One interesting thought experiment when planning for retirement is thinking about your coast number. What is a coast number you ask?
Let’s take an imaginary man, Frank, for our little thought experiment. Frank is diligently saving 20% of his income into a 401K or IRA that is mostly invested in equities. For arguments sake, the retirement vehicle will produce 7% returns every year. Frank wants to retire at the age of 65, when he can pull social security benefits. If Frank front loads his retirement savings, there may come a threshold when he can stop saving 20% of his income because the investments will grow enough on their own to secure his retirement at age 65.
That threshold, is what I am calling the Coast number.
To calculate the coast number, we need 3 inputs. We need to know or guesstimate the Rate of Return that the investment vehicle will kick off every year. We need to know the goal amount to be saved and we need to know how much is currently saved towards the goal.
The continuous compounding formula is A = Pert where A is the goal amount, P is the starting amount, r is the rate of return, and t is the time it takes to get there.
Say Frank wants $25,000 a year from just his retirement savings after he turns 65. According to the 4% safe withdrawal rule, he would need a total amount of $625,000 in retirement savings to do that. If he has already saved $75,000 then we can calculate his coast number.
(1/r) * ln(A/P) = t
(1/.07) * ln (625000/75000) = t
Subtract 30.29 years from his planned retirement age of 65 and we can see that he can stop contributing to his retirement accounts and coast on the savings a little before his 35th birthday.
Of course, for the majority of the population, the coast number would be somewhere in our past. The whole point of this exercise is to see if you front loaded your retirement savings to take advantage of compounding interest, when could you theoretically stop saving for retirement.
You can use the calculator below for your own hypotheticals. They don’t have to be retirement related. Perhaps you are saving up for a house down payment or other large expenditure.
Taxes normally dominates our spending followed closely by Kids (aka childcare). This year Travel made a big splash because we took two international trips. You can read about those trips here and here.
Our asset allocation has also shifted quite a bit over the past year. Our primary residence and apartment building now make up a significant portion of our assets.
Assets by Account Type
We still have the majority of our assets invested in the stock market under tax advantaged accounts (401ks, IRAs, 529s). We also have maintained a healthy liquid cushion should life throw us any curve balls.
The apartment acquisition also put us back into the debt game.
Debt By Type
Credit cards balances are still being paid in full every month, but the ‘Loan’ is the mortgage for the apartment building. At 3.5% for 30 years, I would consider it ‘good’ debt. We currently have no plans to make any accelerated payments.
Overall net worth (assets – liabilities) trended upward for 2016.
net worth (primary residence not included)
The upwards trend is a good sign that we are living below our means.
In some sillier number comparisons,
we used more water this year than in 2015. There are likely two reasons for this: 1. Frugal Boy is using more water than when he was a baby and 2. I replaced a super low flow shower head with a medium flow head.
~ 600 cubic feet more water used
Electric usage is also up this year. There are more gadgets and gizmos in our house. I also ran power tools quite a bit this Fall while working on the basement remodel.
Natural gas usage has remained inline with previous years. Insulation efforts have not yielded any major changes in efficiency.
natural gas usage
We used approximately 1.3 TB of internet bandwidth this year.
Shae and I hosted Thanksgiving this year and my parents handed me an envelope filled with banking receipts covering years of my childhood. It could have just as easily been shredded, but since I have it, I might as well delve in and examine some of the financial going ons of my childhood. I have vague recollections of particular financial events, such as diligently depositing birthday and Christmas gift money, but now I have the receipts to piece it all together.
It all started when I was 3 months old. My parents opened up my first bank account. Gee, thanks Mom and Dad. Back in the olden days, there was no online banking. So I had a Savings Register to record transactions in.
Opening up the register, you can see the first deposit, and subsequently, how old I am.
That $310.00 adjusted for inflation would be equivalent to $660 in 2016. Thanks Grandparents, uncles, aunts, and family friends for pitching in for my financial future.
Over the years, the balance steadily grew. I particularly like the 4th or 5th grade me that deposited $25 of ‘prize money’ in 1998.
I have no memory of what contest I won back then, but an interesting thing begins to happen around that time period. The handwriting changes, and some of the entries are being made by a little boy.
Around junior high school, middle school, or whatever you call 6th, 7th, and 8th grades, I had saved up enough money, at my parents behest, to start meeting the minimum requirements of Certificates of Deposits, or CDs for short. I do remember my Dad always shopping around the 4 or 5 banks in town looking for the best CD rates. I also remember him on a trip up to Grandma Schenk’s house once bemoaning the fact that she did not shop around rates and was leaving money on the table by being loyal to the same bank forever.
Anyway, in ’00, there is a receipt of a CD being closed.
At age 13, the saver mentality had been thoroughly beaten into my head by my parents and I had approximately $3,000 to my name, the bulk of which was tied up in a CD.
Birthday’s and Christmas’s kept rolling by year after year, and year after year I would write a fistful of thank you notes to grandparents, uncles, and aunts before dutifully marching down to the local bank and depositing checks and cash. At some point my Dad made me go alone and stopped helping me fill out the deposit slips. Of course I was terrified, but it was a good sink or swim lesson.
My Dad kept optimizing the best savings rates for me and kept the bulk of my savings locked up in CDs.
This particular CD was kept open for 2 years before being closed. The grand total of interest earned over that two years was $231.47.
In 2004, I began working and earning money for myself. The pay was negligible, but the real payoff was learning the value of a dollar. Performing a mind numbingly boring task for hours on end to collect a small paycheck gives one plenty of time to think. Suddenly, that new flashy item being marketed to you seems a little less interesting when you replace the dollar cost with an hour cost. Something that costs $50, is the same as something that costs almost 10 hours of work for someone on Indiana’s minimum wage of $5.15/hr. Yes, that was what I started at. Spending several hundred of my own dollars to take a girl to high school prom did not seem like a balanced equation. A couple of hours of fun was not worth the 50 hours of work required.
Finally in ’06 as a senior in high school, I opened up my first solo bank account. I was now 100% in charge or my own finances. The rest as they say is history.
Now the tables have turned. I am in the role of Dad, and Frugal Boy and Frugal Fetus are in the role of child. Just like my parents handled all the finances when I was born and slowly relegated duties to me over the years, Shae and I are doing the same with our children. Frugal Fetus doesn’t know it, but he/she already has a college savings plan opened up and partially funded. In fact, since it was opened in July, it has returned 6.83% APY. Frugal Boy’s 529 college savings plan has returned 8.95% APY for the year-to-date. On a more concrete level, any cash that Frugal Boy receives he diligently stores in his doggy bank at his parents behest. Any checks are invested into his college savings. Amusingly enough, Frugal Boy already recognizes and calls out the different bank branches as we travel through town. I think he is almost ready to graduate to his first real bank account. We will probably open a PNC ‘S’ is for Savings account for him. It has 0 fees for age 18 and under account holders and uses Sesame Street characters to encourage kids to save.
There are a number of savings programs available for kids. Here is a roundup of some of the more popular ones.
Last night I watched a great little documentary by PBS Frontline about the shift in retirement responsibility. The documentary, available online for free viewing, provides a short history of the pension to 401k historical shift, follows some regular Joes and Janes, and interviews several major executives on Wall Street.
The easy to digest one hour long video does a great job exposing the hidden cost of expense ratios in certain 401k plans. Two next door neighbors working the same job and contributing the same amount can have drastically different retirement savings because of these often overlooked fees. In fact, the example given by Vanguard founder John Bogle, was almost 2/3 less savings due to high fees.
The documentary fell a bit short in highlighting successful savers who have navigated the somewhat murky waters of retirement savings. Not all 401k plans or choices are bad, and not all pensions were/are good. It is undeniable though that in this day and age, the responsibility for saving and preparing for retirement is ours, not our employers.
Shae and I have kicked around the idea of buying investment real estate for several years. Today, we finally pulled the trigger. In all truthfulness, the moment came several months ago when we submitted a bid on an apartment building. It has just taken until today to finalize all of the legalese. Buying real estate isn’t for the faint of heart!
So what is so special about real estate as an investment tool. In one simple word, ‘leverage’. Putting someone else’s money to work for yourself is relatively easy in the world of real estate. Mortgages are advertised by virtually every bank, credit union, and even insurance salesmen! Right now, we are living in an almost unprecedented environment of cheap borrowing. The prime mortgage rate for a 30 year fixed rate loan is hovering around 3.5%. In fact, that is the rate we secured. I remember when I was a kid and you could have a savings account earn more than that.
We have talked together for years about what type of property we would want, why that would best achieve our goals, and how we would want to operate it. For us, residential housing, aka apartments, with a buy and hold strategy was a natural fit. Earlier this year, we got serious again about getting out of the armchair and into the field. We ran numbers on dozens of different properties for sale. I adapted a simple back-of-the-napkin model from BiggerPockets.com and used that to get a better idea of how different properties sized up to one another. Eventually, we started to get a feel for our local market. There were some abysmal numbers out there, a lot of mediocre ones, and some that seemed too good to be true. We started calling realtors and visiting places in person. Sometimes the numbers lined up with what we saw in person. For example, one place had an amazing rate of return on paper, but in person it was obvious that it was a high turnover, hard to collect rent type of place. When the tenants have smashed holes in the drywall, you run the other way as fast as your legs can carry you!
Eventually, we spotted an attractive looking quadplex that ticked off all our checkboxes. It had a simple geometry, was purpose built for apartments, good neighborhood, and was taken care of by a respectable owner. The ask price was 170k. We offered 151k. Other buyers put in bids, counteroffers ensued, and we eventually won with an offer of 156k. Below you can see our napkin investment math.
Monthly Rent through Total Expenses are on a monthly basis. The CAP RATE, or capitalization rate, would be the investments rate of return. Leverage is what makes the work worth it though. CASH-on-CASH is the rate of return that we are forecasting for the profit, cashflow/year divided by the cash to close. In essence, we made an investment of 45k dollars and expect to make 6k a year in profit. Of course, only time will tell how well it actually performs, but at some point you just have to jump in and start swimming. The other huge benefit of real estate is depreciation, but I’ll get into that closer to tax season.