoeNCA
Posts: 81
Joined: Sat Aug 28, 2010 7:58 am

Post by JoeNCA »

It's an exercise to find the ballpark, nothing more.
US stock market's historical return is said to be somewhere between 8-10%, including dividends. Berkshire Hathaway - over 20%. Inflation excluded.
So 14% return, while difficult, maybe a good target with balanced risk. Not a billion dollar fund here.
Over-all taxes are near 50% for single individual right now. Starting with federal/state income tax and social security/medicare, 40% gets shaved off the top. Then, most commonly, sales tax, vehicle tax and property tax get added. By this time, 50% is easily reached.
Of course, tax-deferred contributions "reduce" taxes, but it still gets paid, eventually. Suppose one loses most of value in it? Explains why many baby-boomers are going back back to work after 60.
Depending on the conditions, the returns needed vary widely. Just wanted to get the "feel" for it again. I haven't actively invested since the 2001 crash.
I myself would also like a simple 4% withdrawal answer (1/.04 = 25x annual expense).
But the reality is is that inflation is the true evil that forces people to evaluate and take on risk for return. And taxes.


JoeNCA
Posts: 81
Joined: Sat Aug 28, 2010 7:58 am

Post by JoeNCA »

Moving again
Will be relocating to another place after this month.
I had found an apartment about a year ago, literally right across the street from work, but had to wait for vacancy.
A shopping center, a gym and a hospital are all within walking distance from this location.
The best part is that I will be reducing monthly rent from high $600's to low $500's.
This is significant, because rent is the largest expense each year.
Even at low $500's per month, the rent will cost nearly $7,000 per year.
Not exactly a bargain since this is after-tax money.
Recently, had an interesting conversation with a co-worker who professed to having lived out of his truck for about a year on work property due to 4+ hour round trip commute.
While this is extreme, for the co-worker, this was necessary and everything went well until he was found out.
Legal ramifications aside, it seems silly to incur such exorbitant cost for rent, especially if one's not investing in housing and some creative solutions are needed here.


GPMagnus
Posts: 116
Joined: Tue Jun 05, 2012 2:24 pm

Post by GPMagnus »

Joe
I really enjoy reading your blog - keep it up!
I have a few points about retirement calculations:
1. Inflation (part one) - the CPI increase you mentioned is faulty for a few reasons:
(a) since 1967, the annual inflation rate has been 4.43% per year - while 5% does not seem like much, compounding has an enormous effect on the final tally.
(b) Look closely at the composition of the rates:
http://www.bls.gov/cpi/cpid11av.pdf
A very significant part of the CPI is the huge increase in transportation costs, esp. fuel, which skews everything - for someone who lives an ERE lifestyle, the actual CPI for food and shelter is probably no more than 2.5% a year. At that rate, every 10 years, you'd have 78 cents instead of 1$, but not 50 cents!
2. Inflation (part 2) - if your portfolio has stocks or bonds, you usually have some CPI protection - both direct (e.g. TIPS) or indirect as companies such as Kraft or Cola Cola transfer some (and many times most) of the CPI increase to the customers, enriching you in the process and offsetting inflation (compare the growth in the dividend from Coca Cola to the growth in CPI - see here:
http://www.dividendgrowthinvestor.com/2 ... lysis.html )
3. 4% SWR - while you do not know how long you will live, the 4% assumes never touching your capital (like an annuity), but (sadly), at some point in the future you will have fewer than 25 years left, so if you;d need more money you could eat into your capital.
Finally, I think that 14% gains per year is something very few people achieve on a consistent basis, and the risk you would need to take to get to that level is very large.
Just my 2 cents ....


JoeNCA
Posts: 81
Joined: Sat Aug 28, 2010 7:58 am

Post by JoeNCA »

GPMagnus, thanks for very informative links on the subject.
Point well taken re: the subject of CPI, and it's quite true that one's consumption choices affect the rate of depreciation - and thus affecting one's "real wealth" - definitely a factor to consider in one's retirement considerations.
I particularly found the dividendgrowthinvestor.com website to be informative.
The more I spend time with the market, as much as I like the various theories of risk management and asset allocation, the more I like the fundamentals. It does not make sense to invest in stocks without dividends - actually gave me another idea which I'll need to verify.
I honestly don't expect 14% returns year after year. For a small investment sum, it's quite easy to generate double digit returns. But as the sum grows year after year, the returns become harder to achieve vs. effort put in - i.e. a literal diminishing returns.
But it's a good target to shoot for and it's nice to know whereabouts the ballpark is.
If there's at least 30% truth in it, then I know I can stand toe to toe with the best of world's economists. Hah.


GPMagnus
Posts: 116
Joined: Tue Jun 05, 2012 2:24 pm

Post by GPMagnus »

Hi Joe
Happy to be of help and its always good to be more informed!
A few more points:
1. You can hedge against inflation by:
(a) being able to produce some of what you consume;

(b) cutting through the supply chain especially for your large expenses - e.g. bigato buys his rice in bulk;

(b) bartering non-perishable goods you have for goods you want (e.g. Freecycle)
2. There is a heated debate in finance literature about dividends. Modigliani and Miller claim (under some stringent theoretical conditions) that dividends are irrelevant and do not change shareholder wealth. The "better a bird in the hand" camp, led by Ben Graham says that a dollar of dividends is better than a dollar of capital gains because it sits in your pocket.
In reality, it mainly depends on taxation of dividends versus capital gains and your personal tax status - for example, tax-exempt funds don't care whether they get dividends or sell the shares they hold for capital gains, but if your tax rate is 15% for capital gains and 39% for dividends, you'll be singing a different tune.
Finally, to put 14% per annum in perspective, if you could compound 1 dollar at 14% for 10 years, you'd have $3.70; if you managed to do it for 20 years, you;d have $13.74 ... sadly this is highly unlikely to occur, and if you can do it, you should go pro and run a hedge fund ;)
You might expect a total annual return of around 9 % from dividends and capital gains, signifying a real return of about 6% after inflation. This is still plenty, and you will sleep much better at night and have lots of time to focus on things that matter like your hobbies and people you care about.
Magnus


JoeNCA
Posts: 81
Joined: Sat Aug 28, 2010 7:58 am

Post by JoeNCA »

Hi GPMagnus,
Very interesting points here.
To point 1, this should be the target for where one should be in retirement, esp. for basic necessities - because real wealth is possession of real goods, and not the medium of exchange, such as paper or credit. Producing and possessing real wealth places you outside of the manipulated system (inflation).
An example would be owning a small farm with land leases for portion of the proceeds in a country with preferably easy and free medical access while qualifying for foreign income exclusion here in the US. Or just have a decent sized vegetable garden in the backyard with few fruit trees while factoring in annual cost for HSA in retirement. Absolutely the sky is the limit here.
Point 2 especially hit home because of future intent in utilizing catch-up provisions available in deferred compensation to neutralize capital gains tax in retirement.
I am looking into maximizing Roth401K and the like instead of traditional 401k, along with age-based catch-up and contribution based catch-up in the future, to eliminate capital gains tax for some of my retirement savings and to keep the leverage. This will also reduce the burden in trying to keeping up with inflation because tax component is eliminated. I may lay out the details in future journal. Currently, RothIRA is the only vehicle that I maximize yearly for this purpose.
Both are excellent points. I guess we'll find out in the future if we can have the cake and eat it too with Roth401k and the politicians. (fade out - with MC Hammer's "U Can't Touch This" in background)


GPMagnus
Posts: 116
Joined: Tue Jun 05, 2012 2:24 pm

Post by GPMagnus »

Loved the MC Hammer reference! Just do your homework and it will save you a bundle + give you a cool feeling of empowerment :)


JoeNCA
Posts: 81
Joined: Sat Aug 28, 2010 7:58 am

Post by JoeNCA »

Moving again? Apartment woes
Finished moving into the new apartment in the low $500's this month.
Immediately, an "issue" was discovered after a night's stay - noisy individual AC units (20+)!
The sound ricocheting off of the concrete walls was like a jet take off and rather unbearable.
I am employing both ear plugs and muffs to counteract the invasion for the time being but summer can last up to 5 months here and I am seriously considering moving again.
Soundproofing would be extensive as it would require dense mass covering an entire wall. Probably a better option would be to soundproof the closet - however, I do not believe I would enjoy being stuck in a closet for 5 months out of the year.
Found a suitable alternative at an apartment 3.5 miles away in a better neighborhood, however research has turned up potential "bed bug" issue per previous renters' reviews.
On the upside, rent would be around $450/mo., as this is a studio unit which is surprising. Of course, 3.5 miles means some commute would be involved.
If the "bed bug" issue has been taken care of, then this would be considered somewhat of a bargain, though I'm trying not to jump out of the frying pan and into the fire with this one.
A third alternative would be to move to a "nicer" apartment complex in the high $700's/mo. down the street from current location which would appear to solve all the issues at an additional cost of several hundred $$$/mo...
Classic.
ERE is being stubborn at this juncture.


GPMagnus
Posts: 116
Joined: Tue Jun 05, 2012 2:24 pm

Post by GPMagnus »

Assume rents are mispriced at your own peril - when there is a cheaper alternative it pays to find out exactly why...


JoeNCA
Posts: 81
Joined: Sat Aug 28, 2010 7:58 am

Post by JoeNCA »

It takes ingenuity to be poor and not suffer.
What difference a street makes! The contrast between have and have-nots is painfully evident in my stride toward ERE.
Today I saw a man sleeping on a bench next to a bus stop at midnight while another, wandered the street aimlessly speaking to himself.
The other night I saw a couple, inside a trash container rummaging for hours for empty soda cans.
I see young people, making body gestures and waving signs, to announce a store opening in now uncomfortable summer heat, for hours.
Local 24/7 restaurant, bus and train service become shelters for the homeless at night, a familiar fixture to patrons.
Then there was the shiny black Mercedes S-class, that impatiently honked its horn at my decade old Toyota for making a slow turn, while it made a zippy bee-line into a multi-million dollar neighborhood, across the street.
A street. That's all that stands between the Mercedes and the rest of the neighborhood that I see everyday - a sight that is becoming commonplace throughout the city. A sight, that is indiscriminant of race, age and color, other than color green.
While I have been blessed with having a choice, I can't help but think of others that do not.


JoeNCA
Posts: 81
Joined: Sat Aug 28, 2010 7:58 am

Post by JoeNCA »

Choices choices
After about a week and half of fervent search, several options have surfaced for the noise problem:
Option 1:
The manager is willing to relocate me to a more quiet unit. The dilemma here is that while new unit is quieter, it's still susceptible to significant outside noise. It is the thin building insulation that is at the heart of the problem. Adding to this are the walls that are acting as resonators of transmitted noise.
With this option, I will have to soundproof the room with acoustic insulation at some cost. If successful, I can maintain low $500's monthly rent and closest proximity to the workplace - literally across the street.
Option 2:
I have found another apartment unit 2 blocks down the street in mid $500's per month. Upon inspection, similar AC noise issues were noted in the living room due to lack of central air but the unit was well insulated. The ambient noise inside the bedroom was acceptable. The unit was more spacious with separate kitchen, living room and bed room.
The negatives are that place isn't secured like option 1 above, and the bedroom faces an intercom from a fast food restaurant that closes at 10pm. Also few residents that I have encountered don't appear to have been screened carefully as in option 1.
Option 3:
The apartment in high $400's about 4 miles away offers the best cost at the expense of a short commute. The neighborhood is impeccable as it borders a local university campus. The unit is a studio but accommodating for my needs.
I was elated until the aforementioned bed bug issue was raised by previous renters in reviews. Asked the manager in point blank manner regarding this problem and the manager acknowledge that problem had occurred several years past and is no longer an issue. The manager also pointed out that prior to a move-in, an inspection and signature will be required that the unit is bed bug free.
Contacted the local exterminator company and found out that bed bugs / pest control isn't regulated by the county and there is no mandatory reporting nor tracking. The county merely provides general information and makes referrals to private pest control industry to those affected.
Needless to say, exterminator company wasn't willing to disclose history on the premises for privacy reasons.
Most likely, bed bugs still lurk in the dark corners of this apartment.
Option 4
The easiest and the most costly option is to move to an apartment block down the street at near $800 per month. Needless to say, the unit is spacious, well insulated, well kept and is located behind a serene, quiet and secure gated compound.
Option 5
Buy a house? While this option was briefly considered due to a build up of equity vs renting, not sure of immediate need and considering waiting until a special opportunity arises in the area.


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