Have you done the following:
- Paid off your home early, even if your rate was 3% or lower
- took your SS at 62
- took your pension early instead of deferring
- bought an annuity
- other…..please explain and let me learn from you
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Non of the above. Investing in technology instead of investing in cash flow.
Don’t invest in EVs, invest in the EV maker that produces good cash flow.
The Captain
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I have intentionally stopped investing with the sole purpose of maximizing my net worth. Instead, while I still want a strong return on my money, the first principles are now:
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What is this money for?
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When do I need it?
By doing that, I now have enough cash in the form of CDs to cover my in-college kids’ 529-qualified undergraduate costs, even though the market has generally continued to rise. Sub-optimal financially, but superb from a peace-of-mind and ability to hit a key financial priority perspective.
Similarly, I now have a bond ladder in a taxable account. Standard guidance would suggest that a bond ladder optimally belongs in a traditional-style retirement account because of the low-growth, relatively high-income that doesn’t get qualified tax status nature of the income it generates. That was originally started to help supplement the 529 college savings plans for my in-college kids, but now it’s also useful for peace of mind in this rough job market.
Likewise, I also paid off a 3.61% mortgage a few years early, back in late 2022. Inflation had skyrocketed my costs to the point where my choices were to either pay off the mortgage or stop retirement contributions or start pulling money from my limited pool of after-tax investments to cover everyday expenses. While the second option would likely have been financially optimal, I chose the simpler option for both peace of mind and reduced communication complexity.
More recently, I took money from a bonus I earned in 2022 and that matured in 2025, along with money from maturing bonds and interest from the bond ladder to buy solar panels for my house. My best estimate is that those panels will have a 6% ROI over their warrantied 30 year lifetime, and even with the tax credit subsidy, it will take 14 years for them to be cash flow break even. Over 30 years, I would hope I could optimally outperform a 6% ROI, and in tough times, the money invested could have come in useful in a pinch, instead of being stuck in silicon on the roof. Yet in a world where AI data centers are spiking electricity prices, there is a very good chance that electric rates will increase faster than the 3% annualized rates built into that ROI calculation. Between that risk mitigation and the fact that the panels will help keep peace in the family during air conditioning season, it was worth the sub-optimal investment.
Regards,
-Chuck
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“Non-optimal” how? All of those examples can be considered optimal under “optimal” circumstances.
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In the sense that making other choices could have easily resulted in a higher total net worth.
It would have been fairly easy, for instance, to outperform a 3.61% mortgage over the past three years with a straightforward index investment. Similarly, given market performance, keeping my college aged kids’ 529 accounts in stock based mutual funds could have given them money towards graduate school or the newly allowed Roth IRA transfers…
The point is that financial decisions always involve trade-offs. I have found it incredibly liberating to shift my thinking to “what is the goal I am trying to achieve?” from “how can I maximize my net worth with this money?” It makes it easier to find better balance.
Regards,
-Chuck
Chuck,
Love your passion for investing/personal finance.
If your retirement software says you have a 99 of never running out of money, why sweat the small stuff….LOL
Time to retire Chuck and enjoy your retirement….Trust the Process
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I got married. I paid off my wife’s student loans shortly thereafter. Then I paid for a second undergraduate degree. Then I paid for a graduate degree. Then she got a job that allows her to support herself independently. Nine months later she was gone.
I earned 91% of the income while we were together. I saved for our future. I invested those savings. I managed those investments. She contributed almost nothing financially, and now she’s about to walk away with a small fortune.
I don’t care how “in love” you are. A marriage is a business arrangement. SIGN A PRENUP. If your spouse-to-be objects, then you just saved yourself a lot of trouble. Protect yourself first, always.
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I plan to work for quite a long time. What form that work takes is still to be determined.
Also, one of my biggest financial mistakes was over-investing in retirement accounts. As a result, it was only very recently where I got a “good enough” bridge plan in place to cover basic costs of living until I could withdraw from retirement accounts without facing early distribution penalties. Even now, that bridge plan is a bit tenuous…
Regards,
-Chuck
welly3,
How long did you know your wife before you got married?
9 months sounds like a very short marriage.
In looking back, were there any warning signs?
I was always good at saving. IRA, 401(k), ROTH, cash in the bank.
What I wasn’t doing was investing. The 401(k), where the bulk of my savings sat, was in whatever funds happen to be easy choices. I retired early, at 56, in part because my wife was ten years older, giving us time together. What we had might have been enough to get by, but it would have been tight. It wasn’t until three years later that I got a notice that my former employer was going to move the 401(k) to a different administrator, and mentioned that if I chose I could convert it to an IRA and keep it where it was. That was what pushed me to take control. I kept it where it was, subscribed to Stock Advisor, and started investing. I spent at least half a year slowly buying SA choices before I was fully invested.
It turned out well for me despite the years when I was only saving. That was 16 year ago, and I now consider myself modestly wealthy.
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We dated for four years.
We got separated after 15 years of marriage. She worked for nine months after getting her graduate degree, and then left.
Toward the end, sure. But it was too late to protect my assets at that point. The time to do that is before signing the marriage license.
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Spouse #1. People change and life goals change. She left along with essentially 1/2 our accumulated net worth at the time. Fortunately no kids. Fortunately early enough in my career where 1/2 that net worth is now a rounding error.
It is classic “Millionaire Next Door” stuff. Quickest way to loose $$$.
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Hi @darrellquock,
But, are they all really non-optimal?
On #1, I never had a mortgage rate below 4.5%-ish. I did have an 11% mortgage when I came back to the States from Korea in 1979. We signed the papers on a Friday to assume an existing mortgage at 11%, which was better than 13.5% going rates. On the following Monday, mortgage lending shut down state-wide when mortgage rates went above the 14.5% state limit.
Might have been sub-optimal, but it was better than the alternatives. On-post housing was terrible. So after we inspected the ‘offered’ quarters, we bought the house and had a nice place to live. (7 months after we declined the unit, it had an electrical fire and destroyed a lot belongings of a Captain and his family.)
On #2, I did start my SS at 62. Why?
SS from 62 to 66 increased 5% for the first year and 6.67% for the next 3 years. After FRA it increased at 8% per year. (Actually, it is all monthly amounts like 5/9 of a percent, etc)
Our portfolio was regularly gaining well above that every year. Right now, our 20+ year number is 19.29%.
The question I asked myself was:
Do I remove money earning over 12% annually to allow my payment to grow at 5% to 8% annually?
I said NO! Not optimal. That reasoning relates directly to your First Question.
On #3, I did not have an option other than continuing to work
On #4, when I opened our traditional IRA’s in 1978, they were cash value, daily compounding, earning 13.25% plus a 1% bonus. They had an absolutely horrible minimum rate of 4.50%.
I moved money back and forth a few times to buy stock during “bargain times” and back once I was making more cash than needed and did not want to buy more stock.
Near the depths of the recession, they were 30% of our portfolio. The day after Christmas, Friday Dec 26, 2008, I transferred all but $500 each to our 2 trad IRA’s. On Monday, I went shopping and got some great bargains that rose 5X to 15X over the next few years.
After we turned 59.5, I sequestered a portion of it as part of our expense cash cushion.
So maybe having those annuities was not a sub-optimal event after all.
Not everything that sounds like a bad idea is actually a bad idea in every case.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
Profile - gdett2 - Motley Fool Community (Click Expand)
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I forgot the mortgage on my first house, purchased in ‘82: 16%, variable rate, no cap. It didn’t turn out to be non-optimal, or if it was not by much. Sold three years later for more than I paid, because I got married. (Wife had a far nicer home.)
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In general, if you can regularly and reliably earn a 19.29% annual return, then ALL possible money should be directed into those investments. Every penny of equity should be extracted from one’s properties at much lower rates than that (even at 8% for a HELOC, it is very worth doing!). And every penny of margin that can be extracted from investment should be used and directed into those investments. Hech, it’s even worth getting a credit card at 8.99% and putting all expenses on the card for a long as possible, and directing the money otherwise to be spent into the investments earning at that rate! 19.29% beats almost all interest rates, and thus ALL potential money should be put into those investments.
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Hi @MarkR,
You may have misunderstood what I posted. The ~19% is the annualized number over 20+ years, not every year.
We have had negative years and a number of years over 60% with 2020 at 102%.
During the Financial Melt-down, our portfolio peak of June 30, 2007 was not reached again until June 25, 2010.
For that reason, I have Never borrowed money to invest. No margin, loans, etc.
Borrowing money to invest is additional risk. The last thing I want in our portfolio is more risk than it has now.
We do have a mortgage on our building lot and I am not paying it off early by removing money from our portfolio. I may apply money to it if we sell a lease or easement. If it gets paid-off early, it will be simpler for my wife.
Investing that money would be in our taxable account, possibly making future taxable events.
Our portfolio is configured as:
Portfolio Value & Income by Acct Type: Taxable: 1.43% 0.00% Trad IRA: 0.00% 0.00% Roth IRA: 98.57% 100.00%
My wife is not an investor and I am leaving her a portfolio that requires no action from her other than doing a transfer of cash to our checking account. I’ll explain.
At our point in time, we do not need more growth. Our annual withdrawal rate is under 0.90%. Not 5.3% or 4%. Less than 1%.
Since heavily selling growth stock in 2020/2021 to build a new house, I have been buying mostly dividend payers, radically slowing the growth. That reduced our annualized growth from a peak of 22.92% on Dec 21, 2020 to the current rate, around 19%
The result is our portfolio produces almost 3X the amount of expense cash we need from it annually. The excess gives a large margin of safety if a few companies reduce/eliminate their dividend. It also allows for an occasional new car or other large purchase.
Most of the companies have long histories of annual raises. Eli Lilly (LLY) raised 15% this week and just today, Realty Income (O) did their 133rd dividend increase since going public in 1994. (That is more than 4 increases per year)
I have been selectively buying stock with available cash in the portfolio. Each week, I slide a little cash to our savings account (cash cushion) then invest the rest. Effectively, this keeps our portfolio cash at zero until I am gone. Then the cash will start to build up.
Our cash cushion has 3 years of cash in it, so she will have time to adjust and read my instructions before she needs money from the portfolio.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
Profile - gdett2 - Motley Fool Community (Click Expand)
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Not entirely. First of all, if you can get a 19% return over 20 years, then perhaps short-term money from assets shouldn’t be directed there, but long term certainly should be. For example, since there are cheap 20-year and 30-year mortgages, any equity should be extracted at the low low rates of 6% or 7% and invested long-term at 19% or so.
Second of all, it sounded like you effectively “borrowed” all social security payments between $5100 (max at age 70) and $2600 (max at age 62), from age 70 through death in return for 8 years of $2600 a month to invest … because you have such high returns compared to what social security gives (as a guarantee).
How did you manage to result in such an allocation? Did you prepay a lot of taxes to get all the money into a Roth IRA? My allocation is almost the complete opposite of this! Probably 92% taxable, 6% Trad IRA, 2% Roth IRA.
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Hi @MarkR,
I “borrowed” NOTHING.
I “compared growth” between two different sources of cash that we needed to live on: one had a low growth rate and another had a higher rate. I CHOSE the higher one, pure and simple.
Simple: I Planned.
I discovered, through Quicken Lifetime Planner, that RMD’s were going to cause a large tax increase for us. In Quicken, I used 8% annual investment growth for planning so it under-estimated actual growth and thus, the RMD amounts.
Remember, from my previous post, our Withdrawal Need is under 0.90%. RMD’s increase that to 3.65% and increase that every year after that.
What made that even worse was the fact the excess amount of the distributions would grow in the taxable environment.
At just 8% growth rate, the size of our combined traditional IRA’s made the RMD’s initially add more than 3X to our current income.
As time went on and the RMD percentage increases, the dollars coming out increased since our growth was over the RMD percentage for a number of years.
Now, we pay a small amount in Fed and State tax for farm income, SS and pension. Tax filings are simple. I like simple.
Not an outrageous amount. Sure, I increased taxes over the previous years. I did it for a plan of annual conversions over 10 years, after which, taxes would remain at that same level/bracket, rather than drastically increasing by doing no conversions.
I made a 10 year plan, using Quicken, to create a level tax environment going forward. No big increase at RMD time.
Toward the end of the 10 years, tax rates lowered and brackets changed and the RMD age increased. I planned ahead and decided to continue the annual conversions and eliminate the traditional assets.
The 13th year saw my first RMD taken on Jan 1. On Jan 2nd, I transferred the remaining stock for my final conversion.
To offset taxes, I used highly appreciated stock in our taxable account to donate to charity. Over the years, we donated about $500K to create 2 anonymous endowments with our local community foundation. As of October, they have distributed over $140K between the 2 recipients and the accounts continue to grow.
Doing this did two things:
- Rather than paying taxes for the conversions, I placed a lot of that money where I KNOW it will do Good Work for Good People, unlike what happens in Washington DC.
- Instead of paying huge capital gains, I paid NONE! Gains for stock like for Netflix, where my adjusted basis was $3.08/share, I received donation credit as high as $396 per share.
Even if the mortgage rate was 1%, at this point in time, in our particular circumstances, I Would NEVER Take a Mortgage To Invest!
If I did take one, the investments would be in the taxable world. Ultimately, it could increase taxes if it was just growth companies. If they were dividend payers, they would add taxable income every year.
It would also increase our cash flow requirement to service the mortgage payments. So I would have to sell taxable investments to produce the extra cash needed or increase the withdrawals from our best asset, the two Roth IRA’s.
Sorry, just does not make sense for me.
I understand that many people get lured into things like:
- I can get a higher interest rate (3.00%) at ABC Bank vs only 2.75% at my current bank.
- Do no Roth conversions of trad assets to Roth because they will have higher total savings because they did not pay taxes.
- Take on credit card debt, HELOC’s, mortgages, margin, etc to invest.
I do not place emphasis on return like item 1. I plan based on what makes sense for our situation with emphasis on what makes things as simple and smooth as possible for my wife to continue with. I keep our accounts where they are convenient for us. I believe I explained items 2 and 3.
I also understand that a lot of people feel the need to make more money. What they have is never enough.
Well, we have more than enough. While we do not need growth, I still have some growth companies in our portfolio but it is not essential to our plan.
Gene
All holdings and some statistics on my Fool profile page
Profile - gdett2 - Motley Fool Community (Click Expand)
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While it is entirely true, most people will not accept that simple truth.