My Retirement Withdrawal Strategy

I don’t believe bonds are safe havens, I shun gold and think CD’s really mean Certificates of Depression. So you may ask, what do you plan to do for retirement? I mean, if you invest in growth stock mutual funds what are you planning to do when you reach retirement age and begin withdrawing money to live on?

Well this is a topic that I am very happy to explore. When investing I am always thinking and planning long term. Every penny invested I plan to leave alone in mutual funds for at least five years. This self imposed rule will continue to be followed leading up to and through retirement. As has become standard practice here at from 0 to $1 million, I will use the most appropriate case study that I can think of: my own.

To help create a gauge I will use the age of 70 as my “retirement” age. Although to clarify, I never see myself ever truly retiring off into the sunset and staying at home all day long. I see retirement as a chance to work part-time teaching, living all over the world and spending time with my family. 70 though is the age in which, if it still exists, Social (In)security can be claimed for the maximum payout. So let’s say then that I plan to file for Social (In)security at 70 and in essence “retire.”

Now my retirement accounts are currently spread across a 401(k) through work and a ROTH IRA, meaning that at 59 ½ I can begin making withdrawals without penalty. As an added bonus with a ROTH there is no required minimum distribution. So at the age of 70 I begin what I will call, “5 year living expense withdrawals.”

I will reiterate here, any money invested in the stock market should not be needed for at least 5 years. So when I plan to begin to live off of my investment income I will withdraw 5 years worth of living expenses at a time. Currently, if I do not invest another single penny into my 401(k) and ROTH IRA, and my mutual funds earn at least a 12% average annualized return, at 70 years of age my retirement accounts will be worth $5,865,308.36.

So to ballpark, let’s say I plan to live on $80,000 a year in retirement, which by the way is 4X greater than what I currently live on. At 70 I will withdraw $400,000 – which leaves the nest egg with $5,465,308.36 to stay invested in the stock market in good growth stock mutual funds. I plan to do nothing fancy with the $400,000 that is withdrawn. No CD’s, no bonds, one idea I have is to take $80,000 and let it sit in my everyday checking account to be budgeted every month, and spread the remaining $320,000 across a few different savings accounts, maybe even across a credit union or two, so that in the event of a “banking collapse” my 5 year & less living expenses will be covered by FDIC insurance.

In 5 more years when I turn 75 and have gone thru my living expenses withdrawn at 70, my retirement nest egg, which was still invested with a value of $5.4 million, will now be worth $9,928,807.67 by my 75^th birthday thanks to the power of compound interest. And every 5 years I will shampoo, rinse and repeat J

Conclusion

I don’t really care if Social (In)Security will be there or not when I retire!

My Approach to Investing

My approach to investing is simple. And by simple I mean painfully simple. Like, so simple that it makes the heads of financial goobers all across the world explode. I do not use tricks, gimmicks or “sophisticated” investment strategies that only stroke the egos of those that have “studied” finance their entire lives. I take a real world and applicable approach that builds wealth slowly and consistently over a period of time, which conveniently feeds into my first point:

Time Horizon

 

Any money invested I plan to leave alone and in the investment for at least five years. I don’t care if the overall market is up, down, upside down or sideways. I am careful in my investment selections and want to give the investments time to grow and ride out short term market cycle fluctuations. Jumping in and out and trying to time the market will only lead to a bottomless pit of despair. For over a century experts and people who live, work in and breathe the stock market have NEVER developed a fireproof formula that leads to riches. My approach screams that wealth is built slowly and layer upon layer consistently and over a period of time. So if I buy shares of a mutual fund and in the following month the overall market drops (which happens when you invest consistently over a number of years), I leave the investment alone and do not panic and sell. I give the investment time to grow and ride out market cycles to get positive average annualized returns, which as of MY LAST ANNUAL CHECK UP was 9%. Which coincidentally leads me to:

Investment Choices

Individual stocks have the potential to generate big returns, but you have to go through a ton of dogs (see facebook) before you even get a glimpse at a long term winner (see apple). So I do not own any single stocks. They are too risky, you and I cannot predict who the next Microsoft is going to be and we could easily waste a lifetime’s worth of earnings chasing after the next “one.”

Bonds are debt instruments and are not nearly as safe as we are led to believe (and honestly, the goobers who probably started this myth were bond sellers). If you are an above average bond investor then you are barely staying ahead of inflation, so I stay away from bonds.

My investment of choice is a diverse and well screened army of mutual funds. I evenly spread my investments across four types: Aggressive Growth (small-cap), Growth (mid-cap), Growth & Income (large-cap) and International. I seek out mutual funds that have been around for at least 10 years, have average annualized returns greater than 12% since inception and have a lead fund manager that has been with the fund for at least 5 years. Do you see a recurring theme here?

I utilize the stock market for long term investing aimed for growth. I do not invest with money I need in the short term and I am not trying to hit a home run with a single purchase. By investing in proven winners (my pre-screened mutual funds) and consistently buying my map to wealth building is being layered and structured over decades, which leads me to:

Purchasing Cycles

Since I’m focused on long term growth I do not care what the overall market is doing in the day to day. Every month I set aside 15% of my gross income to automatically flow into retirement vehicles and as soon as I have enough money to do a minimum purchase on my mutual funds I fire away and buy consistently. Sometimes the market is up, sometimes it is down, but through the way I am investing, to date I am staying ahead of taxes and inflation and my overall net worth grows just about every quarter. I follow the same rule of thumb for purchases through my brokerage account.

My Debt Free Wealth Building Strategy

It’s close to a month now that my household was transformed (after three and a half years of frugal fury fighting) into one that is debt free. We have our next goals and dreams lined up and it is amazing to not owe anybody anything. Through it all we are continuing wealth building as an intricate part of our financial planning. My approach to this is steady and continual: far from get rich quick. We make intentional action and prioritize wealth building every month in our budget, and here are a few of the ways we are doing this:

401ks

I receive no match from my company but contribute 4% of my gross income every month. My wife receives a 50% match up to 6% and maxes this out. It’s a win-win situation, my wife gets an immediate 50% return on every dollar she puts in and I get to lower my tax bill a bit every year. Within my 401k I currently invest in a bond fund because none of the equity options meet my criteria for investing, but I will keep an eye on this and eventually move the investment into an index fund once interest rates start to rise, which should be in a year or so.

Roth IRAs

With after tax dollars we use the ROTH to grow money saved for retirement tax-free. I contribute 11% of my income every month here, and my wife contributes 6%. Ultimately through retirement specific vehicles every month, I contribute 15% of my gross income and my wife 12%.

Brokerage Account

Above and beyond retirement accounts, my wife and I would like investments that we don’t have to wait until 59 ½ (US retirement age) to have access too. Through a brokerage account we still plan and invest long term. Any money put in and invested we do not plan to use for at least 5 years. Within our debt free monthly budget, in a few months once we have the funds for our travel plans for the year set aside in cash, we will begin depositing a dedicated $1,000 every month into this account. One heads up though, our brokerage account is invested in mutual funds which have generated dividends and capital gains that are all reinvested. So we set aside our estimated taxes due through our monthly budget so there’s no “gotcha’s” at year end.  

Our ultimate goal is to have our investments spread across these accounts to generate more income than we generate for ourselves.

My Resistance to Technology

I have been resistant to the advances of technology for quite some time. I currently do not own a phone nor a laptop for everyday use, and worst of all: I like it that way. That wasn’t always the way I used to function though. In college and my first few years in the work force, when I wasn’t with friends, in class or at work, I was glued to a social networking site and my phone.

But then I woke up. When starting my gazelle intensity and looking at my budget I examined every possible way to free up my income and cut unnecessary costs. This led me to kill the phone bill contract – yes I paid the “penalty” to do so – cut the cable and internet and cease the desire for a large flat screen TV. Ultimately this led me to a unique path where I ceased looking to electronics for my daily entertainment. Truth be told it forced me to develop existing relationships rather than stare at the TV or click away on my phone, plus there are some pretty cool stories along the way.

Television

The very first television that my wife and I owned was a hand-me down 1970ish tube from my wife’s grandmother’s farm house. When we “upgraded,” we found for free through freecycle, we came across an in pretty good condition late 1990ish TV. A few years ago the digital upgrade happened across the country. Right around this same time we began our path to financial freedom. So when our TV went out we chose to not run out and buy an adapter nor upgrade and buy a TV. So to this day in our apartment sits our little television that really is more for show! J

Cell Phone

 I think I had always carried a phone on me since I was about a freshman in high school. And let me tell you looking back on it now, it is so freeing to be without a cell phone, I highly recommend it. Not having one has helped me develop patience and be intentional about whom I develop friendships with. Plus I was pleasantly surprised with how many places around town tell me what time it is, no watch needed either!

Cable & Internet

I used to be a TV, movie and YouTube nut. My days off and time away from work used to be wasted for hours upon hours staring at a screen. Now with my time I spend it talking to my wife about our days, dreams and goals, getting to the gym more often, and with my money I spend it on much more happier experiences than cutting a check to DirecTV.

 So I encourage everyone out there, BE WEIRD, it is a uniquely freeing existence.

My Life After Debt

You know, for someone who hates debt as much as I do I’ve sure been talking about it a lot lately. This is why today I want to get back to the business of dreaming and planning my life after debt. Now that my wife and I have paid off over $80,000 of debt in three and a half years it is time to start having some fun and to also continue our sound personal financial practices that have brought us to where we are today.

Retirement Savings

Come hell or high water for the rest of my life I will always save 15% of my gross income to retirement. Currently I use a mix of 4% into my 401(k) at work – currently there is 0 match but I’ll take the year to year tax break from Washington. The remaining 11% goes to my ROTH IRA where all growth on my investments will be tax free. As of now there is also 0 required minimum distribution on the ROTH when I reach retirement age. Tax free growth and no RMD’s sound like a great formula to me!

Long Term Savings

The first thing that jumps to mind is paying for our future kids’ college. The vehicle we will use is an Educational Savings Account (ESA) which is like a ROTH IRA but for college. Although we can’t open an ESA until we have a child, we are going to start saving for it anyway and just let it sit in a simple savings account (the bank where we will open an ESA does not allow me to transfer mutual fund holdings into an ESA, only cash) and once the kid is born we’ll just move the money over. Current tax law allows me to save $2,000 a year in an ESA for each kid, so that translates into $166.67 a month from 0 to 18.

A house paid for in cash is also on our horizon. We are going to continue and consistently save for this goal as it will be a standard line item on our monthly budget. We’re not in a rush and are committed to find the right distressed property, in the right location at the right time.

We also want to save outside of retirement vehicles specifically for dreams and goals that are at least five years away without the handcuffs of having to wait until 59 and a half. For this we use a brokerage account where we can buy all of the best mutual funds that would even make Dave Ramsey salivate. Through this we’ll do things like: go on missions trips, live in Europe for a year, island hop our way across the Asia-Pacific, create college scholarships for high school students, buy a boat, travel the entire continental U.S – just to name a few. In other words: While I love where I am today, being 40+ won’t be so bad either J

Giving

This part is another one of my favorites. While giving is a piece of our long term investing we still give month to month in our current budget and have some plans to give more now that we’ve broken the chains of debt. My wife and I currently sponsor two children through Compassion International and give regularly to our home church. What we plan to do now is sponsor another child through Compassion and increase our regular giving to set money aside for special causes that may come about throughout the course of a year: friends going on missions trips, special collections through church and helping families in need during the holidays.

Travel

Yup, it’s time to see the world. During our expense sensitive time climbing out of debt our travel splurges, which were infrequent (1 or 2 a year), included: Milwaukee WI, Charlotte NC, Mackinac Island MI, Los Angeles CA and our honeymoon to the Mexican Riviera. Now on the horizon we have: Honolulu HI, Miami FL, Europe, Australia and Charleston SC..and that’s just in the next few years. Our plan for this is to put travel as a priority on our budget and always save a monthly minimum for it all year long, while putting extra in months ahead of larger ticket priced trips.

My imagination is running wild at the limitless ways we can use our resources for the future. Helping others, seeing the world, sending our kids through college debt free, paying cash for houses, I think financial peace is starting to crystallize within my vision!

My Ascent Out of Debt

My decision to climb and ascend out of debt forever was one of the best resolutions I have made in my life. My last debt was paid off in March of 2009. And now that my wife has joined the debt free club I have spent some time recently reflecting about those days when I was working my debt snowball.

At its peak my debt stood right at $24,000 that was spread across three notes through student loans. I had two credit cards: one was for everyday use (I did not live on a budget) and was paid in full every month and the other I let a jewelry store talk me into opening when buying my wife’s engagement ring.

My Early debt kill

Before latching onto the ways of Dave Ramsey I was killing debt before I even knew that it was necessary to build wealth. The early debt kill was the largest note of my three student loans, which peaked at $15,700. For the first two years of entering the workforce I paid above and beyond the minimum payment. At this time point in time I used a credit card for every day purchases and did not live on a budget. When fall kicked in during 2008 my wife gave me a brilliant idea. I had roughly $15,000 in a savings account in California that my grandmother had left me when she had passed and this student loan balance stood at around $5,000. My wife proposed that I pay down and close this student loan as it was generating accrued interest on top of the principal, and the remaining 2 notes would still be months away from beginning to accrue.

So I sucked it up and paid down the student loan note that stood at $15,700 at its peak and set the remaining $10,000 aside to buy the love of my life an engagement ring.

My First Step

It would not be until January 2009 when I would first read Dave Ramsey’s “The Total Money Makeover” and my personal finances would never be the same. Since paying off the big note I had two remaining student loan notes which stood at $5,700 and $2,600 and had begun paying minimum payments on these and accrued interest had begun to set in.

So with a game plan I set out to destroy my debt while never fully realizing that I was taking baby steps towards wealth building. So with my first paychecks of the new year in 2009 I had two goals: (1) save $1,000 in a liquid baby emergency fund and (2) pay off all remaining debt with the debt snowball. I had also created and followed a monthly budget where I spent every dollar I made before the month began. Every extra dollar I made and could squeeze out of my budget I applied first to the baby emergency fund then to the smallest debt owed.

Within the month of January I was able to get the $1k baby emergency fund crossed off my list and paid off my credit card that I used for everyday purchases. It was fairly easy to pay this guy off as I typically paid it off in full every month and never ran a balance month to month. So cash envelopes replaced my previous non-plan for groceries, entertainment and clothing.

Getting Pushed Around

Unfortunately though in November of 2008 I had taken the $10,000 previously mentioned to a jeweler in Indiana to buy my wife her engagement ring. No it was not unfortunate that I was planning to get married, the unfortunate part is that I let my personal finances get dictated by a company with an agenda. With the cash sitting in my checking account and my debit card ready to go, I let the salesperson talk me into opening a credit card to, “build my credit,” which meant the jeweler could sell the book of payments and make even more off me in addition to the cost of the ring. So before any interest could accrue I paid the remaining balance and closed the account in early February of 2009. So with $15,000 that was left to me from my grandmother I paid off one student loan note and promised my heart and soul to my best friend.

The Last Debts

The last 2 debts that stood in my way were the student loan notes that stood at $2,600 and $5,700 at their peaks. Armed with my $1,000 baby emergency fund, one student loan knocked out and two credit cards TKO’D I used all remaining and available disposable income to payoff these last two debts in March of 2009.

So to recap:

September 2008

·         Paid off $15,700 student loan

January 2009

·         Read Dave Ramsey’s “The Total Money Makeover”

·         Drafted my first budget before paychecks started rolling in

·         Saved $1,000 baby emergency fund

·         Paid off and closed 1^st credit card

February 2009

·         Paid off and closed 2^nd credit card

March 2009

·         Paid off and closed $2,600 student loan

·         Paid off and closed $5,700 student loan

·         Did the happy dance

It’s funny. Off my credit report I can see the original term agreements from my student loans. For 3 loans that totaled $24,000 if I was to pay monthly minimums on each it would have taken me 257 months, or 21 years. Instead I focused and prioritized and had the debts paid off in 27 months from my graduation date. Or, as I like to put it, 7 months when I finally got serious about it. I’ll leave you with one of my favorite unattributed quotes:

“Those who understand interest earn it: those who don’t, pay it.”

My How To: Read a Credit Report

The credit report is a point of pride for me. I have no credit accounts open and all are paid in full and closed, yes it’s a great feeling to owe no one a single red cent. But for educational purposes it is vital to learn how to navigate your credit report to protect yourself against fraud and inaccuracies.

At the top of the report will be personal information that spits out giving your legal name, social security number, address and phone number. Give those a good look over just to make sure there are no typing errors (we’ll cover what to do if you find one a bit later). But for now onto the meat and potatoes:

Exhibit #1:

In large caps is the name of the creditor you are on file with. There’s tons of good data here including the creditor’s address and phone number. You can also see what your credit limit was, if there is an outstanding balance, what the outstanding balance is and when the account was opened and closed. There’s also a coded key that notes if historical payments are on time (OK) or 30, 60 or 90 + days past view. The most important line I like to circle like a vulture: LOAN TYPE and REMARKS. In my example this was a credit card with a credit limit of $7,000 that was paid and closed in January of 2009.

So for my report I scan through a page or two worth of credit history on my report to ensure that all accounts are closed AND that all accounts are truthfully mine.

Exhibit # 2

The account review inquiry screen shows you a history of who has inquired to see information on your credit report. If you do not choose to opt-out of promotional screening, this tab will be littered with inquiries from our enemies at American Excess and people who want you to Discover bondage. I have opted out of promotional screening offers of credit and these inquiries are fancy talk for requests prompted by myself to have the credit reporting agencies pull my credit report.

Exhibit # 3

This is a communication confirmation that I have opted out of receiving promotional offers of credit. So Visa will have to go lurk elsewhere.

Exhibit # 4

Now there’s a ton of goodies here in spite of the small print jargon. Our consumer rights are direly important when facing fraud or inaccurate reporting. There is a link to the FTC.GOV website that provides steps and procedures on what to do in either situation. But essentially it boils down to this: When reporting fraud or inaccurate reporting the credit reporting agency has 30 days to settle the dispute with the creditor. If unresolved/unanswered then following 30 days the disputed item must be removed from the credit report. If the creditor says the item is accurate then your beef is with the creditor and no longer the credit reporting agency. So you’ll have a new hobby fighting and providing proof and fighting some more that the item is inaccurate/fraud. If it is fraud be sure to get a police report from your local crime fighters so that you have documentation to provide to lenders and the credit reporting agency.

There is also a phone number provided, toll-free, that will prompt you through opting out of prescreened offers. This is what I used and the process was relatively painless. So there you have it, a quick walk through something I hate having but love to check.

My 4th of July

This past 4^th of July was honestly one of the best I’ve had in recent memory. For starters I found it fitting that the first holiday following my wife joining me and becoming debt free was Independence Day, so the timing on that alone sent me into an orbital joy.

For the day we played host here in Chicago as my wife’s parents and sister and brother-in-law made it into town. We spent time together talking and catching up, grilled up some great food and stayed out of the sweltering heat until the sun went down. Needing only to walk about a half a mile we caught three firework displays just by parking our beach folding chairs along the lakefront.

It was relaxing and time well spent. It has almost been a week that my wife and I have become debt free together. We budgeted $300 for the day and only spent around $100 for food, charcoal and lighter fluid while utilizing our apartment building’s community grill. Having a beer while grilling with my father-in-law, watching my wife enjoy catching up with her mother and sister, that’s what life is all about. Quality time spent together with family and friends you love and care about. This is why we worked so hard to get out of debt. This is why we prioritize our financial health above hyper-consuming. We worked our tails off (and will continue to) so that gatherings and travels like this can be a bit more re-occuring J

I had a very freeing feeling as I sat under the fireworks and looked over at my wife. Everything that we have gone through, the decisions we’ve made, where we are and where we plan to go, and man did it feel good. I continue to feel this overwhelming sense of peace and security. My whole heart trusts her and the personal financial plans that we have put into practice. I can’t wait to see what the rest of this year brings!

My How To: Pull Your Free Credit Report

Let me be perfectly clear here: I absolutely hate the credit score and everything it stands for and represents. But every four months I review, for free, my credit report. Here’s the difference:

Credit Score: This is an I love debt score. You have to pay to obtain this number. If you get a $1 million a year raise or your inherit $10 million your credit score doesn’t change a single point. In its entirety, a credit score circles around credit: how much, what types, how long, and is not a statistical measure of building wealth.

Credit Report: A historical and ongoing snapshot of debt accounts.

I use credit report checks to ensure past reported debt accounts are closed and that no new loans have been opened fraudulently in my name. You can obtain a credit report for free once a year from each of the credit reporting agencies: Equifax, TransUnion and Experian. So spaced out over a year and you can pull one free report from each agency every 4 months.

But the process of going through and navigating the web can be tough to navigate as everyone has an incentive for you to click the wrong place and pay for something you don’t really need. So here’s a step by step guide on how to pull your free credit report.

(1)   Head over to annualcreditreport.com to begin, the website will have a selection bar like this. Go ahead and select the state you reside and click “Request Report”

(2)   You will be prompted to this screen to enter verifying personal data about yourself as well as a selection of which credit reporting agencies report you would like to pull.

(3)   From there you’ll be asked to enter the last 4 digits of your social security number.

(4)   You’ll be prompted for a few additional questions to verify you are who you say you are. Below are two sample questions I was prompted with. It can also ask something like, "Which of these addresses have you lived at?"

From there you can prompt yourself to the next screen where you will be able to view your credit report. So stay tuned for my blatantly obvious next post: How to read your credit report.

My Quarter End: 2nd Quarter 2012

This past quarter reminded me a lot of grade school. The school bell rung for recess and the one loud kid who bragged about how great he is at dodge ball, whom built up expectations all year long about his mad skills, went into a full sprint towards the dodge ball circle and proceeded to trip and fall due to his laces being untied, resulting in a skidded knee and a bruised ego. The child, sobbing while on the ground with his boo-boo, proceeded to blame everyone else because it was everyone else’s fault that their laces were untied. That child was Facebook and the game of dodge ball was its IPO launch.

The student council elections are on the horizon and we know who the candidates are. Although a name or two has changed, it’s the still the same boring people spewing the same boring rhetoric that we’ve heard before year after year. Yes it would be great to have better food options in the cafeteria, yes you have great ideas for our school, and yes I believe that both candidates think that they can make a difference in our lives. The truth is you can’t impact whether I get A’s, how much I study or the steps I take to aspire to be what I want to be. Candidates, you are figure heads whom have no impact on my daily life or whether I prosper.

Yet through all of the chaos around us this was a phenomenal quarter in our household. My wife joined the super elite and fit debt-free club and I am so proud of her. As of today our collective net worth stands at $266,980.34 and well over 100k of that is held within cash and equities, so our net worth is now at just about a 50/50 split between debt free real estate and equities & cash.

In the market the summer sell off that has historically occurred in every market cycle..Duhn duhn duhn! Happened! So looking forward I expect a nice rise to end the year; If not in the latter part of the 3^rd quarter then definitely in the 4^th as we will have our Presidential election finalized, followed by black Friday and the Santa Claus rally.

A stat also came out from the Federal Reserve this quarter noting that, adjusted for inflation, the median net worth of American families fell back to around 70k, where it was in 1992. This caught my eye for a few reasons, one of which is why the study focuses on the median and not the average, but mainly that during this same period I have seen unprecedented growth in my own personal net worth. I don’t earn a six figure income nor have inherited wealth. So how did I do it?

Simple and sound personal finance practices have led me to where I am today. In our household we have a 6 month emergency fund to cover immediate disasters which also allows us to raise deductibles across our insurances and pay lower premiums. When we invest we buy and hold for at least a five year period. So though our investments dropped in 2008 and 2011, we weathered the storm and held and are continuing to see positive double digit returns on our mutual funds --  just because we didn’t panic and sell. We’ve also spent the last three and a half years getting rid of debt from our lives. As of Friday, June 29^th, we are a debt free married couple! In curb stomping Sallie Mae and unDiscovering bondage, we’ve opened up our largest wealth building tool – our income.

So in the coming quarters we are going to continue dreaming, drawing up goals and going after them with the same gazelle intensity that got us here. We’ve even got a few vacations lined up in the pipeline, so be on the look out for those as the 2^nd half of this year plays out. But overall I walked away from this quarter confident that simple and sound financial practices work in times of boom and bust.