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When I left my engineering career to become a stay at home dad/blogger, I wasn’t sure if I could continue to save for retirement. My original plan was to use my small blog income to help fund our expenses. That way I could put off withdrawal from my nest egg and let it grow undisturbed. However, life rarely turns out as planned. In my case, the last five years of early retirement has been much better than expected. Mrs. RB40 is still working full time and her income increased significantly since I retired early. My blog income also grew from $10,000 per year in 2011 to $65,000 in 2017. These two factors mean we can fund our cost of living expenses with Mrs. RB40’s income and I can max out my retirement account. Today, we’ll take a look at my Solo 401k and the amazing growth it went through.

I’m sure most of you are familiar with the employer sponsored 401k. Almost every employer offers this plan which everyone should take advantage of. It’s one of the easiest ways to save for retirement. You will be very well off in retirement if you always max out your 401k. The Solo 401k is similar to your regular 401k, but it’s only for self employed people. Let me tell you more about this plan.

Self-employment savings

The Solo 401k (aka individual 401k) is only available if you’re self-employed with no employees or just the spouse. As an employee, I can contribute up to $18,500 to the plan, the standard 401k limit. In addition, as the employer, I can contribute up to 25% of the income. Folks older than 50 can add $6,000 more as catch up contributions. The total contribution for the Solo 401k can’t exceed $55,000 in 2018.

It’s even better if you have a full time job and a small business on the side. You can contribute to your employer sponsored 401k and also contribute to your i401k account on the side. That’s what I should have done during my final year of working full time to reduce our taxes.

In 2017, I made $65,388 from blogging and my maximum contribution was $31,153.70. I contributed $18,000 as an employee and $13,150 as the employer. This added up to $31,150 of tax deduction. We needed as much tax deduction as possible because our tax liability was much higher than expected. Now, let’s take a look at how my Solo 401k is doing.

I used Vanguard’s Solo 401k calculator to figure out my maximum contribution. It’s a good calculator that takes self employment tax into account. Check it out if you’re self employed.

My Solo 401k

The Solo 401k is really great because I was able to save more than I ever did as an employee. Here are my contributions over the years.

Tax Year Contributions
2013 $23,500
2014 $26,000
2015 $24,500
2016 $22,500
2017 $30,150
2018 $6,000 in Q1
Total $132,650

That’s a lot of money stuffed into a retirement account in five years. I’ve been very lucky so far because the stock market did so well since I started investing in my Solo 401k. Now, the balance has grown to over $175,000. Here is the graph from Vanguard.

The green area is where I contributed since 2013. For the most part, I consistently add a fixed amount every month. The amount is the employee maximum contributions divide by 12. That’s dollar cost averaging at work. Also, I add the employer contribution after I finished our taxes. You can see a bigger contribution around every New Year. The best example is in 2018. I contributed about $13,000 over the last few months to take advantage of the 10% stock market correction.

The blue area shows the investment returns. It’s very encouraging to see the returns increasing. Now that the amount in my Solo 401k is beefier, the investment returns is also picking up steam. It’d be awesome to see the blue area outpacing the green someday. I’ll update this post every year so we can see how it grows. Let’s see what happens in 5 years.

Investing with Vanguard

I wrote a more detailed post about Vanguard’s Solo 401k plan a while back. You can read more there if you are considering working with them. My experience has been largely positive. I’ll give a quick summary of that post here.

  • Cost – $20 per year for each Vanguard fund held in the Solo 401k account. This fee is waived if you have more than $50,000 invested in Vanguard funds.
  • Investment choices – More than 100 Vanguard mutual funds. However, we can’t invest in ETFs or the Admiral shares (lower fees.) It’s just their rule.
  • Roth option – Vanguard is one of the few companies to offer Roth 401k. I’m going with the traditional 401k for now because we need the tax deduction.
  • No Loan– You can’t borrow from your i401k account at Vanguard. This isn’t a big deal to me because I don’t plan to borrow anyway.
  • IRS– You will have to file form 5500 EZ with the IRS if the i401k plan asset is over $250,000. See the IRS page on form 5500 for reference. This is the rule no matter where you have the Solo 401k.

More paperwork, great. I don’t have to file the 5500 form yet, but that day is coming up soon. I guess I can’t complain because it means my retirement savings is kicking some serious butt.

Anyway, I used to have just one fund in my Solo 401k because I didn’t want to pay the $20 per fund fee. It was VTSMX. Now I have 4 funds so I can diversify a bit. The value of my  Solo 401k is over $50,000 so they don’t charge me the $20 per fund fee anymore.

  1. VTSMX – Vanguard Total Stock Market Index Fund
  2. VGTSX – Vanguard Total International Stock Index Fund
  3. VBMFX – Vanguard Total Bond Market Index Fund
  4. VMFXX – Vanguard Federal Money Market Fund

All in all, I’m pretty happy with Vanguard. The only problem is the inability to invest in their Admiral Shares. Their investor fund has low fees (expense ratio), but lower would be better. Once the amount is large enough, even 0.1% difference in fees adds up. If I can invest in the Admiral funds, I’d pay $70/year in fees instead of $263. That’s not a huge difference, but it will add up over time. The price tag will increase every year as my Solo 401k grows.

I’m not sure why they don’t let you invest in the Admiral funds with the Solo 401k. I guess Vanguard has to make money too. Maybe I can roll this Solo 401k into my traditional IRA periodically. I’ll check with them.

Rebalance periodically

Lastly, I’d like to remind you to check your asset allocation at least once per year. The stock market did so well in 2017 and your asset allocation might be out of balance if you haven’t checked in a while.

I maintain a spreadsheet to keep track of my net worth and asset allocation, but I don’t update it very frequently. It’s easier to login to Personal Capital to get a quick glance on my asset allocation.

Personal Capital takes all our accounts and calculates the asset allocation. It’s a quick way to check your asset allocation. Sign up with Personal Capital if you don’t have an account yet. They also have a very good retirement planner/calculator and other useful tools. I highly recommend them for DIY investors.

Are you self-employed? If so, are you saving for retirement? It’s difficult to save for retirement if your income is unstable, but you need to plan for the future. The Solo 401k is a great retirement saving vehicle. 

Image credit: Mabel Amber via Pexels

The post Saving More for Retirement in My Solo 401k appeared first on Retire by 40.

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Last week, I had a talk with RB40Jr on the way to school. I reminded him that I have a blog and asked if he’d like to work for me. I could pay him to use his photo on Retire by 40 and also for whenever he takes a good picture that I can use. He’ll be a child model and staff photographer for us. RB40Jr enjoys taking photographs and I want to encourage him to keep at it. I asked how much he’d like to get paid for each picture I use. His answer was “How about $1?” Wow, that’s cheap. However, I told him I’ll pay him $100 per photo. I explained that I’ll put the money in an investment account (Roth IRA) and he can’t get it until he’s older. RB40Jr said okay. Alright, we’ve got a deal. Now I just have to write up a contract and finalize the details. Why am I hiring our kid as an employee? We’ll go over the benefits and then see if they outweigh the negatives. Read on…

The benefits of hiring your kid

There are 3 big benefits to hiring your kid. Let’s go through them one by one.

  1. Teach your kid about personal finance. Personal finance education is so important, but many young adults are woefully under educated about how to run their finance. Most school doesn’t have a course on personal finance. Even if they do, most kids aren’t interested in it anyway. It’s up to the parents to teach their kids the basics. My parents taught me to save, but they didn’t know much about investing. I had to figure out a lot of it on my own. Hiring RB40Jr will give us a chance to teach him how to earn, save, invest, spend mindfully, and more. This will help prepare him to face the real world.
  2. Tax savings. This April, I’ll have to send the tax men over $10,000. My blog income was higher than expected last year. That’s a good problem to have, but I want to reduce my tax liability as much as I can. Hiring RB40Jr will give me a chance to shift some income from me to him. In 2017, our last $5,000 of earnings was taxed at 60%. If I shift this to him, then he can keep the whole $5,000. That sounds good to me.
  3. Head start on Roth IRA. Lastly, the earlier you start investing, the better off you’ll be. If RB40Jr invests that $5,000 in a low cost index fund, it could turn into $1.5 million by the time he reaches full retirement age in 60 years. That’s the magic of time and compound interest. He’d have an amazing head start on retirement savings.

There 3 benefits are huge. They will help set up RB40Jr for a successful future. Also, the Roth IRA is tax protected so it’s the perfect vehicle for investing when you’re young. RB40Jr won’t have to pay any tax on that $1.5 million. The future tax saving will be huge what that kind of timeline.

*I first read about hiring your kid on Go Curry Cracker a while ago and I thought it was an great idea. However, the inertia was hard to overcome. The tax saving wouldn’t have been much because I made less back then. He was too small to learn about personal finance as well. In 2017, Retire by 40 made $65,388 and my tax liability shot way up. This year, it’ll be worth it to put RB40Jr on the payroll.

Hiring your kid is more complicated than I thought

There are some big benefits, but I found hiring your kid is not straight forward process. I can’t just pay RB40Jr $5,000 and call it good. The IRS is involved and this means a lot of rules and paperwork. Let’s try to go through the complications one at a time. Feel free to skim these because they will get a little dry. The tax code is ridiculously complicated.

*I’m not a tax expert so I might have missed something. If you’re thinking about hiring your kid, you probably should consult a good tax professional.

1. You need to have a legitimate and profitable business. A business owner can hire and pay their child. This is part of business expense. Retire by 40 is a single member LLC (taxed as a disregarded entity) and I file the schedule C with my taxes. The business needs to be profitable as well. It’s a bad idea to create an unprofitable hobby business to shift some income to your child. This is a red flag for the IRS. (You can hire your kid if you don’t have a business, but that’s also very complicated. Let’s skip it and focus on business this time.)

2. Avoiding social security, unemployment, and Medicare taxes. If you look at your paychecks, you’d see these taxes that your employer pays. Fortunately, there is an exception for hiring your kid. This is from the IRS under family help.

“Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child are subject to income tax withholding, regardless of age.”

Whew, it looks like we’re good so far.

3. Avoiding income tax withholding. I don’t want to withhold federal income tax. It will complicate my business accounting because I don’t have to do it now. This one is confusing for a dependent because they can’t claim their own exemption. From what I understand, dependents don’t have to pay any federal income tax if they make less than the standard deduction. That’s $12,000 for 2018. In any event, I don’t have to withhold income tax this year because RB40Jr can claim the exemption in the W4. Here is line 7 in the W4.

I claim exemption from withholding for 2018, and I certify that I meet both of the following conditions for exemption.

  • Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and

  • This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.

4. Avoiding self-employment tax. This one is somewhat tricky. I have to put RB40Jr on the payroll as an employee and issue a W2 to him at the end of the year. I also need to send his W2 and a W3 to the IRS. The easier alternative is to hire him as an independent contractor and file a 1099 for him. This is a bad option, though. Independent contractor has to pay self employment tax. All those taxes we tried to avoid above will have to paid when he file taxes.

5. Kid needs to be a legitimate employee. To be legitimate, we need to create a contract for RB40Jr and also keep very good record. I’m going to pay per photograph so it shouldn’t be difficult to keep track of the posts. If I pay him per hour, then we’d need to keep a time sheet. You can’t hire kids to do chores around the house. They need to work on business related tasks.

6. Reasonable pay. The business also needs to pay the kid a reasonable rate. I can’t just say I’ll pay him $5,000 for the year. This one is tricky because rates are all over the place for child model and photographer. From my research, an amateur photographer can charge anywhere from $25 to $150 per photograph. A professional can charge much more. I think $100 per photo is probably too high at this point. I’ll set the rate to $50 per image that I use on Retire by 40 and $10 per image I use on social media. That sounds reasonable to me. Here is a really good reference page on how much photographers should charge.

7. Individual 401(k). Another issue is my individual 401(k). I love my i401(k) and I want to keep contributing to it. However, a business must treat all employee the same. Currently, Retire by 40 contributes 25% of its income (after self employment tax) to my i401(k) as employer contributions. If I hire a full time employee, the business will need to do the same for him/her. Also, I’d have to change to a different plan because the individual 401(k) is only for one person. Fortunately, a part time employee who works less than 1,000 hours per year can be excluded. Okay, it looks like I can keep my i401(k) plan with no change.

8. RB40Jr should file a tax return. All dependent children who earn more than $6,350 of income in 2017 must file a tax return with the IRS. I’m pretty sure RB40Jr will earn less than that so he doesn’t have to file a tax return. However, it’s probably best to file one for him so this looks legitimate.

9. I probably need help from a tax expert. Currently, I do my own business accounting and DIY my taxes. This whole thing is very complicated and I’ll probably need help from a good tax professional.

I’m worn out

Whew, I am beat. Is this really worth it? I don’t know. I already spent many days researching this whole topic and my head is about to explode. The rules are confusing and the information scattered. Why are there so many exceptions?

It looks like we’re okay and I don’t have to make many changes to the business to hire RB40Jr. Basically, I want to make sure we do it right before going ahead with this. The IRS has gone to court over this and they won some and lose some. I’d rather not have to hire a lawyer, though. That probably will wipe out any tax saving we’d get and then some.

I’d love to hear more from someone who has done this. Did I miss anything? Now, we just need to work with RB40Jr to stop sticking his tongue out…

Come back next week to read more about my i401(k). It is worth over $175,000 after just 5 years. I think that’s really good.

The post Why I’m Hiring Our Kid as an Employee appeared first on Retire by 40.

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Alright, I am almost done with our 2017 tax returns! There are a couple of K1 forms that should be coming in April, but everything else is done. Now, I can share my 2017 blog income because that part is finished. We had a record year in 2017 and doubled our blog income from the previous year. That was great news, but we have to pay a lot more taxes this April. Last year, we didn’t have to pay a capital gain tax because we were within the 15% tax bracket. In 2017, I made too much money online and it pushed us up to the next tax bracket. I know making more money is a good problem to have, but it is still painful to write several large checks to the tax man.

I’ll share a few highlights first and then we’ll dig into the details of the blog income.

Taxes highlights

Here are a few highlights from our taxes.

  • We owe the IRS a little over $9,000. We also owe the Oregon Department of Revenue around $1,000. In addition, I’ll have to send in estimate tax payments of about $2,500 every quarter. This adds up to $12,500 that will flow out in April. Ack!
  • At least, we don’t owe any underpayment penalties. We paid 100% of what we owed last year. That gave us an exemption for under paying in 2017.  This year, I’ll have to be more accurate and estimate better because that exception is only good for one year.
  • We made a bit too much income and pushed up to the 25% tax bracket for the first time since I early retired. This is important because now we have to pay the 15% capital gain tax. We haven’t had to pay tax on our dividend income for a while so this was somewhat really painful. The higher income also reduced our child tax credit from $1,000 to $750. If I had made $5,000 less, we’d reduce our tax liability by $3,000. Now, that’s what I call diminishing return.
  • Retire by 40 generated $65,388 last year and I put $30,150 into my individual 401k.
  • I over contributed to my individual 401k by $30. I had to write a letter to Vanguard to recharacterize $30 to 2018 contribution.
  • I did not take a home office deduction although 90% of my work was done at home. This is because my office doubles as RB40Jr’s bedroom. You can only take the home office deduction if it is exclusively used for business.
Blog income history

Here is the whole history of my blog income. I started Retire by 40 in 2010 to help me focus on my early retirement journey. At first, I was hoping to make a little income, but I never imagined Retire by 40 would help our finances this much. It’s pretty amazing that a simple blog generated almost $300,000 in revenue over these last 7 years. Everyone should have a blog. Here is my guide on How to Start a Blog and Why You Should. Many bloggers are more successful than I am at making money and others aren’t. You never know until you try.

My original early retirement plan in 2010 was to live on Mrs. RB40’s income, our passive income, and about $500/month of online income. Back then, we thought Mrs. RB40 would continue to work until she’s around 55. At the time, she just started a new job and she preferred working than retiring. Now, she’s a bit older and she has seen the benefits of early retirement. My quality of life is way better after I retired in 2012 and she wants a piece of it, too. Well, mainly she wants more time to pursue her interests. She likes work, but she just doesn’t have time to do other things that she wants.

Our current plan is for Mrs. RB40 to retire around 2020. Our passive income should be in a better shape by then. We’ll also depend more on my blog income. We’d probably need around $1,500/month of online income so we can put off drawing down our retirement accounts. Drawing down is fine if it comes to that. It’d still be much less than the 4% safe withdrawal rate.

*2018 is from the first 3 months of the year.

2017 Blog Income

Here are the details of my blog income last year.

  • Total Revenue: $69,846
  • Expense: $4,458
  • Net Income: $65,388

We had a record year in 2017. Our revenue was high and our expense was low. Our business expense was lower than in 2016 because I didn’t have any business travel in 2017. It was our best year yet and I’m working to improve it in 2018. It’s going well so far, but Q1 is typically the best quarter of the year. We’ll see how the rest of 2018 goes.

Revenue $69,846

Retire by 40 generates revenue exclusively through advertisements. There are many ways to make money online, but I’m just not ready to branch out yet. More ambitious bloggers use their blogs as platforms to launch new careers such as becoming a published author, freelance writing, motivational speaking, consulting, and personal finance coaching. I’m not quite ready to do those things yet because I’m a bit lazy in my early retirement. If I was more driven, I’d work more to diversify my income. After Mrs. RB40 retires, I might try financial coaching or writing a book because I’d have more time. We’ll see how we both feel in 2020.

How we made money through advertisements.

  • Banner ads: $20,577. These are the banners you see on the sidebar and in the content. I like these ads because the readers don’t have to click on them. In a sense, these are like the ads on TV. I was with AdThrive the entire 2017 and I’m happy with them.
  • Click ads: $2,354. These are the banner ads that readers need to click on. In 2017, I used MyFinance for this and it worked pretty well. MyFinance was much better than Google, Yahoo, and Amazon, but this income stream was kind of disappointing. Click ads just don’t work that well anymore. Even Mrs. RB40 doesn’t click on ads anymore.
  • Affiliate: $44,244. Our affiliate income increased quite a bit in 2017. These are the links you see sometimes in a blog post. We receive a referral fee when readers sign up for services through these affiliate links. Last year I focused on generating more income and added affiliate links to almost every post I published. Adding more links worked very well and I hope the bounty continues for a few more years.
  • Brand ambassador:$2,671. Occasionally, we work with companies to build brand awareness. This usually means publishing an article to highlight their products or companies. It’s really tough to make these posts interesting and useful so I cut way back on this one. Google also doesn’t like this kind of thing because they say we are manipulating their search algorithm. Our income decreased about $5,500 in this category. I’m okay with this because we made up for the decrease through other categories. I’m also happy that we have fewer brand ambassador posts. Although, some companies are good to work with. I worked H&R Block last week and it turned out pretty well.
Expenses $4,458

Our expenses were not too bad in 2017. $4,458 may look high, but that’s because we have more fixed cost now. When I started in 2010, our expense was much lower than this. If you’re new to blogging, don’t worry. It won’t cost this much to run a blog when you’re starting out.

  • Advertising: $673. This is mostly for Aweber, our email marketing company.
  • Travel: $0. I didn’t go on a business trip in 2017.
  • Financial fees: $101. PayPal fee and such.
  • Contracts: $9. This is for the CDN (caching network.)
  • Insurance: $210
  • Meals: $835. We were able to deduct 50% of the business meals.
  • Repair: $7. Minor repair for my computer
  • Internet: $821
  • Phone: $169
  • Mail: $56
  • Hosting: $656. I use Siteground now and it’s great. Retire by 40 has much less server problems now.
  • Product review: $159. Various stuff that I reviewed at Fit by 40.
  • Computer: $901
  • Software: $87
  • PO box: $90
  • Small business license: $100

Overall, the expenses weren’t too bad. This year should be comparable because I haven’t added anything new.

2017 Net Income: $65,388

My blog income was great in 2017. This isn’t bad at all for part time self-employment. I work about 20-30 hours per week and I don’t have to report to anyone. It’s great to dictate my own schedule and work at my own pace. One of my goals in 2018 is to make $100,000 from blogging. This is probably too ambitious so I’ll grade myself on an academic system. I’d be happy to get a B- this year ($80,000.) I’m sure we’ll get there at some point.

In 2017, I focused more on generating income from this site. It worked out quite well and I think 2018 will be very good too. The problem with blog income is that it isn’t stable. What works well this year might not work next year. You can see that from the historical income graph. Our income dropped in 2015 and 2016, and then picked back up in 2017. We have to make hay while the shines.

So what are you waiting for? If you don’t have a blog yet, you really should start one. It’s a great way to build your brand and explore different ways to make money online. You can get started in just a few minutes by signing up with SiteGround (example of an affiliate link), one best hosting companies in the business. They are much better than other hosting companies and the price is still affordable. See my tutorial on how to start a blog if you need a little help.

Okay, that’s it for today. I’m really glad I’m almost done with taxes, though. It’s kind of fun, but it just takes so much time to go over all the accounting over and over again. Have you finished your taxes yet?

Image by Glenn Carstens-Peters

The post 2017 Blog Income Wrap Up appeared first on Retire by 40.

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It’s been a rough winter for us. RB40Jr and I were sick on and off in February and we didn’t do much. This February felt much colder than normal to me. We had warmer weather for about a week early on and then the temperature plunged. I guess the false spring got my hopes up for nicer weather, but winter came back with a vengeance. RB40Jr even got a snow day and didn’t have to go to school. He also missed a couple of days due to some kind of stomach bug. Anyway, the upside is that we didn’t spend much money at all. We stayed home on the weekends and entertained ourselves with books, board games, and movies from the library. It was nice to avoid spending money, but I’m ready for spring and really hope the weather improves soon.

On the financial front, February was rough. The stock market turned volatile and our net worth decreased over $80,000. We’re still up a bit for the year so it’s not a big deal. I don’t worry about the stock market until I see at least 20% downturn. Then it will be a buying opportunity. Also, I finally found a renter for our rental condo! I screened over 20 potential tenants over 10 days. It was hectic. I’ll share this experience next time.

As for cash flow, everything looks good. Our income streams improved and we didn’t spend that much. Okay, let’s go over my 2018 Goals first and then I’ll share the details of our cash flow in February.

2018 Goals

This is my goal scheduling spreadsheet. Last year, I found that I needed to start these goals in the first half of the year. If I wait until summer, they just won’t get done. The first 2 months were slow. It’s hard for me to get much done in the winter. You can get a quick status update from the chart and see the details below.

Financial Goals
  1. Increase our real estate crowdfunding investmentto $100,000. We’re doing well with this goal and now have $38,000 invested. We’re low on cash, though. I’ll probably have to save up for a few months before I can invest in the next project.
  2. FI ratio > 100%.FI ratio is passive income/expense. Currently, our FI ratio is 41% in 2018. That’s very low, but it will improve. Our expenses were higher than usual because we just paid for our summer vacation to Iceland.
  3. Increase bond/cash allocation to 30%. Going to 30% bond/cash will beef up our opportunity fund. However, I’m not in a big hurry to do this because I think the stock market will go up this year. I plan to get it done before the end of 2018.
  4. Travel hack 100,000 points. I got a head start on this one from last year. It’s on the back burner for now. I’ll sign up for new cards later this year when we have a big expense.
Blog Goals
  1. Minor Redesign RB40. WIP
  2. Blog 12 times at Fit by 40.This one is on track so far. It’s not an ambitious goal and I think it will help me stay on top of fitness. You can see how I started the site here – How to Start a Blog and Why You Should.
  3. Blog income $100,000.This one is going to be very difficult so I’m grading it on the academic system. Q1 is the best quarter for blog income and we did very well. I made $11,434 so far in 2018. You can see more detail on my Blog Income page.
Personal Goals
  1. Join Toastmasters. February wasn’t a good month so I had to put this off until March.
  2. Not paying for leaf removal. Showdown in November.
  3. Consolidate down to one property. We plan to move into our rental duplex and sell off the other 2 properties. This one will definitely take more than one year. Our rental condo is rented for at least a year so the earliest we will be able to consolidate is 2019.
Fun Goal
  1. Visit Iceland. The trip is a go. We booked our flight tickets, lodging, and rental car. Iceland is a very expensive country to visit, but it should be a great trip.
Net Worth (+0.6% YTD)

I’ve been tracking our net worth since 2006 and it is very motivating to see the progress we’ve made. 2018 started off with a bang and we had a great month in January. However, the stock market turned volatile in February and we gave up almost all the gains. I expect that 2018 will be a good year for the stock market, but nobody knows how it is going to turn out. President Trump announced new tariffs on steel and aluminum and this could spark trade wars with other countries. It’s a going to be a wild ride this year.

My bet with Warren Buffett – I’ll benchmark our net worth against VFINX for 10 years starting in 2018. VFINX dropped 4% in February. Our net worth also dropped 2.5%. We’re pretty much even at this point.

Here is the picture of our net worth in February, on Personal Capital. Our net worth decreased over $80,000 in February. It looks a scary, but it really isn’t bad in the grand scheme of things. I know it will turn out okay in the long term so I’m not worried about the short term performance.

*Sign up for a free account at Personal Capital to help manage your net worth and investment accounts. I log in almost every day to check on my accounts and cash flow. It’s a great site for DIY investors.

2018 Passive Income ($4,795 YTD)

Here is a quick summary of our passive income. You can see all the details at my new Passive Income page. We’re off to a slow start in 2018 because one of our rentals was vacant. It’s occupied now so the passive income will start to look better in March. Things are looking up.

February 2018 Cash Flow

Our cash flow was very good in February. My blog income was great. March should look even better as the rental income and dividend income pick up. I think we did very well on the expense side too. We didn’t spend much money because we stayed home most of the month. The expense looked a bit high due to our upcoming summer vacation to Iceland. That was the only big expense we had.

Check out the Sankey diagram and see the details below.

Take Home Income (target > $10,000)

For 2018, our monthly take home income target is $10,000. February was a great month and we blew that target away. March should look a lot better too so things are going well here.

  • Mrs. RB40’s paychecks:$5,839
  • Blog Income:$5,954. You can read more details at my Blog Income page. RB40Jr is on the payroll now as model and photographer. The income will go straight into his Roth IRA. I’m excited to see how this experiment will turn out.
  • Rental Income:$340. Woohoo! Our rental condo is occupied. Read more at the Rental Property Passive Income page.
  • Dividend Income:$661. The second month of the quarter is slow for our dividend income. It should look better next month. More details at my Dividend Passive Income page.
  • Crowdfunding Income:$197. Real estate crowdfunding was good in February. This should pick up as the year goes on. 2 deals just closed and they will start paying out soon. Read more at my Real Estate Crowdfunding Passive Income page.
  • Interest Income:$13.
Monthly Expenses (target > $4,800)

For 2018, our monthly core expense should be under $4,800, an increase of $300 from 2017. This does not include contributions to 401k, Roth IRA, and college savings. We didn’t spend much locally this month, but we went over budget just a little bit. We spent $5,307. Like January, the travel bill busted our budget again.

We’re going to Iceland in June with another family. I have known them since college and our kids were born just one day apart. We’re getting a van and renting Airbnb to fit our 2 families. It should be a lot of fun. Iceland is more expensive than any country I’ve visited, though. The van rental cost $1,700 for 10 days and that’s not including extra insurance. Food and lodging will be very expensive as well. I used up most of my travel hacking points last year so we’ll pay for everything this year. Next year, we’ll visit somewhere much cheaper, maybe in South America.

  • Housing: $2,355. Our housing expense is getting expensive. This category is over 50% of our expense every month. There’s not much we can do at this point. This includes mortgage, HOA fees, and property tax.
  • Groceries: $435. Our grocery bill was good in February. We ate very well at home and I cooked many delicious meals. I joined Instagram recently and have more food pictures to share. I hope you like them. Clockwise from top left – shrimp etouffee, shrimp taco with avocado slices and Parmesan cheese, gyro, and pad see ew noodles. Yummm!

  • Cash: $0. We didn’t withdraw any cash in February.
  • Transportation: $44. We share one car and we don’t drive much. I drop RB40Jr off at school in the morning and go grocery shopping on the weekend. That’s about it. We drive more in the summer when we visit local attractions.
  • Kid: $35. We got a pizza for his birthday. We also picked up a puzzle game for our trip to Iceland.
  • Pet: $0.
  • Bills: $257. Electricity and insurance (auto, home, term life, and umbrella.)
  • Health: $26. The only one in this category was the gym membership fee.
  • Travel: $2,156. We booked our rental car and an Airbnb at Vestmannaeyjar.
  • Clothing: $0. Mrs. RB40 wanted to buy something, but she put it off until our condo was rented out.
  • 401k: $3,390. I contributed $2,000 to my 401k. Mrs. RB40 contributed $1,390 to hers.
  • College Savings: $2,600.
  • Extra Savings: $1,706
Extra Savings: $3,972

2018 is off to a good start and our extra saving totaled $3,972 so far. This will go into our saving account to beef up our opportunity fund. We keep about $10,000 in cash as our emergency fund. Anything above this, I’ll invest opportunistically.

Here is what I plan to do with our opportunity fund in 2018.

February 2018 Wrap Up

Overall, February 2018 was a great month for us. Our income was great. Our regular expense was good. Our Iceland summer vacation cost a lot, but that should be it until June.

March should be better on both the income and expense for us. Our passive income should increase and my online income is looking good too. Our expense should be back to normal because most of the Iceland vacation is paid for already. The stock market looks like it will continue to fluctuate. Nobody know what it’s going to do so we should focus on what we can control – our saving rate. The stock market will do well in the long term so don’t worry about the volatility. Anyway, stick to your plan and keep investing.

Did you have a good February? Winter is always a little slow for us. We like hunkering down at home and not do too much when it’s cold outside. I’m really looking forward to more daylight in March. Have a great month!

*Sign up for a free account at Personal Capital to help manage your investments. I log in almost every day to check on my accounts and cash flow. It’s a great site for DIY investors.

Disclosure: We may receive a referral fee if you sign up with a service through the links on this page.

February 2018 Goals and Financial Update is a post from: Copyright © 2010-2016 Retire By 40 All Rights Reserved
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The FIRE (financial independence, retire early) movement is getting more mainstream and there are more early retirement advocates than ever before. The funny thing is that many of us are not retired in the traditional sense. I spend 20-30 hours per week on Retire by 40 and I have some income from blogging. Most early retirement advocates are in the same boat. They are young and they aren’t ready for full retirement yet.  Many of them continue to have earned income after retiring from their career in the traditional workforce. This is inspiring to many people, but it could also be discouraging. Some readers wonder – do I need to be an entrepreneur to retire early? What if I don’t have that entrepreneurial spirit?

My take is that you need to craft your own early retirement. It won’t be the same as mine or anyone else. You don’t have to be entrepreneurial, but it helps a lot.

Entrepreneurial early retirees

The reason why you only hear/read about entrepreneurial early retirees is that they are in the public’s eye. We need publicity to advocate for this FIRE movement. This is not simply saving 10%. It’s a path less taken and we want to spread the word. I’m sure we are just a small fraction of early retirees. Most early retirees probably aren’t entrepreneurial. They are quietly enjoy their retirement without drawing attention to themselves. You won’t hear about these normal early retirees unless you live next door to them and wonder why they always seem to be home. Let’s take a quick poll here to see if I’m right.

Note: There is a poll embedded within this post, please visit the site to participate in this post's poll. How being an entrepreneur helps early retirement

I think being entrepreneurial is a really good way to spend your time after early retirement. It solves two of the biggest problems we have.

Money – This is a big issue with early retirement because we have such a long time in retirement. I retired when I was 38 and my retirement could last 40+ years. That’s a long time for our investments to endure. Our net worth was about 30x our annual expense when I retired, but I was still wasn’t ready to draw down yet. Fortunately, Retire by 40 was generating a little income and that enabled us to put off withdrawal. Mrs. RB40 also still works full time so that makes it really smooth so far. The longer you can put off withdrawal, the longer your portfolio has to compound. A little active income goes a long way in early retirement.

Boredom – Retirement can also be very boring to some people. Fortunately, I’m not speaking from experience here. I’ve been early retired for almost 6 years now and I haven’t been bored yet. It was a lot more boring to pretend to be busy in my old cubicle at work. However, boredom is a real problem for many retirees, early or not. Mostly because they haven’t planned for their life after retirement. Being entrepreneurial can help with this. If you’re working on something you enjoy, then you will put time into it. You won’t have a chance to get bored. Being a stay-at-home dad kept me super busy before RB40Jr started school full time. I had to squeeze in blogging time whenever I could. Often, that was late at night. Now that he’s in school, I have a lot more time to work on my blog and I can finally get more sleep. Life has been quite good recently.

Being entrepreneurial worked out really well for me, but it isn’t for everyone. Maybe you enjoy volunteering instead of hustling to make money. That’s great too. Part of why Mrs. RB40 is reluctant to retire early is because she isn’t entrepreneurial. She doesn’t know what she’s going to do without a job. From what I understand, she plans to putter around and fix all the problems in our house for a while. That might take 6 months to a year, but what will she do after that?  I’m sure that’s a conundrum for a lot of regular people too.

Let’s brainstorm and figure out some alternatives for non-entrepreneurial people. Here are my ideas.

Early retirement for non-entrepreneurial people 1. LeanFIRE

Okay, this is relatively new to me. Apparently, there is a subset of the FIRE community call the leanFIRE movement. The idea is to live on less than $40,000 per year. You’d need to accumulate less than a million dollars to fund this amount of passive income. A million bucks is still a lot of money, but it is reachable for many people.

Many in the leanFIRE community have much smaller goals. Some plan to generate passive income through rental properties which require less capital, but more leverage or borrowing. Some plan to live on much less than $40,000 per year which brings down the size of their target portfolio. This leanFIRE movement probably works best for people who never let lifestyle inflation take over. If you are a new college graduate, this would be real option for you. The leanFIRE retirement would be much harder for older people who are used to spending more money annually. It also depends on where you live. It’d be tough to leanFIRE in most of California, for example.

2. Work part time

I think working part time is a good option too. One of our readers, David Michael, works for a few months every year at the Amazon fulfillment center and takes the rest of the year off to travel and relax. This is a great way to meet new friends and augment their travel budget. They also taught English around the world when they were younger.

Another option is to work part time every week. I hear working at Trader Joe’s part time is a great side gig. Their part timers can get health insurance and other benefits. Maybe I’ll go undercover for a year and write a series on this part time gig. There is a Trader Joe’s close to our duplex. Do you think that would be interesting? I need to find out if you can work about 15 hours per week.

If you’re not entrepreneurial, then working part time seems like a good way to spend your time. Health insurance coverage would be a great benefit too. The job has to be right, though. I wouldn’t want to work too much or too hard.

3. Geoarbitrage (moving to a cheaper location)

There are many beautiful and interesting locations to live. If you are willing to consider living outside the US and Canada, a whole world of possibility opens up. You can live comfortably in Chiang Mai, Thailand for $10,000 per year. Jason Feiber’s annual dividend income is about $12,000 and he is loving life in Thailand. Frankly, I’m jealous. I’d love to live in Thailand for a year so I can reconnect with my relatives.

Chiang Mai isn’t that cheap either. There are many cheaper locations around the world. Geoarbitrage can lower your target early retirement number quite a bit if you’re willing to consider it.

Here is a good post on The Cost of Living in Panama from Jim aka. Route to Retire. They plan to take advantage of geoarbitrage and relocate to Panama in 2019. I’m looking forward to the stories they’ll share.

4. Early pension

The only early pension I know of is from the US military. They have the best pension plan ever. After 20 years, military retirees can receive 50% of their basic pay, full medical coverage, and a slew of benefits. The big issue here is the pay isn’t that great to begin with. The lowest rank (E1) private’s salary starts at $19,000/year. That’s not a lot of money. You’d probably need to move up the rank to survive on 50% retirement benefit. A major with 6 years of experience makes about $73,000/year. Half of that is pretty good. Check out the US Army pay chart.

This one probably isn’t for everyone either. I can’t imagine spending 20 years in the military.

5. Become van people

The #vanlife movement basically means becoming homeless and living in a van. This is beyond leanFIRE. It takes a certain mindset to go through with this. It probably works best if you’re single. I’m 100% sure Mrs. RB40 wouldn’t live in a van with me.

Of course, if you have a bigger budget, you can go with a nice RV. That sounds much better, but it still wouldn’t work for us. We’re spoiled by living in a regular home. This one probably works best if it’s temporary. You can live cheaply for a time and build your retirement fund.

Side story – I went to New Zealand in 2006 with my parents and tried the #vanlife for 10 days. We stopped at rest areas, by the lake, next to the river, and anywhere we could find parking. It was fun, but the van was really cramp for 3 people. I was glad it was over by the end of the trip. My parents didn’t mind it. They already drove around the US for 6 months in their Chevy Astro van a few years earlier.

6. Work longer

Ugh. Here’s the one that nobody wants to hear. If you don’t want to work after early retirement, you probably need to grit your teeth and work longer. This is a common solution presented by traditional financial advisers. While I don’t like it, it is sound advice.

Other ideas?

That’s it from me. Working a bit after retiring from your career is a great thing. It helps with income and boredom. If you don’t plan to work, then you need to find something else to do with your time. Volunteering, hobbies, or working on other projects are good ways to spend some time. It isn’t good to have too much free time. You’ll be bored and early retirement won’t be a fun experience.

Do you have other ideas? What if you want to retire early, but you’re not an entrepreneur?

Starting a blog is a great way to build your brand and generate some extra income. You can see my tutorial here – How to Start A Blog and Why You Should. Check it out if you’re thinking about starting a blog. 

Photo by Christin Hume

Do You Need to Be an Entrepreneur to Retire Early? is a post from: Copyright © 2010-2016 Retire By 40 All Rights Reserved
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Last month, I read about an interesting concept at Get Rich Slowly – The Opportunity Fund. The opportunity fund is basically the money you set aside to take advantage of opportunities. Once in a while, you’ll come across a good opportunity and you need money to take advantage of it. These opportunities can be anything from a chance to travel to Iceland with friends or investing in the stock market when the price is low. But where does the opportunity fund sit in your portfolio? Should it be in cash or something else? Today, we’ll see how to build your opportunity fund and where it should be in your portfolio.

Emergency Fund

Before we look at the opportunity fund, we’ll need to go over the emergency fund quickly. The emergency fund is money set aside for those financial surprises life inevitably throws our way. Nearly half of Americans can’t come up with $400 in an emergency. That’s living close to the edge. If the car broke down, they’d need to put it on the credit card and pay it off over time. This is a slippery slope because the balance on high interest loans tend to keep increasing.

This is why we all need an emergency fund. If you have a stable job and good cash flow, then the emergency fund can be a smaller amount. Personally, I like to keep about $10,000 in our reward checking account for this purpose. The $10,000 can cover 2 months of expense and it should take care of almost any emergency for us. If we need more cash, we’ll raise it by selling some investments.

I also keep an eye on upcoming big expenses. For example, we pay our property taxes in October and that’s a 5 figures bill. When I know there is a big bill coming, I increase our cash fund by that amount. So by October, we need to have about $25,000 in cash.

Opportunity Fund

The opportunity fund concept is very intriguing to me because I couldn’t capitalize on past opportunities. During the Great Recession, the stock market crashed and I didn’t have much extra money to invest. Our portfolio was 100% stocks and it plunged like everything else. The only way to invest was to save as much of our income as we could, and invest that.

We powered through the Financial Crisis because we both had good stable income. We kept investing through it all and didn’t miss out on the recovery like many investors did. I think we could have done much better if we set aside some money in an opportunity fund. We could have taken advantage of the opportunity to invest more when the stock market was down.

Life has changed quite a bit since the Great Recession. Now, I’m a stay-at-home dad/blogger and my income is very uncertain. My blog income was incredible in 2017, but I’m sure it will drop like a rock when a recession strikes. Mrs. RB40’s income is great right now, but she plans to retire early by 2020. Our income is much more tenuous than in 2008. If we don’t plan ahead, we won’t be able to take advantage of the next big opportunity to invest.

Building Your Opportunity Fund

How do you build an opportunity fund? Here is a diagram I made. Our opportunity fund is split in a few accounts. Part of it is in our saving account and the rest is in money market funds.

We put our income into our bank accounts as they come in. This will shore up our emergency fund and there should be $10,000 to $20,000 in that account. Anything over this amount will flow into our opportunity fund. New money will trickle in from this side every month as long as we don’t have unexpected expenses. Your income needs to consistently exceed your expense for this part to work well.

On the other side, we have our investment. I split them into two boxes – bonds and everything else. Our target asset allocation is 20% bond and 80% everything else. As the stock market gets overheated, I plan to shift some stock investment into the opportunity fund. My goal is to increase our opportunity fund to about 10% of our portfolio value. So it to be 10/20/70, opportunity fund/bond/everything else.

Yes, this is market timing. It is similar to Value Based asset allocation. If the stock market is overpriced, then shift some allocation to bond and cash. The US stock market valuation is very high at this time and the expected return is low for the next decade. Many experts predict 4-5% annual gains. That’s much lower than 21% we got in 2017. Nobody knows what the stock market is going to do, though. It could grow slowly over the next decade. Or it could keep shooting up and crash.

The global economy is doing so well and consumers are very optimistic. I think 2018 will be a good year on the stock market. We had a correction in January, but it is recovering quickly. I suspect the stock market will keep going up while the global economy looks this great.

Here is the CAPE ratio. This looks scary to me. The S&P 500 index is approaching the dot com era valuation and we all know how well that turned out.

Do you have an opportunity fund?

New investors shouldn’t worry about the stock market fluctuation. When you’re starting out, you should focus on increasing your saving rate. Older investors who are nearing retirement have to be more conservative. I think increasing our bond/cash allocation a bit is a good idea for us. We’ll have better access to cash. 10% isn’t a huge shift so it won’t screw up our long term plan even if I’m wrong. Also, it will give me something to write about. We’ll see how it plays out over the next few years.

What about you? Do you have an opportunity fund?

*Sign up for a free account at Personal Capital to help keep track of your investment. I log in almost every day to check on my accounts and cash flow. It’s a great tool for DIY investors and I highly recommend it.

Disclosure: We may receive a referral fee if you sign up with a service through the links on this page.

Image by Christian Spies

How to Build Your Opportunity Fund is a post from: Copyright © 2010-2016 Retire By 40 All Rights Reserved
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Last week, I picked up my new glasses and posted a picture on social media. A few sharp eyed readers commented that they loved the background. I replied it was a splurge before I discovered FIRE (Financial Independence Retire Early.) Do you recognize the picture? It is Mrs. RB40’s favorite cartoon canine – Snoopy. The artwork is a limited edition, hand pulled, signed lithograph by Tom Everhart and is part of a set of three lithographs. He’s the only artist authorized by Charles Schultz to reproduce characters from the Peanuts comic. We love the artwork, but they were very expensive when we purchased them. Guess how much they cost and write it down. Don’t cheat and look it up on the internet yet. I’ll reveal the price a little later.

Here is the full set.

Before I discovered FIRE

We purchased these lithographs in 2005. Both of us were doing very well at our full time jobs back then. I was 31 and felt invincible. I made good money, had a beautiful wife, lived in a brand new house, took international vacations, and drove a BMW convertible. Life was damn good. Even at that level of spending, we lived below our means. The cost of living was very reasonable in Oregon back then. We still had extra money left after we paid the bills, maxed out our retirement plans, and invested in a few stocks. I thought we could continue living the American dream until we’re old. Alas, that was the hubris of youth.

At the time, my engineering career was on a good trajectory. I worked hard and got regular promotions. The technical work was fun. I spent a lot of time at work, but that was normal. Most young engineers worked 50-60 hours per week with no overtime pay. Once I got more senior, the job wasn’t as enjoyable anymore. The company wanted me to take on more leadership role and I’m not good at that kind of thing. I was at the peak of my career in 2005. It was a gradual slide after that. Eventually, the job wasn’t the right fit for me anymore and I retired early from my engineering career.

Anyway, I was full of confidence in 2005. That year, we visited New Orleans with friends and had a great time. The food was awesome. We particularly enjoyed the oysters, beignets, and huge po-boy sandwiches. I’m not a big art fan, but we were on vacation so we walked through a few galleries near the French Quarter. Mrs. RB40 spotted these Snoopy lithographs and she fell in love with them. She didn’t want to buy them because they cost a lot of money, but I wanted to get her something really nice. Previously, I didn’t spend much money on gifts. We got married in 1999 at the county courthouse. I didn’t even get her an expensive diamond ring. She only had the $300 ring I gave her before she went off to Peace Corps in 1996. I was poor back then and it was all I could afford, but that’s another story.

I knew she loved Snoopy so I thought these would be the perfect gift to show my appreciation. The price was very expensive at $5,000 for the set, but what the heck. We were doing well financially and five grand wouldn’t break the bank. This was our biggest splurge before I discovered FIRE. We had a nice house and a sports car, but a place to live and transportation were necessities. This was a complete splurge because we didn’t need expensive artwork on the walls, though an interior designer might disagree. Luckily, I learned about FIRE a few years after this and we didn’t splurge on other high priced items.

So that’s how these Snoopy lithographs came into our home. How did you do on the price guessing? Close?

Artwork as investment

Did I regret buying these artworks? Somewhat. I didn’t know anything about art and I shouldn’t have made an impulse purchase like that. Now I know to wait a few days before buying anything. That’s one of the best frugal hacks anyone can do. If I had waited a few days, I probably would not have purchased these lithographs.

They made 500 of these lithograph prints in this edition and destroyed the plates. Unfortunately, I think 500 is too many. After 13 years, there are still many of these artworks in the shops. I did some research on the internet and it looks like the price is around $1,400 each from galleries.

They are a bit cheaper on the secondary market. I’ve seen one for as low as $1,100. We might have an edge because we have a set with the same numbers (#172/500.) The set probably could go for $4,500. Who knows? These are the only household items I have on my net worth spreadsheet.

As a comparison, if we invested $5,000 in the VFINX, it would have increased to nearly $15,000 today. Live and learn, I guess.

On the other hand, we have been enjoying these artworks for 13 years. Mrs. RB40 still loves them so in that regard, they have been good. Most of other the household items we purchased in 2005 are in the landfill by now.

“You better not be thinking of selling my Snoopies!” – Mrs. RB40 as I was taking pictures for this post.

No more big splurges

Fortunately, I learned about FIRE soon after this big splurge. Now, I avoid big ticket purchases and focus on investing. Having a financial goal really helps in that regard. I think most people spend aimlessly because they don’t have a solid financial goal.

Mrs. RB40 says this wasn’t an aimless purchase — it isn’t like we bought a ton of other lithos.

What about art as investments? I wouldn’t do it if you don’t know much about the art world. For $5,000, I learned that Lithographs are not good investment. That’s an expensive lesson. At least that was the only big splurge we had when we were young.

What was your biggest splurge? Have you purchased art before?

PS. The lithograph process is very neat. You can see how it’s done on YouTube.

"Lithography" - YouTube

My Biggest Splurge Before FIRE is a post from: Copyright © 2010-2016 Retire By 40 All Rights Reserved
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It’s only natural to feel anxious when the stock market drops or spikes too fast. The stock market has been stable for so long that many of us aren’t used to the volatility anymore. I wrote this post the last time (2016) the stock market had a correction (10% decline from the peak) and it still applies. Today, I’ll rewrite the post with updated data. When the market is volatile, it’s best to focus on increasing your saving rate. This is especially true when you have 5 or more years left before retirement.

New investors tend to fixate on finding the “best” investments, but what they really should focus on is increasing their saving rate. Most people can increase their saving rate by 10 to 20% without a drastic change in lifestyle. On the other hand, it’s very difficult to beat the market consistently and increase your rate of return. When you’re starting out, your portfolio value will be relatively small and increasing your saving rate will have a much bigger impact than increasing your ROI (return on investment).

Let’s say your portfolio is worth $100,000. If you increase your ROI by 2%, that’s only $2,000 extra. It is probably much easier to cut back a bit and focus on investing $2,000 extra instead. Your saving rate is directly under your control, but the stock market is out of your hands, as the recent volatility illustrated.

New investors

When I was new to investing, I tried to pick the “best” investments. I did it all wrong, though. In my 401k, I picked the funds with the highest returns from the previous year. I didn’t know that over 90% of actively manage funds underperform low cost index funds over the long term. I also didn’t know that the stock market is cyclic. The best funds from one year probably won’t be able to repeat their performance the following year.

In my brokerage accounts, I purchased speculative tech stocks because the price kept increasing. This didn’t turn out well because a few years later, the dot com bubble popped and my portfolio crashed along with Pets.com. While experience is the best teacher, I still wish I had taken the time to learn about investing earlier to avoid those pitfalls. It sure wasn’t fun to go through those stressful periods.

That’s why I encourage everyone to start investing as early as possible. It can take many years to form an investing strategy that you’re comfortable with. You need to go through a few market cycles to see how you will react to the gut wrenching drops. Here is the investing strategy that I can live with through the ups and downs. It works for me, but it might not be the right fit for you. Everyone needs to find their own investing strategy.

  • All of our retirement funds are invested in low cost index funds. This is the core of our investment portfolio.
  • Our taxable account is mostly invested in high quality dividend stocks. Most of these companies should be able to maintain their dividend payout during a downturn. The price may drop, but quality stocks should come back when the market recovers.
  • I have a few speculative investments to keep life interesting. This is a very small part of my portfolio.
  • 20% of our investment portfolio is in bond funds. If the market drops further, I will have the option to trade some of these in for stocks.
  • We have alternative investments in rental properties, REITs, and real estate crowdfunding. These investments provide some stability when the stock market is volatile.

With this strategy, we don’t have to worry about how the stock market is doing and we can just focus on saving as much as we could. In the short term, our portfolio will gyrate wildly along with the stock market, but it should be fine over the long term. Our net worth didn’t drop as much as the stock market because we have alternative investments to help cushion the sharp decline.

Recent Correction

Let’s see how we did during the recent stock market correction.

Personal Capital made it easy to compare our portfolio against the S&P 500 index. The S&P 500 index fell 10% in about 2 weeks. Our portfolio dropped too, but not as much. This is due to the stabilizing influence of our 20% bond allocation and 10% alternative investments. (This chart doesn’t include our rental properties.)

It’s interesting to see how investors reacted to this latest correction. Some investors got scared and wondered if they should sell some stocks. Many investors took the advantage of the dip to buy more stocks. I didn’t do much except making the regular contribution to my 401k. After 22 years in the stock market, I don’t get excited by 10% anymore. I’ll consider buying more after it drops 20%.

BTW, don’t forget to increase your 401k contributions. The 401k contribution limit increased $500 this year. You should max out your 401k contribution every year. It’s the easiest way to build wealth over the long term.

Near retirement

When the market fluctuates like this, it’s best to ignore the movement and focus on increasing your saving rate. It’s actually really good for long term investors when the stock market drops. We can buy more shares for the same amount of money we regularly invest. This is a good buying opportunity for young investors who have a lot of time left. The market will recover and your portfolio will benefit from these gut wrenching drops. Once you’ve gone through a few of these, you’ll learn how to ignore the short term volatility.

This kind of volatility is much harder for investors who are very close to retirement. If you need to start withdrawing from your retirement fund soon, you’ll need to be more conservative. Now is the time to check your risk tolerance. It will be different than when you have many years of work ahead of you. For those near retirement, it’s best to be a little more conservative. Here are some steps you can take.

  • A bigger cash cushion. A retiree should have at least 18 months of cash. This cash cushion would help you ride out most bear markets. Retirees need to fund their cost of living and it’s best to avoid selling when your investment is down. The average bear market lasts for 15 months.
  • Double check your risk tolerance. Most people become more conservative as they age. Retirees need to ask themselves if they can stomach a 40% drops in the stock market. How will this affect their net worth? If not, then they will need to fix their target asset allocation.
  • Consider funding your core expense with very safe investments. If you’ve saved enough, you can use safe bond investments to fund your core expenses. This will decouple your core expenses from the stock market.
Focus on your saving rate

Investing isn’t that difficult. You just need to come up with an asset allocation you can live with and stick with it. This can be challenging for young investors because a big drop seems scary. However, it’s best to keep investing because your portfolio will benefit in the long run. Focus on increasing your saving rate and ignore what the stock market is doing day to day. Everyone who has been through some crashes knows that you need to keep investing through thick and thin.

When I started investing, I focused a bit too much on maximizing the ROI and made many rookie mistakes. Nowadays, I just focus on my saving rate without worrying too much about ROI. I just need to keep investing through all market conditions. It’s simple and stress free.

Did your portfolio fluctuate much over the last few weeks? What’s your strategy for getting through the stock market roller-coaster ride?

*Sign up for a free account at Personal Capital to help keep track of your investment. I log in almost every day to check on my accounts and cash flow. It’s a great tool for DIY investors and I highly recommend it.

Image by Tim Gouw

Focus on Your Saving Rate When the Market Fluctuates is a post from: Copyright © 2010-2016 Retire By 40 All Rights Reserved
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A little obsession is good because it drives us to accomplish something. I was obsessed with getting my engineering degree when I was in college because my parents worked hard to send me there. Many kids were there to have fun, but I just wanted to get through it. Fun was secondary. Mrs. RB40 was an obsession – she went off to Peace Corps for 3 years after college and I was obsessed with getting her back. (BTW, it worked out despite what everyone said. We won!) Blogging and early retirement was a big obsession for a while, too. I routinely stayed up until 1 am when I was working full time so I could blog regularly. It was tough, but I pushed through it.

There were many more trivial obsessions like playing video games or learning how to play the ukulele. I think a little obsession is fine as long as it doesn’t take over your life completely. This applies to early retirement, too. There are times when it is good to be obsessed with early retirement. However, you have to be smart about it over the long haul.

Obsessing with Early Retirement

Early retirement is a marathon, not a sprint. Check out Mr. Money Mustache’s The Shockingly Simple Math Behind Early Retirement if you haven’t seen it yet. Even if you save 50% of your income, it’d take 17 years to retire early. It’s just not good to be obsessive about something for that long. Being overly obsessive about early retirement can be a detriment to your health, relationships, and social life. You have to pace yourself when you’re chasing early retirement. It is impossible to sprint the whole way. You’ll burn yourself out if you try. However, there are two crucial spots where it pays to be obsessive.

When you first learn about early retirement aka FIRE

There are many reactions when people learn about early retirement.

  1. Indifference – It’s not for me.
  2. Disbelief – This is a scam.
  3. Obsessive convert – Wow, maybe I can do this.
  4. Shocked – Does this 4% rule thing really work?
  5. etc…

This is the right time to get obsessive. Most people drift through life without a financial purpose. They make money and spend it just as fast. We’ve been taught that everyone should work until they’re 65. Then they retire to a life of ease. That’s the regular view of work in most developed countries.

We were moderately frugal before I learned about early retirement around 2008. We made good income and we didn’t spend frivolously. However, there was still a lot of wastage. We had cable TV, two cars, a house in the suburbs that was way too big for us, ate out whenever we wanted, took exotic international vacations, purchased stuff without thinking too much about it, and went to the movies often. We lived within our means, but it was a pretty typical lifestyle.

In 2008, we already maxed out our 401k contributions and Roth IRA. That was much more than most people ever did so I thought it was enough. I could have kept working at Intel and then 15 years later, I could have qualified for retirement. It’d still be early retirement because I’d be 50 in 2023. We could stay on the company health insurance plan and perhaps have some pension income. (The formula was complicated. The pension plan would help out if you don’t have enough money or something silly like that. I didn’t understand it at all.) Anyway, we thought we were doing well financially and then I found out about early retirement.

The Discovery Phase

I got excited after I discovered early retirement because it was clear to me that FIRE was within reach. We’ve been saving and investing for over 10 years so our foundation was solid. I could early retire sooner than 50 if we streamlined our expenses. I got obsessive and reduced our expenses as much as I could. This boosted our saving rates and shortened my FIRE timeline even more. I didn’t have to wait for the company to okay my retirement. I could do it on my own. It was a good thing too because my job satisfaction plunged as the Great Recession dragged on.

Mrs. RB40 got on board with reducing expenses because she already was frugal. She never liked spending money so it was a relatively easy transition for her. We still lived a comfortable lifestyle. We just removed the stuff that wasn’t that important to us. International trips were still a priority for us because we enjoyed traveling. However, we reduced expenses in all other areas. We ate out less, shared one car, and moved to a smaller home. There were plenty of free and cheap entertainment options in Portland so we still enjoyed life.

The Autopilot Phase

Once we streamlined our expenses, I got less obsessed with early retirement. There wasn’t much more I could do to reduce expenses after the initial frenzy. I looked for opportunities to create more income, but that was a long process. We got raises at work, invested in dividend stocks, purchased some rentals, and I started blogging. All these passive income streams took time to build.

Once you get through the initial discovery phase, then you need to dial down your obsession a bit and put it on autopilot. The early retirement journey is a long slog. You have got to be able to enjoy life in the meanwhile. The most important things are to stay healthy and maintain a good relationship with your partner.

Health – You can’t compromise on health because you won’t be able to enjoy your money if you’re not healthy. It probably will cost more money in the long run if you put wealth before health. Luckily, being frugal is mostly good for your health. We cooked at home more which is much healthier than eating out. I still pay for my gym membership because that’s the only way I’d exercise regularly.

Relationship – The other big concern is maintaining a good relationship with your spouse. Building wealth is much easier if a couple works as a team. Luckily, Mrs. RB40 was already frugal so it wasn’t a big change for her. Also, we didn’t cut out everything that cost money. We still went out occasionally and saw a show once in a while. It’s all about finding a good balance.

This autopilot phase can last for years. You’ve got to be able to enjoy life while you’re in this phase. Don’t drive your partner away by cutting back too much at once. If your partner isn’t naturally frugal, then you might need to take it slow and keep chipping away. Also, it’s not healthy to stay in a job you hate for too long. This is a long stretch so you need to do something you can tolerate. It’s a good idea to find a better job while the economy is still good instead of working somewhere you don’t like. You’ve got to save some energy for the final stretch.

The End Game

The end game phase is equivalent to the last mile of a marathon. The finish line is close, but you’re not there yet. At this point, you’ve got to put your head down and push through the pain. That’s how I felt during my last year on the job. By then, I hated going to work. The stressful job caused a lot of mental and physical anguish that last year. I was miserable, but I just didn’t want to make any changes. I guess I could have looked for a better job, but I was so close to the finish line. I didn’t want to take any chances at that point. I became obsessed with early retirement and went over my spreadsheet every day. Life was not fun, but thankfully, it was only a short time. It worked for me so I think it’s okay to be obsessed during this final stretch.

Early Retirement Obsession Chart

Check out this chart I made.

This is what I think your obsession with early retirement should look like.

When you don’t know about early retirement, you don’t care about it. In the discovery phase, your obsession spikes. This is when you put your financial house in order and set up a plan to retire early.  Once you’ve got your finances on autopilot, you should dial it back. After all, this phase can take many years. Near the finish line, it’s okay to get obsessed again because you want to get it over with. Whatever you’ve done so far is working so keep it up over this final stretch. Put your head down and push through those obstacles if you need to. I wish you better luck than I had, though. It’d be better to cruise through the finish line, too. After early retirement, you can relax a little and enjoy life more.

Pace Yourself

Whew, this post ran a little long. My point is it could take years to achieve financial independence and retire early. It’s good to be obsessive in your first and final phases of the journey rather than throughout the entire process. Your health and good relationship with your partner need to come first. FIRE is a great goal to have, but don’t let it take over your life for too long.

Where are you in your early retirement journey? Are you obsessed with it?

Image by William van Wingerden

It’s Good to be a Little Obsessed with Early Retirement is a post from: Copyright © 2010-2016 Retire By 40 All Rights Reserved
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