Drawdown Strategy Analysis – using “Power of Zero” – V2 using lessons from the book

My last post, I covered the traditional way to withdraw upon reaching retirement (all your taxable, then all your tax deferred, and finally, all your tax-free spending. In the end, I was left with $1.1M in my Roth IRA.

I also did the analysis with a withdrawal rate of $84,000/year (of which 8,500 if Fed/State taxes). This works out to $75,500 if I manage to avoid any taxes whatever – based on the guidelines of “the power of zero”. In addition, if I keep my income around $24K (the exemption for married) my medical subsidies will reduce my medical costs by an estimated $7.166/year. So I’m going to assume a withdrawal rate of 68,500 to keep the same lifestyle as my previous withdrawal – again provided I can keep my revenue at $24K for the year.

In order to make this work, I would need to use money in my investment account over the next two years to shift $200,000 from my Tax-Deferred bucket, into my Tax-free bucket (using my investment account to pay the taxes. If I do this, at my FIRE date (21 months from now) I should have the following assets:

  1. Taxable bucket: $302,358 (including $156,689 in deferred that I will have just paid the taxes on)
  2. Tax-Deferred: $518,578
  3. Tax-Free: $505,627

So, unless being spent, the items listed will grow at 5.24%.

  • Year 2020 (6 months): Pulling $42K out of Tax-Deferred account (Pop’s IRA). Taxable, but I just got hit with a lot of taxes for my Deferred.
  • Year 2021-2024: Withdraw minimum from Pop’s IRA (a little over $4K) and enough from Mrs. 39 months IRA to hit the $24K (allowance for IRS with no taxes) and remainder from Taxable bucket. This allows us to pay $0 in tax and minimal for insurance, due to subsidies
  • Year 2025-2026: Mrs. 39 Months starts collecting Soc. Security, which alters some stuff. Continue to pull minimum distribution from Pop’s IRA (starting to climb to $5K and $6K), finished depleting our taxable bucket, while reducing money from our tax-deferred bucket to keep total under the $32K minimum for tax-free. Will need to start pulling some from our Tax-Free Roth to make up for lower Tax-Deferred money
  • Year 2027-2028: Mrs. 39 Months goes on Medicare. Assuming medical costs increase about $4500. Continue to take minimum from Tax-Deferred to keep Soc Security under $32K point where we’d have to pay taxes on it. Still Tax free 8 years after retirement.
  •  Year 2029-2031: Mr. 39 Months goes on Medicare. Assume medical costs climb to our final number, so our withdrawal has to be $75,500/year (adjusted for inflation). Still able to pay no taxes by withdrawing minimums from Tax-Deferred and supplementing with Tax-free Roth.
  • Year 2032: Mr. 39 Months begins taking Soc. Security at age 67. However, I’m going to assume that, due to issues with Soc. Security, I am going to assume that I am only going to get half of what I will get (i.e. 50% cut in benefits), so that works out to $16,908/year. So, each year roughly $30K in Soc. Additional funds out of Tax-Deferred and Tax-Free, but I’m going to be past the “don’t pay taxes on Soc Sec – now taxed at 50% of them. Assume income requirements go up to $77K
  • Year 2033-On. RMDs and Social Security force me into higher tax brackets, meaning I’m set at $78500. Mix of Tax-Deferred and Tax-Free withdrawals keep me in good shape.
  • Year 2062: I hit 97 and Mrs. 39 Months hits 99. We have roughly $924K in Roth IRA, and $192K in Tax-Deferred IRA, for a total of $1.16M.

This is more than we had under scenario 1.  This also doesn’t touch our “emergency fund” or house money – which I think of as our backup money in case of major disaster. If this tells me anything, it’s that I should look to shift more than $200k from our Tax-Deferred money, so that we can possibly keep our taxes lower once we start taking our Social Security.

Again, issues with this are that it shows that I could have taken out more and “lived a little more” in my years. In addition, I kept the $9K in medical spending stable, which might not really be accurate.  However, I ended up not paying much in taxes over much of the early part of the retirement.

I think the next step here is to do this study, assuming no social security, and see where that hits.

 

 

Mr. 39 Months

Quarterly Update – Oct 2018

Well, it’s early October, and the year is three-quarters done. Some of the goals have been completed, some are still being worked on, and some have been dropped – a pretty typical year for most folks. So how am I doing in comparison to my goals for 2018?

My Goals for 2018 (some financial, some not):

Finance:

  • Save $81K in tax-advantaged accounts (saved almost $37K in 2017): Grade A. Saved almost $65K after 9 months, and on track to get about $80.5K in by the end of the year.
  • Save $9K in regular: Grade A. Got this done in 1st Qtr 2018.
  • Increase dividend income from all accounts to $24K/year: Grade B. I’ve gotten over $17K for the year, so I’m on track to get to $24K by the end of the year.
  • Passive income covers 33% of base living expenses in retirement, i.e. $24K of my $72K expected expenses: Grade B. See above. If I hit $24K, that is 33% of my expected $72K annual budget upon hitting FI
  • Beat net worth growth rate of 7%: Grade D. So far, I’ve only made 1.5% this year, beyond the money that I have already deposited. If the market stays flat or drops, I won’t hit this number. I need the market to pop up a bit in the last quarter.

Business:

  • Begin attending regular meetings of my local real estate investors association. Grade D. Attended two meetings in 3rd quarter. Slowing down a bit. Some of the meetings have been for info that I’m not interested in, and some of the meetings that I was interested in got blocked by business travel for my job.
  • Double the number of blog visitors in 2018. Grade A. I’ve already hit this goal, and actually working on tripling the number of visitors before the end of the year. Thanks to all of you for tuning in!
  • Write/publish a book on finance.  Grade: Incomplete. Did some initial work on it, but really haven’t put as much work into this as it needs.

Personal:

  • Increase weight lifted by 10% from 2018 (increased by 12.7% in 2017) Grade B: Up 5% from the beginning of the year, but I’ve had some health issues which have set me back here. Still working on it
  • Average 2 hours of cardio per week (currently averaging about an hour).Grade C: Averaging about 1.2 Hours a week for 3rd quarter. Really need to work on this. .
  • Backpack over 100 miles on AT (did over 100 in 2017) Grade: C. Completed only 79 miles this year. Personal issues got in the way of completing other hikes. Looking to rebound in 2019 and get over 130 miles in.
  • Begin volunteering at Pennsbury Manor at their joiner’s shop (woodworking) Grade A: Volunteer training completed, and I’ve been volunteering since May. Year coming to close, but plan to assist in 2019.
  • Reduce weight by 20 lbs. from Jan 2018 (lost 9 lbs. in 2017). Grade D: Dropped down 11 lbs by July 1, but gained most of it back. Health issues are keeping me from aggressively losing more weight right now.
  • Read at least one book a month. Grade A. Read seven (7) books in 3rd qtr – two fiction, 2 financial, three history. I’m going to need to bump this goal up in 2019, cause I’m enjoying it.

Travel:

  • Visit a national park (visited Shenandoah NP in 2017). Grade: A. Visited two parks in May  (Redwoods NP in California and Crater Lake in Oregon) Planning on visiting another park in 2019
  • Visit family in Tennessee, Vermont and New York. Family is very important to me. One of the things I am looking forward to with financial independence is the opportunity to visit family more often. Grade B. Visited family in TN in March. Plans to visit TN in Oct and Nov (Thanksgiving) and Mrs. 39 Months in early November. Missed out on visiting Vermont this year (plan for 2019)
  • Visit Portland, OR and northern California. Grade: A
  • Visit Ellis Island. Wanted to do this in 2017, but didn’t make it. As 50% Czech from immigrant great grandparents from the turn of the century, I believe they went through there, and I want to see it Grade: F. Still haven’t been there and I have had the opportunities.

Overall, I’d give myself a B. Got a lot done, but still have a few more to close out.

Other updates in 2018

How are you going on your goals for 2018?

Mr. 39 Months

How do I track my investments?

There are all sorts of investment tracking systems, software and websites out there, and I’ve tried several. I really put a lot of effort about ten years ago into using Quicken’s software, which allowed it to download from your various investment and bank accounts and automatically update. The problem I had was when it mis-allocated some spend I did (calculating a grocery bill as something else, etc.) it was difficult (for me) to alter it. Within 6-9 months of getting it started, my bank accounts were not matching up with the downloads, and there were all sorts of issues.

As an engineer, I finally threw up my hands, opened up MS Excel, and created spreadsheets to do my bank and investment tracking myself. Since I’m a bit of a money nerd (like so many of us in the FIRE community) I started tracking my banking (both family and personal) in a spreadsheet to see how I did. That led me to get a better handle on my spending, and a better estimate for future spending & goals.

I also started tracking my investments with my own MS Excel spreadsheet. Again, I felt I had more control of the results, rather than a specific, cookie-cutter approach from someone’s software package. I could create my own reports, modify how I calculated results, etc.

So how do I use my spreadsheet? I’m going to assume everyone here has a basic knowledge of spreadsheets and can calculate (either by computer or by hand) the results.

I set my spreadsheet up with each investment on the X axis (i.e. down the left side of the paper) and my info for each investment on the Y axis at the top of the page. For each investment, I had the following categories:

  1. Name (ex. Vanguard 500 Index Fund)
  2. Note, i.e. information on where this investment was (ex. Wife’s Roth IRA, Mr. 39 Months 401K, etc.)
  3. Symbol for investment (ex. VFIAX for Vanguard 500 Index)
  4. Current price, updated at the beginning of each month
  5. Current Shares, updated at the beginning of each month (in case I invested, or dividends were paid)
  6. Current value (a calculation, price * shares)
  7. Value at the beginning of the previous month
  8. Additions/subtractions from investment during previous month (ex. Putting monthly investment into Roth IRA)
  9. Cost basis for investment (calculation of previous two, value at beginning of month + additions/subtractions)
  10. Gain/loss for previous month (calculation, comparing #9 to #6)
  11. Percentage gain/loss

Every month:

  • I take the “current value” from the previous report, and copy/paste the numbers to #7 (note: you need to copy the actual numbers over. If you copy the calculation, it will go haywire on you)
  • I put in how much I’ve added/subtracted from that investment in #8
  • Updated the shares & price

This gives me, for each investment, how much I made, and the percentage gain/loss (#10 and #11 above). I can also look at the values in #6 to determine my asset allocation, and if something needs to be changed.

It typically takes me less than 30 minutes to do this, and I’ve got about 45 different investments (counting 2 sets of IRAs, 2 sets of Roth IRAs, my 401K, Deferred, dividend account and “fun money” account). I find that I enjoy doing this, and it keeps me in better contact with my investments than just going to a website and looking at a report.

Guess I’m just a number’s junkie.

 

So how do you track your investments?

 

Mr. 39 Months

Tracking Lifestyle “creep” and what to do about it.

20 Something Finance had an interesting article on lifestyle creep (how its defined, how to track it, and how to avoid it). For those in need of an explanation, as defined by 20 Something “Lifestyle Creep (ˈlīfˌstīl krēp), noun: the very real, very unnecessary, and very self-defeating personal finance phenomenon of increasing one’s lifestyle spending as a direct correlation to an increase in one’s income over time.”

Basically, people start out with their base pay out of school (example, $35,000/year) and then get pay raises throughout their work life (3% here, 10% here when they change jobs, etc.). With lifestyle creep, folks just take that pay raise and roll it into their spending without thinking about it. Before you realize it, you are making $65,000, but don’t feel any richer (and aren’t any better financially) than when they were making $35,000. It is something that most of the western world suffers from. You get a nicer car, eat out at nicer places, move to a nicer neighborhood, and just don’t make any real progress financially.

He goes through various ways to track your lifestyle creep and then finishes with ways to combat it, including:

  • Continually monitor your expenses and be on the lookout for lifestyle creep
  • Trim and trade expenses (cut back on some things to pay for other things you want)
  • Practice gratitude and question every purchase
  • Pay yourself first (a FIRE staple)
  • Remind yourself of your goals

I went back and looked at my last five years of spending. I broke it out into our family spending (taxes, groceries, insurance, etc.) and my own personal expenses (clothing, gas, lunches/snacks, etc.). I also took out the mortgage spending for the first 2-3 years, as we are mortgage free now, and I wanted to get a good apples-to-apples comparison.

As you can see, we’ve roughly been running between $26K and $29K of family expenses. Remember that this doesn’t count medical insurance, just medical co-pays, etc.

For personal expenses, it looks like I’ve been trending down the last couple of years, and I’m running around$1,200/month.

 

Based on this analysis, I’d say I’m not really running a lot of lifestyle creep. When we paid off our mortgage, we dumped that right back into savings. We then found out a way in 2018 to put even more into savings and reduce our expenses (isn’t that the way it always is with FI?). I’d like to say we’ve avoided lifestyle creep, but I can say that from 1991 to 2000 (the first 9 years out of the army for me), we did experience a lot of it. I went from a $30K/year salary to a $56K a year salary, without a lot diverted to savings.

 

It wasn’t until 2000 (when I got a bump to $68K) that we started to dump all extra money into my 401K and our IRAs. From that moment on, we’ve kept our lifestyle fairly much around $50K – $55K a year (including mortgage) and all excess funds have gone into savings/debt payoff as we moved towards FI.

 

Good article to review for those folks looking for another metric to track their performance.

 

Mr. 39 Months

Update to draw down plan – May 2018

Okay, as I get more information, I continually have to look at adjusting my draw down plan – even as I hit 26 months to go. If you remember from my previous draw down update, the desire of Mrs. 39 Months to continue working, combined with the $64K limit to income for maintaining health subsidies had put me in a bit of a quandary. How do I match my spending to the need for health care? Spend too much, and I end up needing an additional $12K a year.

Well, I got a bid of a surprise with one of my company retirement accounts a week ago, which meant that I would be paying a large lump sum when I left the company (instead of being able to draw it out over time). However, this meant that the remaining funds were “post tax” and thus could be used without endangering me going over the $64K limit. Sweet!

So, based on that, updates on my current investments and plans for deposits over next 26 months, here is what I am looking at:

  • Savings: $132K (can spend without having to pay taxes)
  • Deferred Income from work: $156K (after taxes withdrawn – don’t have to pay taxes on it)
  • Brokerage Account: $87K (can spend about $60K of it without paying taxes. The rest will be taxable.
  • Inherited IRA from my father: $137K (taxable when we take it out)
  • 401K/IRAs: $613K (taxable + penalty)
  • Roth IRAs: $298K (non-taxable)
  • Total: $1,445K liquid assets (350K with no tax)
  • House: $298K (not depending on it unless absolutely necessary, i.e. no reverse mortgage
  • Expected expenses $54K + Mrs. 39 Months spending (assuming equivalent of her take home pay). This assumes having a taxable income below $64K, and thus keeping the subsidies

 

As you can see, I’m actually in pretty good shape. Current plan:

  • For first 6 months, pay for medical with Cobra and take $18K from Deferred (tax free) and mandatory $9K from inherited IRA
  • For each year following, Take $12K from inherited IRA each year, and pay very little tax on it. Should last for 10+ years (till I hit 67)
  • Take $42K from Deferred/post –tax. Should last at least three years (till I’m 60)
  • Move to my investment account. Should last for at least two years with limited taxes (Gets me to 62 and Mrs. 39 Months to 64). At this point, I’m assuming Mrs. 39 Months wants to stop working, so we bump up expenses to $72K a year
  • Draw down 401K at $72K a year. This should last us for 16+ years.
  • At that point, switch to Roth IRA, which has been growing for 20+ years without getting tapped, so it should have over $800K. This should last us for the rest of our lives.
  • Never touch the savings account/emergency fund, or the home value (these are our backups).

Note: all growth, expense and investments assume a 3% inflation rate.

Overall, I’m more confident now that I was a couple of months ago (even with the market not going anywhere). I could conceivably take a few months off my count and go earlier, but I don’t want to do that just yet.

How have your plans changed?

Mr. 39 Months

Original Draw down plan

Updated Draw down plan Mar 2018

 

When the World gives you lemons, FI people make Lemonade

As everyone knows, life gives you little “surprises” now and then, and folks have to be flexible and learn how to “roll with the punches” when that happens. Sometimes it’s pleasant surprises (hey, my company is giving out one-time bonuses) and sometimes it’s not (hey, my basement flooded).

Just recently, I found out that my company made a change to their deferred income (one of the ways they help with retirement planning). Previously, you could draw it in equal parts over a period of time (I believe the max was over a 5-year period). That was my plan, as it would enable me to keep the taxes on it low, and stay under my threshold for medical care (hopefully).

Well, apparently at the beginning of the New Year, they killed that option. Instead I have to take it as a lump sum when I leave the company. So, when I currently plan to hit FI (26 months away) I will take a sudden, massive $200K bump in my pay (in addition to my first six months pay for 2020). The taxes taken out will be nothing like I’ve had to pay before. Ouch!

I took out my pencil and paper (or computer and mouse) and started the calculations. I would end up giving up roughly $50K to Uncle Sam, just on this money alone. Yet, once I had paid it out, that money would become “post tax” money, so if I used it to live on over the next several years, I wouldn’t have to state it on my income taxes (just any interest/capital gains if I had invested it). If you remember the update to my draw-down strategy, I was very concerned about going over the $64K line for income, as this would cause me to lose subsidies for health insurance. I could use Cobra insurance (the insurance you can get from your former company for up to 18 months after you leave your job) – and then transition to paying my own insurance, with the subsidies.

Well now, I will have a pot of $150K (plus the expected $90K in my investments) that is post-tax. Even if Mrs. 39 Months works for several years, I don’t see a reason why we can’t keep under the $64K cap. If she gets a really great job, then I’ll just force her to pay for benefits!

So in the end, it all ended up being OK. Actually better than OK – because the money I save for the subsidies more than offsets the additional up front taxes.

So always look at your finances and play off different scenarios. If I had, I would have determine that, even if the company still had the 5-year stretch out option, it was better to take the money up front.

How have you made lemonade this year!

 

Mr. 39 Months

Exploding your savings rate!

While a major part of the FIRE philosophy is enhancing your income via excelling at work and doing side hustles, another key part is frugality and minimizing your expenditures, so you can maximize your savings rate. In my opinion, the frugality/minimize path is the more effective, because most increases in your income will see a portion taken out for taxes. Any money saved via frugality is post-tax, and therefore goes straight to the bottom line.

One thing you can do is to tray and maximize whatever company benefits you may have, so that you don’t have to spend the money (and be taxed) yourself. Whenever your company benefits package comes out, get a copy and look through them for what discounts or free-stuff is available that you might want to use. Some examples include:

  • Learning Opportunities/Training
  • Discounts on products & services (movie tickets, computers, entertainment, etc.)
  • Insurance (low-cost Life, Disability, etc.)
  • Reduced cost legal services

Use these benefits to try to further cut your expenses, and then bump that money into your savings and investments.

One of the things my company has is a Deferred account – the equivalent of a 401k (paid with pre-tax dollars). You basically don’t get paid this money, you “defer” it to a later date. You can start withdrawing it after you’ve been with the company for 5 years. If you leave the company, you have to take the money out – and pay taxes on it. You can take it out as a lump sum (dumb) or break it out to receive a monthly amount for a period up to 5 years. It’s like a 401K that you could access at age 35!

Previously, I was putting in 6% of my paycheck (the max was 25%) and 25% of my annual bonus (I could put in 100% of bonus). You have to make the decision in December for the following year, and then its locked in. In 2017, I was also putting away $1,376 a month into regular investments, so I’d have something to help “tide me over” from early retirement to age 59 (when I could access my IRAs).

I dawned on me that I could put away 25% of my take home, and that would be around $1,300 per paycheck, or a little more than twice was I was putting away to that investment account. In addition, my cash flow still let me put $300 into that investment account each month. Let’s see, save $1,376/month or $2,900/month? Tough choice. I also realized that, based on my spending, I didn’t really need to get my bonus in 2018. Switch that to 100% to deferred. The result?

 

Bam! Savings rate went from 30.1% of gross pay to 55.9% of gross pay. In addition, I am building up a sizable chunk of money that, when I chose to retire, I can take it out and use for living arrangements with no penalty. While its taxed, I plan to be in a much lower tax bracket by then. Based on this, I won’t have to dip into my 401K/IRA money till well past 59-1/2. Maybe use this to help do some Roth IRA conversions?

After calculating this in early 2017, I felt like quite the idiot for not doing it in 2017. I also realized that I could use this to retire a full year earlier. Shortly after that, I started the 39 Months blog.

So check out your company benefits and other ways to cut your expenses – and then put those funds into investments!

 

Mr. 39 Months

Financial Update – Disaster File

If you remember back at the beginning of the month, I realized that I had to update our personal files, or our “Disaster Files.” This was the files showing investments, wills, titles, etc. Often folks do this once every so often (many times after a family member passes away) and then let it lie fallow till the next “emergency.” Yep, I was one of those folks, having not touched it since 2013. In my previous post I attached a couple of helpful documents that I hope folks find useful.

Well, I dove into it during the month, and so far, here is what I’ve gotten done:

No Description
1 Update Master List from 2013
2 Send Master list to Mrs. 39 Months
3 Price out updating wills
4 Redo filing cabinet with Master List & Disaster file #1
5 Household budget folder (budget goals, income statement, balance sheet, income/expense forecasts)
6 Housing Information (Title, insurance, receipts for work, property taxes)
7 Online passwords
8 Location of keys to safe deposit box – Mrs. 39 Months drawer
9 Credit records: Resolution of past debts (auto, home)
10 Home Insurance Policy
11 Net Worth’s 2009 to present
12 Annual updates for Jan 1, 2017 into investments
13 Investments (list of accounts, goal planning, annual balance sheet)
14 Taxes: Tax records for previous year, current year documents
15 Personal background info (Education, personal history, resume)
16 Credit: Resolution papers of past debts, credit card names, numbers & 1-800 number
17 Health insurance (Booklet from work, health history, medications, etc.)
18 Life Insurance (Insurance policies, etc.)
19 Safe Deposit: Title to Mrs. 39 Months’s auto, DD214, NY and KY marriage certificate, letter of last instructions, copy of will, personal property inventory, negatives of personal property, passports, old passports, Mrs. 39 Months’s birth certificate, Mr. 39 Months’s birth certificate, Mr. 39 Months’s SS card)

So what do I have left?

1 Letter of Last Instructions
2 latest credit report
3 Updated list of personal property
4 Pictures of personal property
5 Guarantees & warranties (appliances, cars, etc.)
6 Auto Info: Insurance coverage, policies, auto registration, repair/maintenance records
7 Instruction letter (where to find everything, computer passwords, etc.)
8 Setup dates for regular updates to the files (so I never have to do this again)

 

Some of these I should be able to knock off. The pictures of personal property actually might end up being a video (room by room) and description. Often these are better than just pictures.

The big killer, for me and for most people, is the Letter of Last Instruction. Let’s face it, its not a fun document, as it lists what happens when you die (not “if you die” but when – we haven’t discovered immortality yet). I’ve done some research on things to include:

  • Instructions about the funeral, memorial service, and preferred disposition of the body. Your loved one should also include any specific instructions for clergy and funeral directors.
  • Location of his or her will.
  • Names of friends and relatives who should be informed of the death.
  • Location of all important personal documents (birth or baptismal certificate, Social Security card, marriage or divorce papers, naturalization and citizenship papers, discharge papers from the armed services).
  • Location of membership certificates to any lodges or fraternal organizations that provide death or cemetery benefits.
  • Information about outstanding debts.
  • Location of safe deposit boxes and keys.
  • List and location of insurance policies. This should include the name of the insured, policy number, amount, company, and beneficiary for each life, health, accident, and burial insurance policy.
  • List of pension systems that may provide death benefits; e.g, Social Security, Veterans Affairs, railroad retirement.
  • List and locatoin of all bank accounts (checking and savings), stocks, bonds, real estate, and other major property (personal and business).
  • List of the names of various advisors, their addresses, and telephone numbers (lawyer, executor of the estate, life insurance agent, accountant, investment counselor).
  • Instructions concerning business operations, if any.
  • An explanation of actions taken in his or her will, such as disinheritances.
  • Personal information: full name, address and length of residence there; Social Security number; date and place of birth; father’s name and mother’s maiden name; marital status; names and addresses of children, spouse, and other members of the immediate family; schools or colleges attended and degrees and honors received; name of employer and position held.

I will probably start working on this in August, with the hope of having it done by the end of September. Wish me luck!

 

Mr. 39 months.

 

 

 

 

 

Updated personal files/disaster files

It is halfway through the year, and one of the things I wanted to work on was my personal files, or as ESI money often refers to them as, my Disaster files. We all keep records, either online or in paper form in a file cabinet. The key is to keep them organized in such a way that you (or your significant other) can quickly get the information that you need.

Typically, folks deal with these things when they first get the “setting up” bug, then let them lie for a significant period of time (sometimes years). I am very guilty of this, and the last time I updated them was back in 2013.

So as part of my mid-year review (and with the opportunity for a 4-day weekend for July 4th in the US), I took the time to dig in and see what I needed to work on. For everyone’s help, I’ve attached two pdf’s to this that I used when I was first setting up back in the 90s.

  • Something written for military personnel to show a file setup situation, by Lt. Cmdr. T. Connors
  • Something provided by USAA (the military insurance Co) for organizing records.

I hope they help everyone.

After going through, here were the deficiencies/tasks that I see I need to work on in the next 30 days to get myself back up to speed.

No Description
1 Update Master List from 2013
2 Send Master list to Mrs. 39 months
3 Price out updating wills – don’t need to update, no change from 2003
4 Redo filing cabinet with Master List & Disaster file #1
5 Letter of Last Instructions
6 Household budget folder (budget goals, income statement, balance sheet, income/expense forecasts)
7 Housing Information (Title, insurance, receipts for work, property taxes)
8 Online passwords
9 Location of keys to safe deposit box
10 Credit records: Resolution of past debts (auto, home)
11 latest credit report
12 Home Insurance Policy
13 Net Worth’s 2009 to present
14 Annual updates for Jan 1, 2017 into investments
15 Updated list of personal property
16 Pictures of personal property
17 Investments (list of accounts, goal planning, annual balance sheet)
18 Taxes: Tax records for previous year, current year documents
19 Guarantees & warranties (appliances, cars, etc.)
20 Personal background info (Education, personal history, resume)
21 Credit: Resolution papers of past debts, credit card names, numbers & 1-800 number
22 Auto Info: Insurance coverage, policies, auto registration, repair/maintenance records
23 Health insurance (Booklet from work, health history, medications, etc.)
24 Life Insurance (Insurance policies, etc.)
25 Safe Deposit: Title to auto, DD214, marriage certificate, letter of last instructions, copy of will, personal property inventory, zip disk with photos of personal property, passport)
26 Instruction letter (where to find everything, computer passwords, etc.)
27 Setup dates for regular updates to the files (so I never have to do this again)

Ouch. I have a lot of work ahead of me. Still, it will be good to have this done, especially as I progress towards financial independence.

Good luck with your mundane tasks.

Setting up your personal record file

Master List

Mr. 39 months

Final Ratios

The final ratios I want to discuss are Savings ratios and Growth ratios

 

Savings Ratios

 

You can use current income to pay for current consumption or to pay off past debts . The other option is to purchase assets that grow and create wealth – wealth that will provide financial security. This wealth is acquired by deferring current consumption and diverting income into long-term investments. The savings ratios measure the amount being saved and invested.

 

The first one is investment assets-to-net worth ratio = investment assets / total net worth (both items from net worth sheet).

 

This tracks increases of income and wealth producing assets. Many people have a significant amount of their net worth tied up in their personal homes (and when that value drops like in 2008, it can be catastrophic). This ratio helps to show improvement in non-real estate assets.

 

Based on our previous statements, the ratio would be $165,000 (investment assets) / $298,700 (total net worth) = 55.2%. This ratio should increase over time as you close in on retirement

 

The second savings ratio you should track is the savings-to-income ratio. It is a simple one, and its purpose is to determine the percentage of your income you save each year. You gain the data from your cash flow statement.

 

Based on the previous statements, the ratio for the previous documents would be $13,500 / $79,100 = 17% of their income, which is good for normal folks. However, for FIRE people, the percentage is a little low – most FIRE folks shoot for 30% – 50% or more. The ratio of savings you need to perform is based on your overall financial goals.

 

Note that this ratio should increase over time, especially as you pay off debts and the mortgage. Don’t just take pay increases and increase your lifestyle – always take some (or all) of it and put it aside into savings.

 

Real Growth Ratios

 

Inflation is the killer of savings, slowly bleeding your savings down until you have nothing left. If inflation is 3%, the price of a product will double in 24 years. How do you deal with this?

 

You save enough and invest correctly, so your money grows faster than the rate of inflation. You should use the growth of Net worth ratio to make sure you are keeping up with inflation.

 

Growth of Net Worth Ratio =[(Net worth this year – New worth last year) / Net Worth last year] – inflation rate

Example: [( 298,700 – 275,000) / 275,000] – .03 (inflation rate) = 0.056 or 5.6% Net Worth growth.

 

Then once you retire, you follow the 4% rule, adjust for inflation, and enjoy the good times!

 

Think of your financial ratios as a report from your annual financial health checkup!