Tuesday, December 17, 2013

Early Retirment Test Drive - Month 1

So it has almost been a month now. I would like to share my current experience with my early retirement. 

It feels a little strange that I no longer need to get up early in the morning and getting ready for work. However, it feels good when I no longer need to rush and it lets me slow down a bit. I usually did not eat breakfast until I rushed into work. Now I have been eating a proper breakfast. 1 health point! 

Now that I have more time, I have been spending more time on our blog. I have been trying to do one post a day and preparing a bunch of posts ahead of time. It has been much better than having no updates for a few months. It is true that writing is therapeutic. It heals. In writing about our experience and our goals, it makes me more certain of our goals of early retirement. 

Another great thing is to have grocery shopping done on the weekdays. We used to do that on Friday nights or Saturday morning, meaning bad traffic or long lines at checkouts. Late weekday mornings or early afternoons have less traffic and almost no lines at checkout, which saves us more time. Also, most stores start their sales on Wednesday or Thursday, so some of the items run out (no rain checks in some stores). Now we do not have to worry about that. Time is money!!!

With Mrs Y at home all day, that means more home made meals. I cook daily almost now. Less sandwich lunches for Mr Y, and more lunch boxes from home. Home made meals use more fresh meat and vegetables, and less processed food. Processed food contains much more sugar, sodium, and chemicals. Another health point!!!

Now on the things I haven't enjoyed. I used to only have about 8 hours or less between work and sleep. Now I have 16 hours - taking out the 8 hours of sleep a day. With all the extra time, what am I going to do? It is true I get to keep the house cleaner, write more blog posts and cook meals; however, I still end up with lots of time on my hand. It gets a little boring after the first few weeks. This makes me think about what we really want in early retirement. 

The difference between now and later will be that we both will be retired, not only me. Since we have been married, we have been doing most things together when we are not at work. Now I am alone at home, it feels strange. Also I am actively searching, meaning I am not 100% relaxed yet. 

However, one thing is certain. To achieve happiness in early retirement, having a hobby will be really helpful. Or early retirement will really just be a semi-retirement instead to avoid getting bored all the time.
 

Monday, December 16, 2013

Being Green to Save some Greens

Mrs. Y here again. I am not exactly a tree hugger, but have been socially aware of the environment wherever possible. Many times we do not realize that being green can actually save us an extra few bucks here and there. Today I will show you some of the small things that I do to save the environment and my money.

Bottled Water

Bottled water can be costly and not environmentally friendly. In the state of California, a tax is added when you purchase any kind of bottled beverage to discourage consumption. So if you live there, having your own water bottle will save you 5 cents a bottle at least. Now, most other states do not impose that tax, but try and do the math in your head. You grab a bottle of water/Coke for 99 cents a day at work for 5 days a week. You work about 20 days a month. That is about $20 dollars a month and $240 dollars a year. That is of course assuming only one bottle is consumed a day. At the same time, 240 plastic bottles are going to the landfill if not recycled. If you really need the convenience, please do recycle wherever possible.

Recycle/Trash

For our current waste management program, recycling is free of charge while trash removal costs money.  Many household waste items can be recycled, ranging from plastic bottles, milk cartons, plastic containers, to old newspapers. Utilizing the recycling service can reduce the amount of your trash removal. For a household of 2, we do not see any dramatic savings. However, for larger families in our neighborhood, without doing any recycling, they would use up to 3 garbage stickers a week instead of one. That is about $7 a week, translating to $365 a year.

CFLs

CFL bulbs have been on the market for years, and the cost of CFLs have  dramatically gone down to less than $1 a bulb (many times cheaper). CFLs use much less energy than a traditional light bulb and last about 6X longer. When we were renting, we always changed out all the existing light bulbs to CFLs. Now that we own a house, we use CFLs for most of our light fixtures. Based on ComEd (our electricity provider), each CFL can save up to $16 a year, assuming 20 lights in an average house, that will be $320 a year. Now, the new trend is LED light bulbs. However, at this time, they tend to be fairly costly and we haven't been catching up with the trend just yet.

Utility Company Programs

Across the country, some utility companies offer programs in the summer to conserve energy to avoid unplanned outages due to over-usage. They offer incentives from $5-$20 per month to install a device on the AC unit to send signals to reduce usage during peak hours. It helps and saves you a few dollars.

Companies also run recycling programs for home appliances or Energy Star appliances upgrades. If you are about to upgrade your house, make sure you check your local utility companies and fill out those rebate forms.

So those are just a few examples of saving money while saving the environment at the same time. What do you do for the Earth while saving a few bucks at the same time?

Wednesday, December 11, 2013

Funding Retirements (Post IRS Age)

Hi there! Mrs Y here. Last week we talked about passive income as part of our funding towards early retirement, but that should not be the only source for our retirement. Our retirement funding strategies should be divided into two segments: pre-IRS age and post-IRS age. Here are a few other items we are considering for the post-IRS age (59 1/2):

401K/IRA

Even though you won't be able to withdraw without a penalty until much later into retirement, it is still wise to put away money into these investments. Make sure to contribute to your maximum employer matching. The employer matching piece is additional funds as part of your total package. No contribution means you lose that money your company is willing to pay you. So think wisely and contribute to your 401k today. Of course if you have a better alternative investment, there is no need to reach the IRS max ($17,500 in 2013).

Roth IRA 

It is very much the same as IRA but contributions are after tax. For high income earners out there, double check the limit on your contribution as you might only qualify for a partial contribution. This helps if you are self-employed or your employers do not offer a 401k plan, or you just want to save additional money.

Health Saving Accounts

A health saving account is a tax-advantage health saving account for taxpayers who are enrolled in high-deductible health plans. Many employers offer the option and will provide additional funds if the employee selects that health care option. The difference between this and a flexible spending account is that the funds you contribute do not expire. These funds can be rolled over if not spent within the contribution year. Some accounts offers investment options when the account balance reaches certain amounts. You can find the contribution limits on the IRS website.

Now once you reach the age of 65, you will be able to use the funds for non-medical expenses without any penalty. However, it will be treated as income and will be subject to tax.  It is very much like an IRA if used after age 65. This can be used like additional savings, if you already reach the contribution limits for the year for your IRA.  More information can be found here.

All the funds above are subjects to a tax penalty until a much later age (about 20-25 years after our planned retirement age).

It is almost the end of the year. Did you put enough in your 401k or IRA yet?

Thursday, December 5, 2013

Passive Income

Many of the personal finance bloggers out there have a common goal: early retirement/financial independence. Most of them know that to achieve their goals is to have some sort of passive income.

There are two common passive income sources utilized by early retirees: rental properties and dividend stocks. Both require a fairly large one time investment.

For rental properties, of course, it will be the cash payment or the mortgage payments you have for the house which will be used to generate cash flow. Property values tend to remain fairly stable, and has potential to appreciate.  Being a landlord is probably not as easy as it sounds. Everything from maintenance of the property, to rent collection are not easy tasks. Also, selecting a lower taxed but renter friendly property is extremely important. To us, rentals are not a great choice. We are not very familiar with the local real estate market. Our local real estate market also tends to have one of the highest property tax rates in the nation. And finally, we not exactly handy enough to maintain the property ourselves, meaning more operating expenses. So that's a no for us in terms of rentals. Now this might change with JOB Acts (read more here). We might able to use crowd funding to include real estate as a part of our investments. 

Dividend stocks can also generate a fairly stable passive income stream. It does have its shortcomings as well. 
Graph from http://www.multpl.com/s-p-500-dividend-yield/
First, to be able to live off dividends, your base investment will need to be fairly large. Based on the graph below, we are currently at a 1.9% dividend yield, even though the all time average is at about 4%. In order to have about $24,000 of dividends yearly, you are looking at an investment of roughly $1.3M. Or at a 4% dividend yield, we are looking at about a $600k investment. To take the average, we are talking about investing $950k in dividend stocks.
Graph from http://www.multpl.com/s-p-500-dividend-yield/
Secondly, besides the large investment base, stocks have always been very volatile. It has been a great year for stocks and the overall market. The S&P 500 along with many other indexes have reached all time highs more than once and their outlook remains positive for the short term. But for how long?? That is the question we all want to know the answer to. There is a chance of losing the base value. However, a safer bet is to invest in index funds that do provide a dividend. To invest in the market, also known as diversification, can reduce risks greatly. 
Finally, companies can decide to stop paying or reduce their dividend payouts. Even though it will dramatically hurt the company stock price and can be a very costly move to the company, it might still happen. According to Bankrate.com, a record 62 companies in the S&P 500 cut their dividends totaling almost $41B in lost payouts in 2008, and another $30B in early 2009.  

Now, here is another passive income source we currently use and will continue to invest more in: P2P lending.  It is similar to a bank loan but funds are generated from individual investors online. The return averages from 8-12%, if not higher. You do face potential defaults though. However, it is always wise to purchase notes in many loans rather than a single one. We invest with both Lending Club and Proper. It has been great so far. It does tie up your base for a few years, but it easily beats those so called high-yield bank saving/CDs.

We are hoping that with a combination of a few things, we will be able to have a passive income stream to support our early retirement. We do not plan to touch the base investments until much later into our retirement. So what are you doing to prepare your passive income stream?



Tuesday, December 3, 2013

Mistakes

We are far from prefect and along the way, we made many mistakes. Here is a list of some of them.

Investing Too Late / Keeping too much Cash in the Bank

As I mentioned previously in another post, we did not invest until the past two years. Just based on the time value of money, we missed many, many opportunities and missed out some big returns between 2008 to 2010. However, we were still able to take advantage of some high interest rates at the time while interest rates were still around 3-4%. Having cash idle is never a ideal situation. We all want to have money making more money passively for us.

Not Buying Company Stock

Only purchase your company stock when it is sold to you at a discounted price (preferable 15% or greater). Mr Y stated his career with a public company offering employees a stock purchase program. If he did buy some stocks then, the stocks have been doing very well and almost double or tripled in price, with his discount. So later, when Mrs Y had the chance to purchase company stock at a discount, she did.

Buying Stocks/Timing the Market

There is no way to time the market. Even if there is, large funds will use that to their advantage, and will be rich  by now. Actively managing stocks and flipping stocks in the short term is not the best strategy, especially if you do have a full time job.  We were caught up in buying internet stocks. For example, Groupon. We brought some Groupon when it went IPO. Partially Mrs. Y's fault for not looking at the financials before hand. Even worse, when the stock dropped, we panicked and sold everything to realize a loss. It was not too much of a loss, but still a loss. Instead looking back, we should have brought more when it was at $2 or $3 share price to even out our cost basis to minimize the loss. DON'T TRY TO TIME THE MARKET. The best way is to buy index funds. Of course, if you truly believe in a company and its product, it might be wise to invest in the company. Telsa is a very good example. They have a great product line with almost no competitors. 

Not Using Insurance Benefits

I know most people try to avoid doctors or dentists. If you do buy health/dental/vision insurance through your employer, make sure you use those benefits. Routine cleaning and oral exams are almost 100% covered in most dental plans. Routine physicals are almost 100% covered as well in most health insurance benefits. We were busy and did not really utilize all those benefits.  Now, I realize that if I am already paying a monthly premium, I should have utilized the benefits even if I wasn't sick for preventive care. It is important to take care of your health at a young age. In the long run, it is a big investment in yourself.

So here are the four things on our list. What are some of your mistakes you made towards your retirement goals?




Monday, December 2, 2013

Wake Me Up - Song of the Week

Wake Me Up by Avicii. 

I really like the rhythm of the song, but never really paid close attention to the actual song until I watch the music video. The video is about a girl looking for the place to which she belongs. After seeing the video, I listened to the song one more time with the lyrics in front of me.

Throughout life, we are not always sure where we belong or what we are looking for. We get confused and we wander. For the financial independence journey, I will have to say that I have been fairly lucky that I wasn't lost for too long. I went to college and then to graduate school, and finally into Corporate America, like most people. After a year into the job, I realized that I was not exactly cut for the politics and b***s***. Many times, it is not all about whether you are good at your job or whether you work hard. Many other factors can be a part of the promotion decision. I accepted that it was ok for me to stay at a low level, as long as the pay was reasonable for the work hours and for the work done. It confirmed that I need a much earlier retirement. As we started reading all the personal finance blogs, we are more determined that it is possible to hit our early 40's retirement goal.

Life is too short to be worked away. There are things to do and place to be. So the song goes, "Hope I get the chance to travel the world but I don't have any plans". I do have a plan. I want to travel the world to see all the wonders and experience all the interesting cultures. But I agree with "life will pass me by if I don't open up my eyes". It might be a happy thing to say, but we are all eventually going to leave, and we will not get back any seconds we waste.

I guess I am very lucky to have a goal in life, so that I am not wasting more time looking for it. Well, here is the song. Hope you will like it and wake yourself up from all the confusion you have about your life's goals.



"Wake Me Up"


Feeling my way through the darkness
Guided by a beating heart
I can't tell where the journey will end
But I know where to start

They tell me I'm too young to understand
They say I'm caught up in a dream
Well life will pass me by if I don't open up my eyes
Well that's fine by me

[2x]
So wake me up when it's all over
When I'm wiser and I'm older
All this time I was finding myself
And I didn't know I was lost

I tried carrying the weight of the world
But I only have two hands
Hope I get the chance to travel the world
But I don't have any plans

Wish that I could stay forever this young
Not afraid to close my eyes
Life's a game made for everyone
And love is the prize

[2x]
So wake me up when it's all over
When I'm wiser and I'm older
All this time I was finding myself
And I didn't know I was lost

Didn't know I was lost
I didn't know I was lost
I didn't know I was lost
I didn't know (didn't know, didn't know)