It was an odd job. I worked only a few hours a week, and a lot of that was spent listening to her tell stories about her life, past and present. She had a great mind for finance, and I picked up some useful advice that I probably changed my life. For one, I learned how to use Quicken, and I saw the benefits of tracking your expenses. I started tracking my own expenses right after that, and I’m still using the same copy of Quicken today.

The biggest takeaway might’ve been when she said, “Do you know what compound interest is? It’s the greatest thing in the world!” She owned some shares of IBM stock, and had seemingly owned them since the beginning of time. Over the years, she said she would buy sometimes, or sell some other times. But always, always the dividends were re-invested in more IBM stock. She told me about DRIP (Dividend Re-Investment Plan) funds, which we never learned about in school, as a good way for someone young like me to get involved buying stocks.

So I did. I opened a DRIP at the beginning of my senior year with Coca-Cola. Only the oldest, reliably dividend-paying companies seemed to offer DRIP funds, and Coca-Cola seemed like a more fun company to invest in than IBM or Exxon-Mobil or what have you. Plus, I figured that no matter what fads or technologies come along, people will always need something to drink, and whatever you want to drink, Coke will sell it to you.

Computershare is their DRIP fund administrator. So I bought the minimum required (probably $25 worth) through them and started automatically investing $10 a month, every month on the 15th. Fifteen years later, I’m still investing in a monthly basis. The only thing that’s changed is that I’m investing $75 a month instead of $10.

It’s worth about $8,500 now, which doesn’t sound like much considering I’ve been at this for fifteen years. Those financial tips you hear like “by just saving $10 a month, you can start a retirement fund!” are fibs. You need to do more than that. Luckily, the Coca-Cola holding is just a small percentage of our investments.

Who needs a DRIP fund?

Well, I’m thinking of officially ending our DRIP fund, in a way. Computershare charges fees for re-investing dividends and investing monthly. They charge $2 per automatic investment, plus 3 cents per share, and 5% for each dividend re-invested. Their website sucks, and it’s a minor annoyance that the Coca-Cola holdings are separate from everything else we have. (See Is Vanguard Getting Too Big?)

Aside from that, Comptuershare is a bastard if you try to sell shares. I don’t think they’re alone among DRIP fund administrators in this respect. They punish you for leaving. It costs $15 or $25 to sell shares, plus 12 cents per share. So it would probably cost us about $50 just to completely sell our position. And that cost will only increase as our position increases. So better to move out sooner rather than later, right?

If I move everything to Vanguard, re-investing dividends would be free, but new investments would cost $7 every time. That’s more than what Computershare charges. So I’m thinking of continuing to invest in Coca-Cola only once per quarter, instead of once a month, purchasing $225 every time (three months worth of $75 investments).

I’m not sure how much the exchange will cost (I’ve read conflicting reports), but it would be cost less and be less risky than selling and attempting to re-buy it at the same price.

Anyone else have, or used to have, a DRIP fund?

The post Who Needs a DRIP Fund? appeared first on RidinKulous.

MMM says, “you too should be paying absolutely no attention the news.” But I’m here to tell you today that if early retirement is your goal, there is a news story that deserves your attention!

Bringing new meaning to the term “White House”

The New York Times reports that Republicans are considering a sharp cut in 401(k) contribution limits.  And a sharp cut it is. Right now, you can contribute a maximum of $18,000 per year to your 401(k). Under the new plan, the limit could be as low as $2,400. Yes, that is just over two thousand dollars! Anything over that will be taxed. And the converse is true. Instead of all of that money being taxed later in life upon withdrawl, when you are hopefully in a lower tax bracket, they will be taxed today at your higher rate.

After a very early golden period upon its inception, in 1985 the 401(k) was limited to $7,000 per year. Every year or two, like its cousin the Roth IRA, the limit has increased all the way up to today, where the 2018 limit is planned to be $18,500. This is a massive cut and would accomplish exactly the opposite of what the 401(k) plan was supposed to do: encourage people to save for their retirement.

Everyone uses the 401(k) plan. They don’t use it enough, but everyone uses it. The average worker making less than $30,000 a year contributes 5%. The average worker making over $100,000 contributes just over 8%. So this is not just a tax increase on one group over another. It’s a tax increase on everyone.

Like I’ve pointed out before, 401(k)s can be awful in implementation. They can encourage people to save for retirement on one hand, while stealing their retirement contributions with the other. But they are a godsend in theory. In 1980, 38 percent of people had a workplace pension. Today that is down to 13 percent. Meanwhile, 401(k) participation rates have increased. Defined contribution plans like this allow clever people like us to sock away as much money as possible and retire on our own terms.

Personally, I find this move to gut 401(k)’s be an affront to all that is decent in Ridinkulous land.

The 401(k) plan is a cornerstone of the early retirement movement. Its contributions are not taxed. Your typical early retirement striver is going to be maxing out their 401(k) plan every year, and then cleverly converting that money into a Roth IRA after retirement using a “conversion ladder” so that it’s not penalized upon withdrawl. Using the ladder method, you can keep your savings from being penalized, and even keep yourself in a low tax bracket, but it requires a frugal lifestyle.

Ha ha ha! We’re rich!

The reason this is so offensive to me is because Americans already have the financial decks stacked against them in a way that citizens of other countries do not. They need to find a way to pay for healthcare costs, save for their children’s education (or let them take out massive loans), pay for childcare costs, and also save for their own retirement while navigating the confusing world of investment firms. This would be okay if people were paid enough money to save for all of these things on their own, but we actually have a minimum wage the rest of the developed world laughs at.

The other problem is that the average American gets no financial education to speak of, but does get incredibly easy access to gambling. Why do you think so many people non-sarcastically refer to the lottery as their “retirement fund”?

401(k)s are under-utilized, but that’s not a fault of the plan. That’s a fault of the education. If people think there’s a better chance of retiring by winning the lottery than by socking away small amounts of money every month, that’s a failure of financial literacy. But instead of fixing the problem and help people save, the Republicans are deciding to penalize the average Joe and put retirement further out of reach. They are fine with ditching the estate tax, which only the highest-earning 0.2% of Americans pay, while increasing taxes on the rest of us.

More rich white folks!

It’s just an awful, ruinous idea. What would be the point of socking away money for retirement at all when that $2,400 a year won’t add up to a hill of beans!

You may have heard that after pulling a choke job on healthcare reform, Republicans (who control the Senate, House, and presidency) are focusing now on tax reform. Tax reform is notoriously difficult to pull off because there are so many stakeholders (literally every person in America) with so many varied interests. So god help us, they just might drop the ball again and not pass anything.

It’s widely known that this raid on your 401(k) plan is a way for Republicans to pay for their corporate tax cut, lower rates for the wealthy, and their wet dream fantasy, abolishment of the estate tax. But I can’t imagine anybody who’s actually in favor of this, Republican or Democrat.

If passed, I would never vote for a Republican again in my lifetime. So, if you have a Republican member of Congress in your district or state, I would be calling them right now. No tax increases on people just because they are responsible enough to save money!

What do you think of this new proposal? Terrible idea or the worst idea?

The post Retirement News: Republicans Want To Tax Your 401(k) Contributions appeared first on RidinKulous.

Rental properties are not central to our plan to retire early and be financially independent, but they provide a nice alternative investment to the more common defined contribution plan and the pension scheme we have. Unlike the stock and bond markets, the housing market behaves on its own set of rules, so in addition to being a source of cash flow, it’s another type of asset diversification. For example, while stock prices might tank, your house still holds its value (hopefully), or if the housing market tanks, your portfolio stays steady (hopefully).

But we’re lucky. Our area has never been susceptible to the waves of speculation in the housing market that have made many places unaffordable. So I am not too worried about big gains or losses. Housing is pretty boring and predictable, seeing as how widely accepted it is as a storage of wealth. I like all of my investments to be this boring (I’m looking at you, cryptos).

Some people (with more knowhow and time than we have) are able to buy houses cheap, rehab them, and sell them for a nice profit. For me, a worthwhile investment property is simply one that is basically ready to rent out that I can buy at a price that gets me my preferred return on investment. If I can mostly ignore it, and it brings in a certain amount of money, I’m happy.

What is a certain amount of money? I created a spreadsheet that lets you plug in the asking price, potential rental income, property taxes, and expected insurance, utilities and maintenance costs, and it will spit out a cap rate. My desired cap rate is between 9 and 10%. So you enter potential properties, and you’ll know exactly what purchase price you need to get for each to get your desired cap rate. On the reverse, it also tells you how much higher your rents would have to be to get your desired cap rate based on a static purchase price. This spreadsheet has been integral in comparing properties.

Our Second Rental Property

The fun thing about purchasing a rental property as opposed to a home for yourself is that you’re evaluating it on different criteria. You don’t have to like it. You just have to know that other people will like it. For instance, the rental property that we just bought had some renovations done probably ten years ago. The kitchens aren’t high end, but they  still look good enough to impress visitors. The bathrooms are nothing special, but they’re sizable. If I was just out of college, I’d definitely be interested.

I like this rental property firstly because it meets my financial ratios. But I also like it because it’s much more basic than our first rental property. The apartments are smaller, the walls are all white (except for the grey in the kitchen), the floors are all the same laminate, and there’s a shared washer and dryer in the basement. Our first rental property is bigger, has washers and dryers in each unit, and lots of little details and weird layout things, which means some people will love it, but some will people hate it.

This second property is much more straight forward. It’s simple, easy to care for, and there’s not much to dislike. That makes it easier to find renters! We did a dozen showings over a week, got four applications, and accepted two. We closed on February 28th and had both units occupied two months later.

The inspector we used when buying this property has owned a ton of rental properties through his life. And he said owning rental property is a great way to “get rich slowly,” a phrase anyone in the personal finance community is familiar with. And that phrase made me think about how the biggest value of owning a rental property is in the asset itself. You go from a down payment of a certain amount to owning the full value of the property once the mortgage is paid off. Which got me thinking of a new way to evaluate return on investment: What does that down payment turn into after 15 years?

(Previously, I’ve calculated a straight annual profit amount, and a questionable, but fun, per-hour wage)

Assume your cash flow comes out to zero for the 15 years of the mortgage. I mean, hopefully you’re cash flow positive. But for the sake of the calculation, assume your expenses exactly equaled your income. This rental property cost $114,000, and our down payment was $28,500. Invest $28,500 of cash for 15 years requires a 9.7% annual return to get to $114,000 in the end. So even if the house doesn’t change in value one bit, that is nice gain you can’t get elsewhere. I’m ignoring the fact that you have to work for this return, and that your income and expenses won’t be equal, and that your house’s value will change. Hopefully these all turn out positive!

Have you considered making rental income part of your journey to financial independence?

The post Getting Rich Slowly – Our Long Term Investment Property Plan appeared first on RidinKulous.

Saving up to retire early isn’t a goal shared by many people.  So you might be surprised to learn that, for the few people looking to go whole hog in saving for retirement, there is a shocking variety of accounts to choose from! Once you decide to start keeping your money instead of spending it, where the hell are you supposed put it? Under a mattress?

Today we solve that dilemma!

But first, there are a few Golden Rules to follow when it comes to investing your nest egg responsibly that I assume you have to know:

1. Buy hugely diversified mutual funds instead of individual stocks. (Something like VTSAX, Vanguard Total Stock Market Fund, and its international cousin VGTSX)
2. Make sure those mutual funds charge very low fees.

Diversifying between stocks and bonds, international and domestic, and small and large companies is simple and pretty fun*. But one area I found myself lacking knowledge in lately was the difference between retirement account choices. IRAs, 401(k)s, Roths, 457s, SIMPLEs,.. There are enough acronyms to fill a letter factory!

So I made a little summary for myself of the common options:

How many do you have access to? Well, I can tell you right now that you have access to a Roth IRA. Because everyone does. The 457 Plan and 401(k) Plan are only available through your employer. The 457 Plan is optimal for early retirement planners because it lets you withdraw before age 59.5 for any reason, without a penalty.

As for the Traditional IRA, you have access to that, too, because everyone does. But there’s a hook, and it always messes with my head: You can invest post-tax dollars and take a tax deduction for that amount, essentially making them pre-tax dollars, but only if you do not have an employer-sponsored retirement plan.

If you have access to a retirement plan at work, your available deduction for a Traditional IRA starts getting phased-out when your income reaches $52k for individuals and $83k for couples. Oh, and did I mention the $5,500 limit covers your Roth and Traditional IRAs together? The Traditional IRA seems to have the most annoying rules to deal with, but we’ll leave that aside for now.

We had been doing most of our retirement investing in Roth IRAs as a way to guard against tax risk. Our income was taxed at 15%, and by saving in a Roth IRA, we wouldn’t have to pay taxes on that money again. We don’t know the future, but I would be willing to guess that tax rates will go up at some point. And who knows what the income brackets will look like? By investing post-tax money, you eliminate your risk that future tax rates will be sky-high.

But I realized recently that sometime in the past few years, we had entered the 25% tax bracket! So by investing mostly in a Roth, we were essentially gambling that our tax rate in the future would be more than 25%. At this point, I kind of doubt that, and here’s why:

You see, since we manage to live well on only about half of our income, then in the future, if we are only withdrawing that money which we need from our retirement accounts to live on, say $50,000 a year, we will be in the lower (15%) tax bracket.  Again, assuming all tax brackets and rates remain level.

So what was I supposed to do? Invest it all in my employer’s 457 plan, or Marge’s 401(k) plan? What about those fees! What’s the best option?? Where are the best returns??? I demand only the best retirement option!!!

So I did an analysis comparing all of the retirement accounts available to us, and then some, to determine which ones would produce the best returns after twenty years, given a set of variables. Then we can rank them and max out our retirement funds in the correct order!

The results might be surprising…

The Types of Funds

1. 401(k) with low fees and no matching funds 2. 401(k) with low fees and matching funds 3. 401(k) with high fees and no matching funds 4. 401(k) with high fees and matching funds 5. Taxable account with low fees 6. Roth IRA with low fees

7. Traditional IRA with low fees

The Variables Used

Annual Investment: $5,000 (pre-tax) Annual Return: 10% Low Fee: 0.15% High Fee: 2%

Tax Rate At Retirement: 15%

Also, anywhere you see “401(k)” you can substitute a 457 plan or 403(b), since the effect is the same on those types. OK, and I know, a 10% return is a bit optimistic, but the rankings don’t change if you make that 7% or whatever you like.

You’ll notice I did not include any high fee mutual fund options in my Taxable Account or IRA options. That’s because if you open any of those accounts, you are the only one who has any say over what funds are bought. And you’d have to be insane to purchase a high cost mutual fund in that case. Remember the Golden Rules! But when it comes to employer-sponsored plans, you have to take what they give you, and in some cases that includes high fees.

Now, I’ve done two analyses based on my/your current tax bracket. The results change if you are in the 15 or 25% brackets, which should cover most everybody. Here are the results after 20 years of investing…

If you are now in the 15% tax bracket:

Those values are post-withdrawl, meaning the 401(k) taxes, deferred until retirement (we’re assuming 15%, remember) are taken out. So they are all on an equal footing. These are all post-tax amounts.

Clearly, what pushes a few retirement plans ahead of the pack are the matching funds. If you have an employer that matches your contributions dollar-for-dollar up to a certain amount, you should be maxing out that match first, regardless of the fees. Once an employer stops matching funds, the return drops off significantly, which you should expect. After all, a match is just an immediate 100% return!

I was a little surprised that, under the 15% tax bracket example, the Roth IRA and 401(k) with low fees were exactly the same. Your annual $5,000 contribution is actually $4,250 into the Roth once taxes are taken out. But in that example, your 401(k) is also taxed 15%. It’s just on the way out as withdrawls. So although they actually grow looking completely different, you end up with the same amount in the end.

I was also very glad to see my suspicions confirmed that high fee 401(k) funds kill your retirement! If you take my high fee estimate of 2% out every year from that 401(k), then under the 15% tax bracket, you would’ve been better off opening a regular old account and letting it get taxed every year! To the tune of $13,000!

People complain about Uncle Sam taking their money constantly. But what about Investment Advisor Greg?

“GIMME ALL YOUR MONEY!” – Greg

If you are now in the 25% tax bracket:

Once you are in the 25% bracket, investing post-tax dollars in a Roth IRA becomes a worse proposition. I guess that’s obvious, but it’s good to see just how much worse. The account is worth about $28,000 less after 20 years than if you had been investing dollars that will only be taxed 15% post-retirement.

I should also mention that, in that 25% tax bracket example, if you play with the fees on the high-fee 401(k), it actually does better than the Roth IRA if the fees are 1.2% or less, so that’s something to consider. Even if I reduce the gains to 7% annually, the 1.2% fee rule still held.  So if you can get your fees down below 1.2% on average, the employer-sponsored plan is better than the Roth.

Also, the 25% tax bracket is where the value of postponing taxes outweighs the horrible high fees of that 401(k) account! You’ll notice that the high-fee 401(k) account does better than a taxable account getting funded with post-tax money. Notably, I also taxed all of the gains at 25%, which isn’t really right. How much that taxable account is actually taxed depends on lots of factors, but for simplicity’s sake, I’m just going to leave it like that. In reality, the gains would probably be taxed less. But having taxable accounts and being in the 25% bracket just isn’t the best choice for retirement funds no matter how you shake it.

Using Norm & Marge As An Example

To illustrate exactly how this plays out for a married couple in the 25% bracket like us, I’ll use us as an example! The retirement accounts we have access to fall into the following categories:

–       Marge’s high-fee retirement account, which is matched up to 3%

–       Norm’s low-fee retirement account which has no matching.

–       Roth IRAs

–       Taxable accounts

Going by the rankings then, here is where our priorities are:

1. Invest in Marge’s high-fee retirement account at work only to the extent of the match. At that point, it becomes a high-fee account without matching.
2. Max out Norm’s low-fee retirement account at work.
3. Max out our Roth IRA contributions.
4. Max out Marge’s high-fee retirement account at work without matching..
5. Invest any excess retirement funds in taxable funds, or start looking at other options.

I will be working up a super cool Retirement Account Decision Tree based on these findings to make this all easier to follow both for me and for you. This decision tree will go viral, and Ridinkulous, the most dope personal finance blog on the internet, will take its rightful

Tell me everything that’s wrong with my assumptions and everything I should add to make my rankings more reflective of reality.

* (ed. The description of diversification as “fun” is subjective)

The post Ranking The Retirement Accounts appeared first on RidinKulous.

Then when the sun was shining (and Eurovision wasn’t on) I worked outside on a DIY lounge chair. During the warmer months, all I want to do is sit outside and read. Right now all we have is some patio table chairs. But I want to stretch my legs out, so I figured a lounge chair would increase my leisure comfort about 50%. But lounge chairs are expensive! So I found plans online and made that my new project. I had a lot of the wood on hand already, so it should be pretty cheap, and hopefully very comfy.

Now for the actual financial part of our post…

If you read any personal finance blogs, including this one, you know Vanguard pretty well. They are the dominant name when it comes to broadly-diversified low-cost investing.

They provide cheap, easy access to the stock market as a whole. It’s a no-brainer to use them, since we know that the average active investment mutual fund will underperform a passive investment fund, especially after accounting for the fees.

I had been hearing recently about how passive investing has really taken off. That even your average, middle class investor understands that this is the way to go. But it wasn’t until reading an article in the New York Times that I realized just how dominant Vanguard has become. (We shell out $7.50 a month for a Times online subscription, but it’s worth using one of your precious ten free articles a month on this)

Besides painting a charming portrait of Vanguard’s low-key suburban Philadelphia offices, the article shows the extent to which Vanguard has been ruling the market:

“In the last three calendar years, investors sank $823 billion into Vanguard funds, the company says. The scale of that inflow becomes clear when it is compared with the rest of the mutual fund industry — more than 4,000 firms in total. All of them combined took in just a net $97 billion during that period.”

I mean, I knew Vanguard was getting more well-known these days, but my jaw dropped at those numbers. They’re taking in almost ten times more than every other company combined! Those include like Fidelity, T. Rowe Price, and Blackrock…

Our household is a case in point. I wondered, how much do we actually have at Vanguard?

How much of our money is invested with Vanguard

Yes, that’s almost 90% in Vanguard mutual funds. That basically reflects what’s going on with Vanguard in general. Crazy, isn’t it?

We started investing in Vanguard in 2006 or 2007 after previously putting our excess cash into some unbelievably profitable (by today’s standards) CDs with a 5% return. I can’t remember how I found out about Vanguard, but since I had taken finance classes in college, it had already been drilled into me that most mutual funds were out to profit as much as possible from the consumer, with the front and back loads and high fees.

So we started Roth IRAs at Vanguard. As jobs came and went, 401(k) savings were rolled over into more IRAs at Vanguard. Our emergency fund moved from a savings account to a Vanguard money market mutual fund. My 457 Plan started introducing Vanguard funds to their choices a few years ago. Soon I had exchanged all of former 457 funds for Vanguard Total Bond, Institutional, and Small Cap Indexes. I even moved all of our individual stocks from the skeevily named TradeKing to Vanguard for the sake of easier record-keeping.

At this point, it’s easier for me to list our financial assets that are NOT with Vanguard: A DRIP fund with Coca-Cola, a handful of other stocks, Marge’s current 401(k), and Lending Club. The Coca-Cola DRIP is basically a legacy investment that I’ve been putting money into monthly since 2003, when I was but a junior in college.

“The triumph of index fund investing means Vanguard’s traders funnel as much as $2 billion a day into stocks like Apple, Microsoft and Amazon, as well as thousands of smaller companies that the firm’s fleet of funds track. That is 20 times the amount that Vanguard was investing on a daily basis in 2009. “

So what are we to make of this? Is this a problem that passive investing is becoming the norm?

Soon the only people playing around in the stock market using active investing will be the super-rich who have nothing to lose. They’re the only ones not getting on the passive investing bandwagon because, well, what do they care if they lose some money? So the part of the market that is actively invested will have fewer and fewer players in it.

There will always be some money to be made on buying and shorting under- or over-valued stocks. I don’t think there will ever come a point when the entire market is invested in passively. As long as there are current events happening, economic news coming out, and quarterly reports being issued, people will be buying and shorting stocks based on that information. If there is any money to be made at all, people will be there to take advantage of it.

Also, I heard that supposedly the market is showing a extremely low amount of volatility lately. Like, so little that it’s strange historically. I wonder if the amount of passive investing is part of the cause?

How much of your money is at Vanguard? Or do you actually use another company?

The post Is Vanguard Getting Too Big? appeared first on RidinKulous.

That’s a nice idea. But who said you had to rely just on dividends and withdrawls from your investments in retirement? There are other options. Today I’m going to be comparing and contrasting two other options we have available.

The pension

Rabbits: Content without a pension

I work for a huge employer that still offers an honest-to-god pension. So the pension has always been a part of my retirement planning. And so it is for everyone else who works for this employer. In fact, from the way they talk, you’d think they were all planning to be completely reliant on the pension to cover their living expenses!

The talk is always about how many years they’ve put in, or how many years they “have left.” Like it’s some kind of prison sentence. I don’t know if this is an actual reflection of people’s financial standing, or just a misunderstanding of how pensions work, but everyone seems dead set to work at least 30 years, no matter how old they would be by that point.

Hopefully this picture will illustrate how many numbers we’re looking at today

The basic pension rules

Under our pension system, for up to 20 years of work, you get 1.66% of your final salary for each year worked. Once you hit 20 years, you get 2% for each year. And then at 30, it drops down to 1.5% for each additional year. So between years 19 and 20, you get a jump from about 31% to 40% of your income. Then it becomes less lucrative to stay longer than 30 years.

Pensions aren’t paid until you’re at least 55, and there is a penalty if you don’t have at least 30 years at that point. That penalty is reduced for each year you delay taking a pension until age 62, when you are not penalized at all.

But what does it practically mean to take a pension early? Let’s look at someone with a salary of $70,000:

Taking retirement at age 55:

Taking retirement at age 62:

According to my calculations, there is no incentive to delay taking your retirement until age 62. Even with a 27% penalty, it’s worth it to take the pension for those seven years.

In our 15 Years example, after seven years of saving all of the $12,770 at 7% interest, it would total nearly $115,000. At that point, the $115,000 at 7% would be generating $8,000 a year, turning that $12,770 pension effectively into a $20,770 pension.

But if you held out on collecting retirement until age 62, you’d be waiting seven years to turn that $12,770 pension into a $17,493 pension. That’s an extra $4,723 a year. So, in a way, you’re losing money by not taking the penalty!

As someone planning for an early retirement, I’m looking to skew towards the lower end of the Years of Service spectrum. But is it worth? Am I leaving so much more money on the table by quitting at 20 instead of 25, or 15 instead of 20?

beep bop boop beep NUMBERS!

Savings needed to replace a pension

Now that we know that it’s not worth delaying taking a pension from age 55 to 62, we’ll forget collecting at Age 62 and just focus on the Age 55 chart. How much money in savings would it take to replace the annual income from working a few more years for a pension? Using a 4% withdrawl rate, here’s how much you would need to have saved up to replace each five year increment:

15 Years vs 20 Years

20 Years vs 25 Years

As expected, the jump from 15 to 20 years is bigger than the one from 20 to 25 years because of the bump at Year 20 from 1.5% per year to 2%.

For working from year 15 to 20, you get an additional $7,740 in income.  That would require an additional savings of $193,500 in the bank to replace.

But don’t forget, that pension doesn’t kick in until age 55. Say I’m retiring at age 40. We don’t need $193,500 right now to make up the gap. In fact, $70,142 invested at age 40, left alone and growing at 7%, turns into $193,500 by age 55. Why, that’s just one year’s income for our $70,000 earner! Or, if you like, two years with a savings rate of 50%, like we saved last year. Suddenly that 15 year pension turns into a 20 year pension through your own shrewd investing!

Hmmm… maybe a pension is not as much of a golden handcuff as I had thought. Let’s look at another example.

Rental Property Income

Our first investment property income statement is forthcoming, so right now, let’s use our very optimistic income projection as a basis. In our example, with a 2-unit property, we are bringing in $5,525 a year in cash. When it gets interesting is when the mortgage is paid off. Without mortgage payments, that would leave another $10,440 in cash flow for us! That’s nearly $16,000 a year total.

You can probably see where I’m going with this. One fairly simple income property bringing in $16,000 is worth more than a 15 year pension!  By buying one more similar investment property, we’d have $32,000 a year, which would cover almost all of our living expenses in 2015.

But unlike stocks, bonds, and a pension, an investment property is not entirely passive income. Things need to be fixed. Tenants need to be vetted and apartments need to be filled. But after not hearing a peep from our tenants for the last two months, I’d say it really is close to passive income. And besides, don’t you need something to do in retirement anyway?

Things might need to be demolished, like a garage!

Real Estate, Savings > Pension

But the one big advantage the Savings and Rental Property methods have over the Pension for early retiree wannabes like you and me is that the income is happening now instead of at age 55. No need to wait. This is something the pensioners at my work don’t seem to get. Dividends will show up in your bank account right now. Withdrawls from a 457 Plan can happen right now. And you don’t have to wait until age 55 to have access to rent payments. You can create your own pension. Call it a DIY pension, or a “pensionhack” if you’re nasty.

What about a pencil-sharpening business?

So if you don’t have a pension in your future, and most Americans hired today won’t, don’t worry! By owning a rental property or squirreling away your money, you’re basically creating your own pension! Sure, a rental property is just a little bit more work. But if you look at it another way, by not putting in all those years at a workplace to secure a pension, in the long run, owning an investment property requires far fewer work hours.

Not that there’s anything wrong with a pension

This is not to put down the pension at all. The one big benefit it has other the other methods is that it is a defined benefit plan. What you receive every month is not affected by the stock market or by unexpected expenses at a rental property.

And not everyone is as financially astute as the readers of Ridinkulous. People like the security and “sure thing” nature of pensions or Social Security. We know that people have a problem saving for retirement on their own and I think the disappearance of the private sector pension is going to be hugely economically damaging in the near future. People just don’t save on their own. Politicians would count the disappearance of the pension and the rise of the 401(k) as an indicator of our economic freedom. Yes, it’s true! People are now free to save nothing for their retirement! We also have the freedom to be ripped off by investment advisors and fund managers!

I believe in saving people from their worst impulses, and that includes not saving for retirement. Many people just don’t see the value in it since the payoff seems so far down the road. That’s exactly why pensions are important. It’s the long view that causes people to put it off until it’s too late.

What are you doing to hack your own pension?

The post DIY Retirement Income: Pension Vs. Savings Vs. Rental Property appeared first on RidinKulous.

Today I’m going to give you what our ideal return is on this rental property would be. By ideal I mean rented out for 12 months a year, with minimal maintenance expense. And then as time goes on, we can check back in and see what the reality is and how it compares! This whole rental property business is new to us.

A few weeks ago, we listed the first floor apartment at $1,150 a month and have gotten very few bites. The few bites we did get, through Craigslist, punked out and stopped responding to me. I’ll admit, $1,150 is on the high end for this neighborhood, but I figured all it would take would be to get someone in to view it for them to snatch it up. It’s just that good.

Well, after we listed the second floor apartment, I was almost proved right. The second floor is not as nice (I think) as the first, since it has smaller rooms, an older kitchen, and an odd layout. Still, it has all of the same new windows and floors as the first floor. I listed the second floor on a Saturday night for $950, we probably received five times as many replies, and by Monday night we had accepted tenants!

Basically, I think people search by price and bedroom count. So we’ve dropped the price on the first floor to $1,100. We’ll see…

So where are those numbers?

Let’s see. The house cost $134,000. I’ve shied away from leveraging debt before, but we ended up going whole hog this time. So while we took out a mortgage on about $102,000, we covered another $25,000 with a Home Equity Line of Credit. So much for being debt averse!

I did the HELOC for two reasons:

1. We could still easily afford the mortgage and HELOC even if we had no tenants. Since we save about 50% of our income every month, we would just tap that down a bit.
2. The obvious reason: Less cash outlay!

I see we actually paid out about $35,400 on closing day. Even though that includes expenses that aren’t even part of our down payment, I am just going to call that our down payment, subtract the HELOC amount ($25,000) and say we actually put down about $10,000 in cash out of pocket. That $10,000 down payment means our return, in ideal circumstances, should be pretty eye-popping.

Expenses

Our monthly mortgage payment is $758. Our monthly payment on the HELOC is $112. So our yearly expenses would look like:

We have to pay for the gas heating because there is one meter and it is not zoned, so we include that in our tenants’ rent. Only time will tell what maintenance expenses will be needed, but let’s just go with the low end $1,000. After all, this is supposed to be ideal, isn’t it?

Income

Subtract the $19,075 in expenses, and that is $5,525 in net income.

Return

Our Return on Investment = Income/Down Payment = $5,525/$10,000 or 55 percent!

But that’s not all! Mortgage payments aren’t just an expense, they build up equity in a house. Since the mortgage is at 4%, I’ll estimate that, out of $9,096 spent on mortgage payments, the interest is $4,080 on the $102k mortgage. That means $5,016 of the mortgage payments is principal. Add that back into the net income, and we magically now have $10,541 in income.

$10,541 net income /$10,000 down payment = 105 percent return!

Wow! Too bad numbers can be misleading! If we had used even more HELOC and put down less cash out of pocket, say $2,000, our return would technically be 527 percent! Hell, if we did used a home equity loan for our entire down payment, you could say our return is infinite!

In reality, that 105% return is completely unsustainable, since the second year, the income would stay $10,541, but the basis would be $20,541, making the return 51%. What serious real estate investors look at, I think, is the “cap rate,” which calculation depends on who you ask, but basically it’s…

Net Income/Home Value = $10,541 /$134,000 = 8 percent.

That calculation is a good way of comparing different rental properties, but I didn’t shell 134 thousand clams out of pocket for this house, so it’s kind of irrelevant at this point.

Know anyone who needs an apartment near Albany, NY?

The post Revealed: How To Make a 105% Return On Investment Revealed! appeared first on RidinKulous.