Looking for some critique & analysis of my financial plans

Hello Fellow financial planners & investors,
I have been a do-it-yourselfer, investing for 15 years, since I started a job after completing an engineering PhD (I am in silicon
valley area, but I am not a comp science or electronics engineer). Over the years, my wife and I have been aggressive savers, with a view towards early retirement, and we think we have done well. Would appreciate some critique and analysis, and discussions on potential blind spots we may be missing.
Self age: 41; spouse: 35; two kids, 7 and 4. GOAL: Retire by 45, definitely by 50. Home: in SF Bay Area, bought 10 years back @ 360K; remodeled with about 100K 1 year back. Presently valued at about 650K (after the fall in prices; before was at about 800K). Mortgage: 210K. 7-year fixed mortgage at 4.5%, will convert to ARM in April 2011 (in 2.5 years) HELOC: 45K, ARM, @ 4.25% presently (prime MINUS 1/8th or so) Other debts: NONE (no other debts of any kind)
Income: Self 140K; wife: 60K (works only 60% of the time, to help with children after school)
Retirement savings: $420K total. Details: 400K in two 401Ks; 20K in IRAs (don't qualify for Roth). Retirement funds are broadly diversified in S&P 500 index, Growth index, and a bunch of other mutual funds. No single fund more than 10%; international about 25%; all stock funds. The total has been as high as almost 500K, before the last 1-year's downturn.
Nonretirement savings: Total: 500K (details below) DRIPS (XOM: 70%, PFE: 6%, BAC: 8%, LMT: 12%, IIBK: 4%): total: 200K Mutual Funds: (Vanguard 500: 25%, Vanguard Growth: 25%, Wells Fargo Enterprise: 50%) total: 250K 529 funds for children: (50% for each child, CA scholarshare mutual funds): 40K total. Misc. 10K
Life insurance: Self: 500K (self-pruchased, outside term) + 400K (employer paid group term) Spouse: 200K (self purchased term) + 250 (employer paid group term) Disability: both have group disability for about 2/3rd of pay (self- paid, but through work) LTC: NONE Been VERY LAZY about: wills, probate, estate planning Expected inheritance: NONE form either side Doomsday Retirement Plan: Have a large home, car, and 8 acres of irrigated, agricultural land in an overseas location. How we got here: Education put us in good jobs; we have always saved 45% to 55% of our earnings, first 5 years to accumulate down payment and get in a home, and last 10 years to "fill the house" and build the above portfolio.
WILD CARD: I have employer stock (not options) worth 350K (pre cap- gains tax). This is a private company stock, valued once a year in Oct (i.e., price remains fixed for the year), encashable once a year over a 2 months window; has a 3-year history of paying annual dividends at about 2% of the stock value. The stock has grown 7-fold over the last 7 years, but the future growth is expected to be more modest, say 15% -20% a year for next 2-3 years. What to do with it? Sell it, and pay off the mortgage, and live "debt free" or let it grow...
I would like critique on all of the above, but particularly on the wild card. It's becoming about 25% to 30% of my total investment (Excl home equity), which seems too high a concentration. On the other hand, it is immune from daily fluctuations of the market, since it is private and valued just once a year. The company has been consistently profitable last 10 years (and 16 of the 19 years of its existence). Revenue growth about 20% per anum; operating margin 30% to 34%. Has 50% + market share in its domain; curr employees about 300, and rev about 150M.
M N Door
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In article
snipped-for-privacy@yahoo.com wrote:

While I cannot give advice to you, here is what I would likely do in that situation.
First off, pay off the home with the funds that you have in non- retirement savings. Get rid of anything that costs you each month an interest payment. The tax savings on a mortgage are not worth what they cost.
Second is dump the life insurance. Why pay for that when you have more than that much sitting in the bank?
Third, I wouldn't mess with drips. I don't see the value of any investment that makes one have to jump through those kinds of hoops.
Fourth, I'd consolidate this stuff at a brokerage house or a private bank such as US Bank or Wells Fargo. Let someone else worry about the details. Get a single statement each month. Have someone that you can call and talk who is on your side when it comes to investing.
Fifth, visit a family lawyer and get a will set up. You don't want your kids to become foster children in the event that you and your wife are in a bad car accident. You want some kind of a plan for the end game.
Sixth, call a travel agent and book a cruise. You and your wife have done well here, and you deserve to celebrate a bit. And at the end of the cruise season, you can get a top notch cruise for less per day than what a good hotel will cost.
-john-
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I am not keeping my mortgage for tax savings, but more for the reason that the rate on it is pretty good (only 4.5% from April 2004 through April 2011), and even after the current severe loss in the markets, over the last 10 years, most of my funds / stocks have averaged about 8% to 14% annual gain. I am very debt-averse guy (twice in life too car loans, which I paid off in less than 4-5 months, as soon as CDs matured), but the mortgage debt I feel like keeping at least until 2011.

John, can you elaborate a bit more on this?
Our reasoning is that, should I die, wife should be able to pay off mortgage, immediate-fund the college savings for kids, without touching our investments for retirements (the 401Ks and outside investments), and, fo wife to be able to go from 60% work to 25% work, or so. For 500K term I am paying about $350 per year (current one is 15 year level term, about 5 years into it; previously had smaller amount of insurance) -- so, even if I am fired tomorrow (so group term is gone), and next day I am gone, wifey and kids are at least financially protected, for the current premium of $350/month. At my leve of "pleasure consumption" this means only 5 weekend ski trips/ year vs. 5 weekend ski trips, so I am able to rationalize it. But would welcome additional discussion from you and others.

You are right, some DRIPS have put in a lot of hoops. Fortunately, mine are XOM, LMT, BAC, PFE, IIBK, and all of these are eitehr fee- free, or miniscule fee, and it's all on auto-pilot. I have not had to fill any forms, or make any call in years; each month just there's an auto-withdrawal from my credit union a/c, and I get monthly statement.

Thinking about this, but still not decided about paying someone to manage. For now, I use vanguard's service (cashedge engine at the back), which aggregates all my accounts from everywhere to show a consolidated view. Good to monitor, rather than 15 separate online accounts; but on a bad market day, the total drops by 80 to 100K : ( But I am cool with that.

Yeah, this is one area where we have been very lazy. We tried once or twice, read all Nolo press books, started getting some references for family lawyers, but never got to the point of completing selection, making appointments and moving ahead.

Great idea, than you! Actually, we do have our pleasure consumptions -- so while we have never had any cable/satelite, and actually watch less than 4 hr/week TV, we do splurge on all kinds of kitchen gadgets (4K induction stove!, a wine refrigerator), ski trips, beaches, and also sampling all kinds food, at home and at restaurants. But cruise sounds a great idea.
I know my previous post was long, as is this one, but you skipped over the wild card. What do you think of the employer stocks I have, which is becoming 25% to 30% of total. Time to sell, just to keep percentages in check (hey, history is full of Enron, Merryl Lynch, Wamu, Bear Sterns,...), or keep it, since it is a private equity, valued just once, and not subject to market volatility.

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In article
snipped-for-privacy@yahoo.com wrote:

Caveat still applies.

My personal philosophy is that folks should have a core holding of safe investments including at least one good car and a home that can be depended on. As a result, I suggest a more modest paid-for home as opposed to the mini-mansion that is mortgaged to the hilt. You never know what kind of eggs life is going to lay for you, and they cannot repo a paid-for house.

If you have the money on hand, then life insurance is more like playing the lottery. The chances of getting a payout is remote, so it is mostly like feeding coins into a slot machine. If you allocate the money you have on hand, you can pay off the house, establish college funds, and leave your wife in good financial condition.

I don't want you to pay a full management fee of 1% or more. I was thinking of something like what you have. One firm, one statement, and maybe a few hundred a year at most for the service. At the same time, you want to pay enough to get access to a top notch broker. Not joe sales guy, but a gold team level or above advisor has a track record.

This is problematic to answer. My view is that having stock in your employer is too risky because you have too much wrapped up in one company. The rules of diversification says that you should dump all (or at least most) of the company stock. You don't want to be another Enron-like employee where the million dollar stock account goes down to being worth a buck-fifty. Since you have funds in both retirement and taxable savings, this isn't as bad of a risk. You don't lose it all if the company tanks. The other problem is that as soon as I say to sell all the company stock, it will probably have a great year, and you will come after me with an Uzi. Common sense says get rid of it (or reduce your holdings), but you have enough invested elsewhere such that it isn't a show-stopper issue.
Again, I cannot advise you here, I can only suggest what I might do if I found myself in your situation.
-john-
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John A. Weeks III           612-720-2854             snipped-for-privacy@johnweeks.com
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A car isn't an investment; it's an expense. Because of insurance and maintenance costs, it eats money even when you're not driving it. The same is true of owning a house. OTOH, I've found I can get by just fine without owning a car (between walking, taking public transportation, and using ZipCar); I'd have a harder time getting by without having a place to live. ;-)
Anyway, yeah -- I'm certainly happier having a modest home that is 100% paid for than having to fork over huge mortgage payments on a mini-mansion every month. Housing is most people's biggest expense, and once you're free of that mortgage payment it makes a huge difference in your cash flow situation.
-Sandra the cynic
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I use the definition of an investment to include a tool or machine purchased with capital to be used to earn a rate of return. That includes stuff like a punch press at a factory or a roller mill at a steel plant. In my case, and in many cases that I know of, I sell my time to make money. If I cannot get to the jobsite, I get no paycheck. As a result, a reliable working vehicle is an essential tool in my manufacturing operation where I convert time into pay. Yes, a little different way of looking at it.
My point was, investment or expense, is that you don't want to lose a $250,000 a year job over a beater car that won't start a few times a week, or makes you late for work on a regular basis. At the same time, one does not need to run a late model car lot in front of their house with a vehicle for every day of the week, and payment books to match. Just make sure that you have one reliable car so you don't put the big picture at risk over small change.
-john-
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Certainly, some people would have a very hard time earning their living without a car, either because it's the nature of their job or because they have chosen to live and/or work in an area with few alternative forms of transportation available. OTOH, it's getting easier and easier for folks to get by without owning a car, as telecommuting becomes more common and car sharing services like Zipcar are catching on.
Back when I got my first job out of college, I bought a new car and drove it to work even though it was easy walking distance, because I grew up in the Detroit area back in the 60's and 70's thinking that's what grown-ups did when they got jobs. It wasn't until my last "beater car" died of old age several years back that I realized that, hey, I don't really need a car anyway! I telecommute now; in my previous few jobs, even when I still owned a car, I walked or took public transportation to work.
Anyway, my point here is that telling folks they need to "invest" in a reliable car is 1970's Detroit thinking. Nowadays, not every working adult really needs to own a car -- and for those who don't, a car is an unnecessary expense, not any kind of investment. Moreover, choosing to live in an area where you need to drive 10 or 20 miles to get to the places where you need to go every day seems to me to be as pointlessly over-consumptive as buying the mini-mansion or late model car lot in front of it.
-Sandra the cynic
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This is about as ignorant a comment as I've read here. Most jobs that are really necessary to be performed cannot be done telecommuting. As a consumer, you should really learn where those things you consume come from, other than China. Most farmers actually need a reliable vehicle, for instance. Just going to the hardware store might be a necessity some days. Very few construction workers have jobs within walking distance of their homes, and public transportation probably doesn't get you to the construction site either. Those are two rather common jobs for whom a reliable vehicle is a necessity. Oh, maybe a doctor should have a car, too, just in case. Over-consumptive? Give me a break.
Elizabeth Richardson
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If you go back to my post, I did say that some people do have jobs where having a car is a necessary part of it.

Indeed, this is one example of a person who not only needs a vehicle in the course of actually doing their work, but is also most likely constrained to living in a rural area.

Here in the Boston area, construction workers are usually driven to the job site in a truck owned by the contractor. I'll bet a very large fraction of them don't have cars of their own.
FWIW, I'm an engineer, and in the almost 30 years I've been in this business I've literally *never* lived where I couldn't walk or take public transportation to work and to shopping and other places I need/want to go on a regular basis. This includes having lived in the Seattle, St. Louis, Salt Lake City and New Haven in addition to Boston. (You mentioned hardware stores -- there are two within a 10-minute walk of where I live now, plus a Home Depot a few miles away on a direct bus line.) I contrast that to how I grew up; my dad was also an engineer, but we lived in such deep outer suburbia that he drove about 40 miles each way to work every day. Living like that was my dad's choice, not a necessity of his job. It was a luxury, as much as the mini-mansion and parking lot full of late-model cars that he kept. 1970's Detroit thinking, as I said, when gas was cheap and the economy ran on the automotive industry. Nowadays the economy runs on the Internet, and the Internet has made it possible for a lot of people not to have to "go" to work at all.
Since I'm not tied to working in any particular location, I'm not sure I want to stay in Boston indefinitely, but there are plenty of other walkable cities with decent public transportation out there, as previously noted. The car-sharing services have really been catching on in many cities as well. Zipcar is super-convenient for the cases where I do need a car -- to get somewhere that public transportation doesn't go, to take the cats to the vet, to bring landscaping supplies home from the aforementioned Home Depot, etc. While I did own a car for many years even when I didn't need one on a daily basis, after having used a car-sharing service instead for several years now I don't really ever want to go back to being a car-owner again.
Anyway.... I'm not claiming that nobody needs to own a car -- only that it's not a given that *everybody* needs to own one. And if you don't need a car, it's not an "investment".
-Sandra the cynic
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On Sep 27, 4:46 pm, snipped-for-privacy@yahoo.com wrote: [snip]>

XOM and LMT have been good, BAC looks ok going forwards and has a nice yield - depending on when you bought. PFE has disappointed many, but the yield is nice, and I didn't look into IIBK but I guess you have. I'd suggest comparing your overall returns on those to your returns on mutual funds, and perhaps you would consider applying the same type of analysis you applied to the company your currently work for to find some more profitable investments for yourself. (I would prefer to take divs and skip the DRIP plans, personally, but it's not a huge difference.)
At a 4.5% mortgage, I'd keep the mortgage in place since you can take full advantage of the deduction to further reduce your costs of funds there, and since your return on capital is higher elsewhere. The home value may well recover within five years. And your stock holdings (mutual funds included) should recover as well.
The company you work for and a share of which you own sounds like it is doing well, and you sound like you are in a position to know. If at some point in the future the company should elect to go public, your returns could very well be an immediate and very large increase. So, indeed, I agree with your assessment that it is a bit of a wild card. As long as the company is doing well, and you see no real economic reason to sell, why not hold on to your ownership interest?
Just guessing that your after-tax savings run about 80k, and making a rough estimate of your future liquidated net worth after taxes in five years - I come up with about 2.7m, which should be enough to preserve capital and generate 100k before taxes. Your retirement home would be bought out of those funds. Many here on this forum have tried to future-estimate health-care and college costs. Twenty to thirty years from now, your health costs will rise, but will probably not overhwelm your budget. As Elle pointed out months ago, the bulk of health-care cost falls in the last three to five years of life, and thirty years from now, that chunk may run at 200k a year, each.
I see three points where a bit of weakness may be present in your plans: 1) Your kids' college costs are not paid for 2) You may find retirement at 45 is not as pleasant as you imagine (nothing to do is a curse - really, there's only so much golf you can play) 3) While you fall into the upper 5%, you may want to cushion your retirement even more than 2.7m less new home. Twenty years from now you may want more than 150k annual income. 4) You should do estate planning and help your kids when they need the most financial assistance, right after college
See if you can find a copy of Ben Graham's "Security Analysis" fourth edition (sixth is available easily) and learn about investing in common stocks. If you do retire early, you may find investing is a nice hobby that you get paid well for, at your level. E.g. What is your company's return on invested capital? Also, the Bureau of Labor Statistics has some demographics for income and net worth that you may find useful to identify yourself as far as standard of living goes. Also keep in mind that every 10k of pension or retirement benefits implies an underlying net worth of about 143k, assuming a 7% rate of return.
Hope the above gives you a useful viewpoint for comparison.
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On Sat, 27 Sep 2008 22:33:40 -0500, dapperdobbs

I really enjoy your posts, but it has been many moons since we could earn 4.5% risk-free "elsewhere". I suspect that most of the folks who have been investing while running a mortgage are in a serious hole.
(I say "risk-free" to keep this apples and apples since the choice we are discussing is investing vs. paying down/off a mortgage.)
-HW "Skip" Weldon Columbia, SC
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Not more than a year or so ago, CDs were near 5%. Rates seem to go up faster than they drop. There's a (mortgage) rate where I'd agree 100% with you, but it's a bit higher, maybe 6-7% as the grey area.
At 4.5% mortgage rate, 28% bracket, a return (based on 15% div and cap gain rate) of 3.81% or higher is the OP's breakeven. DVY (the iShares Dow Select Dividend ETF) is currently pushing a yield of 4.75%. If the market remains flat to down slightly for the next decade, this choice will break even for this situation. Not risk-free, but not using a long term return assumption (of 8-10%), either.
Joe www.blog.joetaxpayer.com
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Moons ==> Months. "a year or so ago" ==> 12 months. 12 months ==> 12 moons ==> "many moons".
Q.E.D.
BTW -- the single last year equates to (depending on when you're reading this) about a negative 25%, wiping out much more than your last year's worth of growth.
.
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Moons ==> Months. "a year or so ago" ==> 12 months. 12 months ==> 12 moons ==> "many moons".
Q.E.D.
BTW -- the single last year equates to (depending on when you're reading this) about a negative 25%, wiping out much more than your last year's worth of growth.
.
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dapperdobbs wrote:

This is interesting. Can you give me a cite or URL where this is spelled out? I have heard of a 12X mult of the yearly pension, but this exact figure is new to me.
Chip
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The thing is that pensions are more complex than such a simple rule of thumb can account for. To come a lot closer, I'd say to go get some quotes for current prices for immediate annuities. The values, you'll note, depend on variables such as current interest rates, your age, your sex, if it's a second-to-die (and then, on your spouse's age and sex, too, of course), if it's inflation indexed or not, etc.
But for what it's worth, a 65yr-old man in my state can get single-life income, no payments to beneficiaries, no inflation adjustments annuity paying around $675/mo for $100,000. That's $8100/yr, or about 8%.
The same annuity for a 45-yr-old man pays only about 6%, and even less if it's a woman instead of a man.
You'll probably need to talk to an insurance agent to get quotes for more complex situations (ie. specific companies, inflation-index, etc).
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On Sep 29, 7:14 pm, snipped-for-privacy@fractious.net wrote:

For a lifetime annuity purchased in a taxable account, the purchase cost is amortized over 360 months for under 56, 310 months for 56-60, 260 months for a 61-65 year old, 210 months for 66-70, and 160 months for 71 and older. That will reduce the taxes from the annuity.
-- Ron
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A quick annuity calculator here:
http://www.immediateannuities.com /
Some people might put a portionof their savings (say 1/3) in annuity to generate baseline living expenses and invest the rest more aggressively.
Annuities pay slightly more than 30-year treasuries (6%) if you are under 60, then increase with age.
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On Sep 27, 3:46 pm, snipped-for-privacy@yahoo.com wrote:

You probably won't have enough net worth to comfortably retire without working at age 45.

Your house has to be worth more than that. Get a formal appraisal and get a building inspector to find things that might need to be repaired so that you will be able to put it on the market.

That's good, don't pay off early unless your rate goes to 7% or more.

That's good. Remember that Social Security averages the highest 35 years of earning, so if you can stretch your working years out it will help. (I know SS doesn't pay that much, but it helps.)

You have a good balance between retirement and non-retirement savings.

As your net worth increases, you may not need LTC insurance, but you need it now.

Private companies are valued conservatively, so keep the stock until you leave your job.
Once you retire, medical insurance may be a major problem.
Rather than completely retiring, your wife and you should consider getting other work such as new company start-ups, research, or academic teaching.
How soon does your pension become vested, and when can you start getting your pension?
-- Ron
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PENSION? Surely you are kidding. Not only my company does not have any pension, none of my friends' companies have any pension. In fact, I don't know anyone younger than 45 whose job has pension (I know there are such jobs, such as postman, bus driver, etc.) But certainly none in the professional areas, in silicon valley.

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