- They each retire with a $500,000 portfolio.
- They each withdraw 4% of their portfolio in the first year of retirement, then adjust that amount upward each year to account for inflation (as measured by the Consumer Price Index).
- Their portfolios are identical: 60% in Vanguard Total Stock Market Index Fund and 40% in Vanguard Total Bond Market Index Fund, rebalanced at the end of each year.
- The only difference is that Leslie retired at the end of 1994, and Bob retired at the end of 1999.
As I wrote in my review of “Your Money Ratios”, Charles’ book sings to me. Charles has the ability to simplify complicated financial topics for the average reader to understand. His book is seriously one of the best books I’ve read on personal finance in a long while.
One of the keys to progress is learning from experts in their various fields. Charles is gracious enough to answer some follow up questions I’ve been burning to ask after reading his book. This will be a two part post due to the 2,800 word length of the interview. In part I, we discover Charles’ motivation for writing his book, strategies for early retirement, and his conservative and debatable 50%/50% investment split between stocks and bonds. In part II, we discuss the much maligned 401K, personal income taxes, why Social Security will survive, and why the flat tax is the right way to go! Please enjoy!
WRITING “YOUR MONEY RATIOS”
Question: Was there a particular lightning bolt reason why you decided to write this book? For aspiring authors, what suggestions do you have to get your worked published in this ultra competitive field of business?
Answer: I wanted to write a book that would help average readers understand the most fundamental and critical relationships among one’s income, capital and debt, and how those things must be managed throughout your working career to build financial independence. So I took what are often quite complicated topics and figured out a way to present them in a very simple format that anyone can follow. I would like more people to enjoy the benefits of financial independence, and I hope this book does that.
As far as writing, all I can say is write about what you believe in. Hopefully, if you believe in it strongly enough, you’ll develop some expertise and then seek out ways to spread your ideas. Try to develop some niche that is reflective of your expertise. So I developed the ratios and they came out of my background in tax, finance and also working with individuals.
Think about what you do that is a little different and try to focus on that unique nature of what you do. It is a tough slog because the field is very crowded and often the least valuable information gets the most press. But you have to accept that reality and still push ahead. And then you need a little luck. Your message has to somehow get into the hands of people who appreciate and understand it. And that is hard to predict, which means you need a little luck to get it out there. So if you are going to pursue that path, I think you need to accept those realities of the marketplace.
This week on Financial Samurai, we’ll share our thoughts on the latest government rhetoric, highlight a guest post by Flexo, introduce a new fun challenge, and perhaps discuss one of the key things to consider for job seekers.
THE SAMURAI FUND UPDATE: +3.85% vs. S&P 500 +1.88% as of Friday, Jan 15th. 203 basis points of outperform puts us in the Top Tier of all funds.
Stars: Lenar +25%, Toyota +8%, GE 9%, Harmon +7.4%,, Calgon +7%, Big Lots +7%.
Dog Poops: Lumber Liquidators -7%, Berkshire -1.6%, Steris -1.25%, ABM -1%, Monsanto -1%.
Looks like there’s some good demand from new entrants, and investors who want to give us several hundred million more to build new positions! Contributors, please provide an update on your name in the TSF page above, especially if your name is sucking wind. Will be making room for new names in February.
SAMURAI WEEK IN REVIEW
* People now realize that converting to a ROTH IRA is pretty ridiculous as Kevin M reminds us that the first $18,700 (equivalent to $470,000 in pre-tax funds at 4%) you withdraw from your retirement funds is tax free. Meanwhile, JoeTaxPayer highlights that if you retire with $2.17 million in today’s dollars, you only have to pay 15% tax! You’ll have to retire with more than $5 million dollars to average a 25% tax rate, based off a 4% income return. $5 million is only 50X your $100,000 “average” income. Always good to dream big for those of you who’ve justified your ROTH IRA contributions. Joe, you made my day!
* Family seems to be the number one reason why people choose to freeze during the winter, and melt during the summer. FYI, it is possible to make friends in paradise folks. It’s also possible for your family to fly out and visit you on the beach. If you’re miserable, don’t limit yourself! Just think about how much easier it is to travel now vs. 300 years ago.
* The “Get Financially Naked” book giveaway ends on Saturday, January 23rd. It’s a great little book for couples who feel they need some help in improving their communication as it relates to finance. With all our book giveaways, we’d like to share them with those who’d like and need them the most.
* Americans really shouldn’t complain about our finances since we’re wealthier than 99% of the rest of the world. That said, it’s all relative, and if everybody is wealthy, then it’s really hard to feel special. The key seems to be to amass your wealth, and move elsewhere!
Sam Samurai – “Slicing Through Money’s Mysteries”
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If you live in the United States, you are wealthy beyond what most others dream of. Your salary is 99% higher than of the world population. Visit areas like India, and Africa, and you’ll see what real poverty looks like. If you moved there, you could live like a king! Don’t believe me? Visit Global Rich List and plug in your yearly salary.
So what exactly does it mean to be wealthy anyways? It’s all relative to the environment you live in. What might be considered below the poverty level in the USA ($22,050 for a family of four), might be considered well off when living in say Uganda. According to the Global Rich List even at the US poverty level, you still make more money than 89% of the world.
If you look at the Wikipedia chart, you will see the USA has the most wealth compared to any other country (including Japan). No other country comes close to the USA. So while you may not feel wealthy comparative to what you see in the media, you still are better off than 99% of the world population. In terms of average income, the USA is only 13th in the world, but we still have more stored wealth than any other country.
Stop complaining that you can’t afford that new Lexus you lust for. Many people around the world don’t even own a car! They get from place to place by bicycle. It’s true you may not live like a rock star, famous actor, or business titan, but you live better than most.
Most people in the United States have:
Publisher: The Penguin Group. Hard cover. 257-pages. Price: $26.
Author: Charles Farrell, JD., LL.M., investment adviser with Northstar Investment Advisors, in Denver. He writes the “Retirement Roadmap” column for CBS Moneywatch.
Review: “Your Money Ratios” sings to me! For someone who loves using ratios such as the 1/10th rule for car buying, and 30/30/3 rule for home buying, I absolutely adore this book. Charles’ writing style is very balanced and easy to understand. When it comes to math, many people, including myself fall asleep. But, if you can just do simple division and multiplcation, this book will keep you on the right path towards financial security.
Charles’ “Unifying Theory of Personal Finance” is his core philosophy that all decisions you make should help move you from being a laborer to being a capitalist. In other words, make money work for you, and not the other way around. It’s important that with every single monetary decision you make, you ask yourself will this help you become a capitalist or not.
Capital To Income Ratio
With great pleasure, I announce the launch of The Samurai Fund!
Thesis: Through random selection based solely off permutations of reader’s names (personal or site title), we are able to create a long-only mutual fund that will outperform the S&P 500 index!
Fund Details: $1,672,003 billion launch, $100/share NAV, with 17 positions equally weighted. Concentrated multi-strategy portfolio with defensive names in the alcohol and utility space, as well as higher beta names in technology and health sciences. Small caps and large cap names included. S&P 500 start value 1,115 benchmark.
Investment Outlook 2010: The stock market continues to rebound, but at a slower pace. Inflation and interest rates remain benign, leading to a re-emergence of consumer spending. Housing stabilizes with 30-year mortgage rates staying below 6.5%. The government maintains record spending to stimulate the economy and the unemployment rate begins to fall in the second half of the year. The S&P 500 increases by 10-15% with a blue-sky target of 1,322.
Duration & Rules: One year. The bottom 3 performers will be up for review every quarter. To stay in the fund, one must write a convincing argument as to why we should not cut our losses. Picks down more than 20% also will be re-evaluated.
Goals: To have fun, learn something about the stock markets, prove a theory that luck plays a big part in performance, and to build better relationships with the community.
Contributors: Please retweet and spread the word to any of the social media sharing sites below. We need all the support we can get to outperform the professionals! Contributors are encouraged to provide updates and commentary as the months progress. If anybody wants to do a portfolio analysis below, please feel free to do so!
*** STOCK PICKS SUMMARY WITH CONTRIBUTORS ***
Company (Ticker): Boston Beer Company (SAM)
Market Cap: $668 Million at entry price $46.60.
Commentary: Love Samuel Adams beer, but with no dividend, lofty valuations and minimal earnings growth, it’s hard to see this defensive stock providing alpha to the fund. People need to drink in good times and bad!
Company (Ticker): ABM Industries (ABM)
Profile: A building maintenance and facility services company.
Market Cap: $1.09 Billion at entry price $20.65.
Commentary: The stock doesn’t look like it’s going to do anything spectacular in the short term but ABM is predicted to have consistent earnings growth throughout the year and has beat the analyst’s estimate every quarter for the last 4 quarters.
ABM is currently trading at $21.14 and the 1 year target estimate is $25.50. Volume peaked at 700k shares the week before Christmas and then dropped way off, and its trading well above the 50 day and 200 day moving averages, so it’s hard to tell if the stock price is going to continue to rise, trade sideways, or drop this week.
Not exactly a sexy stock but facility services should be fairly recession-proof and should do even better now that we’re supposedly heading into a bull market.
Company (Ticker): Harman International Industries (HAR)
Market Cap: $2.44 Billion at entry price $35.28.
Profile: Engages in the development, manufacture, and marketing of audio products and electronic systems in the United States and internationally.
Commentary: Don’t know a thing about the company but will be interesting to find out!
Company (Ticker): Calgon Carbon CP (CCC)
Market Cap: $786 Million at entry price $13.90.
Earnings Growth 2010: 47.2%
Profile: Manufactures and markets products and services employed for separation, concentration, and purification of liquids and gases (huh?). Drinking water and wastewater treatment, enviro remediation, and industrial process apps are its customers.
Commentary: Better than average predicted earnings growth for 2010 and trading right around the middle of its 52 week high so it could have some potential. I don’t pick individual stocks but this will be a fun one to watch!
Company (Ticker): Monsanto Co (MON)
Market Cap: 45.03 Billion at entry price $81.75.
Dividend (yearly): 1.30%
Earnings Growth 2010: 34.7%
Profile: Monsanto Company, together with its subsidiaries, provides agricultural products for farmers in the United States and internationally. It has two segments, Seeds and Genomics, and Agricultural Productivity.
Commentary: Monsanto has been beaten down pretty badly (it was at it’s high, over $145 per share), so it has some room to rise! People need to eat, and MON has some of the best engineered seed available.
Company (Ticker): Berkshire Hathaway (BRK-A)
Market Cap: 152.89 Billion at entry price $99,099.
Profile: a holding company owning subsidiaries engaged in a number of business activities. The most important of these are insurance businesses conducted on both a primary basis and a reinsurance basis. Berkshire also owns and operates a number of other businesses engaged in a variety of activities.
Commentary: Can you bet against the Oracle of Omaha? Until recently, Berkshire has done remarkably well year after year, investing in well known companies such as Coke, American Express, and P&G.
Company (Ticker): Steris Corp (STE)
Market Cap: $1.65 Billion at entry price $27.97.
Dividend: 0.44 (1.60%)
Estimated Growth in 2010: 4.1% (ouch!!)
Profile: Steris Corp develops, manufactures, and markets infection prevention, contamination control, microbial reduction, and surgical support products and services to healthcare, pharmaceutical, scientific, research, industrial, and governmental customers worldwide.
Commentary: With the hysteria of swine flu in the past and Lord knows what kind of mutation it will bring in the future, the company will stand strong in years to come. Medical tech stock tends to be a defensive stock during the bear market and move steadily in a hot market. You would DEFINITELY want it in your portfolio!
Company (Ticker): Big Lots Inc (BIG)
Market Cap: $2.42 Billion at entry price $28.98.
Earnings Growth: 11.5%
Profile: Big Lots, Inc. operates as a broadline closeout retailer in the United States.
Commentary: As a discount retailer, it does well when the economy struggles. In 2010, as the economy only begins to improve, Big Lots should continue to have success in the discount market.
Company (Ticker): PG&E – Pacific Gas and Electric (PCG)
Market Cap: $16.89 Billion at entry price $44.65.
Earnings Growth 2010: 7.6%
Dividend yield: 3.7%
Profile: PG&E is a public utility company that provides electicity and natural gas to northern and central California.
Commentary: Pop culture reference: villan in ‘Erin Brokovich’
Company (Ticker): Toyota Motors (TM)
Market Cap: $140 Billion at entry price $84.16.
P/E ratio (ttm): Nada – They’ve been losing money for the first time in over 50 years!
P/E ratio (fwd): 25X
EPS Growth: Yahoo lists 1200%? From zero that won’t be too hard!
Profile: One of the largest car companies in the world.
Commentary: Challenged by some quality issues they will likely continue to suffer for a few more months but I believe their commitment to continuous improvement (Kaizen) will help them out of this rut.
The continue to build good cars that have generic styling that appeals to a wide market. They are coming out with some new technology including plug in hybrid and are revamping the Lexus brand to draw in the younger crowds. If you like fast cars check out the Lexus all carbon body LFA!
Company (Ticker): Compellent Technologies, Inc. (CML)
Market Cap: $704 Million at entry price $22.68.
Earnings Growth 2010 (estimate): 31.0%
Profile: Compellent Technologies, Inc. is a provider of enterprise-class network storage solutions. The Company’s storage center is a Storage Area Network (SAN), that is designed to significantly lower storage and infrastructure capital expenditures, reduce the skill level and number of personnel required to manage information and enable continuous data availability and storage virtualization.
Commentary: Aggressive earnings estimates for a company that has yet to register large profits. I guess my entry will mimic the elements of the S&P that drags down the rest.
Company (Ticker): Lenar Corp (LEN)
Market Cap: $2.4 Billion at entry price $12.77.
PE: N/A (divide by zero – never a good sign)
Dividend Yield: 1.2%
Earnings Growth 2010 (est): showing losses
Profile: A leading home-builder in America.
Commentary: As I mentioned earlier, I think housing is on very flimsy stilts. The current anemic upturn (if you can call it that) only propped up due to government subsidies and bailouts so I would never recommend a home builder as a stock pick in 2010. But the rules are the rules, and as such I expect this component of your honorable Samurai fund to weigh it down like an old rusty boat anchor. LOL
Company (Ticker): General Electric Co (GE)
Market Cap: $162.5 Billion at entry price $15.13.
Commentary: With the recent pending sale of NBC Universal to Comcast this might be an interesting stock as GE attempts to get leaner, but really how lean can you make a company that has more than 323,000 full time employees. I suspect GE won’t be outperforming much other than say GM.
Company (Ticker): Monster Worldwide (MWW)
Market Cap: $2.2 Billion at entry price $17.40.
Earnings Growth: 167% for next year
Profile: Monster.com, a popular job search and placement site.
Commentary: I am picking this stock to keep with the play-on-the-blog-name theme, but I actually am pretty bullish on economic recovery so this recruitment giant isn’t entirely unattractive. I haven’t looked at the accounts or the balance sheet etc, though, and I’m not wildly familiar with US stocks (though I know many of the companies superficially) so I recommend it only for the FS fund, nothing more!
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Updated on 2/8/2015. Let the bull market continue!
It’s amazing how quickly time goes by. Usually, I get nostalgic this time of year, reminiscing about all the memories over the last 12 months. Not this year. Let us remember that we went through an economic blitzkrieg in 2009, and I am so glad it’s over!
The one thing I am really hopeful for is a rebound in employment. Over the past 3 months, I’ve encountered so many positive job data points in my industry from friends and acquaintances on the job front, I’m absolutely hopeful those who are seeking jobs, or better opportunities will find them in 2010. Companies always over fire during downturns, and therefore have to scramble to rehire in this upturn. Below are five more predictions you don’t even have to think won’t come true!
FIVE PREDICTIONS THAT MOST CERTAINLY WILL COME TRUE