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Build a Runway

September 6, 2022 by Lazy Man 2 Comments

Build a runway

It’s great to be back from vacation. My kids have their first day of school today, and I am almost getting into a steady routine.

Almost. I’m headed to a financial conference (FinCon) tomorrow and will be there until the end of the week. In the meantime, it’s good to dip my toes back in the waters of writing about personal finance.

Traditional personal finance advice says you should save a certain amount (15% or so) in a retirement account. When you reach age 65 (or 67), you retire from your job and start withdrawing from that retirement account. You can supplement your income with Social Security.

It’s excellent advice. It’s as good as anything that can be generalized in a few sentences. It’s also a lot more than most people do.

However, if you are here reading this article, you are likely looking for more specific ideas and planning for more specific scenarios. Maybe you want to retire early as I did in 2006*. Perhaps you are looking for more from your money than just a normal retirement in your mid-to-late 60s.

I saved money in retirement accounts for years. I often maxed them out. My wife had done the same, even before we met. Now that we are in our mid-40s, we realize we’ve built a nice nest egg. If the markets continue to do their thing for the next 20 years, it will likely quadruple. To understand why I’m using a quick rule of 72 calculation to estimate that the money doubles every ten years at 7% growth. Twenty years would be doubling twice or a quadruple.

We’re in a good position to follow the traditional path of drawing down from that nest egg in retirement. As Hannibal on the A-Team used to say, “I love it when a plan comes together”.

There’s just one “thing”. If we save too much money, we’ll have to pay taxes at our regular income rate. That could be high since we saved so much. We’d also be forced to withdraw from some accounts due to the evil RMDs (Required Minimum Distributions). It’s a great situation, but it’s not optimal. Not only that, but we’re putting all our money into the future. As we used to say in the tech world, what would happen if you got hit by a bus? It’s not always great to plan for the future.

Build a Runway

A better plan may have been to build a runway. I’m stealing borrowing this from my friend who used to be a personal finance blogger.

The idea of building a runway is simply just growing the money you have outside of retirement accounts and extending how long they cover your expenses. If your expenses are $50,000 a year and you have an investment portfolio of $25,000, then you have a runway of six months. I don’t view it as the same as an emergency fund, so I’m allowing myself to invest it at risk. Maybe you want much less risk and want to treat it as an emergency fund. That’s fine too. It’ll take longer to build the runway if you are investing conservatively or not at all. I’m too impatient for that.

For the longest time, we had no runway. I had tried to build passive income streams like this blog. We have some real estate investments, but it doesn’t generate cash flow since we still have mortgages on them. I had also tried to cut down on our future expenses – getting solar panels, paying down the 15-year mortgage, etc. My wife’s military pension is a built-in runway.

It wasn’t until recently that we started to build this runway. One of the properties was getting difficult to manage from far away, and the tenants’ lease expired when the seller’s market was at its peak. It was extremely difficult working with the tenant, but at least the timing was perfect. I had thought about doing a 1031 exchange, where you quickly buy a new investment property and avoid taxes, but it didn’t make sense to me to buy at the height of the market again.

So we have a little runway now. It’s good for about two years. If we had a genuine financial emergency, we could probably extend it to four or five years by cutting back on luxuries like the kids’ private school and refinancing the last few years of our mortgage over another 15 years. Neither one of those are an ideal situation, but I think it’s essential to plan for what a worst case looks like.

It would be ideal for us to grow this to be 13 years long and reach age 59.5 when we can start withdrawing from our retirement nest eggs. It looks like investment growth over the next 6-7 years (at 7%) would make it big enough to carry us through the last six years of a stretch run.

Have you started building a financial runway outside of your retirement accounts? If so, how long can it last for you?

* Nowadays, I’m unsure if I ever want to “retire” as I imagined in 2006. I just got back from two and a half weeks of traveling, and while it was fun, I needed to get back to creating, helping people, or doing something productive.

Filed Under: Financial Planning

Reminder: Check Your Personal Finance Holes

January 24, 2023 by Lazy Man 3 Comments

I joined my local chapter of the Business Network International (BNI) a few weeks ago. I hope to write a review of it after a few more. It’s an interesting group. Everyone has a specialty: real estate agent, painting, flooring, electrician, etc. Every person specializes in one thing. I’m actually there for my dog sitting business. Providing my services as a blogger doesn’t have a local demand. Also, they already have one person who can create quick websites for local businesses. The group can only have one member per specialty because the goal is about them referring business to each other. It works well for most of the group and I may be a customer of most of them due to our rental properties.

Anyway, this story isn’t about my (or anyone else’s) BNI group in general. Instead, it is about one specific story that a lawyer shared. He said that he recently had a client close on a $700,000 house… and it came up later that the client didn’t buy home insurance. He had never heard of something so crazy. Me neither. Whenever I’ve had to buy a home, I get a mortgage so it’s really owned by the bank. I can’t think of any bank in history that has lent out money for a mortgage without requiring the home (their interest) to have insurance.

It was a shocking moment for me on the call. I think most other people realized how crazy it was, but it was hard to tell on Zoom.

That brings me to today’s title topic, plugging your financial holes. Most of us have them. I’ve been writing about personal finance for 15 years and I still have to put together some critical estate planning documents. Just last week, after four years and dozens of hours of calls, I finally got umbrella insurance. That was a weird situation where none of our regular insurers would sell us a policy until they had all our insurance business – but they didn’t offer the insurances we needed in every state we needed it in. More than a few of the tenants we’ve had didn’t have renter’s insurance when we asked at the time of signing the rental agreement.

The most common holes are in those areas I’ve covered insurance and end-of-life documents. It’s easy to miss them because they don’t impact your day-to-day finances. Other than those big ones there are small ones such as money leaks. These would include those unused streaming or magazine subscriptions. Money leaks are annoying, but at least they are usually very quick to fix.

So take a little time today to reflect on if you have any personal finance holes. If you do, write them down and block time off in your calendar to help make sure you get it done.

Filed Under: Financial Planning

Planning our First Non-Retirement Asset Allocation

January 13, 2022 by Lazy Man 2 Comments

I feel like I’ve written at least 35 different asset allocation articles over the last 15 years. Almost all of them had one thing in common, try to maximize growth.

That’s because almost all of our money is in retirement accounts. With a long-term view of 30-40 years, I don’t mind being aggressive.

All that has changed though. I recently realized that my biggest money mistake may have been maxing out our retirement accounts at the expense of investing in regular after-tax accounts. We can’t easily use 90% of our net worth – it’s tied up retirement accounts or real estate.

The good news is that we’ve been able to nearly double the cash that we can easily access over the last year. We stopped maxing out retirement accounts and are just keeping the cash.

I don’t mind having cash. It makes me feel more comfortable than I have in quite some time. However, having too much cash could be a bad thing. I’ve written about inflation, not once, but twice recently. It’s not great to have more cash around than you might need. The whole point of this website is to make my money work and cash is too… lazy. It doesn’t do enough work to fend off inflation.

That brings up an interesting problem though: how much cash should you have? Everyone’s opinion is going to be different on that one. I’d like to have 6 months of expenses saved up. However, I don’t feel I need to have that right away. That can be a longer-term goal. A shorter-term goal would be to have 3 months saved up. That’s standard emergency fund guidance though.

Our necessary expenses (housing, transportation, food, kids’ private school*, etc.) is around $100,000 a year. We’d need $50,000 to have six months. That’s a lot and I think we should build-up to it. To start maybe 3-4 or months of cash makes sense. This would allow us to invest some of the rest of the money. Then at least some of our money would be working.

How should we invest the rest of the money though? I plan to invest it like a 3-legged stool. The first leg is the cash above.

The second leg would be bonds. They are relatively stable. Even in a bad market, they probably wouldn’t lose too much value. I’m starting to learn about I Bonds and they seem to be paying over 7% interest right now. That’s very good, especially at nearly zero risk. The downside seems to be that we can only $10,000 per person. Between my wife and I, that’s actually a good amount for our current needs. The I Bonds would be a strong second leg of the stool.

If I Bonds weren’t paying so well, I would look at putting the money in Vanguard’s VASIX mutual fund. It holds a series of diverse bonds and doesn’t seem to get hit too hard by market crashes. Over the long-term, it seems to return 6%, which isn’t bad for a conservative investment. This could supplement the I Bonds as well if we need it. Think of a stool leg that splits off into two feet at the bottom.

Finally, I’d want some growth. I know we have it in our retirement accounts, but it would be nice to have it outside of that. For this leg, I’m thinking of buying VASGX. It’s one-stop shopping giving a strong mix of domestic and international stocks. However, it does have some bonds, which may hold it back some. Of course, I could just buy fewer bonds from that leg and more of this for growth.

Over time, I think it makes sense to simply grow these out equally. However, once we have six or nine months in cash, and another 6 months in bonds, we could turn our attention back to all growth.

Much of this could also change based on our income streams. Right now, I’ve got a customer support job, the earnings of this blog, and dog sitting. My wife has her regular pharmacist career. This plan was largely brought about by her plan to retire and collecting her pension. However she switched jobs and likes that better, so she’s changed her mind about retiring (for now). We have a profit-sharing investment that pays around $14,000 a year and we could refinance our rental properties to give us more cash flow. So as we pile on these income streams we may never get to the emergency fund because another income stream helps out. Or maybe we only have to touch a small part of the emergency cash.

So that’s our plan. How do you handle your after-tax allocation strategy? Let me know in the comments.

* I know that the kids’ private school isn’t a true necessary expense, but it’s a big one and we’re budgeting for it. If we got into any kind of real emergency, we could drop it, so planning for this adds some flexibility. Similarly, we could always refinance the house and make the payments very small as it’s almost paid off. Having all these different levers to pull is great, but I’d like to plan as we won’t have to.

Filed Under: Financial Planning Tagged With: cash, I Bonds, VASGX, VASIX

My Estate Plan Journey (Step 1)

October 26, 2021 by Lazy Man 5 Comments

Regular readers may know the drill – I spent the summer focusing on dog sitting. It was an extraordinarily good time to make money with everyone getting a pandemic dog and then traveling with vaccines. I didn’t think I’d be doing this much dog sitting in October, but it hasn’t stopped. For this reason, some of my articles have been a little brief.

My wife has been wondering if it’s time to retire. The answer to “where do we go from here is “one more year.” This will give us time to tie up a lot of loose ends, dot the i’s and cross the t’s… and any other cliche that you can think of.

The military has had a couple of good seminars and she’s starting to have some confidence in the steps. I’ve only been preparing for it for fifteen years, but I guess some “Dan guy” who doesn’t know our money situation sounds trustworthy. I’m not bitter, not one bit. Well, as you can tell, I am, but it is kind of nice to have her interested in finances. She’d mostly been focusing on work and now that she’s turning her attention to retirement, she’s starting to realize the position we are in with multiple streams of income and a nest egg that is double what he recommends.

One of his recommendations is one that I’ve been trying to get done for a couple of years now… set up an estate plan. It seems that many of my online blogging friends set theirs up at age 47, so we aren’t too early at age 45. My mother set hers up around age 70, I think. She might have had something set up before that, which I didn’t know about.

My initial thought was to reach out most popular lawyers in town. They already do some incorporation stuff with Lazy Man and Money, so we have a relationship for a couple of days of the year. However, our neighbor across the street is a partner at a firm that does estate planning as well. He’s mostly retired I think, but I see him leaving for the office now and again.

I wanted to give our neighbor the business, but I didn’t want to confuse our friendship. My wife figured it would be fine. We called up the office and mentioned we knew him, but I think they are setting us with someone else at the office. This is perfect because I honestly want someone closer to our age working on it if we are going to keep this for the next 40 years.

They emailed us a PDF of a packet to complete. I remember thinking, “This is going to be easy. I have our net worth for every month of the last decade and all these equations to produce nearly anything they want.” I was prepared!

I was NOT prepared!

There was a list of things to gather such as account numbers. I didn’t include those in my spreadsheets.

Then it asked for the location of our safety deposit box. Ummm, what year is it again? I once asked on Twitter if people still get them and it seems they are very, very uncool.

Copies of insurance policies? I know I must have those somewhere, but that’s going to be a search.

Deeds? Ummm, I guess we have those on the cars. We still have mortgages on the real estate though.

I went ahead and started to fill out the packet without all this stuff. At the very least, I should be able to get my name and address areas completed. However, after that section, I found I could the next section and the next one. Sometimes, I had to stop and look up some information online, but I was able to get a good amount done.

The Big Initial Surprise in Setting up an Estate Plan

I knew that somewhere it was going to ask stuff about guardians and health proxies, so it’s not a surprise. However, the depth of the questions certainly made me realize that I hadn’t covered as many bases as I thought I did. In a lot of ways, this is an excellent exercise to plug up the financial holes in our plans. These holes are mostly administrative. They aren’t the kinds of things that I write about on this site because I find them very boring. Sometimes the most important things are boring.

I’m not sure if getting an estate plan is right for you, but it may be worth looking into it. I imagine you’ll learn a few new things about your financial situation.

After I get this packet into the lawyers and we review it, I’ll be back with another article about the next steps. I anticipate that some of these are personal, so I’ll try to generalize the things that would most apply to this broad audience.

Filed Under: Financial Planning Tagged With: estate plan

Our Next 5 Years of Expenses

January 19, 2021 by Lazy Man 2 Comments

expenses

Today I wanted to look at our next several years of expenses. Most people are probably fine with looking at one year of expenses. However, we have two Big Financial Events (BFEs) colliding that will drastically change our financial picture. In 6-7 years, we’ll finish paying off our primary mortgage and two investment property mortgages. Around the same time, the kids will be graduating from their expensive private school. That may translate to ditching $50,000 in investment expenses while adding $25,000 in income.

That’s a great BFE down the line, but we have to get there first. So let’s look at where our money goes until the BFE.

[Note: You might be asking, “Why did you choose 5 years in the title?” Well, choosing 6-7 years just looks weird. I think there’s more value in people looking at 5-year chunks anyway.]

Expense 1: Kids’ School

Currently the kids go to private school. It’s an exceptional school. In one of my kids’ classes, two of the ten kids’ parents are public figures with an estimated net worth of hundreds of millions of dollars. You could call it the best education that money can buy.

We are lucky to get a large military discount. We think it’s a good value even though it is clearly still very expensive at $25,000 a year for the two kids.

I realize it is a great privilege to send your kids to a private school. We’re very frugal in a lot of other areas, so we’re okay with investing in our kids’ education.

School Annual Expense: $25,000

Expense 2: Housing (and Rental Properties)

We have our primary residence and 2 other rental properties on 15-year fixed mortgages. The idea was to front-load the expenses while we were making good money, pay less interest, and not have to worry about mortgages in retirement.

We recently sold one investment property (via a 1031 exchange to limit taxes) and bought another one closer to where we live since it would be easier to manage. The good news is that process reset the mortgage for 20 years so now it is cashflow positive as opposed to the other two slightly negative, cashflow properties. Between maintenance and such, we can probably consider the three investment properties – all in an LLC to be cashflow neutral. In around 6 years, we should be able to bring in around $25,000 in additional income. In the meantime, we don’t have to plan any significant annual expenses due to the income from the tenants. (This could change, so we need to keep an emergency fund for it.)

Our primary house though is a big expense. We have about another 6 years on that mortgage. I’ll round it up to $3000 a month to make it $36,000 a year. In fact, I’ll bump it up a little more to include some maintenance. (I’ll be adding some extra money to pad all the expenses at the end, so let’s not quibble about whether this enough padding for now.)

Housing Annual Expense: $40,000

Expense 3: Transportation

I haven’t looked at our transportation costs in a long, long time. I typically don’t worry about breaking it out, because we do the best we can – there’s no fat to trim. We’ve paid off our cars, but they are 7-8 years old now. We are the type of people to drive our cars into the ground. The timing of paid-off cars is good because we can probably get by without a car payment until the mortgages (noted above are all paid off)

Of course, there’s more to transportation than just the car. I’ll budget another $3,000 for gas, maintenance, insurance, etc.

Transportation Annual Expense: $3,000

Expense 4: Food

Food is like transportation. I don’t typically look at the numbers because I’m frugal with our shopping. Fortunately, we have an American Express card that gives us 6% cashback on groceries. Since we use that card for food religiously, I can look up our annual spending on the card and use that number.

In 2020, we spent $6,253.28 on groceries. In 2019 we spent $5,585.16. So on average, we can expect to spend $6,000 on groceries. However, our 7 and 8-year-old boys will probably eat more, so I better boost this up to $8,000 to be a 6-year average.

Our restaurant spending is a little more difficult. We do have a credit card for that, but for some reason, Chase disables the year-end reports for that one particular card. I added up each month’s statement from 2019 (restaurant spending in 2020 was off due to the pandemic) and found that we spent about $8000 there as well. As we found out in 2020, this is an area we can cut back on if we ever need to.

Food Annual Expense: $16,000

Expense 5: Healthcare

Healthcare is provided by my wife’s work. It comes out of her paycheck, so I don’t notice it. It’s great for now, but my wife will likely retire within the next 6-7 years. It’s a good idea to include this category to plan for that scenario.

We can get Tricare for Life, which is relatively cheap military healthcare. My wife is an expert in healthcare and it’s her main business to know the economics of this stuff. It looks like the deductible is $300 per family with a catastrophic cap of $3000. It seems like most other things are covered in some way.

I have to admit that I don’t understand any of these things. Maybe I should read “Healthcare Plans Explained for Dummies”, but I know this is our best option, it’s cheap, and my wife knows all this.

Healthcare Annual Expense: $1000 (but no more than $3,000 – I think?)

Expense 6: Miscellaneous

I’m adding $15,000 to the final number for things that I’m just too lazy to add up. That can include the kids’ extracurriculars, kids’ camps, house cleaning service, utilities (lowered by our solar power), landscaping, emergencies, entertainment, vacations.

We’re fairly frugal with some of these items. We can stretch our vacation dollar with our Aruba timeshare and stored up airline miles. We can also use numerous military perks in retirement. We can skip some kids’ camps if we have two adults around all day.

Miscellaneous Annual Expense: $15,000

College Savings

It may seem weird to spend tens of thousands of dollars on a private school for a first grader and save next to nothing for college – yet here we are!

The reality is my wife’s GI bill can effectively cover half of the college expenses for both kids. We have some money already saved for college and a little time for it to double. We’ll ask them to cover some expenses so that they have “skin in the game.” After the BFE in 6-7 years, we’ll have more cash flow for college. Hopefully, they’ll get some grants and scholarships – they better for all we are spending on their education now, right?

In reality, we’ll save more than $0 as we have been doing, but we don’t need to factor this in as a requirement.

College Annual Expense: $0

Final Expenses

Here’s what our expenses look like in a table:

Housing$40,000
Schooling$25,000
Transportation$3,000
Food$16,000
Healthcare$1,000
Misc$15,000
Total$100,000

I’m certainly making that $15,000 Miscellaneous section do a lot of work, but that nice, even $100,000 number is so damn attractive. I definitely let the tail wag the dog to reach that number.

If we presume a 20% effective tax rate we’ll need a pre-tax income of around $125,000 before taxes. That may be a bad assumption of taxes, so it’s a question that I’ll have to ask our tax preparer.

While that $125,000 sounds like a ton of money, after the 6-7 year BFE, it would effectively be closer to $45,000 – with $25,000 of income from the rental properties. That’s a lot more manageable, especially with our other income sources.

Why These Expenses are Important

You may have caught a hint of why I’m going through this analysis. It was originally intended to be part of a bigger article analyzing a bigger question. Expense analysis is a critical factor in determining if you can retire.

Next week, we’ll revisit these numbers in a larger context.

Filed Under: Financial Planning Tagged With: expenses

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