Taking Early Retirement - I Retired Early

April 21, 2010
by Jeremiah
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Three Easy Investing Rules

First – let’s be clear. You’re not going to retire rich by investing in Certificates of Deposit (CDs) or money market accounts unless you already have five or ten million dollars. If you have five or ten million dollars, you can afford to put your money in a CD or money market paying 3% and get by living on the interest. Note that you can get by but you are not ever going to get richer. You are already rich. If you want to continue to build wealth, CDs or money market accounts will not get you there. Taking inflation into account, these accounts will not keep you rich either. You need to make over 10% annually, just to stay even, with taxes and inflation.

If you are like me, you never had millions to sock away in CDs or fixed income vehicles. I once owned a closed end fund of municipal bonds from Nuveen. In the tax bracket I was in at the time, the rate of return was over 10% taking into account the effect of not having to pay Federal taxes. It was also fun to talk about my muni bonds at parties, etc. I was out of the stock market for a while and was trying to get a better rate than CDs to park my short term money. Since I have learned about equity investments like stocks and mutual funds, 10% in a muni bond fund no longer appeals to me.

Second – if you are new to investing you need to know how to paper trade. Paper trading was something I learned from Ken Roberts, the author of “The World’s Most Powerful Money Manual & Course”. I bought the course through the mail in the mid eighties, and while I never really understood all of Ken’s teachings, it was where I learned about paper trading. Continue Reading →

April 19, 2010
by Jeremiah
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Should You Buy Stocks and Hold Them?

S&P 500 Track Record
July 1998 – August 1998 -2%
August 1998 – March 2000 +60%
March 2000 – October 2002 -49%
October 2002 – October 2007 +100%
October 2007 – March 2009 -57%
March 2009 – Present +68%

If you haven’t already, I suggest that you take a look at my article Investing For Retirement Course 101. Take a look at my five basic tenets for investing. Let’s discuss the first one – “I do not Buy and Hold”. There is a reason for that. Can I ask you one question? If you lose ½ of your investment in the market, what return do you have to make to get your original investment back? Did you answer 100%?

Set It and Forget It

Now if you invested in a broad market of stocks like the S&P 500 or maybe a S&P 500 Index back in July 1998 and held that investment until March 2010, what do you suppose you return would have been? I’ll give you a hint. The S&P 500 went up 68% from March 2009 until the present. Need another hint? The S&P 500 went up 100% from October 2002 until October 2007.

So how did you do? We will see how a “set it and forget it” plan works out. Let’s say you invested $100 in the S&P 500 in July 1998. In August 1998 the S&P 500 went down 2%, so your $100 would be worth $98 (2% of $100 = $2 and 100 – 2 = 98). From August 1998 until March 2000 your investment would have gone up 60%. Now your investment would be worth $156.80. Not bad, correct?

From March 2000 through October 2002 your investment in the S&P 500 Index lost 49%. Now your investment has lost $76.83 – that is 49% of $156.80. And your total is $79.97 (156.80 – 76.83). As I stated, you have to make a 100% gain to make up for a 50% loss in your account. So if you lose 49% between March 2000 through October 2002, that’s almost 50%. So for the next period of time, you need to make 100% to get back to where you started at $156.80. So how did the S&P do? Continue Reading →

April 7, 2010
by Jeremiah
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How Can I Retire Early?

Two Questions For You

At least once a week, four or five times a month, since I retired in September 2009, I hear the same question, “How can I retire early?” I always respond by asking two questions.

How old are you?
How old do you want to be when you retire?

Just Give Me An Age

The answer to question #2 is not, “I can’t afford to retire when I want to.” Tell me an age. Let’s say you are 40 and you want to retire when you are 55. That’s 15 years. But most of the people I talk to are not 40 years old. They are usually 50 and want to retire at 55. If you are 50, can you save $1450 every two weeks to reach your goal of retirement at 55?

Can you Save $35,000 a Year?

If you are 50, you can retire at 55 if you can save enough. Most people can’t save at that rate of $1450 every two weeks. It would take saving about $35,000 a year at a rate of 20% on your investments to get the same amount of money that a 40 year old would have at 55 using only $4,000 a year in a Roth IRA.

But you can only put $4,000 into your Roth until you get to be 55 and when you can put in $5,000, but you want to retire at 55 so that shoots that plan. Also your earnings every year will be taxable, since you are saving $31,000 more each year over what you put in the Roth. So your net result will be less. To offset a 28% tax rate, you’d have to save over $40,000 a year. So the goal of retiring at 55 might be unrealistic. Or maybe not, depending on your savings rate.

Can You Live On Less? Continue Reading →

April 5, 2010
by Jeremiah
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BEWARE of the Treasury Bond Salesman!

Treasuries Are At 4%

I got a Wall Street Journal Market Alert e-mail today. It said the interest rate for 10 year Treasuries hit 4% for the first time since June. So (yawn) what’s all the fuss? The 10 year Treasury rate is the benchmark for U.S. consumer and corporate borrowing. It means higher rates are coming for credit cards, mortgages, car loans, and other consumer and corporate borrowing.

Treasury Prices Going Down

The 10 year Treasuries going up and hitting 4% means the prices of Treasuries are going down. So if you are holding any Treasuries, the sale price they will go for in the bond market, in the future, has gone down. If you hold any 10 year Treasuries in your portfolio, your portfolio has taken a performance hit. Bond prices and bond interest have an inverse relationship. This means when rates go up, the prices go down. When rates go down, the bond prices go up.

What Are US Treasuries?

You probably already know about US Treasuries. These financial instruments, also called bonds, are what Washington sold to American and foreign investors and what the elected politicians in Washington used to pay for the excesses from 2001 – 2008. They used the proceeds of the bond sales to pay for the fix up of the terrorist attacks of 9/11/2001 in New York and Washington DC, the fix up for the aftermath of Hurricane Katrina, the Iraq war, and you name it. You’ll remember the last President never raised taxes to pay for any of these things. Wasn’t he a good guy?

Where Did The Money Come From?

So where did all the money come from? What the elected politicians in Washington from 2001 – 2008 did, was to raid the surplus sitting in the government bank account during the Clinton years AND they stole the Social Security surplus set aside to fund your retirement and your kids retirement for many years. They used the government surplus and the Social Security surplus to fund wars, hurricane and terrorist attack relief and payoffs. They also sold billions of dollars in Treasury bonds.

The American Payoff

Payoffs? Yup! Maybe you remember each American taxpayer got a $1200 check from the government back in the early nineties. Where did the money come from? It was sitting in the government bank account and the elected politicians in Washington thought everyone should have a pay day so they gave it away. Every taxpayer, single and married got a check for $1200. My wife and I each got a US government check for $1200 – $2400 total for doing nothing.

The last president gave away your Social Security surplus; and you are wondering if you will get any of the social security money when you retire? What do you think?

Getting Back To Treasuries

Let’s get back to Treasuries. Right now, we’re in danger of losing our best customers who pay for all those Treasuries the US uses to pay for the country’s excessive spending. China and Japan have already started scaling back their Treasury purchases – at the worst possible time. In February, the 30-year Treasury auction was so bad the Federal Reserve had to dive in to the market and buy up the long-dated Treasuries that didn’t sell.

In short, Washington needs Treasury buyers. So they raised the rate on Treasuries to 4% to attract more buyers. If Japan and China are cutting back, where are the buyers going to come from? I think that the guys in Washington are going to be looking to you… and the cash in your retirement plan to buy up those unwanted Treasuries. Personally I think the government will make you buy Treasuries for your retirement account in the next ten years – sometime in the next decade, for sure. This is NOT happening yet. But I think the day is coming.

For Taking Early Retirement (TER), I hope you are enjoying a great retirement or are close to that day!

Jeremiah John

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April 1, 2010
by Jeremiah
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Leaving Civil Service? Take Your FERS!

A Man Who Works For Civil Service

I met a man by accident at the tire shop when I was having my tires rotated. His name was Frank. He drove a Monte Carlo and was at the tire shop getting a plug for a tire that had picked up a nail. I told him about my military service and that I was a veteran and he told me he had worked in Civil Service for 9 years. We got along pretty well and we swapped phone information, etc. and vowed to get back together at some point in the future.

Retiring Before Age 60

I came across his information in my billfold two years later. I called the number he gave me and after a brief introduction, we agreed to get together for a coffee at a local coffee shop. He was finishing up his college degree and was thinking about leaving Civil Service for a job in corporate America. I told him of my plan to retire when I was 57. I discussed my retirement investment plan and we laughed about retiring early before age 60. He said he did not know anything about investing and was in the Civil Service FERS retirement program. We seemed to have a lot in common, but we were both really different from each other. We parted company and once more agreed to touch base sometime.

Research About FERS

When I got home, I did some research about the Civil Service FERS retirement program to learn more about it. It was established in 1987 for people joining Federal service for the first time and was designed to take the place of the defined benefit retirement plan employees who were hired before January 1, 1987 had in place. You can read more about CSRS and FERS in the articles I posted here and here.

Frank called me, this time, about a year later. He had gotten his college degree and had accepted a job with a large company. Since he was leaving Civil Service he remembered our conversation about early retirement and wanted to get together and discuss his FERS account. Could we meet again? I said yes, but it was going to cost him a latte’. We agreed to get together on the next long weekend at the coffee shop. I told him I would do some more research about the FERS retirement plan.

Take Your FERS!

The bottom line was that when we got together, I told Frank he should transfer his retirement account away from FERS and move it to a qualified IRA with a well diversified financial company like Fidelity. I’ll discuss the reasons why I gave him this advice in a future article.

Jeremiah John

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