Generation-X' Journal

Where are you and where are you going?
Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Sat Jan 13, 2018 6:15 am

2.5 Years to go

Things have become more real now as what seemed so far away became close to grasp.

Instead of chasing, now I find myself being chased by time to prepare for this eventuality.

Living a year in pre-retirement trial provided a clear sense of the true needs and concerns:

1. How to outpace inflation / cost of living in retirement?
2. What is my acceptable standard of living?
3. If gov't policies can change on a political whim, then what is right mix of after-tax,pre-tax and tax free funds in retirement?
4. It was a right decision not to rely on Obamacare for retirement.

Even after many years of trying to prepare, these are difficult questions to answer. But I have come to realize that in order to deal with inflation, first I must deal with taxes. I can not fight both and win, especially in retirement.

The original retirement framework was based around pre-tax savings, reserved for retirement spending, followed by a small pension, for basic necessities. It was a very typical approach, employed by many people.

I now find this framework to be inflexible and too fragile.

Pre-tax savings is great for generating net worth by leverage, however, the value of net worth is hampered by eventual taxation and the penalty of Required Minimum Distribution, which is levied exponentially, and eventually annihilates the savings.

Leaning heavily to only one type of savings is a handicap because it denies access to tools available from other types of savings for a better tax strategy.

As a result, I have decided to move to a more logical grouping of 1/3 after-tax, 1/3 pre-tax, and 1/3 tax-free savings.

The more I look at things, this is what I think I see:

Income generated through working is one of the highest taxed income, because of many taxes that are levied against it, such as social security tax, medicare tax, federal and state income tax.

Income through pension eliminates social security and medicare tax, but federal and state income taxes are still levied.

Income through social security can be taxed up to 85% for federal income tax, depending on yearly income level. Fortunately, CA does not tax social security.

Income from investments, tax can be drastically reduced, eliminated or even be deducted in after-tax environment. In pre-tax environment, federal and income tax will be levied. In tax-free environment, no tax will be levied.

Income from real estate, for me, just isn't worth the legalese and active involvement required.

After-Tax: Qualified Dividends, Long Term Capital Gains, Tax Gain Harvesting, Tax Loss Harvesting. It can provide tax free income and offers a way to offset ordinary income such as pension, in conjunction with mortgage interest deduction.

Pre-Tax: Deferring Tax, Leverage. Most important, it provides leverage while reducing present tax at same time. But I do pay a lot of taxes later, especially when forced Required Minimum Distribution kicks in.

Tax-Free: Typically Roth IRA. No tax, period. Roth IRA conversion ladder. This can be a good way to access funds in retirement before the age 59 1/2 and after-tax income source is a little thin.

Depending on *where* the income is generated, the tax on that income can be higher, lower or none at all,

1/3 after-tax component:

Pension will be the primary source of my after tax component. It will generate about $2300 monthly. A sum, after the 1 year trial, that made me realize I could get by but I'd want a more comfortable lifestyle. And I really dislike paying rent.

Because of the cash flow, I can continue to build this component even after retirement.

I plan to retire with at minimum 100k-150k after-tax balance and use qualified dividends, long term capital gains, tax loss and tax gain harvesting at 15% or equivalent tax rate to generate tax free income.

I also plan to use 30 year mortgage or 80-10-10 to avoid rent, possibly recoup the cost of housing if I sell, and to help stay in 15% or equivalent tax bracket by using mortgage deduction to reduce ordinary income. 80-10-10 appeals because it avoids PMI which is no longer tax deductible and replaces it with tax deductible interest. **UPDATE** it appears that tax cut took away HELOC interest deduction and it appears that I will need 20% down payment to avoid PMI.

30 year or 80-10-10 will have a lower monthly payment than 15 year, maximize mortgage deduction (payment will be mostly interest) and it will provide a natural asset protection (mostly debt with low equity for homestead exemption).

And I will get to have comfort.

I plan to do a more detailed analysis to come up with the right monthly cash flow that will balance the income, deduction, tax bracket and cost of basic necessities to be close to perpetuity within my lifetime.


1/3 pre-tax component:

I plan to retire with at minimum 300k in pre-tax balance. In the beginning, the goal of this account will be leveraged income generation to be used in roth IRA conversion ladder. Gradually, I will convert the entire amount over to tax-free before RMD.


1/3 tax-free component:

I will be using Roth IRA conversion ladder to have spending cash flow from the pre-tax component. For the conversion ladder to work, the contributions must continue after retirement. For this reason, I plan on getting a part time job or starting a small business or some sort. This will be a new research area.

I plan to retire with at minimum 200k in after-tax balance.


Moving forward, I will be keeping track of my progress in these allocations.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Sat Jan 20, 2018 3:06 am

Status Update 1/19/18

Small Investment

Small investment has pretty much reached its full intrinsic value before the tax reform. It has moved up about 50 points since the purchase. Now the effect of tax reform will start kicking in and I believe the investment still has another 20 -30 points ahead of it, though it will be a more rocky road.

I had planned to take the gains and replace the investment with long calls, but because the long calls were selling at a premium, purchased protective puts instead. The rationale is that if the investment moves downward in the short term, then I can sell the shares at that time and leave the puts in place. When the shares stabilize, I can repurchase at a lower price and sell the puts for some small gain.

Image

Mega backdoor Roth

Established Mega Backdoor Roth account and will begin contributing. The Mega Backdoor Roth is just a fancy term used to describe 401(a) defined contribution plans under IRS section 415(c)(1)(A) with contribution limit of 55k/yr in 2018. The 401(a) contribution is offset by 401(k) contribution (18.5k in 2017), pension contribution and other pension related contributions. By the time the offsets are factored in, maybe about 15k - 20k in contribution can be made into the plan.

The contribution is AFTER-TAX and gains are TAX-DEFERRED. So there is no reduction of income like 401(k) and gains are not tax-free like Roth IRA. Not a great choice as savings goes, except, because the contribution is made after-tax, it can be rolled over into Roth 401k or Roth IRA.

Since I maximize traditional tax deferred accounts first for income reduction, contribution to 401(a) is very small - but every little bit helps.

Net Worth

I will be re-characterizing much of the assets moving forward to achieve 1/3 - 1/3 - 1/3 balance of pre-tax, after-tax and tax free. I will detail some of the plans to achieving this using the recent tax reform going forward.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Sat Feb 03, 2018 7:36 pm

Status Update 2/3/18

* Net worth has moved up to about 530k

* Small Investment- Sold the entire position held since April 2017 at around 215 1/2 and made quick gains with puts as a result of Dow's 600 point drop. Sold and replaced puts with long calls near close on Friday 2/2 for a possible bounce next week.

* Begun process of monitoring the buy list and housing prices in preparation for a possible market crash.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Mon Feb 05, 2018 3:15 pm

Playing with firecalc

After spending a year in a simulated retirement, it quickly became apparent that following two variables constitute a major challenge in keeping the financial independence:

1. Inflation
2. Taxes

While I can only cope with inflation and have no direct control over it, I can control taxes - as taxes are a function of income and property.

Therefore, income necessary to sustain basic necessities in financial independence will determine the amount of tax.

In addition, income necessary for any sustained activities in retirement will also add to the tax.

In my experience, the biggest expenditures for basic necessities were:

1. Housing
2. Healthcare
3. Food
4. Transportation
5. Insurance

Example basic necessities:

1. Housing: 300k home @ 725*3 = 2175 + 350/mo util = 2475
2. Healthcare: ranges from 400-700/mo. chose 600
3. Food: 400
4. Transportation: 300
5. Insurance: 200

Total: 3975

Firecalc starting basis:

* $4000/mo. spending estimate for 40 years with 5% inflation
* constant purchasing power
* 0% growth in portfolio with 5% inflation

calculate the starting portfolio or the amount of savings needed: $3,460,038


Scenario 1

* Add social security beneifit @ 73% level starting in 62, the savings needed: $2,896,192


Scenario 2

* Add social security beneifit @ 73% level starting in 67, the savings needed: $2,869,247


Scenario 3

* Add social security beneifit @ 73% level starting in 62 and;
* Add pension @ 2500/mo and;
* Remove healthcare cost to spending estimate of 3500/mo.
* $3500/mo. spending estimate for 40 years with 5% inflation
* constant purchasing power
* 0% growth in portfolio with 5% inflation

Calculate the savings needed: $322,423

Calculate the max. spending level w/ 400k savings: $42,598
Calculate the max. spending level w/ 450k savings: $42,983
Calculate the max. spending level w/ 500k savings: $43,369


Scenario 4

* Add social security beneifit @ 73% level starting in 62 and;
* Add pension @ 2500/mo and;
* Remove healthcare cost to spending estiimate of 3500/mo.
* $3500/mo. spending estimate for 40 years with 5% inflation
* constant purchasing power
* Savings: 10% Total market equities, 90% 5-year treasury

Calculate the savings needed: $262,508

Calculate the max. spending level w/ 400k savings: $45,057
Calculate the max. spending level w/ 450k savings: $45,885
Calculate the max. spending level w/ 500k savings: $46,714

So it becomes clear that whether I take risks in the market or not, my spending level in retirement at the current rate is around $3,500/mo.

It's not bad, but also, it's not great.

This means taking out about $18,000 every year from retirement savings to supplement the difference. Then I can live in a 300k home (It's an 'okay' home right now, as the average housing price here is about 450k) and drive a decent new car as needed and live. That's pretty much it.

Oops, Dow just dropped 1200 points as I write this, so I think I will buy back the long call option on brkb that I closed this morning.

To be continued.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Tue Feb 06, 2018 3:03 am

It's Beginning to Look a Lot Like Christmas

"It's beginning to look a lot like Christmas
Everywhere you go
Take a look at the five and ten, it's glistening once again
With candy canes and silver lanes aglow..."

I missed buying the call option earlier today, and glad I did, because as of right now, the dow futures is pointing at another 751 point drop.

More importantly, if true, then it's appearing more likely that opportunity is knocking and it will present itself in the near future.


by Generation-X » Thu May 05, 2016 2:55 am

...The beauty of all this, is that it does not really matter.

...Accumulation of savings continues, and like a tigress lying in wait, she will act, when the opportunity presents itself - having prepared herself for that moment...

...On a side note, even if the market collapses, the process takes years and being able to see clearly through that process to call the bottom takes patience...

...Even if opportunity never comes, the routine savings, not having debt and living below one's means will be more than enough - in fact, it's the foundation...


by Generation-X » Sun Jan 17, 2016 2:03 am

...All future savings, both taxed and deferred will be invested in equities as the market undergoes the correction - naturally, the intent is to buy close to the bottom as much as possible.

The companies to purchase have already been selected. If company does not have dividends, then that company will not be purchased.

The goal moving forward, will be to create a cashflow that will mirror at least half the cashflow provided by pension - idea being, this will cut down the time to retirement by half.

The process will continue even after retirement, into perpetuity...


Let the good times roll. I have the time to wait.

https://www.youtube.com/watch?v=hUtebKDKqJA

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Tue Feb 06, 2018 3:34 pm

Entered a long straddle @ 200.

I can not believe it's at 200.

https://www.youtube.com/watch?v=OrNCpkpFP6Q

https://en.wikipedia.org/wiki/US_Festival

wolf
Posts: 659
Joined: Fri Jan 06, 2017 5:09 pm
Location: Germany

Re: Generation-X' Journal

Post by wolf » Sat Feb 10, 2018 12:51 pm

Generation-X wrote:
Tue Feb 06, 2018 3:03 am
...All future savings, both taxed and deferred will be invested in equities as the market undergoes the correction - naturally, the intent is to buy close to the bottom as much as possible.
Do you have a plan, how and when you buy equities? I have started a BEV (Bird's Eye View) for all of my portfolio positions, starting with 26th January. I think I will enter the market when something has decreased 20% in price.

Ist this correction (possible down-turn) in the market good for your FIRE-Plans?

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Sun Feb 11, 2018 1:55 am

wolf wrote:
Sat Feb 10, 2018 12:51 pm
Generation-X wrote:
Tue Feb 06, 2018 3:03 am
...All future savings, both taxed and deferred will be invested in equities as the market undergoes the correction - naturally, the intent is to buy close to the bottom as much as possible.
Do you have a plan, how and when you buy equities? I have started a BEV (Bird's Eye View) for all of my portfolio positions, starting with 26th January. I think I will enter the market when something has decreased 20% in price.

Ist this correction (possible down-turn) in the market good for your FIRE-Plans?
I think it depends on what the investment is. If it's the whole market - i.e. VOO, SPY, DIA etc., then the market will show when to buy - I just wait until the market goes back up. I use at least 10yr chart on monthly to get the B.E.V. of SPX, DJI etc.

So far, this is just a small blip on the 10yr monthly chart. Market hasn't even begun to move down yet. But once it does move, it will sell off for years in the long run, while retracing for months at a time.

by Generation-X » Wed Jun 14, 2017 12:57 am
"It seems just throwing money at the market will make it grow. I have committed about 10% of my assets in an equity position and the gains have been realized very quickly. Anyone can be a stock market genius at times like this, and this is very reminiscent of year 2000 tech bubble, except worse because market is much higher. The market will continue to rise until it can't. The trick will be knowing when to get out, as always."

I recognized this "heat up"-before-the-melt-down market move early last year, which was similar to 2000 dot com crash. But it's not over 'til the fat lady sings. And because the market is much higher now, the corresponding decline to percent decline must also be greater, as we've seen.

For me, this is the time to keep FOMO (Fear Of Missing Out) in check and enjoy the "heat up" bonus. The real gift, if realized, will be the market meltdown. Because once the dust settles, everything will be on sale. We recently had a local Walmart close a store down - rather than moving inventory, they had 25%, 50% and 75% off sale as the closing date approached. People were just piling stuff into their carts at 50 and 75% off. YEAH.

For individual stocks, I watch the stock price. Because the price of the stock determines the ROR. A meltdown will happily comply and provide the gift that keeps on giving (i.e. even lower price).

I believe the most important priority right now is to accumulate as much cash as possible. What good is 25, 50, 75% off sale if you don't have any cash to buy anything with?

And if market recovers and resumes its move higher, if jumping back in, I plan to keep a short leash.

Yes, a meltdown at this juncture would be the best thing for my planned retirement. There is a research that says the market return within 10 years after retirement will be the key to a sustainable retirement.
Last edited by Generation-X on Sun Feb 11, 2018 11:57 am, edited 5 times in total.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Sun Feb 11, 2018 2:07 am

Status 2/9/18

Closed the long straddle for a decent profit. An educated guess for a market sell off or a quick market rebound paid off, because straddle needs a huge move and volatility to be profitable.

I am back in cash again and watching the market.

Since we are only at SPX 2600 level, it appears to me that if this is a true recession, it could bring SPX down to 2100 level rather quickly by the end of 2018. And if SPX lost that, next might be SPX 1000 again, perhaps in 3 years by rough estimate.

Market appears to be anticipating credit tightening in the near future and we now face with certainty, a higher federal deficit due to GOP/Trump tax cut and military spending.

The odds of a recession seems pretty high to me but market always has a way of surprising everyone.

I plan to grab some popcorn and watch the fire works until it's time to act.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Thu Feb 15, 2018 1:31 am

Status 2/14/18

Entered a small short position today based on interest rate's rise and what appeared to be a lackluster bounce from market's oversold condition last week.

If the market is retracing, then it should reverse well before SPX reaches 2800. If market is "recovering", then it will continue to make new highs.

I believe the market is correct so I sided with the market. Let's see what happens in the next few days.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Wed Feb 21, 2018 9:57 pm

Update 2/21/18

I am looking to close the short position for a small profit tomorrow or Friday. Most likely tomorrow.
Normally, I'd let things run, but BRKB has earnings after market close on Friday, 2/23/18.
This is an interesting dynamics, as market is retracing down while I expect decent earnings report from BRKB due to the tax cut.
I will most likely take long position prior to market close on Friday.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Sat Feb 24, 2018 2:38 am

Update 2/23/18

Closed the short position at pretty much break even on Thursday.

I had expected the downslide to continue but thanks to intervention by the Fed (Bank of St. Louis president James Bullard's comment early AM) it bounced the market up before BRKB resumed its slide down.

Market volatility reminds me of the dot-com bubble days, when anyone with a dollar bill in their pocket tried daytrading by the lure of easy money. (almost all lost money) (bitcoin anyone?)

And we can clearly see programmed trading influencing the market now with quick, sharp "V" reversals taking place at lightning speeds.

Purchased several long calls throughout the day today.

At the current price, BRKB is somewhat undervalued again and I would love to own the shares back, but because of the overall market condition (i.e. a bubble), I am trying a different approach until the market resets.

The approach will likely be okay until the day market truly falls, but until then it has a high probability of generating profits with a reasonable downside.

I'm only risking profits already made to generate additional profits and it will exceed break-even on the second cycle if everything goes well. (let's just say, it will be challenging)

Looking forward to tomorrow's annual. I don't care about the one-time increase in the book value from the tax cut, it will be offset anyway.

Rather, it's the intrinsic value.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Wed Feb 28, 2018 2:27 am

Update 2/27/18

Things were moving along great until - you guessed it - the Fed speech.

The position was up around 40% gain at the peak today but ended with around 27% gain due to the market reversal.

I find the market psychology interesting, as, if S&P is returning 10% (historical average) why would fed rate increase to 2.5% - 3% matter that much?

To be fair, it was only a percent drop in the Dow.

I expected a challenge but I also expect gains in BRKB to continue, based on observation and intrinsic value. For the near term, it appears price may linger somewhere between 210 and 220, barring any upset in economic or global politics.

If things continue without any major upset in the market, I think year end target of 240-260 is possible, though it will be fairly tough to get there.

This is fun. In the mean time, I'm getting ready for the big fall. I hope it happens.

I have a feeling Trump will help out big time. (He already did with the tax cut a.k.a. inflation).

"Stupid is as stupid does" - Forrest Gump.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Thu Mar 01, 2018 1:53 am

Update 2/28/18

Closed the long positions in the morning and took in a nice profit, which wasn't bad for a few days' work.

I didn't like the way price was struggling to advance the resistance in the high 210's.

I will be watching the market in the next few days to confirm where it's heading.

A further degradation in SPX will indicate that market will re-test SPX 2600 level.

If that's the case, I will short the market to 2600. If SPX loses 2600 level, then we will be closer to the big fall, where I want to go.

I will also keep my eye on BRKB, but if we're heading toward a bear market, then it is a bear market.

"A rising tide lifts all boats" and ...

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Thu Mar 01, 2018 9:28 pm

Update 3/1/18

No sooner than a couple days go by posting about Trump and his market killing magical abilities and out of the blue, Trump pulls out yet another rabbit out of a hat, this time with import tariffs.

I am sure many of the newly unemployed voters will show their love for Trump. Time will tell.

I entered a small short position in the morning during Powell's testimony when market edged higher, because I felt no amount of smooth talk from the fed chairman will change the fact that market correction was under way.

Then later on, market moved on Trump's magic. It was music to my ears but I felt the move was rapid and closed the short position for a quick profit at the end of the day.

I will be looking for a bounce tomorrow. If the bounce fails, I will short the market again.

For the intermediate term, I'm keeping my eye on SPX 2600 re-test.

BRKB is back down to 201 level but if market stabilizes for the short term, I suspect it will pop again, as it's looking somewhat undervalued at this point.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Fri Mar 02, 2018 9:22 am

https://www.youtube.com/watch?v=rqDq3eyTGck

Cautiously entered a small short position. Will be on the look out for a market bounce today.

wolf
Posts: 659
Joined: Fri Jan 06, 2017 5:09 pm
Location: Germany

Re: Generation-X' Journal

Post by wolf » Sun Mar 04, 2018 1:03 pm

It sounds like (day)-trading what you do. How much (percentages) of your portfolio have you allocated to such tradings?

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Sun Mar 04, 2018 6:30 pm

wolf wrote:
Sun Mar 04, 2018 1:03 pm
It sounds like (day)-trading what you do. How much (percentages) of your portfolio have you allocated to such tradings?
I'm not a day trader.

I am of the opinion that it is in my best interest NOT to hold securities for the near term.

I believe we are at the end of a bull market and the market has a good chance of a high downturn.

In essence, I'm compensating by trading (no pun intended) a good chance of high downturn for a chance of positive return with high risk.

A high volatility environment, usually indicative of a major market trend change, is better suited for trading than investing.

So as you're alluding to, only the minimal amount needed is put to risk. In my case - the previous profits.

The percentages differ depending on various factors but usually much less than 1%.

This is something that I can do right now because of the conditions that are in place.

I have a good reserve of profits made from last year. And I'm not willing to risk a large principle in a volatile environment.

The mindset I'm in, is to save as much cash as possible and keeping them liquid, for future deployment.

https://insights.som.yale.edu/insights/ ... ity-matter

The current state of things has both positives and negatives going for it, but I see turmoil up ahead, both financial and political, adding to the chance of a high downturn.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Sun Mar 04, 2018 6:40 pm

Status 3/4/18

* Net worth increased to around 540k.

* I am still in a small short position, as market bounce appeared lackluster. The situation involving Trump is setting the stage for some political and financial consequences.

I believe a military conflict involving North Korea is now in the picture given Trump's instability and as a possible hole card for the inevitable prosecution headed by Mueller.

I will be watching the market next week.

Generation-X
Posts: 157
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X » Tue Mar 06, 2018 7:05 am

Status 3/6/18

I expect to see market reversal up ahead, prior to SPX 2760 or so.

Clearly, if market moves past 2800, then we're probably looking at a new market high.

I'm still in my small short position.

If market reverses, I will add to the short position. If SPX breaches 2800 then I will close the short position and go long as I expect SPX to make a new record high.

Post Reply