June dividend income and over-valued markets

In June, our dividend portfolio provided $606.03 in passive income, surpassing our previous 1-month record of $387.16 in December, 2015.  It’s also a big improvement from last June’s $159.24 in dividends, though it’s not quite apples-to-apples since two ETFs that paid us dividends in June (VTI and VXUS) paid their dividends in July of last year.  In July, 2015, we received about $140 from those two, so even adding that dividend income to last June’s number, we are still up over 140% year-over-year.  Our goal is to generate $90k in passive income per year, so we are a long ways off from that goal, but it still feels nice to make progress toward our goal.  I should note that the majority of our dividend-producing securities are stock ETFs, which pay quarterly dividends, corresponding to the stocks they hold, so that was part of the reason June was such a strong month for us, and a $600 month in June does not equate to a $7,200 annual run rate (unfortunately).  This is different from certain bond and preferred stock ETFs, which may pay monthly dividends.

With the news of the Brexit and all of the uncertainty surrounding Europe, I’m reluctant to invest a lot of cash into the stock market these days.  For now, I’m keeping most of our left-over income in cash or fixed income products.  At some point, I’m hoping for more of a pull-back in the market, to put the cash to work, much like the rest of the other readers of personal finance and early retirement blogs, I’d imagine.

At this point, even outside of the uncertainty surrounding the Brexit, the current S&P 500 P/E ratio at above 24 is significantly above both the mean (15.60) and the median (14.63).  This link shows the P/E ratios, as well as other relevant information:

http://www.multpl.com/

In Robert Shiller’s book, Irrational Exuberance, he has a chart that shows 10-year stock market returns for various PE ratios in the S&P 500.  I read the book years ago, so I don’t remember what the expected return would be when the P/E ratio is at current levels, but I know it is not a good expected return.

At this point, I’ll plan to continue to mostly sit on the sidelines with our extra income.  We are still investing some money in the stock market on a regular basis since both my wife and I contribute to our 401(k) accounts, but we’re just not putting most of our excess cash into the stock market, like we were doing at this time last year.

How about you?  Any readers have strong views one way or the other regarding stocks or dividends these days?

What can happen in five years?

Since we are now less than 5 years from my planned early retirement date (the date is based on me reaching a certain age, and my birthday is in June), I think it makes sense to review what I’ve done over the past five years.  I read somewhere that people generally over-estimate what they can accomplish in 1 year, but under-estimate what they can accomplish in 10 years.  Based on my experiences, I think that is a pretty accurate statement.

Here are some accomplishments and life events my wife and I have experienced over the past five years:

  • I got engaged, and then married
  • My wife and I have welcomed two beautiful children into the world
  • My wife and I have bought and sold a house
  • I have lived in three different states
  • I’ve been with the same company for the five years, but have been promoted twice, and my base salary is now just over 150% of what it was when I joined the company
  • I bought a car, originally financed over 4 years, but I paid it off in about 2.5 years; my wife has a paid-off car, as well
  • I paid off all of the student loans I had from graduate school, after graduating with my MBA in 2006
  • I have increased my investible assets by over $300,000, growing my taxable brokerage accounts from $0 to six figures
  • I’ve read countless books, including fiction books, as well as non-fiction books, including history, philosophy, finance, investing, and self-help/motivation
  • I started a blog called Turtles’ Tipping Point

While life is not linear, and it’s difficult to predict what will happen in the coming months and years, here are some goals I plan to accomplish, and their deadlines, during the next five years:

  • Continue to raise two healthy children, being the best father and husband I can be – ongoing
  • Keep my mind healthy, focusing on the future and positive thoughts and actions – ongoing
  • Move to the same place where my wife lives, either through a job with my current company, or a new one – by late 2016
  • Dividends at an annual run rate of $3.5k – December 31, 2016
  • Gain financial freedom – June of 2021
    • Dividends at an annual run rate of $100k – June of 2021
    • Have contributed >$50k to each child’s 529 college savings account – June of 2021 (tracking the contributions because I have (at least some) control over the contributions, but really no control over how Mr. Market behaves over time)
  • Weigh < 160 – December 31, 2016

There are many other short-term goals I need to accomplish while on the way to accomplishing those goals, but those are the main ones I’m focusing on at a high level for the next five years.  Examples of the nearer-term sub-goals I am working on include things like improving my savings rate, promotions and raises at work, and fitness goals, such as running a certain distance in a certain time, or lifting a certain amount of weight.

What about you?  How have your last five years gone, and what are some of your goals and expectations for the next five?

Should you pursue early retirement?

This may seem like an easy question, but I’m convinced that the answer is not necessarily easy, and is not the same for all people.  While I know I want my family to achieve financial freedom by June 2021, the reality is that I don’t anticipate a conventional retirement of playing golf and lounging around all day.

In his book, The Happiness Equation, Neil Parischa points out that there are 4 S’s we derive from work; Social, Structure, Stimulation and Story. He goes into a bit more depth on each topic, but the gist of his theory is that we need the social interaction, structure to our days, mental stimulation of completing tasks, and the stories of the companies or organizations for which we are working in order to feel happy.

I can’t disagree with any of Parischa’s points, and when I consider my pending financial freedom, I realize I will need to satisfy those human needs I had been meeting from work through some other means besides a normal 9-5 job.  This was an interesting realization to me, as when I first began thinking about financial freedom, I had this idea that I would sit around all day doing nothing, and I would be happy in that situation.

Since reading Parischa’s book and a few others, I’ve come to imagine a different life once my family has reached financial freedom.  As I mentioned in an earlier post, I have a better idea of the items I plan to leave behind once I leave the work force (primarily office politics, stupid pointless bureaucracy, dependence on an employer and boss, etc.) than I do of the lifestyle I have at that point.

I also read The 80-20 Principle by Richard Koch, and he put together a really interesting framework for people to consider what type of work would be best for them.  There is a vertical axis that represents person’s need for achievement, while the horizontal axis is divided into different types of organizations or structures in which the person should work (working in large organizations, self-employed, and employing or organizing others).

The combination of these two books got me to realize that while I think we should all strive for financial independence sooner rather than later in order to have the option to stop working for a time, or take a lower-paying position that we may enjoy more, early retirement is not for us all.

I think it’s key to realize what drives us when we are making big decisions, like changing jobs or quitting the workforce altogether.  I know myself well enough to realize that most of the work-related stress I’ve had and my desire to reach financial freedom quickly stems from me not particularly liking working for other people or having people work for me. There are people who desire power, and enjoy ordering people about and organizing them to complete tasks, but I just do not get a lot of happiness from this.

I prefer to not need approval or get approval from anyone; independence is what I crave most.  I also do not have a strong need for achievement.  I know this in part because I know people who do have a strong need for achievement, and who prefer working in large organizations or managing others, and I can sense that I just don’t have the same ambition or desire in those situations as those people have. I’ve still managed to get promotions, and do well in corporate life, but admittedly, not as well as some peers of equal or less (in my humble opinion) ability.

Before reading Koch’s book, I would sometimes wonder why I just didn’t have same desire to move up the corporate ladder as others had.  I wondered why I was so detached and un-engaged on occasion, but now that I know Koch’s framework, I understand the reasons, and understand that I am better suited to working as an independent contractor or consultant of sorts, or not working at all.

How about you?  Is it early retirement or bust for the readers out there????

Actions taken so far

Although I just started blogging about my family’s journey to financial freedom, I have been taking actions toward this goal for the past few years.  Below are some of the steps my wife and I have taken to get to where we are at this point on our journey.  While we’re happy with the progress we’ve made so far, we have a long ways to go to reach the tipping point, but the progress we’ve made so far gives us confidence we can get there in time.

  • Paid off my student loans – I graduated from business school with my MBA in 2006, and at one point, had over $110,000 in student loans to my name.  I paid the last of these off in 2014.  It was a happy day to know I know I no longer owed that money, and it freed up my cash flow by a little over $300 per month.  I was greatly inspired by No More Harvard Debt, and while it took me a bit longer than it took Joe (the site’s founder) to pay off the debt, I did accomplish the goal.  My wife graduated with her MBA 1 year after me, and has already paid off her student loans, as well.
  • Paid off two cars – my wife and I now have to cars that are completely paid off.  We each moved out of New York City a few years back, and when we did, we bought new cars and settled into new lives in different parts of the country.  Now that we have a growing family, we may be buying a larger car or an SUV in the future, but we plan to pay cash for any new vehicle, and not to have a car payment again in the future.  For me, with a 4-year car loan, paying off my car increased my cash flow by over $600 per month.
  • Cut the cord on our cable – I held onto cable for longer than I probably should have, in large part because I love sports, and watching football on Saturdays and Sundays in the fall is one of the more enjoyable activities for me.  However, since we have a growing family, I have less time to watch sports, and it’s more enjoyable and rewarding spend time with my family anyways.  I just made this change recently, as I am currently living apart from my wife, but this change has increased my cash flow by approx. $100 per month (Internet is $55/month, Netflix is $10/month, and my previous bundle package was $165/month).
  • Got a roommate – this is the biggest recent change, and has proven very rewarding financially.  My wife and child are currently living in a different city from me, and I travel pretty much every weekend to see them, so it just seemed wasteful to be paying for two bedroom apartment in the Bay Area, while using only about 1/2 the space approximately 2/3 of the time (5 out of 7 days), so I put an ad in Craigslist and found a gentleman with a similar family situation to mine.  He works for Apple.  He works long hours, and his family is currently residing in Southern California, so he is gone most weekends, as well.  This has worked out very well, as I have made a new friend and the money I receive each month to help with the rent has subsidized my plane tickets to visit my family.  My roommate moved into the apartment only a few few weeks after my wife and daughter moved out, so the overall impact to cash flow has been small.  I receive slightly less than $1,400 per month to help with the rent, but spend approximately the same amount on flights and parking during the same time frame.  While I don’t necessarily enjoy being a male in my forties living with another man, this situation has worked out better than I anticipated, and I don’t feel as wasteful as I otherwise may have felt if I had not taken this step.  It’s obviously nice to have some help to pay rent to boost the savings rate, as well.
  • Small steps toward frugality – I have also taken a bunch of smaller steps to help save money.  These are minor steps, but I think the end result of many steps together will move the family toward financial independence sooner. I bring part of my lunch to work each day (grabbing lunch in the office cafeteria with my co-workers has proven to be a good break, and has enabled me to socialize and unwind during a given day, so I’m reluctant to bring my whole lunch), cutting down on my Starbucks trips (I still have coffee, but generally buy a larger container of Starbucks iced coffee for about $5, and just bring a cup to work each day, the larger container lasts about 1 week for me), cooking more at home, checking out more books and books on CD from the local library.

So, there you have a it; a summary of the main actions we’ve taken up to this point to help push us toward the tipping point.  I will be posting passive income received and savings rates each month starting in June, but thought it was important to document some of the steps we’ve taken to date on our journey to financial freedom.

How about you?  Have any readers made some similar, or different steps on the journey to freedom?

So, how much will it take?

I believe that in order to live the lifestyle we wish to live in early retirement; we will need roughly $7,500/month, or $90,000/year.  I am very confident that this number will change over the next 5 years as we approach our early retirement date, but number is my best guess at this time.  There are a few items I think about when considering how much passive income we’ll require at that time.  Some of the main ones are:

  • Tax rates of dividends and capital gains versus the tax rate my wife and I are paying while working full-time. Right now, dividends enjoy much better tax treatment than wages, but that could change in the future.
  • Our future housing situation and city/state of residence. We are currently living in different cities, but plan to be living together again soon.  We would like to buy a house when that happens, so we expect to have a mortgage payment, but the size of the mortgage will vary greatly depending on where we live.
  • Health insurance once we are no longer working. Once neither my wife nor I are no longer on our company plans, we will have to find health insurance for the whole family, and it’s difficult to estimate how much that will cost five years from now.

At a 3% yield, $90,000 per year would require a portfolio of just about $3 million.  That’s a massive sum, and seems pretty daunting right now, but that’s what we’re shooting for.

As for a portfolio to accomplish this 3% yield, it would have to be something like the one shown below.  It is 60% in common stocks (VTI and VXUS), 12% in preferred stocks (PFF), 15% in bonds (VCIT and VGIT) and 13% in real estate (VNQ).  You can see from this sample allocation that I am more interested in low-cost ETFs rather than stocks in building up my portfolio.  This is largely due to my background as an equities trader, and a lot of academic research that has shown how difficult it is for fund institutional managers to beat the market over time.  That being said, I do currently own a few individual stocks that I have generally bought at what I believed was a discount after news events that hurt the price of the stock without (in my view) negatively impacting the long-term value of the business.

Potential early retirement portfolio
Potential early retirement portfolio

There are certain tax considerations I will have to keep into account as we begin building toward a model similar to the one below.  For instance, the dividends provided by the corporate bond ETF I chose (VCIT) are not qualified dividends, and are taxed at a higher rate than dividends from regular stocks.  The REIT dividends from VNQ are also taxed differently than traditional dividends.  We will look more into tax efficiency and optimizing the portfolio for taxes as we get closer to the tipping point, since tax laws may be slightly different in 5 years compared to now.  More to follow on asset allocation in coming posts, especially as we approach 2021.

How about you?  What does your early retirement portfolio look like?

Why seek early financial freedom? And why blog about it?

When I think about the life circumstances that pushed me in the direction to seek an accelerated path to financial freedom, a few experiences and moments of inspiration come to mind.  I am in my early 40s, and up until just a few years ago, I had the idea, generally accepted by most Americans, that I would continue working my way up the corporate ladder into my late 50s or even into my 60s, before enjoying my well-earned retirement.

I work for an “old tech” company in the Bay Area, and a few years back, I was working on a project, and spending my entire days swamped in Excel files and PPT presentations, and it was just an incredibly soul-sucking experience.  On a whim, I happened upon a story about a blog called www.nomoreharvarddebt.com , and my life began to change.  From there, I discovered Mr. Money Mustache, Retire by 40, Financial Samurai, as well as a few other personal finance/financial blogs, and I knew what I wanted.  I wanted financial freedom.

I no longer wanted my well-being, and the well-being of my family to be dependent upon a continuing paycheck from big business.  I wanted (and still want) my independence, the freedom to enjoy life on my terms, and not on somebody else’s.

The plan is to reach financial freedom by June, 2021, just over 5 years from now.  I’ve read that when working towards a goal, it is most productive and motivational to have a very clear vision of what you want to accomplish in order to sustain your desire to get there.  Since my world is slightly in flux at the moment (more to come on this in upcoming posts), it is difficult to be able to describe in detail exactly what I want.  But I can describe pretty well what I do not want and will not miss when I leave corporate life:

  • Having to swallow my pride on a regular basis being nice to people who are not showing any sort of common courtesy or respect to me
  • Working late hours because a senior leader couldn’t make a decision in a timely manner
  • Arguing over tiny inconsequential details in presentations, scripts and other documents
  • Watching other more senior people in the organization receive raises and promotions largely on the backs of people like me, while I got a fraction of what I felt I earned based on our relative contributions to the goals of the organization
  • Having to constantly stay on guard to avoid having other people take credit for my work
  • Sitting in traffic while commuting to and from the office during the worst traffic of the day

I don’t have the clearest vision for what I want my life to look like after I reach financial freedom, but some activities I plan to enjoy:

  • Spend more time with my family, including family vacations, coaching kids’ sports, etc.
  • Travel more often both domestically and internationally
  • Attend sporting events like NFL, NBA, college football games, etc.

In terms of why I started the blog, there are really just a few very simple reasons.  First, I like to write, so it’s a fun activity for me.  Second, when I first decided to set a goal to retire early, I found so many great blogs, and read through them pretty quickly, and I found myself wanting more, so I’m hoping to return the favor to someone who is starting out and looking for kindred spirits on the same path to freedom.  Third, I have some experience in financial services, having worked as a trader in NYC from the mid to late 2000s, and believe I have a good perspective to share with curious readers.  Finally, I think I have a different perspective on the journey to financial freedom than some of the other bloggers out there today.  I am working toward financial freedom for a growing family, and similar to me, my wife works for a large corporation, so I have a perspective not only as a guy working in big business, but also as a parent, and as a husband to a woman who is also climbing the corporate ladder.

So, there you have it.  The reasons I started the blog, as well as a general vision of how I want my life to look, but a clearer description of what I don’t want in my life.  The plan,on a very high level, is to increase my family’s saving rate and invest the surplus over the next 5 years to build out a robust passive cash flow stream to replace the active income I will no longer receive once I stop working.

I know it won’t be an easy journey, but I am now more excited about my future than I’ve been for a long time.

How about you?  Any readers beginning or continuing their own journey toward financial freedom?

About this site

I built this site to document my family’s journey to financial freedom.  I am a father and a husband, with a beautiful wife, one young daughter, and another child on the way.

It is called Turtles’ Tipping Point because in life, I have found that the surest way to accomplish goals is to make incremental progress on a regular basis, sort of the moral of the story of the tortoise and the hare. The Turtles in this case represent my family on our journey from being dependent on my wife’s and my corporate jobs to being financially free to live life on our own terms.

The “tipping point” portion in the title refers to the time when the passive income streams we are currently building up become large enough to support our lifestyle as a family in America.  Once we have reached this tipping point, we will no longer be beholden to our current corporate 9-5 lifestyles, and can leave the rat race for good.

Our goal is to reach the tipping point in June of 2021, approximately five years from starting the blog.