Category: Early Retirement

Disclaimer: First thing’s first, I’m the realest. I’m also not a financial adviser, so anything I say here is just my opinion, and you’re responsible for your own money and returns.

With that out of the way, My goals for this year have changed recently. Some back story: My wife has student loans that are small enough that they could be paid off within a year. In the past, I had been of the opinion that the interest rates on the loans were low enough, that we would do better by making the minimum payments and continuing to invest in dividend stocks. Over time, the growth of the stocks and dividends would offset the expense of these minimum payments on the loans.

However, these loans are becoming a bigger burden than the money they represent. In the past few years, my wife has changed her name, and we’ve moved across the country. These changes, are causing the debt collector to start pestering my wife and her family for information on a regular basis. She makes her payments on time and consistently every month, so this behavior is completely unwarranted. As a result, this small amount of debt is creating a disproportionate amount of stress to her and her family.

So, we’ve decided that instead of trying to reach our goal of saving $18,000 this year, we will make an effort to 1) pay off her student loans, and 2) contribute $5,500 to my Roth IRA.

I traditionally make all of my investments in a taxable brokerage account, so this may sound a bit surprising that I would be making this change. I decided that there might come a day that I regret not taking advantage of the yearly contribution limits. Or so I thought…

My retirement strategy is to live off of dividend income from my investments. Dividends have favorable tax treatment, if your income puts you in the 10% or 15% income tax brackets, qualified dividends are taxed at 0%. Non-qualified dividends are taxed at the same rate as your income.

“What’s a qualified dividend?”
A qualified dividend is a dividend received for a stock you’ve owned 60 days before and 60 days after (without selling) the ex-dividend date. So, if I buy JNJ today, and it’s ex-dividend date is in 60 days, if I don’t sell those shares for another 121 days, that dividend will be taxed as a qualified dividend.

This is important because it means whether I put my money in a taxable brokerage account or a Roth IRA, they will both be taxed at 0%. Since I don’t plan on selling, I don’t care about the difference in capital gains tax. (This is all on the assumption that my income in retirement is under the cut off between 15% and 25% income tax rates, and that these rules are maintained)

I’ve already made 1 contribution to my Roth IRA, and now I regret it, because I’ve put limits on the usefulness of that money, with no benefit.

Instead, I will be putting the rest of my contributions in a traditional IRA, because I’m currently in a higher tax bracket than I would be in retirement.

What about you? Are you maxing out your Roth IRA, IRA, or avoiding them all together?

As 2014 is coming to an end, now is an excellent time to take a good look at our current status and our goals for next year. In a recent article, I said I was going to rededicate myself to transparency. So I’m going to take this opportunity to share the current holdings in the account I track on this blog.

This is my joint account with my wife, and we’re hoping to use the dividends from this account to become financially independent. This is what it looks like (Ticker – shares – annual dividends paid):

BP – 50 shares – $120.00 per year
CVX – 9 shares – $38.52 per year
MCD – 11 shares – $37.40 per year

My goal going forward is to share the new stock purchases I make as I make them.

I had some yearly goals for 2014 that I will talk about in another post closer to New Years Eve. However, there are some other goals I want to start tracking here for both short and long term. These are kind of milestones, but could also be though of as achievements in a video game.

Goals:

– Save 50% of our joint income for at least one month (in other words, keeping our expenses below 50%).
– $500 forward annual dividend income
– $1200 forward annual dividend income ($100 per month average)
– Own 10 companies
– Own 20 companies

These goals are obviously not massive in scope, but they are the targets I want to achieve on my way to financial independence. It’s unlikely I will achieve all of them in the coming year, so these goals do not have deadlines. However, it will keep me on track to how how much closer to each goal I am with each purchase that I track here.

The drive for financial independence and early retirement from the corporate world seems like such a fundamental motivator for me that I am often surprised when I see people bashing it. The argument that I think holds the most merit is that early retirement can be considered selfish.

I think there are absolutely some selfish factors about my goals. I want to have more free time. I want to get away from environments where I need to take orders from others. I want to be able to spend more time with my family. Of course, I would also like to have some time to play video games. For me, one sentence justifies these desires.

We are all going to die.

Despite even the best efforts to stay healthy, you and everyone you know will someday die. It’s a bummer, but it’s true. There are only so many days you are going to walk this earth, how many of them do you want to spend making SOMEONE ELSE RICH? That is what you do by staying in the workforce unless you work for a non-profit. If you enjoy your work every day, then by all means, continue as long as you wish. However, many of us have worked just as hard, but either never got an opportunity to work for the companies we want, or found out our dream job wasn’t all it was cracked up to be.

So, let me pose this question. Which is more selfish? Working 40 years at a marketing company to make as much money as possible and feeling like a “contributing member of society,” or working long enough to reach financial independence so you have the time to do something more fulfilling and meaningful.

Here’s another misconception naysayers have about early retirement. Many of them think that all we want to do is sit on the couch, watch tv, golf, and sleep. Every person that I’ve talked to who is seeking early retirement has said they want to give back to society when they reach their goal. Whether it’s through volunteer work, counseling, or donating to charity, the early retirement pioneers see financial independence as a means to a benevolent end. A person with enough free time (achieved through financial independence), may find they have the inner desire to make the world a better place.

My favorite case study for this concept is Bill Gates. At several points in his career, Bill Gates could have sold his Microsoft shares and donated the cash to charity, but he didn’t. He kept growing that capital and eventually started the Bill and Melinda Gates Foundation, which arguably contributes more to the betterment of society than any charity that he could have donated to earlier.

Early retirement is hardly the most selfless thing in the world. However, in terms of the greater good, there’s a case to be made that achieving financial independence is not an entirely selfish goal. What good would you do if you had the time and money?

Why you need to be financially literate.

The retirement plans offered by employers have evolved from pensions to 401k’s at the end of the last century. What this means is that the responsibility for saving for retirement has shifted from the employer to you. This is great for investing nerds like myself, but not as good for today’s average young professional.

Let’s role play for a second. You’re a level 1 professional with a full time job making $35,000 per year. Your employer offers you a 401k with a match up to 2%. You’ve been told by your parents that the match is free money, so you enroll and put away 2% of your paycheck each month which your employer will match.

The next step is tricky, it’s time to pick out funds. Having never looked at anything like this before, it looks like something out of the Matrix or written on the wall of an ancient pyramid. You’ve got to pick something, so you just randomly pick 10 funds that sound “cool” or “profitable.” As a result, you end up with high expense ratios, low yielding bonds, and shares of companies you know nothing about. Let’s say this works out well enough and your funds manage to produce an average of 5% compound growth per year.

Assuming the average yield, salary, and contributions remain the same for 20 years, you’ll come out with a 401k valued at about $48,000. To a novice, this might sound like a lot, but anyone that’s tried to plan for retirement knows how little of your expenses this would actually cover at a 4% withdrawal rate. Now, you’re in your 40’s and really not even close to retirement.

Because our schools don’t teach students how to create a budget, evaluate funds, or analyze a company’s EPS or payout ratio, The young professionals of the world have no clue how to approach investing for their retirement. Social Security is most likely not going to be a major contributing factor for Millennials in their retirement, and without pensions offering a “hands-off” way to invest, the burden is entirely on the individual to figure it out.

Many are not even aware of this burden. Discussing money has become taboo in the U.S., and if nobody is talking about it, how are young people going to find out?

Unless you want to work until you’re 75, you need to educate yourself on investment. Unless you want your kids to work until they’re 75, teach your kids about money, budgeting, and investing. I’ve been adding posts to a Dividend 101 category for you to get started and learn how to be a dividend growth investor. There’s no shame in starting out, but there is shame in having the ability to act and doing nothing.

They say “You can’t see the forest for the trees.” In other words, it can be easy to lose sight of your goals while focusing on the tactics. For us dividend growth investors, and most other investors for that matter, we do what we do as a means to an end. Financial independence (FI) and/or early retirement (ER) are the primary goals for all our research and hard work. It can be easy to forget that while diving into earnings reports and dividend history. This is why it’s important to set a clearly defined goal.

A common goal across the investment blog community is to achieve FI/ER by the age of 40. But what makes 40 so special? I asked some of the people who inspire me to share their thoughts.

Joe at retireby40.org, who is already enjoying early retirement, said “I think 40 feels like the mid point in our lives. If you’re not happy with your life by then, you need to make a change.” Many of us spend the majority of our time working at jobs we don’t love to cover the costs of living. We only have so much time on this planet to enjoy, so if there’s a way to enjoy it more, why not pursue it? Joe saved everything he could to invest in a number of different strategies including dividend investing, Peer-to-Peer (P2P) lending, and real estate. In July 2013, these investments empowered Joe to leave his corporate job and live life on his terms before he even actually turned 40.

Achieving that freedom while you can still enjoy it is important too. Jason Fieber at dividendmantra.com says “I think 40 is a popular age because it’s young enough to still live life to its fullest, while also being old enough to be experienced enough to know exactly what you want out of life.” This is why setting a goal early and working towards it is so important. “… if you start working at 22, and retire at 40 you’ve got 18 years to build a large enough portfolio to live off of.” Jason’s journey began in 2010, 2 months before his 28th birthday. His plan: “to save more than half of my net income for the entire 12-year period and invest in high quality companies that pay rising dividends at attractive valuations.” So far he has built a portfolio valued at almost $150k, which many consider to be “Critical Mass.”

Setting the goal is important, but knowing what you want to do with that freedom is important as well. Tim at theconservativeincomeinvestor.com invests to have the freedom to never be stuck in a job he hates and to give back to society. His goal would be better defined as financial independence rather than early retirement. In Tim’s eyes, “Financial independence lets you become more philosophical and focus relentlessly on personal happiness and benefiting society without getting caught up in the rigmarole of the paycheck-to-paycheck lifestyle.”

40 is such a popular target age because you’re young enough to still enjoy the money. What good would all of your hard work and saving be if you were too old to enjoy it? You always hear retired people say “youth is wasted on the young” but what they really mean is “I wish I knew what I know now when I was younger.” This is why the best time to start saving money and investing is NOW. Set a goal for yourself, and be clear how you want to achieve it. What age do you want to retire by? How much money will you need? How much do you need to save each month to achieve that? Once you have your plan, start acting on it. For me, this means buying dividend paying stocks that raise their distributions each year like MCD and TGT.