Monthly Archives: October 2017

Why Get Life Insurance If You’re Financially Independent

Why get life insurance if you're financially independent and can self insure?The following post is sponsored by SelectQuote, based in San Francisco. They’ve been around for over 30 years, and I had the opportunity to sit down with their CEO for an hour to talk about his business and how they’ve managed to grow for so long. 

After giving folks a heads up about a common bait and switch tactic in the life insurance industry, I was asked by a number of people why I’d waste my money on life insurance premiums if I’m financially independent. It’s a good question that merits a deep dive because many of you will face the same dilemma once your passive income can cover all your living expenses or once your net worth reaches 20X your gross income. After all, you’re one of the few who care enough about your finances to read this site!

But I’m a little surprised why the folks asking couldn’t think of the many reasons why life insurance might be necessary after reaching FIRE. I guess if you haven’t reached FIRE, don’t have a family, or have never sat down with an estate planning lawyer, it’s hard to know.

Here are some reasons why life insurance is a good idea despite being able to self insure. You can click on the audio version if you scroll to the bottom.

Why Get Life Insurance After Reaching Financial Independence

1) Your estate’s value is still below the taxation limit. You may be financially independent, but your estate’s value might still be far away from the $5.49M limit per person. Anything you pass to your heirs beyond $5.49M per person gets taxed at roughly 40%. If you’ve got let’s say $3M left when you die, you can have up to $2.49M of life insurance get paid out tax free to people of your choosing.

2) Your estate’s value is above the taxation limit. Given you’ve got to pay a 40% tax on every dollar above $5.49M per person, your heirs might have a large tax bill if you are far beyond the limit. Leaving $8M as an individual would lead to roughly a $1,000,000 tax bill. A life insurance policy can help pay for the tax liability. High property taxes and ongoing maintenance costs are the reasons why many historically mansions are gifted to the state. Their heirs couldn’t afford to take care of them.

3) You believe you’ll die before the term limit is up. Despite all the blood work and physical exams, insurance companies can only come up with a best case guesstimate of when you will likely die. But despite all the actuarial data, you may know your health better than anybody. If you think you’ve got a greater chance of dying before the term limit is up, then life insurance becomes a better deal.

4) You want to provide liquidity. You may be leaving behind stocks, bonds, real estate, fine art, and collectibles, but they require an extra step to become liquid. Further, don’t assume that all your assets will neatly go to your heirs as your will directs. Probate court can tie up your assets for months or maybe years. Life insurance is a way of diversifying your giving.

5) You plan on setting up a life insurance trust. A life insurance trust is an irrevocable, non-amendable trust which is both the owner and beneficiary of one or more life insurance policies. A life insurance trust doesn’t count towards the $5.49M per person estate tax limit, provided it’s stood alone for a number of years. There is a limit to how much isn’t taxable, but you’ll have to check with an estate planning lawyer.

6) The premiums paid is worth the peace of mind. If you’re financially independent, the monthly premiums aren’t as big of a deal as they would be for someone who isn’t financially independent.  Therefore, it’s easier for a financially independent person to afford life insurance to provide greater security for his/her family. It’s the same logic as people who can pay cash for a home taking out a mortgage because the interest rate is so low, compared to the person with poor credit who needs to take out a loan and has to pay a much higher rate.

7) You have a large amount of debt. You might have a massive net worth, but if you also have a large amount of debt, your net worth can disappear quickly during a downturn. The time to sell anything is during a bull market, not a bear market. Think about how many wealthy people had to declare bankruptcy due to being over-leveraged. Further, if you want to hold onto your the assets left behind for sentimental reasons or because you believe its a good investment, life insurance will help.

Life Insurance Is A Good Deal

At some point, you truly may be sufficiently wealthy to not need life insurance. Maybe that net worth is over $10+ million per person, it’s an individual decision. But for the vast majority of us with dependents, having life insurance is a good idea. You can always reduce your coverage amount or cancel your policy as your wealth grows. That’s what I plan to do.

I like knowing that my wife and son will get an extra million dollars in case I’m stuck in a ravine somewhere with my car on fire. I like that life insurance will pay for a good portion of my estate taxes. It also makes me happy knowing that my son will never starve, even if my wife ends up spending everything or getting bilked out of everything I leave her through a revocable living trust.

Life insurance is relatively cheap for people on the healthier end of the spectrum. You do not want to wait until you have some type of illness before getting a quote. Just having something as common as sleep apnea can cause your premiums to quadruple.

If you’re middle class, then life insurance is even more valuable to your dependents than if you are rich. And if you’re wealthy, the cost of the premiums are such a small percentage of your income that it makes life insurance also worthwhile.

Providing peace of mind to your loved ones is a major reason why people buy life insurance. It’s a universal factor for people of all income levels, even those who are financially independent. SelectQuote, America’s No. 1 term life sales agency, takes the time to talk with you and listen to your specific needs to find the policy that’s right for you and your family. Working with only highly rated life insurance companies, SelectQuote shops multiple plans to help you deliver peace of mind to your family. Get a free quote from SelectQuote today. 

Readers, what other benefits are there to having life insurance after reaching financial independence that I may have missed?

The post Why Get Life Insurance If You’re Financially Independent appeared first on Financial Samurai.

How To Stop Worrying About Your Child’s Future And Start Enjoying The Journey

By far the best reason to own and operate a business

Ever since publishing, The Fear Of Screwing Up Our Kids As FIRE Parents, I’ve been brainstorming how we can give our kids everything without giving them everything. The worst thing we can do as parents is take away our children’s sense of accomplishment. I pity the kid who starts off driving a BMW to school instead of walking or biking.

But recently, I’ve been losing enthusiasm for writing because I’m often too tired due to full-time fatherhood. If I had a mundane job that required little thinking, work might be easier. Besides, how hard is taking care of a child if you’re gone for 12 – 15 hours a day, right?

Unfortunately, even as a stay at home dad with an online business, it’s difficult to be creative when you lack sleep. It’s as if creativity uses a different chemical in the brain that is finite in supply.

Hitting the 10-year business anniversary mark in 2019 can’t come soon enough. After that, I’ve considered becoming Keyser Söze, never to be seen or heard from again.

But I realized instead of lasting until 2019, I’ve got to last at least until 2042. Why? Because the absolute best benefit of owning a business is creating a life safety net for our children. Not only does a business provide insurance they don’t fall through the cracks, a business produces a perpetual teachable moment for all our kids to apply what they’ve learned in the classroom to the real world. 

The Real World Is Brutally Difficult

Imagine spending almost $500,000 in private K-12 tuition only to see your child go to an average university anybody could have gotten into. Because the school is average, he will likely land an average job or no job. Now imagine the best case scenario where you send your kids to public grade school and they get into a top rated university. You still have to pay out the wazoo, yet there is no guarantee they’ll get a great job.

Related: What If You Go To Harvard And End Up A Nobody?

The world is now a hyper competitive place. Even if your child is “perfect,” s/he will have a difficult time getting ahead. But what if they have some challenges? Here are some things you may worry about for your child that can be overcome by owning your own business:

  • Your child may be a minority who will face racial discrimination her entire life
  • Your child may be a minority who is required to score higher on standardized tests to have the same chance of getting into a university
  • Your child may have a learning disability
  • Your child may have a physical disability
  • Your child may get into an accident, resulting in a disability
  • Your child may be small in stature and get picked on by bullies because their parents are terrible
  • Your child may be unattractive, even though you think he’s the cutest ever
  • Your child may get in trouble with the law
  • Your child may get suspended or expelled from school

If you own a business, you ensure that your child will always have something interesting to do no matter how much they try and fail on their own. Getting straight A’s or going to an elite university no longer matters as much, so long as they are learning.

Further, you don’t have to wait until your child graduates from college before introducing her to every facet of your company. You can start in elementary school or middle school so that by the time she goes to college, she’ll have a much better idea at what she wants to study.

One of the biggest problems with education is that we learn a bunch of subjects and forget everything we learned years later because we don’t see the relevance, nor do we apply what we learn to the real world. Therefore, we’re only teaching our children how to listen, follow instructions, study, and take tests. What a shame to only create an army of “yes sir, yes ma’am” in society.

When I went back to Berkeley for business school part-time, it was amazing to use my professors as business consultants for my job in finance. Suddenly, theory turned into application, and education became super impactful. The same can be said for getting your child involved in your business.  Continue reading

The 10 Best Reasons To Start An Online Business

The 10 best reasons to start and operate a businessStarting a business changed my life for the better. But I dilly dallied for a couple years before starting Financial Samurai in 2009 because I wasn’t sure whether I’d be able to commit to a long term plan. I remember hearing that it takes 10 years to become an expert in anything, and I didn’t want to start something if I wasn’t going to follow through. When the financial crisis hit I figured it was now or never.

Now that I’m 8.5 years in, there’s not a day that goes by where I’m not thankful for having this site. I understand that a lot of you will say that you don’t have a good business idea or don’t have a clue as to how to start. The reality is I had no business idea either

But now, things are so much better than having a day job. The key is to just launch  and then figure things out as you go. You can afford to do so nowadays because the cost to launch and maintain is so cheap. Good luck doing trying to figure things out when you have to pay $5,000+ a month in rent to run a retail store or restaurant!

Let’s look at the top 10 benefits of owning your own business in Part I of this two part series.

The Top Reasons For Running Your Own Business

1) No Boss: The older you get, the less likely you will tolerate someone telling you what to do. By the time you’re in your 30s, you’re already a master at your job. You’ll also have a lot more money. Thus, you won’t accept instructions as easily because you don’t need the money as much. Further, you’ll also have the requisite work experience to get another job for likely more money and more appreciation if a change of scenery seems advantageous. Even if your boss is awesome, being your own boss is 10X better.

Related: How To Deal With A Micromanager Without Killing Yourself First

2) Master Of Your Time: Sunday evening is always a great time because you’re reminded there’s no need to set an alarm clock. You get up when your body naturally wants you to get up. As a result, you’re happier, healthier, and way less stressed than being forced to wake up by a certain hour because you have to be on a call or in the office by a certain hour. You can take a three hour break in the middle of the day to watch a baseball game if want. Afternoon siestas are no problem either. By the time your kids get home from school, you’re refreshed and can spend as much time with them as they’d like before they go to bed. Then you can work in the evenings if you wish.

3) Much More Efficient: I always knew that working for a large corporation wasn’t very efficient because there were too many meetings about meetings. To get something done requires so much bureaucracy. Many people I know simply spend hours surfing the web at work (thank you!) because they’ve either already finished with their work or are waiting for their managers to catch up. It’s no surprise that startups with no resources constantly innovate much quicker. I’ve now experienced countless examples of business development deals that have taken 3+ months to finalize, which would have only taken me one hour if I was on the other side of the table. Three hours of entrepreneurial time is like 12 hours of corporate day job time.

4) No Commuting: Commuting is one of the biggest wastes of time and money. Not only are you more stressed by the time you get to work, you might also get in an accident on your way there as well! Unlike those who smartly run internet businesses, not every entrepreneur gets to have no commute. But at least when you’re your own boss, you can decide guilt-free when to work from home, when to go to the office during non-rush hour traffic, and when to leave at more convenient times.

5) Expense Deductions: Although it’s nicer to have a corporate card that pays for everything, it’s still nice to have expense write-offs so you can have more freedom to spend however you wish. For example, instead of having to spend a weekend in a conference room at your company’s corporate offices where they serve you free rubber chicken sandwiches, you can write-off a semi-annual team building trip to Hawaii. Besides expense deductions, running an online business costs a fraction of what it costs to run a bricks and mortars business, which much more scaleability.

6) All The Income And All The Equity: As an employee, you earn a salary, and maybe get a tiny amount of equity (the vast majority of employees get no equity). As a business owner, you not only earn what your business makes, you also hold a massive portion of the equity that can be sold for multiple times revenue, operating profits, or earnings in the future. The only way to next level wealth is to own equity in a business. As an employee, you are making someone else rich. As an owner, you are directly making yourself rich. Operational leverage is huge with an online business. Please study this chart carefully:

Wealth breakdown including business equity

The wealthy own businesses. The non-wealthy have all their wealth tied up in an illiquid primary residence, if they’re lucky.

7) More Correlation With Effort And Reward: Most people simply want a fair shake. But working for someone else requires playing politics. People promote and pay people they like and trust. This is why there are always questionable performers who rise to the top. The larger the corporation you work for, the more politics you must play. If you are the business owner, you don’t have to play any politics. You decide what’s best for the business. There’s nothing better than getting rewarded for hard work.

8) Potentially Lower Tax Rates: Expense deductions will lower your effective tax rate. You just don’t want to take on superfluous expenses because that would be counterproductive. There is a chance the Trump administration may lower the small business pass through tax rate to that of the corporate tax rate. In which case, small business owners may see 5% – 15% lower income taxes for the same income earned by W2 earners.

Related: How To Pay Little Or No Taxes For The Rest Of Your Life

9) Higher Pre-Tax Retirement Contributions: Business owners can save up to $55,000 in their Solo 401k for 2018, provided they have an operating profit of at least ~$182,000. Business owners who elect to go the SEP-IRA route can also contribute $55,000 a year pre-tax, provided you pay yourself ~$220,000+ in income. As an employee, you can only contribute up to $18,500 max in your 401k or $5,500 in your IRA (if your income is low enough). Anything more depends on your employer’s matching program.

10) Location Independence: Being able to run your business anywhere in the world is truly liberating. You can geo-arbitrage by moving to a cheaper country if you wish. If you don’t want to go that far, you can always relocate to the heartland, where housing is often one third the price of coastal city real estate. Vacations are no longer limited to just two or three weeks. There’s nothing more fun than seeing the world while making money.

Business Ownership Provides Options

How much you can make online a month

With all these great reasons, hopefully everybody will now start their own online business, even if it’s just a side hustle while you have a day job. You just never know what the future holds if you take action. Two years after starting Financial Samurai, I realized I could leave a well-paying banking job. Heck, even one site I hardly ever update is generating a passing ~$500/month for the past five years.

As a business owner, you will feel more proud of what you produce because before you, there was nothing. Every time you see your product in the store or in the news, you will beam with pride. It’s rewarding to see an FS article hit the front page of Yahoo. And it’s surreal to see hundreds of thousands search results when you type “Financial Samurai” into Google.

But the reality is that 97% of you won’t take action. This is an irrefutable truth supported by millions of data points. It’s much easier to do nothing, even if you aren’t satisfied with your lifestyle.

So for those who need extra motivation to change, stay tuned for Part II of this series. I’m confident after reading Part II, the non-action rate will decline by 1% to 96%! Just like investing in real estate and stocks, 10 years from now, you’ll be happy you started today.


How To Build A Stronger Brand For Your Business Or Career

How Much Can You Really Make Online

Readers, what are some other benefits and reasons for owning a business I haven’t touched upon? What stops you from starting a side hustle when people are starting the dumbest businesses everyday, raising tons of money, and sometimes getting rich?

The post The 10 Best Reasons To Start An Online Business appeared first on Financial Samurai.

What A Potential Real Estate Crowdfunding Loss Looks Like

My first potential real estate crowdfunding lossDo you ever feel like your faith is being tested? I’ve been feeling this way a lot more recently. For example, I always get to the bus stop right after the bus leaves. Yet every time I drive down the hill because I’m sick of waiting 20 minutes for the bus, the bus drives by.

I recently published The Worst Landlord Horror Story Ever, a story about a reader who bought a Las Vegas residential property several years before the bottom fell out in 2008-2009. He went through hell dealing with maintenance issues and suspect tenants. Eventually, the complex started accepting Section 8 housing where the government would subsidize 80% of the rent to lower income earners. His housing complex of 157 units turned into a drug infested war zone. Only after buying two more units at the bottom of the market did the reader finally break even after 13 years.

So it is with complete surprise that I got an e-mail the very next week notifying me my real estate crowdfunding fund invested in a 168-unit garden-style apartment complex in Las Vegas! This was also after I decided to invest another $250,000 in the fund, bringing my total up to $500,000.

Here’s the e-mail,

“The Fund’s Investment Committee has approved a $600,000 preferred equity investment in Vernazza Apartments, a 168-unit garden-style apartment complex in Las Vegas, NV, only 3.5 miles from the Las Vegas Strip, 4.5 miles from McCarren International Airport and 8 miles from downtown Las Vegas.

The Property was originally constructed in 2001 as an affordable housing development. In 2016, the Property was purchased by the seller under a “qualified contract” that released the Property from its affordability requirements. Although technically a market rate property, residents in occupancy during the conversion maintain protected below market rents for a period of up to three years, and as of May 2017 only 54 of 168 units (~32%) had rolled over to market rate units.

The Nathan Family Office and Madison Residential (together, the “Sponsor”), see an opportunity to purchase the Property and roll the remaining below market units to market rate units, especially after restrictions are lifted in October 2019.

The Nathan Family Office and its management partner, Madison Residential (“The Sponsor”) has successfully raised capital on the RealtyShares platform for three prior deals, and all payments for those investments are current. For Vernazza Apartments, the Sponsor is contributing $3.5mm of capital to the deal (100% of JV equity), putting its own money at risk before any losses would be incurred by RealtyShares. Additionally, the Sponsor is expected to set aside 28 months of preferred current payments in a RealtyShares controlled account.”

My heart sank when I read that not only was this a Las Vegas apartment complex, it was also an affordable housing development. I’ve got nothing against affordable housing from a social good perspective. Rocketing housing costs are making it difficult for everyday people to live.

But as an investor who is hell bent on staying financially free due to his investments, I worry about investing in an affordable housing complex for all the reasons my landlord horror story mentioned and the fact that in order to get the target 13% IRR, the Sponsor is relying on turning the remaining 114 units (68%) into market rate housing. It remains to be seen whether the tenants will simply accept the rent increase, move voluntarily, or be evicted with potential buyouts.

RealtyShares Las Vegas deal

Here Are The Investment Highlights and Risk Mitigants

RealtyShares Vegas Investment

Target IRR: 13%

Demonstrated Rent Increases: As of the May 29th rent roll the seller has rolled 54 units to market. Of those 54 units 24 have been renovated. Leases executed in the last 60 days have achieved the following:

1) Unrenovated market rate units have leased at an average $112 (~10%) per unit over affordable units, 2) Renovated market rate units have leased at an average of $188 (~24%) per unit over affordable units.

Attractive Basis: The subject property is being acquired off-market and was sourced through a relationship of the Sponsor. The Sponsor believes that the $108k per unit price basis is well below comparable assets of a similar 2000 vintage. The sales comp summary included indicates that the purchase is 15.2% below the comp set on a per unit basis and 13.7% on a psf basis. It should also be noted that the average age of these comparable properties is 5 years older than Vernazza.

One thing to note from my landlord horror story is that an institutional investor picked up their 157 units during the financial crisis for roughly $60K/unit, but I’m not sure if these units are like for like since the Vernazza is newer.

Strength of Submarket and Primary Market: The Property is located in the Spring Valley submarket of Las Vegas, which reported a mean vacancy rate of 3.2% in Q1’17 across all property classes per REIS, and average vacancy is expected to decrease to 2.6% by 2021. The included proforma assumes a 5.5% stabilized vacancy for conservatism.

Alignment of Interest: The Sponsor will have approximately $3,500,000 of its own money at risk before losses would be incurred by RealtyShares.

Reserve for Preferred Payment: At closing, the Sponsor is expected to set aside 28 months of preferred current payments in a RealtyShares controlled account.

Population Growth: According to ESRI, within a 3 mile radius of the Property, the population is forecasted to grow by 6% over the next 5 years translating to over 8,000 new residents in the near vicinity.

Access to Local Amenities: The Property is located in close proximity to numerous amenities and employers not the least of which is the Las Vegas strip located 3.5 miles due East.

RealtyShares Las Vegas Property Location

Setting Low Expectations

Perhaps I’m being too pessimistic on the deal given the Sponsor is putting up $3.5 million of their own capital before investors lose money. The catalyst is very clear: a “qualified contract” that releases the Property from its affordability requirements by October 2019.

But given the risk involved, I’m disappointed the target IRR is only 13%. A target IRR of 18% seems more appropriate. For reference, a 13% IRR is lower than all the previous target IRRs for projects in the fund that aren’t investing in affordable housing.

But here’s the thing. The seller is selling the property to us for $18,200,000 after they had bought the property for only $11,530,000 in August 2015! I’d be selling too if I could make a 58% return on my money in two years. Yes, the sellers had to spend money renovating some of the units, but they couldn’t have spent that much since 68% of the units are still below market rate units. Therefore, even if the seller loses $3.5M of its equity financing, they would still make a 27.4% gain in two years ($3,117,000). It is the seller who is playing with the house’s money, not us.

Housing prices

I personally would not have invested in this deal because I’m trying to stay away from coastal boom bust cities like Las Vegas, the #1 city that got crushed during the housing crisis. The other cities that got hit the most were Phoenix, Fort Lauderdale, Miami, West Palm Beach, and Tampa according to Trulia. I’ll be happy if this project just gives us our money back (0%) return in three years.

Now you know the downside of investing in a fund. You can do all your research, but once you hand over your money, it’s up to the investment committee or fund manager to decide how to best invest your money. Sometimes their investments won’t align well with your beliefs, and you’ve got to be OK with it.

My problem is that I’ve been hands on with all my investments my entire life. Therefore, it’s hard for me not to watch where every dollar goes. But as a 40-year old father who has better things to do than pick every single investment, I need to outsource my investing to others who do have time and expertise.

The more I can let go, the more I can focus on enjoying life to the fullest. And who knows? This Las Vegas investment might very well return 40% after three years as targeted. I’ll be sure to let y’all know if it does! And if it’s a big bust, I’ll be sure to let you know too. At least this is only one of potentially 10 – 20 investments within the fund.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.


Buy Utility, Rent Luxury: The Real Estate Investing Rule To Follow

Focus On Trends: Why I’m Investing In The Heartland Of America

What do you think about this Las Vegas multi-family property investment? Do you think it will return a 13% IRR for three years, or do you think it’s going to be a money loser? Anybody from the Las Vegas area want to do a drive by or tell me what they think about the apartment complex? Have you noticed good deals getting harder to come by in real estate crowdfunding land?

The post What A Potential Real Estate Crowdfunding Loss Looks Like appeared first on Financial Samurai.

The 401k Maximum Contribution Limit Finally Increases For 2018

401k Maximum Contribution For 2018 Rises To $18,500401k savers rejoice! For 2018, the maximum employee 401k contribution will increase by $500 to $18,500, from $18,000 in 2015, 2016, and 2017. Meanwhile, the employer contribution limit also gets a $500 increase to $36,500, bringing the total annual 401k contribution limit to $55,000 according to an IRS announcement.

For participants ages 50 and over, the additional “catch-up” contribution limit will stay at $6,000, a level that has stayed the same since 2015. It’s interesting the IRS doesn’t want to give older folks an incentive to save more.

Although your 401k alone will likely be insufficient to meet all your retirement expenses, if you max out your 401k every year, you will likely far surpass the median (~$18,000) and average (~$200,000) household retirement savings held by those between the ages of 56 – 61 today.

Historical Maximum 401k Contribution Limits (Employee + Employer)

Here’s an updated chart with the historical maximum 401k contribution limits. Notice how much more the employer can contribute to your 401k than the employee. When you hear about employer profit sharing or employer 401k matching, those numbers can now go up to $36,500. It all depends on how profitable and generous your employer is.

For example, those employers who are offering a 100% match up to $5,000 of employee contributions still have $31,500 they can contribute if they truly wanted to. From 2001 to 2012, I worked for a pretty generous employer who during my final five years contributed over $20,000 a year in profit sharing.

Historical 401k Contribution Limits Up To 2018

For those of you who are now entrepreneurs, freelancers, or work for money-losing startups, not having a 401k or an attractive company contribution is a real opportunity cost. Make sure you calculate these lost benefits before you leave your cushy day job.

For entrepreneurs and freelancers, however, not all is lost when it comes to the 401k because we are allowed to contribute to a Self-Employed 401k (aka Solo 401k) up to the $55,000 maximum if you have enough operating profits. A self-employed person has the right to contribute up to $18,500 to their 401k as the employee, and roughly 20% of the operating profits (revenues minus expenses). Therefore, to contribute the maximum $55,000, the entrepreneur needs to earn at least $182,000 in operating profits.

Here’s a more detailed write-up about how to calculate how much you can contribute to a self-employed 401k plan. Although it’s great an entrepreneur or freelancer can contribute $55,000 in tax-deferred profits to retirement, remember it’s all their money to begin with. Whereas if you´re an employee working for a company, it’s free money.

401k Savings Guide By Age

The below is my updated 401k savings guide by age to include various contribution amounts, various contribution limits, company profit sharing amounts, asset allocation levels, and historical stock market and bond market returns. These are all rough estimates to give readers a target to shoot for.

401k savings targets by age

If you are “unfortunate” enough to only work until age 35 at a company with a 401k plan, then you can shoot for a 401k savings range of between $150,000 – $500,000. If you are fortunate enough to work for 38 consecutive years at a company with a 401k plan until you’re allowed to withdraw penalty-free, then your target savings is $750,000 – $5,000,000.

As a Middle Age Saver (40 years old), I started my 401k contribution in 2000 when the contribution limit was just $10,500. Therefore, I’m more focused on the Mid End column to get to $2,500,000 by the time I turn 60. Even if I contribute $35,000 a year for the next 20 years to my Self-Employed 401k plan, I’ll need the stock market and bond market to rise by at least 3% a year to get to $2,500,000. In other words, when it comes to investing, there are no guarantees. You must take a certain level of risk.

The “Younger Age Savers Or High End” column is the 401k savings potential for those just out of school and who have generous employers. In every scenario, an individual who contributes for 38 years will become a millionaire. Unfortunately or fortunately, not everybody will work for such a period of time.

Motivation For Maxing Out Your 401k

I really hope everybody who has a job that provides a 401k plan takes full advantage. To not do so is completely foolish. Below is data from the Bureau Of Labor Statistics regarding the latest participation rate in defined contribution plans like the 401k.

A 44% participation rate is not bad, but the number should be 100% if you are a Financial Samurai reader. Further, you can bet that only a minority of the 44% max out what they can contribute to their pre-tax retirement savings plan, otherwise, how else would you explain only a ~$18,000 median and $200,000 mean average retirement savings amount for 56 – 61 year olds. My hope is for 100/100, meaning every reader hear maxes out their plans for as long as you are able.

Defined Contribution Plan 401k Participation Rate

Here are some thoughts to get you motivated to max out your 401k.

1) Remind yourself a 401k is only one leg of the retirement stool that is already broken. The other two legs of the retirement stool are a pension and Social Security. According to the Bureau of Labor Statistics about 22% of full-time private industry workers have a defined pension benefit compared to 42% in 1990. Although most public sector employees still get pensions, public sector employees account for only around 10% of the population. In other words, most people don’t have pensions anymore.

As for Social Security, the realistic calculation is that when eligible, we will still all receive Social Security checks, but at 70% of what is currently promised if nothing is changed. Given most people don’t have pensions and Social Security won’t be paid in full, the 401k is an integral part of your retirement plan.

2) Calculate a budget based on a $18,500 reduced gross income. Nobody really sits down and writes out their expenses. We’re either afraid or lazy for some reason, yet we can spend hours doing research on our next big screen TV or laptop. But for your own sake, take your current income, subtract $18,500, and multiply it by one minus your effective tax rate to calculate your disposable income e.g. $100,000 – $18,500 = $81,500 X (1-25%) = $61,125 after taxes and 401k max. Divide the annual income by 12 to get a monthly disposable income figure and work your budget from there. The bigger the buffer you can have from spending all your disposable income, the better.

3) Make your contributions automatic. As soon as you make your maximum contributions automatic, you will adapt your lifestyle to your paycheck. Automatic contributions will save yourself from yourself. It’s exactly like the government withholding federal income taxes each paycheck because they know you won’t pay your full tax liability at year end. Making your contributions automatic will make savings so much easier. You will wake up 10 years from now and be amazed at how much you have accumulated.

4) Envision your 60 year old self working the cash register at McDonald’sOne of my biggest motivators for saving and paying down debt was seeing senior citizens working minimum wage jobs. While I admired them dearly for continuing to work, they also scared me straight into saving more because I didn’t want to be them one day. Instead, I wanted to be relaxing on a beach with a Mai Tai in one hand watching the sunset with my lovely wife. The more we can envision ourselves in poverty, the more incentivized we can be to max out our 401k.

5) Do it for your family. If you’re not willing to get in shape, save aggressively, and invest wisely for yourself, then at least do so for your family. There’s not a day that goes by where I don’t think about ways in which to give my son and my wife a better life. When you know you’ll likely die before your spouse and child, you’ll start focusing on your finances much more seriously.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

Diversify Your Retirement Savings

Once you start contributing like a champ to your 401k, run your 401k through a 401k fee analyzer to see how much in fees you are paying. I discovered I was paying a whopping $1,748 in annual 401k fees when I thought I was paying maybe $200 a year. Over a 20 year period, my fees would climb to ~$90,000, provided my portfolio also increased as well.

How To Reduce 401k Fees

For those who seek to retire before 60, it’s important to also to save and invest as much as possible in your after-tax investing account. Ideally, your goal should be to grow your after-tax investment account larger than your 401k by the time you’re ready to retire. Make your after-tax investment contributions automatic with each paycheck as well.

The chance of you working for 38 years at a company with a 401k is not high. Therefore, you shouldn’t rely on your 401k for retirement. Instead, look at your 401k as a bonus you’ll get to use once you pass the age of 60. I plan to have over $2,500,000 in bonus money in 20 years. How about you?



The post The 401k Maximum Contribution Limit Finally Increases For 2018 appeared first on Financial Samurai.

The Fear Of Screwing Up Our Kids As FIRE Parents

The fear of screwing up your kid as a FIRE parentEvery other weekday, I walk by my 27-year-old neighbor playing catch in the middle of the street with his 20-something-year-old friend. He’s a nice guy with an intricate tattoo of a dragon on his right throwing arm. I saved his beat up Subaru Outback from getting a $120 street cleaning ticket one day, so he’s always super friendly.

Although Jake is a nice guy, it doesn’t seem like he has a job or any ambition beyond just having fun. When he’s not playing catch in the middle of the day, he’s off to Tahoe with his buddies for a week at a time. When he’s not snowboarding, he’s traveling for a softball match. It’s a great life. I just wonder whether his parents deprived him of his potential because he’s still living with them.

The truth is, I’m afraid my son will turn out to be like Jake or my other 26-yo neighbor who lives at home with his parents and wakes up the street every morning with the gurgle of his new motorbike. When I asked his mom what he’s doing now that he’s graduated from college, she shrugged and told me, “he’s still trying to find himself.” Fair enough. At least he’s got a sweet sports car and motorbike to take him wherever he wants to go.

A FIRE Parent’s Warped Reality

As two stay at home parents who live unconventional lives, we feel our financial independence may end up screwing up our son’s life. After all, being raised by middle class and lower middle class parents, and going the traditional route ultimately led us to FIRE in our 30s.

I now approach life not caring about following the rules anymore. Don’t want to go to college? No problem. Just take classes so you can be an expert in something. Want to try your hand at online entrepreneurship? Sounds good! Your old man can give you some good pointers. Don’t want to get married? Wonderful. Use the annual $10,000 in marriage penalty tax savings to go see the world.

For those of you who’ve built some multi-generational wealth, who have FIREd, or who work non-traditional jobs, let’s talk about what our lifestyles might do to our kids.

Educational Attainment

As a tennis coach for a private high school in SF, I’ve begun to learn about the intricacies of the private school system. You’re supposed to apply to a feeder pre-school before your child is born in order to get on the track to one day get him/her into the very high school I’m coaching at.

But before applying to my high school, you’ve first got to get your kid into one of the selective K-8 private schools after completing pre-school. The admissions process includes an evaluation of how your kid plays with others as well as an aptitude test. Talk about putting your kid through the gauntlet early on!

The thing with going to an elite private high school is that not every alumni gets into a prestigious university. In fact, only the top 10% of kids get into the most selective universities. Everybody else gets into a top ~50 school, which is great. But so do many kids who go to free public high schools.

As a public high school graduate who attended a public university and got a front office job at Goldman Sachs in NYC, I 100% believe in the value of a public school education – so much so that I have ZERO stress about trying to get my son on the private school track. If he doesn’t get in, he’ll go to public school, hooray!

But because I hang out with so many friends who do send their kids to private school, they give me stress about whether or not I’m doing the right thing being so lackadaisical. I think, Will not sending my kid to private school, even though I can afford it, deprive him of an opportunity to reach his full potential? This stress is part of the reason why I’m considering leaving San Francisco.

While at GS, we routinely rejected kids from Harvard, Princeton, Yale, Stanford, Columbia, Cornell, UPenn, Brown, and other great schools for various reasons. One consistent reason was that the rejects were all one dimensional, uncharismatic geeks who didn’t know how to communicate. Therefore, if you can’t get a good job, what’s the point of spending all that money, working so hard, and stressing all those years? The more prestigious your education, the higher the expectations.

I’d rather have my kid attend a lower tier school and surprise on the upside. Your mannerisms, communication skills, affability, work ethic, and connections are more important than where you went to college. You can work on all these things without ever attending a top ranked university.

Besides, in 18 years, how important will a traditional college degree really be if everything can be learned on the internet for free? There are speciality schools popping up everywhere now that teach kids hard skills. Over time college may eventually become a relic.

Career Choices

I firmly do not care if my son becomes a doctor, lawyer, banker, venture capitalist, private equity investor, strategy consultant or some other traditionally high paying occupation. I’ll be proud of him, whatever he does. I just want him to be happy and find someone who cares about him as much as I care for him and my wife.

As someone who worked in finance for 13 years and has written about money for more than eight years, I clearly see how money and prestige does not automatically lead to happiness. I’ve written about this topic over and over again with examples such as:

Scraping By On $500,000 A Year: Why It’s So Hard To Escape The Rat Race

Do You Want To Be Rich Or Do You Want To Be Free

The Unhealthy Desire For Prestige Is Ruining Your Life

The only professions I feel are incredibly honorable are those that help other people. Being a doctor or a teacher are two occupations that come to mind. Working at a non-profit that helps foster children is another.

I can’t believe how much education doctors have to go through to be who they are. To be able to heal and provide solace are wonderful skills that cannot be over-appreciated.

Given there’s nothing more precious than our children, I believe teachers aren’t given enough credit for what they do. A good teacher can make all the difference in the world.

Mom and dad have already sacrificed themselves for money. Thus, after graduation we’d like to have our son focus on service to others.

A Sense Of Achievement

There’s nothing better than working hard and then achieving your goals. We want to instill in our son a work ethic that allows him to appreciate the correlation between effort and reward. To give him everything would be an absolute travesty, because we never fully appreciate what we don’t earn.

I fear we won’t push our son hard enough to achieve his maximum potential. Instead of spending at least three hours a night on homework like his mother and I did in high school, let’s just have fun since he’s going to forget everything anyway! If we were struggling, surely we’d like for him to go to a great school and get a high-paying job so he can not only take care of himself and his future family but also provide us some financial relief as well. But we don’t have such anxiety.

We’re going to try our best to raise a grounded kid who appreciates the value of a dollar. But I know it’s going to be a challenge because our son will wonder why his parents are the only parents who never have to go to work. He’ll wonder why his old man is at every soccer match, every orchestra recital, every play, and every debate. He’ll see that all I do is type on a keyboard for several hours a day and that’s it!

I remember clearly as a 23-year-old wanting to make as much money as possible so my mother could retire earlier. She was often stressed at work and even consulted me on whether she should retire before the age of 60. I told her to not waste one more second at a job she disliked. Her pain motivated me to aggressively save in order to let her be free sooner. When she retired before 60, it was one of my proudest moments.

Is It Time To Stealth Wealth Our Kids?

Deep down I find solace knowing that no matter what, our son will be fine because we’ll always be there for him. But I wonder whether it’s a good idea to Stealth Wealth our son before he understands what wealth means.

One of my friends lives in a $18 million mansion and flies private with his kids. How the heck are his kids going to be happy with anything less than the best once they get jobs? Will they be willing to live in a dumpy room in an overpriced SF apartment because they only make $50,000 a year? Hard to imagine.

We already live in a middle class neighborhood in a very humble home that’s less than 2,000 sqft. All we’d really have to do is get rid of the SUV before he’s seven years old and drive a Honda Accord instead. Mom doesn’t wear jewelry, and I just wear jeans and sports clothes.

We want our kids to have it better than us. And I’m sure our kids want to see if they can one up their parents. But if you retired in your 30s and live a life of leisure, that’s going to be damn hard to beat.


No Wonder Why Millennials Don’t Give A Damn About Money

A Massive Generational Wealth Transfer Is Why Everything Will Be OK

How To Get Your Parents To Pay For Everything Even After You Become An Adult

Confessions Of A Spoiled Rich Kid

Readers, anybody fear screwing up their kids’ lives due to the lifestyle you lead today? How do we instill in our children an appreciation for hard work if they come from a financially well off family? What are some of the action steps you’ve taken to ensure your kids don’t grow up to be deadbeat losers?

The post The Fear Of Screwing Up Our Kids As FIRE Parents appeared first on Financial Samurai.

Net Worth Benchmarks To Ensure Proper Growth Over Time

Net worth benchmarks to ensure it grows on trackWhen I was in my 20s and early 30s, my goal was to always grow my net worth faster than the S&P 500. This is easier to do the less money you have thanks to aggressive savings. Now in my 40s, my goal is to try and earn a return equal to 3X the risk-free rate of return. With the 10-year bond yield at ~2.35%, the target return is roughly 7%.

The more money you have, the more risk averse you tend to become. At least that is my experience. Further, there’s no need to swing for the fences when hitting singles and doubles can provide for a healthy lifestyle, especially if you’ve already escaped the rat race.

For example, you can invest your entire $300,000 portfolio in the S&P 500 to earn potentially $45,000 (15%) or lose $45,000 one year. Losing $45,000 is not a big deal if you’re making a decent salary and are willing to work for many more years. But if you have a $5,000,000 portfolio and are approaching retirement, shooting for a 15% return is unnecessary because if you can comfortably live off $300,000 a year, then you only need a 6% return.

Some people have tried to make me feel bad about a 10% YTD return on my public investments when the S&P 500 is up 14% YTD 2017. But given my net worth benchmark is roughly 7%, I’m happy with the returns, especially since my private investments are doing well. I was happy when my net worth was 60%+ lower five years ago, so I’m still happy today.

In this post, I’d like to review various benchmarks you can follow to gauge your net worth performance.

Benchmarks To Gauge Net Worth Performance

* The S&P 500 Index. If you live in America, the easiest and most common benchmark is comparing your portfolio’s return with the 500 largest stocks in the country. The S&P 500 represents 14 different industries, thereby thoroughly representing the economic health of our nation. Wherever you live, just use your country’s largest stock index as a benchmark.

* Risk Free Rate Of Return Times A Multiple. The risk free rate of return is the 10-year bond yield, which changes every single day.  You need to figure out a reasonable multiple on that bond yield because you are guaranteed to return the yield if you put all your money into Treasuries. What rate of return over the risk free rate (equity risk premium) do you require? My simple formula is to take the latest 10-year bond yield and multiply the figure by 3.

Historical returns of stocks and bonds

Returns of Stocks, 3 Month Treasury bond, 10 Year Treasury Bond

* Sector Specific Exchange Traded Funds (ETFs). If you work in the real estate industry and invest in REITs and homebuilders, then perhaps you should consider benchmarking your financial performance to a homebuilder ETF such as ITB, XHB, or PKB. If you work in pharma at Genentech, then consider ETFs such as PJP, IHE, XPH. If you work in finance and own your bank’s shares as part of your annual bonus, then maybe indexing yourself against XLF is a good idea. Whatever industry you are in, there is an index or an ETF for you to use.

* Consumer Price Index. The CPI is produced by the Bureau of Labor Statistics and is often maligned as an unrealistic gauge of inflation. For example, the current CPI is roughly 1.8%, but how can this be if tuition, food prices, and everything else that matters to you are soaring? The CPI should be considered the base case benchmark for everyone to beat.

* The Case/Schiller Home Price Index. The Case/Shiller Home Price Index has risen to be the authoritative benchmark for real estate performance. The Index breaks down home price growth by region. Given we’ve discovered that a lion’s share of the median net worth in America consists of property, then the Case/Shiller Index should be a relative good barometer for the median American.

Case Schiller National Home Price Index

* Hedge Fund Index. Hedge fund managers are supposed to be masters of the universe. Unfortunately, in a bull market they suck a lot of wind because of their mandate to hedge. They have absolute return goals where investors expect them to continuously make money even during recessions. One of the most widely followed hedge fund ETFs is HDG. The HDG is designed to reflect hedge fund industry performance through an equally weighted composite of over 2000 constituent funds.

Hedge Fund Index

Alternative Benchmarks To Track Performance

* Your Parents Financial Situation At Your Age. Ask your parents what their circumstances were at your age. Did they own a home? A car? What was their savings level, salary, net worth? It may be a fun exercise to have a candid financial conversation with your parents. Be sure to use an inflation multiplier to get a like-for-like comparison. It could be interesting to get some subjective thoughts about their financial situation compared to yours.

* The Neighbor You Despise. Comparing yourself to your neighbor is one of the most common, yet worst ways to compare your financial situation because you don’t really know exactly how they got their money. Whenever we see a new car in our neighbor’s driveway, it’s hard not to feel envious. We wonder whether they got a great bonus at work or in my neighbor’s case an inheritance. My neighbor is 26 years old and rides a brand new $10,000 motorbike along with a sports car because he has no living expenses living at his parent’s house. His parents travel back and forth between their two houses. He probably has an embedded net worth of $2,300,000 because he will inherit his parent’s house when they pass.

* The Average Net Worth For The Above Average Person. I firmly believe many Financial Samurai readers can and will achieve a $1,000,000 net worth by age 50 by aggressively contributing to their pre-tax retirement savings, investing an additional 20% of their after tax savings, owning a primary residence, and working on a side hustle.

Average net worth for the above average person

* The Average Net Worth Of The Top 1% By Age. If you’re really gung ho, then you might want to try and earn a top 1% income level for your age group, followed by a top 1% net worth as well. There are plenty of people who make a lot of money but blow it all due to a lack of financial discipline. Shoot for a $1,000,000 net worth by 35, $5,000,000 net worth by age 50, and $7,000,000+ net worth by age 60. These numbers are roughly 13% light because nowadays top one percent income is over $400,000 a year.

Top one percent net worth by age

* The Median Retirement Household Savings In America. If you’re feeling unmotivated, then you can always follow the mean (average) retirement account savings of American families by age based on 2013 data. The sad part of this chart is that it’s much higher than the median retirement account savings of families by age, where the median 56 – 61 year old only has $17,000 saved. I hope you guys all agree that the below figures are not very inspiring.

Mean retirement household savings by age group

Assign Meaning To Your Numbers

Having more money tends to be better than having less money. But after a certain point, more money means nothing, and can often bring about misery if too much time is spent chasing the almighty buck.

Write out your financial objectives, make a plan, track your net worth, benchmark its growth against your comparison of choice, and go about living as full a life as possible. If the numbers are good enough for your lifestyle, that’s all that matters.

Since 2012, my #1 goal has been to earn enough money from my investments and my writing to never have to work a day job again. In order to do this, I had to figure out a way to generate $200,000 a year in passive income to cover our family budget in expensive San Francisco.

Today my goal is to sustain this level for the next 22 years until our son graduates from college. This may sound daunting, but that’s the challenge I’ve set for myself!

Readers, what do you benchmark your net worth performance to? What are your main financial objectives? What other net worth benchmarks can you think of?

The post Net Worth Benchmarks To Ensure Proper Growth Over Time appeared first on Financial Samurai.

Your Chances Of Becoming A Millionaire By Race, Age, And Education

Your chance at becoming a millionaire by race, age, educational attainmentA million bucks! What a dream. Once you have the cash you can promptly fly to Macau, bet it on black and turn it into $2 million! Or, you can lose it all and spend the rest of your remaining years wondering what were you thinking.

Getting to at least one million dollars in net worth is a nice milestone to achieve. I firmly believe the majority of people reading Financial Samurai and other personal finance sites which don’t hawk credit cards will be able to achieve millionaire status.

If I were to guess the exact percentage of Financial Samurai readers who become millionaires in their lifetimes, I would say 65%. It doesn’t sound like a huge amount until you read the data below. For the remaining 35%, you’ll have more money than if you hadn’t started reading personal finance sites.

Since 2009 I’ve received dozens of e-mails from readers saying they’ve busted through the $1 million net worth figure thanks to aggressive saving and investing. Many have mentioned they wish they had discovered the personal finance world sooner. But better late than never I say!

So what about the rest of the 300+ million Americans who were fortunate enough to be born or gain citizenship to our great country? What are their chances of living the champagne dream and caviar lifestyle?

(audio version)

How Many Millionaires Are There In America?

According to Spectrem Group’s Market Insights Report 2017, in 2016, there were 9.4 million individuals with net worth between $1 million and $5 million, 1.3 million individuals with net worth between $5 million and $25 million, and 156,000 individuals with more than $25 million in net worth, the report says.

In other words, there are roughly 11 million millionaires in America. This count is at a record high thanks to a bull market in stocks, bonds, and real estate. Although 11 million sounds like a lot, it still only accounts for roughly 3.5% of the US population.

But if you happen to be born into one of the 11 million millionaire families, then the chances are extremely high you will also become a millionaire thanks to an inheritance or a living trust. With all the resources money can buy, you should have a greater chance of generating more wealth than the kids born into non-millionaire households.

Related: A Massive Generational Wealth Transfer Is Why Everything Will Be OK

So I began to wonder what the data says about the average American’s chance of becoming a millionaire. Luckily for us, Bloomberg has compiled three highly insightful charts based on Federal Reserve data which I’d like to show you today.

Chance Of Becoming A Millionaire By Educational Attainment

Odds of being a millionaire by education

The chart says that the more education you receive, the higher your chance of becoming a millionaire across all races. Makes sense since high paying jobs often require higher levels of education e.g. lawyer, doctor, executive management, and scientist. The chart says that for Asians with a Bachelors degree, the probability of millionaire status is roughly 17%. For Hispanics with a Master’s degree, the chance for millionaire status is roughly 11%.

The statistic that jumps out the most is the 37% probability a White person with a Master’s degree becomes a millionaire. 37% looks incredibly high compared to every other percentage in the chart. If I was a White person, a Master’s degree is exactly what I’d get. Just not one in History or Journalism.

What I’m also surprised about is the low level of probability for Hispanics and Blacks to become millionaires even with a Master’s degree. You’d think that by the time you get to the Master’s level for education that the people and institutions you hang around with would provide very similar financial and career opportunities for all types. But with Blacks with Master’s degrees only having a 7% chance of becoming a millionaire compared to a 37% chance for Whites, something seems very wrong.

The Chance Of Being A Millionaire By Age

Odds of being a millionaire by age

Everybody’s chance to become a millionaire improves up until the age of 61. But after 61, the chance for Hispanics and Blacks to become millionaires declines. It’s interesting to see the slopes for Asians and Whites are much steeper, which probably indicates there is a higher representation of Asians and Whites in higher paying industries.

Given investments tend to appreciate over time, their performance is independent of age, even if you are over 61 years old. Therefore, one my hypothesize that Asians and Whites make up a greater representation of investors in stocks, bonds, and real estate.

The slope difference between races is why there’s been such a rally cry for Hispanic and Black diversity in industries such as tech and finance. Humans tend to take care of their own. So if all Google has are White people as managers, it will be harder for non-Whites to get ahead.

But I’ve noticed there’s only an uproar for a lack of diversity at higher paying companies and industries. No uproar can be heard in grade school teaching where the majority of teachers are female (I’m a high school tennis coach). There is also no uproar about diversity in the military, where the majority of service people are male.

Hopefully those who fight for diversity are willing to fight for diversity across the board, not just at places which pay the most money.

Your Chance Of Being A Millionaire By Race

Odds of being a millionaire by race

Putting everything together, the Fed data says Asians have the highest odds for becoming millionaires, which I find odd since Asians are a minority that represent roughly 5% of the American population. Asians still face discrimination just like Hispanics and Blacks. Meanwhile, it seems like test score requirements are higher for Asians to have the same chance of admittance at certain colleges.

Perhaps its easier to mobilize a smaller population to heavily invest in their future, as is the case with Singapore and its 5.6 million population with a $53,000 per capita GDP versus trying to mobilize a 1.4 billion China population with a per capita GDP of only $8,100.

Here are some personal insights on why Asian income and wealth is so high.

In an ideal world, it would be wonderful if everybody could have an equal chance to become a millionaire by race, by age, and by education attainment. Unfortunately, the system is rigged. It’s up to us to proactively enrich our minds with knowledge that can help us grow our wealth.

Do You Like Your Odds Of Becoming A Millionaire?

The odds of becoming a millionaire in America are 6.4% to 22.3% according to data from the Federal Reserve Board’s Survey of Consumer Finances. I’d gladly take those odds over trying to become a millionaire in any other country. I bet the odds of becoming a millionaire if you were born in Zambia, where I used to live for one year, is less than 1% because their GDP per capita is only $3,900, or 1/9th the GDP per capita in the US.

But going back to my original thesis, I feel that at least 65% of you who constantly read personal finance sites have a chance of becoming a millionaire in your lifetime. 65% didn’t sound like much in the intro, but now you know that it’s 3X higher than the highest chance anybody has of becoming a millionaire in America.

Personal finance sites do a lot of things, but most of all, they make you pay attention to your finances. As soon as you have heightened awareness about how much you are saving, what you are investing in, your net worth asset allocation, and your retirement plan, it’s only natural to generate more wealth than the typical person who is financially unaware.

If you put away just $350 a month and earn 6% a year, you will become a millionaire in 46 years. If you decide to wisely max out your 401k at $1,500 a month and earn 7.5% a year, you will become a millionaire in just 22 years. And if you decide to max out your 401k and invest another $1,000 in after-tax proceeds a month, you will become a millionaire in just 17 years if you earn 7.5% a year.

If you don’t like your millionaire odds, change them! Believe that becoming a millionaire is highly possible in your lifetime. And once you feel you’re on track to get to $1 million, you might as well shoot for $3 million due to inflation.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

Related: The First Million Might Be The Easiest

Readers, what do you think your chance of becoming a millionaire in your lifetime is? Why do you think there’s such a huge percentage difference between races for those who get Master’s degrees? With the bull market making so many people rich, do you think more people will be inclined to aggressively save and invest as a result?

Intro graphic by

The post Your Chances Of Becoming A Millionaire By Race, Age, And Education appeared first on Financial Samurai.

Financial Samurai 3Q 2017 Investment Recap: Redeploying Capital

Financial Samurai Quarterly Investment Review3Q 2017 was a complete blur. After selling my rental house in June, I was mentally exhausted and decided to do a whole lot of nothing except try and be a good father and continue writing on Financial Samurai. The feeling was kind of like wanting to just sleep in after taking a final exam.

Having a lot of cash all at once is actually kind of stressful. Because I don’t want to lose out on gains in a bull market, I’m anxious to put money to work. At the same time, since the absolute figure is much larger than I’m used to, I’m afraid any rash investment decisions might lead to regrettable losses.

Out of the ~$1,800,000 in proceeds, I reinvested ~$935,000 as detailed in my post: Ideas For Reinvesting Proceeds After A Home Sale. Then I invested an additional $174,872 in new money.

This post may provide insights into helping wary investors redeploy a large windfall and setting up an investing system during a bull market.

My 3Q investment objectives were the following:

* Redeploy ~50% of house sale proceeds with an overall return objective of 10% a year

* Keep the remaining proceeds liquid in order to have enough ammunition to buy a cheaper house with ocean views if an opportunity arises

* Buy the dips in the stock market to bring exposure weighting up by 5%

* Read perma-bearish websites to have a well-rounded perspective since I’ve been relatively bullish for so long

* Reduce wage income for the rest of the year to reduce taxes given the home sale

(audio version of post with some added nuance)

3Q2017 Investment Review

Financial Samurai 3Q 2017 Investment Recap

Total July Investment: $317,580

Stocks: $82,000

$29,000 in large cap tech names

$20,000 in son’s 529 plan (a 18-year target date fund that’s essentially 95% stocks, 5% bonds)

$33,000 in an S&P 500 index fund

Bonds: $235,000 in various California muni bonds with YTM of 3.7% – 3.85%

Mortgage Pay Down: $580

$580 Lake Tahoe vacation property (I automatically pay $580 more a month)

Comment: After paying off $815,000 in mortgage debt in June, I wasn’t motivated to pay more debt down. Instead, I focused on building a California municipal bond portfolio for low risk and high certainty. I didn’t expect to invest as much as I did in stocks, but there was a sell-off in the beginning of the month that tempted me to deploy capital. 

3Q2017 S&P 500 Performance

S&P 500 had a dip in early July and was very volatile in August

August Recap: $537,403

Stocks: $92,000

$42,000 in the S&P 500 index fund

$15,000 in my son’s 529 plan

$35,000 in various large cap tech names

Bonds: $234,111 in various individual CA zero coupon muni bonds with YTMs of ~3.85%

Venture Debt: $72,712 in second venture debt fund

Mortgage Pay Down: $13,580

$12,000 to Squaw Vacation Property

$1,580 to Golden Gate Heights primary

Real Estate Crowdfunding: $125,000

The RealtyShares DME fund invested $600,000 in a preferred equity investment in Vernazza Apartments, a 168-unit garden-style apartment complex in Las Vegas, NV, only 3.5 miles from the Las Vegas Strip, 4.5 miles from McCarren International Airport and 8 miles from downtown Las Vegas.

3Q2017 10 Year Treasury Yield Performance

Bonds prices were rising until August, and then reversed course hence the higher yield

Comment: There were multiple sell-offs in the stock market in August, which made me invest more heavily in stocks than I normally do. Although I’m not excited about stocks, I decided to hold my nose and focus on asset allocation since I’m ~5% below my target equities allocation of 25% of net worth. I focus on tech and the S&P 500 b/c my rental house was a derivative play on tech.

I slowed my municipal bond purchases because the 10-year bond yield edged down to about 2.15%, which made yields unattractive. If the 10-year bond yield gets back to 2.5%, I will be aggressively buying again.

My b-school classmate launched his second venture debt fund, so I decided to invest $200,000, of which $72,712 was called in August. The first fund has returned about 12.5% a year for the past three years, with one year left to go.  

I’m not fond of the multi-unit Las Vegas residential property by RealtyShares, despite the sponsor putting up $3.5M and this being a preferred equity deal. I’ll be publishing a detailed post about this deal in an upcoming post. Recall that I’m trying to diversify away from expensive coastal city properties and cities like Las Vegas, where prices are much more susceptible during a downturn. Instead, I’m much more interested in the heartland. At least there’s no state income tax in Nevada, which will therefore suffer less if state income tax deductions go away under the Trump tax plan. 

September Recap: $254,889

Stocks: $46,000

$15,000 in an S&P 500 structured note with a 15% buffer and 100% upside participation

$31,000 in an S&P 500 index ETF

Bonds: $74,116

$74,116 in an individual CA muni bond yielding 3.25%

Mortgage Pay Down: $9,773

$7,773 to Lake Tahoe Vacation property

$2,000 to Golden Gate Heights primary residence

Real Estate Crowdfunding: $125,000

The RealtyShares DME Fund approved an investment up to $825,000 common equity investment in River Ranch Apartments, a 104-unit multifamily community located in Canyon Lake, TX. The property is centrally located between Austin and San Antonio (an equidistant 1-hour drive from the CBD’s of both cities) and just minutes from New Braunfels and Interstate 35, providing access to major employment hubs. The property was built over two phases in 2011 and 2017 and features Class A construction, with amenities including a swimming pool, fitness center, laundry facility, BBQ/picnic area and covered parking.

River Ranch Apartments at Canyon Lake, Texas RealtyShares deal

Comment: Nothing looked good in September. It was only in the last week of September that I invested some money in the stock and bond market due to small pullbacks. There’s now excitement about Trump’s tax cut plan, which boosts earnings for large corporations, its shareholders and small business owners. If tax cuts pass, public companies are trading at ~10% cheaper valuations than current forecasts. Further, my online media business’s bottom line might increase by 5% – 10%. 

The 10-year bond yield climbed back to 2.35%, but still not high enough for me to get excited about putting significant money to work.

The RealtyShares domestic market equity fund bought another property in Texas, which is what I want them to continue doing. Now I’ve got exposure in Houston, San Antonio, and Dallas. The latest is a three year deal with a target 16.3% sounds good. But to be conservative, I’m modeling an 8% IRR instead. 

3Q2017 Investment Total: $1,109,872

Remaining cash balance: $1,090,000

Concluding Thoughts

The reason why I continue to hoard so much cash is because I’m addicted to owning physical property, even though being a landlord pains me to no end. I was going to offer $1,500,000 for a fixer, but the agent said don’t bother. It ended up selling for $1,700,000 after being listed for $1,300,000. I was going to offer $1,600,000 full ask for a house if they agreed to cancel their upcoming shows, but the agent declined and the house also sold for $1,700,000.

I keep going back and forth with whether I should just buy a $1,700,000 house that may be worth $2,000,000 three years from now. It’s a lot of money, but it’s $1,040,000 less in SF housing exposure than I had before I sold my rental. But every time I write up an electronic offer, I start to dread having to hire contractors and eventually find tenants. As a result, I’ve motivated myself to try and earn an extra $100,000 a year in business income instead.

For the rest of the year, I plan to continue buying the S&P 500 any time it corrects by 1% or more up to $100,000 each time. If the 10-year yield gets to 2.5%, I will invest an additional $250,000 – $500,000 in bonds. Finally, I’m having dinner with three people in October from the RealtyShares investment committee and will ask them to explain their investment rationale in a couple existing projects and hear what they have to say about future investment plans.

If no corrections occur, I’ll just continue to invest at least $10,000 a month in each asset class and hold the rest in cash just in case a sweet house pops up or a big correction comes along.

Finally, I ran my investments through Personal Capital’s Investment Checkup feature to see how I was doing and also analyze my current investment asset allocation compared to their recommendations based on my profile.

According to the chart below, my public investments are up 9.78% YTD, which is underperforming the S&P 500 by 3.9% and outperforming the US Bond index by 6.74%. I’m happy with the results so far, because I’m shooting for a 10% annual return with my new investments, and a 4-6% annual return in my overall net worth. Because I reached my target retirement figure in 2012, it almost feels like any gains since is a bonus.

What my You Index doesn’t capture are the returns from my physical real estate, real estate crowdfunding, and online business. The online business has fortunately been my best performing asset this year.

Financial Samurai Investment Performance

Here is a chart highlighting my current public investment allocation versus Personal Capital’s recommended investment allocation based on my financial objectives. The 16.6% weighting in Unclassified are manual entries of my private fund investments in venture debt, private equity, and real estate crowdfunding. Therefore, my Alternatives weighting is closer to 17%. Because I just sold my house, my cash portion is much higher than recommended.

Personal Capital Investment Allocation Recommendation

Overall, I’m quite happy with my investment allocation in the current environment. You can find your custom Personal Capital Investment Checkup under Planning -> Investment Checkup to see if your investments are matched up with your financial objectives.

Readers, how did you invest in 3Q and what are you expecting for the remainder of the year? Will this bull market ever end? Disclaimer: Unless you are me, or your finances and risk tolerance are exactly like mine, don’t invest like me. Graphic by

The post Financial Samurai 3Q 2017 Investment Recap: Redeploying Capital appeared first on Financial Samurai.

Career Or Family? You Only Need To Sacrifice For 5 Years At Most

Career or family? You only have to give up 2 - 5 years of your life.It’s impossible to be a great parent and a great employee or entrepreneur at the same time. Something has to give don’t you think? I’m sure some of you are disagreeing since you’ve done a wonderful job doing both. But unless you believe being a great parent includes being away from home for 12 hours a day while your little one gets ignored at a daycare facility, we’ve got different definitions.

And if you’re rich, hiring a nanny to take care of your kids while you pursue making even more money you don’t need doesn’t count as great parenting either. At least if you’re not rich, you’ve got an excuse to go to work!

Before every parent reading this post gets too pissed off, let me acknowledge we don’t need to be great at both parenting and work. Being good is generally good enough. But if you want to try to be great at either your career or at parenting, then it’s often beneficial to go ALL-IN.

Time As The One Constant For Parenting

This is not a post about how to be a great parent because unlike work, parenting is very subjective. There are no titles or pay increases, only endless care you must provide in hopes that your child enjoys their youth, learns new things, and grows up to be a good person.

I have zero credibility with regards to teaching others how to be good parents given my < 1 year of experience. So I won’t try. All I can hypothesize is that the more time we spend with our children, the higher likelihood that we may become better parents, all else being equal.

Spending more time with your child makes you keenly aware of your child’s unique needs. As a full-time parent, you end up morphing into a pediatrician, physical therapist, visual therapist, and occupational therapist all-in-one to ensure your baby is getting everything he or she needs.

Therefore, we can set up a loose parental ranking system based on time:

1) Both partners stay at home to raise their child, while both partners have activities to demonstrate work ethic.

2) One partner stays at home and has help from a relative, nanny, fellow parent, or friend.

3) Both partners go to work, leaving their child with a close relative like a grandparent.

4) Both partners go to work, leaving the child with a daycare provider.

5) Both partners have incredibly busy jobs that require constant travel for days or weeks at a time.

6) A single parent who is never home and is strung out on drugs.

You can be a good parent in any of the above scenarios except for the last one. But even if you find yourself in scenario 1 or 2, you won’t necessarily become a great parent. At the end of the day, you can only try your best and make the most of your current situation.

The 2 – 5 Year Rule For Parenting

How babies process foodBefore I became a father, I already suspected I couldn’t become a great dad if I continued to work 60+ hours a week in banking. I had spoken to plenty of 60+ hours week colleagues who lamented to never having seen their kids grow up. Many parents, especially working mothers, also told me they felt a tremendous amount of guilt being at the office all day.

When I asked why wouldn’t they just take a break from work, they always said they couldn’t quit the money. It wasn’t just the people from banking who said this. The same refrain was echoed by the people from private equity, venture capital, management consulting, and technology. Despite the good pay, there are plenty of miserable folks.

Because I recognized my inability to simultaneously give my best to both work and fatherhood, in 2010, when I was 33 years old, I started to seriously plan for a career transition. It was one year after I had started Financial Samurai and already I could see its potential to one day free me from corporate bondage.

The whole idea was to have something to do at home while taking care of our little one together with my wife, who would ultimately join me in early retirement. Since time spent with your baby/toddler is a key variable for being a good parent, having two stay at home parents seemed better than having just one.

Dilemma: For years, I thought the best solution was to forsake my career and focus on being a good father. This is one of the reasons why I waited so long before deciding to have kids. I felt I needed to save way more money than I realized because I was never going back to work. I regret having waited so long.

Solution: What I now realize is that if you want to be a great parent, it doesn’t have to be an all or nothing proposition. Instead, all you really have to do is give up at most five years of your career to make things happen.

Why Five Years?

Age five is when most kids start going to kindergarten. Once they’re in kindergarten, you no longer have to spend all day with them. Given you now only have to drop them off and pick them up, you’re welcome to go back to the salt mines.

If you feel five years is too long of a period to be out of the workforce, you only have to give up your career for two years because age two is usually the earliest kids can attend pre-school. A pre-school day lasts between 3-9 hours, but it’s usually recommended not to leave your kid in pre-school for longer than six hours or else they’ll be too tired, too cranky, or too homesick. The only hitch is that pre-school is usually only two or three days a week.

If you don’t have kids, you probably won’t be thinking about these timelines because you’ve got so many other things to think about. We were thinking about things like buying the right home, remodeling, getting a safer family car, life insurance, taking pre-natal vitamins, proper feeding, right size diapers, doctor visits, and more.

But if you know you’ll only have to be out of the workforce for 2-5 years maximum, you won’t have to save and invest as much. You’ll also be able to be more confident having kids earlier, which may make it easier on the mother’s body and safer for the well-being of both mother and baby.

If you exit the workforce for 2-5 years at a younger age, you’ll correspondingly be that much younger when you restart your career. After all, many people who stop work and go to graduate school for 1-2 years seem to have no problem finding work again.

Balance For Everything

Good parenting instructionsI know some of you are thinking I overanalyze things. Millions of people just wing it all the time and are fine. Well maybe not, since there are so many messed up kids and divorces. But this article isn’t for me since I’m already a father who doesn’t plan to go back to work again.

This article is for those of you who are considering when is the right time to have a kid, how will having kids disrupt your career, how much you need to work, save, and invest to ensure your family is taken care of, and for those who want to be the best parent possible.

I wish someone clearly explained to me the 2-5 year timeframe during my most gungho career days. I would have been much more serious about trying to start a family when I was 32, instead of trying at age 36-37.

Being a full-time parent rivals the toughest jobs in the world. You need a tremendous amount of patience, endurance, and calmness about you because there is no reasoning with a baby/toddler. At any moment, she could injure herself or die. I would say in comparison, most jobs are a walk in the park compared to taking care of a baby/toddler. No wonder why so many parents can’t wait to get back to work after their parental leave is over!

Now that I’ve spent over six months being a stay at home dad, I can unequivocally tell you that it was the best time spent. I wouldn’t trade any amount of money to not have that time with him. They grow up so fast. Once that time is over, you can never get it back.

Related: Financial DEpendence Is The Worst: Why Each Spouse Should Have Their Own Money

Readers, how do you balance career and family? Why don’t more people give up 2-5 years of their working life to spend more time with their babies? Is money too hard to quit? What is the best parenting advice you got or can give?

The post Career Or Family? You Only Need To Sacrifice For 5 Years At Most appeared first on Financial Samurai.