Financial Samurai

With the average savings rate below 5%, a median 401(k) of only $100,000, and an average 401(k) balance at retirement age 60 of around $230,000, most Americans are financially screwed. Just do the math yourself. Add the average Social Security payment per person of $18,000 a year to a 4% withdrawal rate on $230,000 and you get $27,200 a year to live happily until you die at 85.

Let’s think about this some more. You spend almost 40 years of your life working just to live off minimum wage in retirement. Hopefully you were able to live it up during your working years, otherwise, how else can we explain a national sub 5% savings rate? Blowing lots of money for fun is fine if you expect to live like a pauper when you’re old. The better way to do things is to smooth out your spending across your expected life expectancy to reduce stress and live a much steadier lifestyle.

We’ve talked in detail about the proper asset allocation of stocks and bonds by age. Just know that stocks should be a minority portion of your net worth by the time you are middle age. If you so happen to have 100% of your investment allocation in stocks before retirement and 2009 happens, well then you are poop out of luck. Calculate how much you lost, equate your loss to how many years it took you to save the value of the loss, and expect to work that many more years of your life. Now that’s depressing.

We also found out that the median net worth for 2010 plunged to $77,300 from a high of $126,400 in 2007. Surely the median net worth has recovered since 2010, but such data from the government only rolls around every three years. The main nugget of information is that from 2007 to 2010, the median home equity dropped from $110,000 to $75,000. In other words, the median American’s net worth almost ENTIRELY consists of home equity! What another bad idea.

Finally, despite a 120%+ rebound in stocks since the bottom of the crisis and savings interest rates of only 0.1% due to a dovish Fed, a lot of people missed out on the recovery as evidenced by a tremendous amount of cash still sitting on the sidelines due to fear. Billionaire hedge fund manager David Einhorn is suing Apple for hoarding their $134 billion in cash due to a “grandma depression mentality.” Anybody who has lived through the 1997 Russian Ruble crisis, the 2000 internet bubble, and 2006 housing correction probably has a good portion of their net worth in CDs, bonds, and money markets because they’ve been burned so many times before.

The question we must all ask ourselves is, “What is the right net worth allocation to allow for the most comfortable financial growth?” There is no easy answer to this question as everybody is of different age, intelligence, work ethic, and risk tolerance. I will attempt to address this question based based on what has worked for me, and what I believe will work for anybody who is serious about building enduring financial wealth for the long run. I’ve spent over 10 hours writing this post in hopes that every Financial Samurai reader can build a rock steady net worth portfolio to make money in good times and lose less in bad times.

THE MENTAL FRAMEWORK FOR NET WORTH ALLOCATION Read more…

Early retirement is fantastic. There’s only one problem. Most early retirees no longer contribute to their 401Ks unless they start a business. Not only that, early retirees lose employer 401K match and profit sharing. I just took a look at my final year’s employer 401K profit sharing plus match and it came out to $27,000. There’s much more to your job than just your salary!

My 401K makes up a minority portion of my stock exposure as I’ve been aggressively investing through structured notes and after-tax accounts. Furthermore, I’ve been receiving more deferred company stock than desired. Although $400,000 is not a lot to retire on, it’s the best I could do after maxing out for 13 years after college. It should serve well for illustrative purposes to see how a portfolio can grow under different assumptions.

With the way the government loves to spend our money, I wouldn’t be surprised if the retirement age for distribution without penalty increases beyond 59.5 or the government imposes a “distribution tax” to take more of our money. That said, we can hope for the best by reducing our mutual fund expenses and creating different scenarios to better prepare for our future.

The best way to increasing our odds for retirement success is to run various investment scenarios. I will run three investment scenarios (Conservative, Realistic, Blue Sky) using the free 401K investment analyzer by Personal Capital. Regardless of whether you are retired or not, I encourage everybody to perform at least these three scenarios and write down some notes. Early retirees need to be extra diligent given we are more dependent on our investments to survive. If you have years to go before retirement, I suggest you pretend you are retired now so you can develop a fire to be all over your money!

CONSERVATIVE 401K PORTFOLIO SCENARIO Read more…

It’s reflection time here at Financial Samurai. I’d like to go over some of the most visited posts by search, the most commented posts, as well as other posts I think are worth highlighting. I wrote over 200 articles in 2012, so there’s a lot to sort through!

I’ve done my best to be as helpful as possible on important subject matters such as investing, retirement savings, and career moves. We’ve got one life to live, so we might as well get our finances in order to live it to the fullest!

The theme of this site is to slice through money’s mysteries to achieve financial independence. I’m not one to shy away from providing my own opinions when I feel strongly about a subject. If I think you are wrong, I will tell you so and provide reasons why. I hope you do the same because that’s the best way we can learn.

It’s important that Financial Samurai never turns into a factory site with neutered content. I started Financial Samurai in 2009 as an outlet for my frustrations about the financial crisis. I hope none of us ever revisit such times, although our government is doing their best to bring us there with the budget debacle! If I ever hire staff writers, I will make sure they come with their own thoughts and not be afraid to challenge conventional wisdom and defend their positions.

Without further ado, let’s recap the year 2012!

Top Five Most Read Posts Written In 2012 On Financial Samurai

1) How Much Should People Have Saved In Their 401Ks At Different Ages? (168,422 views, 431 comments) - A positive sign visitors are taking the initiative to understand whether they are on track for retirement. Although I do not think the 401K is enough for most people to live off in retirement, it’s a big portion of the retirement puzzle. I get the sense that despite the growth of our government, more people are coming to realize they should only depend on themselves.

2) What Income Level Is Considered Rich? (108,232 views, 147 comments) - The term, “class warfare” was bantered around a lot during the Presidential campaign, pitting the wealthy against the not-so-wealthy. People wanted to find out what income level started to make people “evil.” There’s so much hatred towards people who have more. Hopefully this post helps provide some perspective that cost of living is very different across the country.

3) The Average Net Worth For The Above Average Person (81,800 views, 233 comments) – Taking things one step beyond income to find out what above average people have in terms of net worth. Everybody believes they are above average, but that’s mathematically impossible.

4) Definitions Of A Middle Class Income: Do You Consider Yourself Middle Class? (76,300 views, 106 comments) – With so much talk from Obama and Mitt about how they plan to take care of the Middle Class, everybody is wondering whether the candidates are talking about us!

5) Don’t Get Fired Or Quit, Get Laid Off Instead (42,283 views, 143 comments) - There’s tremendous dissatisfaction in the workplace. Studies show that less than 50% of workers are happy at their jobs and a full 25% hate their jobs. The economic downturn of 2009-2010 created pent up demand for those who want to move, but couldn’t. As the economy continues to get better, I forecast a surge of people looking to find more meaning in their lives by taking the leap of faith and doing something they truly want to do.

* For reference, the most read post was written two years ago and received over 450,000 views in 2012.

Top Five Most Commented Posts Of 2012 (Outside The Top Five Most Read) Read more…

It took me two years to engineer my own layoff because I was concerned and didn’t know how. There were no resources on the market that could guide me to quit my job with money in my pocket. What was I supposed to say, “Hey Boss!  If you give me $200,000 I’m outta here!” over coffee one morning?

What if I quit and my bank account goes dry in six months? What if I can’t find a new job in a new industry that I really love? What if my entrepreneurial endeavors fail miserably and some exogenous variable knocks me out for the count?  What if I turn into a deadbeat with no more motivation to do anything again?

I didn’t hate my job, I just didn’t love it anymore like I once did 13 years ago. Nothing is worth doing for an extended period of time if you don’t love it. Ten years in a row is the maximum amount of time I can truly commit to one occupation or firm with full enthusiasm. To go much longer would be unfair to my employer, to others who have a deeper hunger, and ultimately to myself.

I kept questioning what type of idiot would quit a good job in this type of economy? After a while, I started asking myself what type of idiot not to quit in this economy! Wages are down, profits are abysmal, and industries are going through multi-year consolidation phases that won’t be pleasant.

With no kids, a 16-18 year financial safety net, and a clear idea of what I want to do after my separation, I decided to make the move in 2011 after creating a healthy stream of passive income over the past 13 years. I was so close, but couldn’t pull the trigger because I was STILL too unsure. What I needed was that one last kick in the pants to send me on my way to entrepreneurship.

FINDING THE CATALYST AND UNDERSTANDING HOW Read more…

Tonight I do not have to set the alarm because tomorrow I do not have to go to work.  After 13 years of climbing the corporate ladder, I finally reached the roof and discovered everything was as imagined.  A lot of sun with the occasional pigeon cooing out yonder.  I can now see through the entire valley, down towards the ocean.  I am officially retired!

Ever since my first job in 1999 I’ve been saving like a juggernaut so that one day I might retire early.  I’ve definitely had my ups and downs with the internet bubble, housing bubble, financial sector meltdown, and now the European debt crisis.  There were several times I wanted to quit due to the immense pressure.  But despite all of this, I stuck through it and “The Nut” continued to grow to the level of self-sustainability.

When I first graduated from college, I was presented with two choices.  Choice number one was to go to Shenzhen, China and become the head of operations for a family friend’s new eyeglass factory after two years of training.  It wasn’t a sexy job, but I would be able to fulfill my goal of working abroad, becoming fluent in a second language, and riding the China boom.  The idea was to get some work experience and then do something on my own in the wild, wild East.  Just two years prior, I got a chance to experience China for the first time as an exchange student and loved it.

The second option was equally exciting, working for a powerhouse firm in New York City to get rich the old fashion way.  I was told around 8,000 people globally applied for 60 spots and for some reason, I got one of them.  Although I had nothing to lose by going to China, I decided to play it safe and stay in the United States.

Despite appreciating the past 13 years, I’ve always wondered what it would be like if I took the other route.  Perhaps it’s the reason why I’ve traveled internationally every year since graduation.  Too bad we can’t live two concurrent lives!  I’m an adventure seeker who moved around as a kid every two to four years thanks to my parents’ work.  Staying in one place longer than five years was absolutely foreign to me.

After playing things conservatively for so long, I finally feel like now is the time to shake things up!

TAKING A LEAP OF FAITH IS EASIER WITH A LONG RUNWAY Read more…

Everything is relative when it comes to money.  If we all earn $1 million dollars a year and have $5 million in the bank at the age of 40, none of us are very wealthy given all our costs (housing, food, transportation, vacations) will be priced at levels that squeeze us to the very end.  As such, we must first get an idea of what the real average net worth is in our respective countries, and then figure out the average net worth of the above average person!

According to CNN Money, the average net worth for the following ages are: $9,000 for ages 25-34,  $52,000 for ages 35-44, $100,000 for ages 45-54, $180,000 for ages 55-64, and $232,000+ for 65+.  Seems very low, but that’s because we use averages and a large age range.

The Above Average Person is loosely defined as:

1) A person who went to college and believes that grades do matter.

2) Does not spend more than they make because that would be irrational.

3) Saves for the future because they realize at some point they no longer are willing or able to work.

4) Largely depends on themselves, as opposed to mom and dad or the government.

5) Takes responsibility for their own actions when things go wrong and learns from the situation to make things better.

6) Has an open mind and is willing to look at the merits of both sides of an argument.

7) Welcomes constructive criticism and is not overly sensitive from friends, loved ones, and strangers in order to keep improving.

8) Has a healthy amount of self-esteem to be able to lead change and believe in themselves.

9) Understands the mental to physical connection in everything we do so that that a healthy mind corresponds with a healthy body.

10) Enjoys empowering themselves through learning, whether it be through books, personal finance blogs, magazines, seminars, continuing education and so forth.

11) Has little-to-no student loan debt due to scholarships and part-time work.

Now that we have a rough definition of what “above average” means, we can take a look at the tables I’ve constructed based on the tens of thousands of past comments by you and posts I’ve written to highlight the average net worth of the above average person.

THE ABOVE AVERAGE NET WORTH DECONSTRUCTED Read more…

If you ever want to be absolutely free, you need to develop multiple income streams so that when the inevitable change happens, you’ll be covered.  I first recommend you start with the end in mind. What makes you happy?  From this question, now you can derive how much money you honestly think will make you happy.

Once you’ve digged deep to answer these two important questions, you can then start building your income goals.

What makes me happy?

Family, friends, experiences, travel, freedom to say and do what I want, sports, relationships, the online community, hot tubbing with drinks, food and enough money to not have to worry. Good old nostalgia really makes me happy too.

What makes me unhappy?

Racists, bigots, haters, lying politicians, bad bosses, cronyism, inequality, people who say one thing and do another, thieves, and zealots who impose their will on others. See this post for more.

How much money do I need to achieve what makes me happy?

Anywhere from $3,000 to $15,000 a month after taxes to account for a single life to one that provides for a family of four.

I really don’t need much to be happy if I’m supporting only myself and have no debt.  I was super happy living on nothing while in school, so $3,000 a month after tax would be fine.

$15,000 a month after tax is a large nut that equates to about $235,000 in gross income a year, the income level where I think maximum happiness is attained. With $15,000 a month, I can afford private school tuition for two if necessary, go travel 8 weeks a year, get huge and eat whatever I want, have a paid off car, live in a comfortable home practically anywhere in the world, and continuously save for a rainy day. Furthermore, $15,000 a month after tax can be used to help my parents in case they need financial help for whatever reason.

Think about an after tax monthly income number you’d like to achieve and let me know. For now, it’s time to open up the kimono and see what can be produced after over a decade of saving and investing. This is a long post, so make sure you go to the bathroom first!

CONSTRUCTING THE FREEDOM PORTFOLIO Read more…