Reader J is 26 years old, married, has two kids and dreams to be financially secure with a paid-off house and enough investment income to support his lifestyle in 10-15 years. It is an aggressive goal but he is off to a great start and has accumulated a tidy nest egg for someone his age. He has devised a detailed financial plan and wants feedback on his investment strategy. Part 1 is featured today and I’ll run the rest of his plan in the near future.
I’ve known of passive investing with index funds for several years, but I’ve never trusted my own intuition to do it. Even though my gut was telling me my “financial advisor” wasn’t adding value and wasn’t able to time the market, I never spent enough time to really research indexing enough to make my mind agree with my gut. I felt at the time it was better than nothing since I was preoccupied with work and family.
Starting in 2008 I made it my goal to begin to manage my own personal finances. I quickly found out it is actually a very interesting topic and a natural extension to my nature of being a “saver” and a nerd. So I’ve spent much of year reading books and blogs, taking my time to understand and not feel rushed into making any decisions. As Buffet says, it’s better to “move like a sloth”.
I’ve not invested anything extra with my advisor for probably 2 years, so at the beginning of the year one of my major concerns was “time risk” of investing a lump sum of cash. As we see now that risk was very significant, and just by pure dumb luck, I missed a lot of the pain. I feel like there needs to be more information on how to make this transition. I probably would have used dollar cost averaging or value averaging, but now that the market is already so much lower I think the risk is much tolerable and timing won’t make a significant impact on future returns.
Reason for Sharing
What I’d most like back from posting my plan is just feedback of any sort. Let me have it, the plan is personal but put yourself in my shoes and let me know why it doesn’t make sense or that you think it’s a good idea. I wish there was a place to post and compare investment plans and asset allocations, leave comments and track the performance over time.
Investment Goals
Before writing this plan down on paper I was talking about “the 10-year plan” that we would continue saving but also buy a house with a 10-year fixed-rate mortgage that we would aggressively pay down in those 10 years. The goal being we would have the safety and shelter of a paid for house plus by that time our investments and savings would have grown at an assumed 8% real return to provide enough income (assuming a continued 8% return) to “financially retire” with a modest life style living on $40,000 in today’s dollars.
But is that really retiring when most people only assume a 4% real return / withdrawal rate in retirement? Doesn’t that mean in years like we are currently in the retirement would fail and necessitate new income from “having” to work again? Is it possible to retire extremely early if you have to assume this rate of return, or should I be more realistic and say the goal is “early semi-retirement”? It’s a personal question, but I still wonder which is appropriate since I’m so far outside the normal realm of how average people save, invest and plan to retire.
