Drawing down a windfall...

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Tarkus
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Drawing down a windfall...

Post by Tarkus » Sat Sep 06, 2014 1:03 pm

Three years ago, at the age of 41, I sold a majority stake of my business to a private equity group. They valued my business at $10 million. At the time, my industry was growing at an unprecedented rate. I thought it was probably an unsustainable growth rate, but I wasn’t sure. I hedged my bet and took $6 million in cash and left $4 million in the business.

I became a salaried employee, earning a nice income – I got a five year contract earning $250,000 per year, though I am no longer running the company. This was less than we had been taking home in the two years prior to the sale, but significantly more than we were earning in the 20 years before that. As our income grew, our expenses grew with it – we bought a $1 million house and began sending our two children to an expensive, private elementary school. $250,000 was barely enough to cover our expenses, but it still seems to me quite a lot of money. (We don’t live in a particularly expensive city.)

My wife and I had to reconcile our differing views as to how to handle the windfall. Ultimately, we agreed that we sacrificed so much, lived in places in which we did not want to live, and worked so many long hours that we should finally start enjoying the fruits of our labor. We wanted to travel with our young children, buy some nice things, eat out whenever we want, and do some house projects, etc. We did not feel the need to leave our children a massive trust fund, although we did want to make sure that we funded 4 years of whatever college they wanted to attend.

We decided we would augment our income with some calculated annual withdrawals from the investment portfolio. So we exited the “accumulation” phase and entered the drawdown phase. Because we are in our forties, we have to make the money last – we decided to withdraw no more than 4% of our portfolio value every year to fund our lifestyle. In the back of our minds was always the idea that there would be a second payday when we sold the remaining 40% of the business.

In the hands of my private equity partners, however, the business has not done well. They were very aggressive and leveraged the business to the hilt, taking on a huge multi-million dollar bank loan to acquire a competitor. That decision only made sense if the growth continued, and starting about a year ago, the industry has been flat or shrinking. In 2013, we missed our budget considerably. Earlier this year the bank demanded that the investors de-leverage the company, and with a gun to my head I wrote a check for my share of the “capital call”: $1.4 million. To have done otherwise would have meant being diluted out of the business I worked so hard to build. (I have a lot of doubts and angst about whether I made the right decision.)

We are now left with $2.8 million in “liquid investments”, meaning taxable investment accounts, retirement accounts, and 529 accounts. They are invested largely at Vanguard, and our overall allocation is 65% equity, 35% bonds. We have another $700K of equity in our house. We also have $1.2 million of equity in commercial real estate that brings in about $80K of income per year. I conservatively value my investment in my company to be worth $0. So, in total, we have about $4.7 million of net worth. (Just three years ago I thought we had about $11 million of net worth!)

So… I guess I am wondering if we are crazy to be withdrawing from our portfolio to fund our lifestyle. There’s simply not a lot of advice available on people who are drawing down their investments even prior to retirement.

Are we on the right track or misplaying our hand? What would you do in my shoes?

Leeraar
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Re: Drawing down a windfall...

Post by Leeraar » Sat Sep 06, 2014 1:14 pm

Let me see, 4% of $6 million is $240k, plus your salary of $250k. You may live another 50 years.

And, you are asking, is your $500,000 per annum lifestyle sustainable?

No.

L.
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Lafder
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Re: Drawing down a windfall...

Post by Lafder » Sat Sep 06, 2014 1:18 pm

Tarkus,
As I read it, you are at risk of your networth dropping even more. You are spending more than you are making and your job does not sound very secure.

You may get some more detailed investment advice if you post your holdings like this http://www.bogleheads.org/forum/viewtop ... f=1&t=6212

You mentioned assets, what about debt?

You have already noted that your net worth dropped from 11 million to 4.7 million. I understand part of that is the unexpected loss in value of the company you own a portion of. But having to kick in 1.4 million means you lost even more than what you thought you had.

It sounds like a great time to get a handle on your expenses, needs vs wants, and reassessing how to make the $ you have last and grow.

Note that the stock market has been up in the past 3 years, so your networth has gone down even more considering your holdings should be up much more than the 4% you are withdrawing.

Have you and your wife read The Milionaire Next Door? It might provide perspective.

The business just might take off again. But it also might close leaving you no income, or ask for another big cash infusion.

While it is a first world problem to figure out how to make the most of your 4.7 million is assets, and business intelligence/hard work/employability, you may be at a bit of a crossroads that will make a big difference in your future quality of life.

best wishes,
lafder

livesoft
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Re: Drawing down a windfall...

Post by livesoft » Sat Sep 06, 2014 1:20 pm

I don't see any difference between drawing down your portfolio now and later in retirement. You might as well consider yourself early retired.

In your shoes, I would move to a place with a great public school system and take my kids out of private school. Full disclosure: I live in a place with a great public school system and my kids are now in college. I am also early retired.
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SimpleGift
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Re: Drawing down a windfall...

Post by SimpleGift » Sat Sep 06, 2014 1:26 pm

Tarkus wrote:There’s simply not a lot of advice available on people who are drawing down their investments even prior to retirement.
Since you and your wife are in your 40s, you likely have a 50-year investment horizon remaining. While it's not unreasonable to be withdrawing from your nest egg at your age, I believe that 4% is much too high a withdrawal rate for such a long remaining life expectancy.

With your long, 50-year investment horizon, I'd be looking at the advice on safe withdrawal rates normally given to foundations and endowments. You might find this study by Jim Otar helpful:

"Perpetual Withdrawal Rates for Foundations, Endowments and Charitable Trusts"

His conclusion: A maximum of 2.3% annual withdrawals from portfolios with 50% stock.
Cordially, Todd

22twain
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Re: Drawing down a windfall...

Post by 22twain » Sat Sep 06, 2014 1:32 pm

Tarkus wrote:Three years ago [...] I got a five year contract earning $250,000 per year
So you've got two years left on that contract, right? What are your employment prospects after that, at your current company or elsewhere?

trueblueky
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Re: Drawing down a windfall...

Post by trueblueky » Sat Sep 06, 2014 1:34 pm

I would cut expenses. You have $250,000 for two years, if the company doesn't go under first, then what? You also have $80,000 income from real estate. In a not-particularly-high-cost area, that would seem to be way more than enough. On top of that, you were drawing down 4% of $6 million = $240,000/year. This is not sustainable at your age. 4% is a round figure estimate of the sustainable withdrawal rate for a 65-year-old. Sounds like you know that, but haven't convinced your spouse.

Time to plan. What will you do when the two years are up? If you live on the real estate income and a sensible drawdown, how much would you have to live on? You can't drawdown the 529 yet, so that's 2-3% of some amount less than $2.8 million (I'd guess $50,000 annually). What can you do now to reduce your expenses to the $130,000 level, or at least get on that glidepath before the five years are up?

You're fortunate to have accumulated so much wealth at such a young age. You can continue to live a better lifestyle than most and much more cheaply than you have been. Depleting your retirement account in your 40s is risky.

Edit: didn't see the five years started three years ago. This is worse than I thought at first.
Last edited by trueblueky on Sat Sep 06, 2014 8:51 pm, edited 2 times in total.

freddie
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Re: Drawing down a windfall...

Post by freddie » Sat Sep 06, 2014 1:51 pm

Lafder wrote:Tarkus,
As I read it, you are at risk of your networth dropping even more. You are spending more than you are making and your job does not sound very secure.

You may get some more detailed investment advice if you post your holdings like this http://www.bogleheads.org/forum/viewtop ... f=1&t=6212

You mentioned assets, what about debt?

You have already noted that your net worth dropped from 11 million to 4.7 million. I understand part of that is the unexpected loss in value of the company you own a portion of. But having to kick in 1.4 million means you lost even more than what you thought you had.

It sounds like a great time to get a handle on your expenses, needs vs wants, and reassessing how to make the $ you have last and grow.

Note that the stock market has been up in the past 3 years, so your networth has gone down even more considering your holdings should be up much more than the 4% you are withdrawing.

Have you and your wife read The Milionaire Next Door? It might provide perspective.

The business just might take off again. But it also might close leaving you no income, or ask for another big cash infusion.

While it is a first world problem to figure out how to make the most of your 4.7 million is assets, and business intelligence/hard work/employability, you may be at a bit of a crossroads that will make a big difference in your future quality of life.

best wishes,
lafder
The 11 million is one of those delusional numbers, that never really existed except on paper. At best after paying taxes it would have been like 9 million:) But all that (and the 1.4 million dollar donation to the company) is all water under the bridge. You can't do anything about it now. At this point you have to decide what your life is going to be going forward. My big concern would be what are your job prospects in 2 years when your contract expires. Are you going to get fired or get a big raise? Can you get another job and what is the likely salary? Having to live off 160k is a heck of a lot different than having to live on 250k.

From a mathematical point of view you need to figure what date you want to retire and figure out if the portfolio growth by then will be enough to meet your needs.

JW-Retired
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Re: Drawing down a windfall...

Post by JW-Retired » Sat Sep 06, 2014 2:27 pm

Tarkus wrote: We are now left with $2.8 million in “liquid investments”, meaning taxable investment accounts, retirement accounts, and 529 accounts. They are invested largely at Vanguard, and our overall allocation is 65% equity, 35% bonds. We have another $700K of equity in our house. We also have $1.2 million of equity in commercial real estate that brings in about $80K of income per year. I conservatively value my investment in my company to be worth $0. So, in total, we have about $4.7 million of net worth. (Just three years ago I thought we had about $11 million of net worth!)

So… I guess I am wondering if we are crazy to be withdrawing from our portfolio to fund our lifestyle. There’s simply not a lot of advice available on people who are drawing down their investments even prior to retirement.
It sounds like you are still spending as if you had a reliable half million a year income? ($250k salary + 4% of $2.8 million + the $80k of property income = $473k.)

Agree with others you need to cut expenses. What is making the spending so high?
JW
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cjking
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Re: Drawing down a windfall...

Post by cjking » Sat Sep 06, 2014 2:58 pm

Simplegift wrote:His conclusion: A maximum of 2.3% annual withdrawals from portfolios with 50% stock.
That 2.3% is of the initial balance, for a steady inflation-linked income. I think OP is taking fluctuating income of 4% of current balance. I used my own rule of thumb to calculate a (fluctuating) withdrawal for the OP, on the assumption that the younger member of the couple currently has an actuarial life-expectancy of 35 years, and got an amount that equated to about 4% of current net worth. So I think 4% of current balance is OK for them.

Globalviewer58
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Re: Drawing down a windfall...

Post by Globalviewer58 » Sat Sep 06, 2014 3:00 pm

Drawing no more than 2% from the portion of the remaining $2.8 million that is considered retirement assets would be my goal. This requires prioritization of spending. Note that I would not be withdrawing the equivalent of 2% of the 529 balances as this is likely intended for education expense in the future.

There may be some learning from your fabulous payday and subsequent market events for your former business. The biggest learning point is diversification. I don't fault your desire to leave 40% of your payday in the company. Once burned, I would be shy about contributing the capital to keep your share of the business. Your real estate holding represents another concentrated investment. It may be worth thinking about liquidating the real estate in favor of a diversified portfolio. Reinvesting dividends is a standard Boglehead practice but it appears you are currently spending the $80K of income from the property.

You and your wife have an opportunity to adjust spending now to preserve more of what you earned. You are relatively young so your wealth needs to be treated as the golden goose for the coming 50 years.

retiredjg
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Re: Drawing down a windfall...

Post by retiredjg » Sat Sep 06, 2014 3:12 pm

A 4% withdrawal rate (which includes both the cost of investing and the taxes on the money withdrawn) has historically been sustainable for 30 years. To my knowledge, nobody every looked at a time period longer than that. You have the possibility of a lot more than 30 years and we don't even know if that 4% will work going forward. And if you are not counting the taxes (many people don't think of that) then you are withdrawing more than 4%.

I don't think what you are doing is sustainable if things don't go very smoothly in terms of both finances and health. What you are doing might work if all the stars align. But it might not work under many scenarios (including unexpected illness or disability). And if it does not work, the consequences could be fairly grim. Hoping it will work out is not a strategy. I think you need to develop a strategy that will work if/when things go awry.

Don't expect your kids to be happy about this. They will likely feel cheated and be very angry. Don't let that affect your good judgement. The greatest gift you can give them is your own financial security in your older years.

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dratkinson
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Re: Drawing down a windfall...

Post by dratkinson » Sat Sep 06, 2014 3:20 pm

If memory serves, the 4% safe withdrawal rate was recommended for a 30-year retirement horizon: 65-95. Starting withdrawals in ones 40s would require a much lower rate to sustain.

One additional wrinkle. There have been recent topics about current market returns only supporting a 3% safe withdrawal rate: "3% is the new 4%". If true, then believe your safe withdrawal rate to be closer to ~1.5%.

To be truly conservative, I'd plan not to touch the remainder of your windfall until you actually retire. Why? Because tapping into a one-time windfall can give a false sense of wealth encouraging us to take on permanent unsustainable new lifestyle expenses. Because you may need it for another capital call, if you plan to maintain your equity share.

Your've got your contract salary ($250K) and your commercial income ($80K), so $330K/year. That's all you can reasonable expect to spend now, and less in full retirement.

There is no guarantee your 5-year contract will be extended at the same rate: a business in decline requires cost cutting, so plan for this eventuality.

You don't mention it so suspect you have been thinking of your business equity as your retirement fund so have not been contributing to formal retirement plans. Believe you should be doing this for yourself and for your wife (spousal IRA).

Plan for the worst. Hope for the best.

One possible exception. Your wife can be allowed to spend her after-tax/401k/IRA salary as she likes.

Read the Wiki topic on how to handle a windfall.
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Tarkus
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Re: Drawing down a windfall...

Post by Tarkus » Sat Sep 06, 2014 3:23 pm

We have no debt to speak of... $300K of mortgage on a $1 million house.

What is making the expenses so high? We spent $441K last year, not including income tax. Yes, quite astonishing. The biggest discretionary contributors last year were:
  • quite a bit of travel, $57K
  • painted our house: $20K
  • private school: $42K
  • new car: $55K
  • shopping (clothes, gifts, electronics): $57K
  • eating out: $13K
  • pet-related expenses: $11K
This year we've done a great job of cutting all of these expenses -- we've been more disciplined and our YTD expenses have outpaced our income by $20K... oh, except we added on to our house and have spent another $150K on top of that. :oops: So, maybe we're not really that disciplined yet.

Yes, these are truly first world problems! But when we sit down to construct a family budget I'd like to make sure we do it in such a way that doesn't cause us to prematurely deplete our remaining wealth. So we'll have to reconsider the 4% we have been taking, which would amount to $115K next year if we continued on the same path.

As some of you have divined, my job prospects are uncertain. I think I am a valuable contributor, but I am also a big ticket that might need to be cut. I should be employable, but I doubt if I will ever earn $250K outside my own company. I'm an entrepreneur, and I'd be most comfortable starting something from scratch, but that takes time and money. I'm currently working every day to make sure my existing company is on a solid footing and can survive some of the bad luck and aggressive risk taking. I'm thinking a little bit about what I would do next. I don't really want to stop working.

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LAlearning
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Re: Drawing down a windfall...

Post by LAlearning » Sat Sep 06, 2014 3:31 pm

You are one of these people: http://online.wsj.com/articles/six-figu ... 1409936418

You need to stop.
I know nothing!

freddie
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Re: Drawing down a windfall...

Post by freddie » Sat Sep 06, 2014 4:04 pm

Tarkus wrote:We have no debt to speak of... $300K of mortgage on a $1 million house.

What is making the expenses so high? We spent $441K last year, not including income tax. Yes, quite astonishing. The biggest discretionary contributors last year were:
  • quite a bit of travel, $57K
  • painted our house: $20K
  • private school: $42K
  • new car: $55K
  • shopping (clothes, gifts, electronics): $57K
  • eating out: $13K
  • pet-related expenses: $11K
This year we've done a great job of cutting all of these expenses -- we've been more disciplined and our YTD expenses have outpaced our income by $20K... oh, except we added on to our house and have spent another $150K on top of that. :oops: So, maybe we're not really that disciplined yet.

Yes, these are truly first world problems! But when we sit down to construct a family budget I'd like to make sure we do it in such a way that doesn't cause us to prematurely deplete our remaining wealth. So we'll have to reconsider the 4% we have been taking, which would amount to $115K next year if we continued on the same path.

As some of you have divined, my job prospects are uncertain. I think I am a valuable contributor, but I am also a big ticket that might need to be cut. I should be employable, but I doubt if I will ever earn $250K outside my own company. I'm an entrepreneur, and I'd be most comfortable starting something from scratch, but that takes time and money. I'm currently working every day to make sure my existing company is on a solid footing and can survive some of the bad luck and aggressive risk taking. I'm thinking a little bit about what I would do next. I don't really want to stop working.
Still have 186k unaccounted for. Through in 16k for a mortgage and 20k in property tax you still looking at 150k of expenses that aren't listed. I worry more about them than just about anything on your list since that whole list can be pretty much zeroed out if needed. Now it is important not to confuse 1 time expenses (I assume your not buying a new car and painting the house every year) the long term spending, but 441k would require something north of 600k (depending on your exact tax situation to sustain). You are not remotely that rich. Heck even if you got your 5.4 million back, you barely be rich enough and would still need to keep working. In your current state you can afford just about anything. But you can't afford everything. Right now your like the lottery winner. You will be "broke" in 10 years.

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Re: Drawing down a windfall...

Post by The Wizard » Sat Sep 06, 2014 4:46 pm

I agree with all the others.
You and your spouse should be GROWING the windfall for the next few years, not drawing it down.
At least to the point where the kids are out of the house and the end of college expenses is in sight.
It would be most advisable for you to make some significant changes and soon...
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bertie wooster
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Re: Drawing down a windfall...

Post by bertie wooster » Sat Sep 06, 2014 4:56 pm

I agree with others that, even though you have a lot of money, you are spending too much.

The other thing that concerns me is that this business appears to be a sunk cost that you continue to put money ($1.4 million!) and effort into. You yourself intimated that you'd like to start another company. Leave the current company (which your private equity buyers appear to have wrecked) and start something new.

And cut those expenses!

Calm Man
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Re: Drawing down a windfall...

Post by Calm Man » Sat Sep 06, 2014 5:00 pm

I've been around and seen those businesses where you are "sucked in" in that if you don't keep meeting capital calls, you have nothing. But then, you are giving the capital to people who have run the business into the ground and your additional funds may not be enough and they may want more.

I do wish you had read about handling a windfall before you started doing so. You have burnt down a lot of the money and people in your shoes can literally go broke with expensive houses, expensive private schools, 1 or 2 non-working spouses, etc. I would focus on looking hard at your lifestyle and I would really have a talk with yourself about what you are going to do when the next capital call comes. Because as you know that additional capital finds its way to funny places. Good luck to you.

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Kenkat
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Re: Drawing down a windfall...

Post by Kenkat » Sat Sep 06, 2014 5:26 pm

Another rather obvious "you are spending too much".

You could not buy a $55,000 car and spend $7,000 instead of $57,000 on vacations next year and save $100,000 on those two things alone. People afford a pretty nice lifestyle on that amount.

You had a couple of flush years after 2 decades of hard work and enjoyed it. Great. But the days of buying anything you want are over - you need to make some decisions on where you spend your money rather than trying to figure out how to generate more money coming in. You can't make an effort to cut expenses and then spend $150k on home improvements. You just can't.

I'd try to figure out how to get by on the $250,000 salary. That doesn't sound all that stable either so I sure wouldn't be tapping my nest egg on top of that.

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Re: Drawing down a windfall...

Post by Leeraar » Sat Sep 06, 2014 5:31 pm

You may want to make a plan like Gregory Olsen, who sold his company, saw the buyers' management run it into the ground, bought it back, built it up again and then sold it a second time.

He is a physicist in Princeton who then took a Soyuz ride to the space station.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

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Toons
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Re: Drawing down a windfall...

Post by Toons » Sat Sep 06, 2014 5:34 pm

You are spending too much money.
Ask yourself this question,Do I need it or do I want it
Develop a budget,look at what goes in and what goes out, Stop Spending Money Frivolously.
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Jazztonight
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Re: Drawing down a windfall...

Post by Jazztonight » Sat Sep 06, 2014 5:49 pm

...pet-related expenses: $11K
My wife recently dropped the health insurance she'd been carrying on our cat, Graciela, who, in my opinion, is a slug and contributes nothing to our home except fur, which she sheds at will.

I, on the other hand, had a pet scorpion, Ibsen, for six years (see avatar). I fed her every three months, whether she was hungry or not. Cost? About fifty cents a quarter.

Back to you: I agree with all that's been said and suggested. You and your family have the opportunity to live well and very comfortably if you all take control of lifestyle spending.

Do you think that's possible?

Remember, you're dealing with Bogleheads here.
"What does not destroy me, makes me stronger." Nietzsche

livesoft
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Re: Drawing down a windfall...

Post by livesoft » Sat Sep 06, 2014 5:54 pm

How does one find the time to spend all that money? I'm retired, but it still takes time to decide on a painter, plan vacations, go on vacations, decide on remodelling, and shop. And sometimes you just want to lay in bed and do nothing, so that takes time, too.
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Leeraar
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Re: Drawing down a windfall...

Post by Leeraar » Sat Sep 06, 2014 6:11 pm

livesoft wrote:How does one find the time to spend all that money? I'm retired, but it still takes time to decide on a painter, plan vacations, go on vacations, decide on remodelling, and shop. And sometimes you just want to lay in bed and do nothing, so that takes time, too.
You have people.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

freddie
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Re: Drawing down a windfall...

Post by freddie » Sat Sep 06, 2014 6:42 pm

Leeraar wrote:
livesoft wrote:How does one find the time to spend all that money? I'm retired, but it still takes time to decide on a painter, plan vacations, go on vacations, decide on remodelling, and shop. And sometimes you just want to lay in bed and do nothing, so that takes time, too.
You have people.

L.
Or a wife:). More seriously you just buy expensive stuff. It takes the same amount of time to buy and drink a 100 dollar bottle of wine as it does a 10 dollar one. Or a 6k bed versus a 1k one.

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burt
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Re: Drawing down a windfall...

Post by burt » Sat Sep 06, 2014 6:47 pm

Live below your means (you are not doing that).
Financial security is freedom, peace of mind, and tranquility.

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edawg
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Re: Drawing down a windfall...

Post by edawg » Sat Sep 06, 2014 8:25 pm

Tarkus, My grandfather's story from the 1930s sounds very much like yours. In his case, he lived very well during the Depression years pulling down $30K plus incentives (400K+ in today's dollars). And they had the house in New York city... and paid for 3 kids to go to the finest prep schools. And vacationed in nice places in the summers. And later on, those kids expected daddy to pay for a similar lifestyle ever after and were ruinous, leaches the rest of their days (well except for one daughter who married VERY well who spent her husbands money wisely in later years). And he divorced and lost the critical mass of capital to fund the lifestyle until my grandmother came along (she was the "saver" who counterbalanced his "spender" personality).

So FWIW, it seems your values are from a high place (ie, more humble) if you made a business that "brings rain" to provide a living for all the people who work for you while you're asking the questions to this forum. So a situation where you can cash-out of the albatross, er big house, invest time in the kids while still having a mission for yourself (when they begin to fly on their own) sure seems a better way to live. This could be another small business, working for incubators for other start-ups or something along those lines. Peace of mind and soul is priceless.

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Re: Drawing down a windfall...

Post by Quickfoot » Sat Sep 06, 2014 8:30 pm

Yep, you should be able to more than meet your needs with $250K a year, I would NOT be drawing down the windfall but instead downsizing your living expenses. 4% a year is aggressive if you want the money to be around for retirement as well, if you don't need it for retirement 4% is reasonable.

Looking at your expenses from last year your spending is out of control (especially travel, shopping and private school). Time to ditch the private school, stop shopping, reign in vacations, maybe downsize the house and in general reign in the other expenses that you've convinced yourself or been convinced you deserve.

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Re: Drawing down a windfall...

Post by trueblueky » Sat Sep 06, 2014 8:45 pm

cjking wrote:
Simplegift wrote:His conclusion: A maximum of 2.3% annual withdrawals from portfolios with 50% stock.
That 2.3% is of the initial balance, for a steady inflation-linked income. I think OP is taking fluctuating income of 4% of current balance. I used my own rule of thumb to calculate a (fluctuating) withdrawal for the OP, on the assumption that the younger member of the couple currently has an actuarial life-expectancy of 35 years, and got an amount that equated to about 4% of current net worth. So I think 4% of current balance is OK for them.
We weren't given exact ages. A 40-year-old female has life expectancy of 42.32 more years. A female age 49 has 33.97 more years, according to SS 2010 actuarial life table. The IRS joint table for two 40-year-olds is 50.2 years. Recall this is average; 50% will live longer. Therefore, advise against 4% withdrawal rate.

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gardemanger
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Re: Drawing down a windfall...

Post by gardemanger » Sat Sep 06, 2014 9:17 pm

The line item for travel seems extraordinarily high. That, plus expensive private schools, suggests the possibility that the kids might be over-scheduled or even overwhelmed by all this stuff you're throwing at them. What kind of travel are we talking about here?

You didn't mention the ages of your children, but it might be worth re-thinking the kind of quality time/enrichment you want to provide for them at their current ages. Common sense suggests (and research backs up) that kids grow up more creative and resilient if they have time and space to just mess around. Having family activities where you really interact (can be cheap to free), and also having unstructured time for the kids to do their own thing (free) will probably have a better payoff than the rat race of over-scheduled childhood.

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Re: Drawing down a windfall...

Post by PoeticalDeportment » Sat Sep 06, 2014 9:18 pm

livesoft wrote:How does one find the time to spend all that money? I'm retired, but it still takes time to decide on a painter, plan vacations, go on vacations, decide on remodelling, and shop. And sometimes you just want to lay in bed and do nothing, so that takes time, too.
Nice try Mr. 33439, but I think we know how you spend your time!

Tarkus
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Re: Drawing down a windfall...

Post by Tarkus » Sat Sep 06, 2014 9:29 pm

I read the WSJ article this week (Google "Six-Figure Incomes—and Facing Financial Ruin"). It was eye-opening. I have been meaning to print it out and share it with my wife so she can read it too. :)

I have already decided that we can not participate in any more capital calls. This has been far more ruinous to our wealth than the overspending. We'll just take the dilution. It's far too risky for us to play this game.

2013 was our worst year of overspending; we spent $143K more than we earned. It required that we liquidate 3.4% of our (at the time $4 million) portfolio to maintain. In a strange way, I might argue that 2014 is an improvement, at least as far as "lifestyle spending" is concerned. We're already $115K in the red YTD, but $134K of our expenses is the house project. So we are actually spending significantly less on every other category. I think there is a path that is not too painful. (It probably involves flying coach.)

I think it's important for us to draw up a budget, and try to live within it. There is still plenty of discretionary spending to be done. Unfortunately, there's just too much damn life left too live to celebrate as hard as we have been. I have never considered that our investment needs to last "50 years". That really chills me to the bone. I forget people do live that long sometimes...

I do appreciate all the perspectives.

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Re: Drawing down a windfall...

Post by Toons » Sat Sep 06, 2014 9:32 pm

"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Drawing down a windfall...

Post by Leeraar » Sat Sep 06, 2014 10:08 pm

Tarkus wrote:I read the WSJ article this week (Google "Six-Figure Incomes—and Facing Financial Ruin"). It was eye-opening. I have been meaning to print it out and share it with my wife so she can read it too. :)

I have already decided that we can not participate in any more capital calls. This has been far more ruinous to our wealth than the overspending. We'll just take the dilution. It's far too risky for us to play this game.

2013 was our worst year of overspending; we spent $143K more than we earned. It required that we liquidate 3.4% of our (at the time $4 million) portfolio to maintain. In a strange way, I might argue that 2014 is an improvement, at least as far as "lifestyle spending" is concerned. We're already $115K in the red YTD, but $134K of our expenses is the house project. So we are actually spending significantly less on every other category. I think there is a path that is not too painful. (It probably involves flying coach.)

I think it's important for us to draw up a budget, and try to live within it. There is still plenty of discretionary spending to be done. Unfortunately, there's just too much damn life left too live to celebrate as hard as we have been. I have never considered that our investment needs to last "50 years". That really chills me to the bone. I forget people do live that long sometimes...

I do appreciate all the perspectives.
On the "soft" side, if you'll excuse me:

Your wife is a co-conspirator. You have to enlist her in the campaign to spend less. This could put a huge strain on your marriage if she is not on board. A divorce is likely to take a very large chunk of your remaining joint net worth.

I suggest you get an accountant. Your numbers do not add up. You may well be spending more than you think you are. Paying someone to total up your real net worth and to track your cash flow for a few months or even a couple of years will be well worth it. That person will also act as a buffer in discussions with your wife over spending and living within your means for the long term.

Good luck. I hope you pull out of this tailspin.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

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Re: Drawing down a windfall...

Post by Watty » Sat Sep 06, 2014 11:06 pm

The situation sounds very similar to many professional sports players that end up with a large sum of money that soon run out of money.

In addition to the problem with spending too much, it was not clear why there was not any significant growth in the money that shou;s have been invested when the stock market has done so well over the least three years.

You have pretty much already shot yourself in the foot several times. It would be a bit extreme but you might want to consider putting a million or more into a trust where you cannot get to it except to make withdrawals that were planned when the trust was set up.

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Re: Drawing down a windfall...

Post by JW-Retired » Sun Sep 07, 2014 7:38 am

Tarkus wrote: In a strange way, I might argue that 2014 is an improvement, at least as far as "lifestyle spending" is concerned. We're already $115K in the red YTD, but $134K of our expenses is the house project. So we are actually spending significantly less on every other category. I think there is a path that is not too painful. (It probably involves flying coach.)

I think it's important for us to draw up a budget, and try to live within it. There is still plenty of discretionary spending to be done. Unfortunately, there's just too much damn life left too live to celebrate as hard as we have been. I have never considered that our investment needs to last "50 years". That really chills me to the bone. I forget people do live that long sometimes...
Can I ask what your in-the-red" boundary is? Is that living on your $250k salary only? Or salary + the $80k rental income? Or what?

IMO, you need to live on your salary less ample yearly contributions to your retirement fund. It's way too early to be drawing your nest egg down any lower than it has been already. It needs to grow a lot more before you retire. Living on SS + a $2.8M nest egg RMD sounds like a fairly comfortable income to me as a 70 year old right now. But it certainly won't cut it for the level of "lifestyle spending" you are now accustomed to. Plus, we are all expecting you will burn through a good bit more of the money before you turn things around.

It's quite urgent to stop the bleeding soon.
Good luck,
JW
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Re: Drawing down a windfall...

Post by Grt2bOutdoors » Sun Sep 07, 2014 7:45 am

LAlearning wrote:You are one of these people: http://online.wsj.com/articles/six-figu ... 1409936418

You need to stop.
+1 At the rate of spending you are doing, you are going to be flat broke in very short order (way before age of normal semi-retirement).....You were at the top of the mountain, you're now going down the path of falling off a cliff with no parachute to speak of.
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Re: Drawing down a windfall...

Post by The Wizard » Sun Sep 07, 2014 7:52 am

livesoft wrote:How does one find the time to spend all that money? I'm retired, but it still takes time to decide on a painter, plan vacations, go on vacations, decide on remodelling, and shop. And sometimes you just want to lay in bed and do nothing, so that takes time, too.
As you probably know, doing repeat travel back to places you've enjoyed in the past is quite simple, not much research needed.
I can do that with several Caribbean islands in about the time it takes me to find my wallet and credit card...
Attempted new signature...

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Re: Drawing down a windfall...

Post by angelescrest » Sun Sep 07, 2014 8:29 am

freddie wrote:
Leeraar wrote:
livesoft wrote:How does one find the time to spend all that money? I'm retired, but it still takes time to decide on a painter, plan vacations, go on vacations, decide on remodelling, and shop. And sometimes you just want to lay in bed and do nothing, so that takes time, too.
You have people.

L.
Or a wife:). More seriously you just buy expensive stuff. It takes the same amount of time to buy and drink a 100 dollar bottle of wine as it does a 10 dollar one. Or a 6k bed versus a 1k one.
Or a husband.

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market timer
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Re: Drawing down a windfall...

Post by market timer » Sun Sep 07, 2014 8:46 am

You say your net worth is $4.7mn. Let's add another $2mn in future earnings (present value), conservatively assuming you lose this job and can earn about $100K/year for 20 years. I think you can sustainably spend 3% of that $6.7mn, or roughly $200K/year (pre-tax). Feel free to tweak these assumptions.

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Re: Drawing down a windfall...

Post by WhyNotUs » Sun Sep 07, 2014 9:01 am

Are you a serial entrepreneur or lottery winner?

There are serial entrepreneurs who can envision/copy ideas, bring them to market, develop the market, and sell as soon as the market is emergent and move on to the next challenge with a big pocket of change. It can range from new products to multi-level marketing schemes to real estate entitlement, to restaurants but whatever the area, they have a sense for getting in and out (or fail trying). Most of us have probably met people who are SE. They are good at keeping a pot of funding for the next start-up and have access to OPM- other people's money. They can ride the roller coaster of start-ups with more grace than I could.

There are also lottery winners. Someone needed their lot for land assemblage of a big project and was willing to pay windfall rates for it, someone had been making polka dot dresses for 20 years and a famous star suddenly started wearing one of their polka dot dresses and Macy's wants to buy their firm, etc. Just because I can make polka dot dresses really well does not mean that I will be particularly good at anything else so I better take my windfall and make it last.

You will have to decide for yourself which you are.

Regardless of the above, you have adopted an unsustainable lifestyle. You can change it now or when your funds are depleted, my personal preference would be to do it now but YMMV. In your gut you probably know that you are living in an illusion. From the rational perspective, sinking money back into a company that you sold at the top was a foolish business move. In reality you sold your business for $4.8M at this point. From an emotional perspective, take your family somewhere quiet for a weekend (camping?) and just talk about what has happened in your life and ask everyone to discuss what they really need. You might find that everyone would be fine getting off the spending merry-go-round.

Securing your future, trying to divine what is next for you professionally, and identifying what your family really needs in order to grow together seem like tasks at hand.
I own the next hot stock- VTSAX

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Re: Drawing down a windfall...

Post by cherijoh » Sun Sep 07, 2014 9:04 am

gardemanger wrote:The line item for travel seems extraordinarily high. That, plus expensive private schools, suggests the possibility that the kids might be over-scheduled or even overwhelmed by all this stuff you're throwing at them. What kind of travel are we talking about here?

You didn't mention the ages of your children, but it might be worth re-thinking the kind of quality time/enrichment you want to provide for them at their current ages. Common sense suggests (and research backs up) that kids grow up more creative and resilient if they have time and space to just mess around. Having family activities where you really interact (can be cheap to free), and also having unstructured time for the kids to do their own thing (free) will probably have a better payoff than the rat race of over-scheduled childhood.
The kids must be pretty young:
...began sending our two children to an expensive, private elementary school

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Re: Drawing down a windfall...

Post by vested1 » Sun Sep 07, 2014 9:14 am

I would look closely at each individual expense to see if it is sustainable over the long run. For instance, you mentioned that your children are in elementary school and their tuition is a combined $42k a year currently. With that type of tuition the added expenses associated with their school are likely taken for granted, such as uniforms, extra curricular expenses, private lessons, etc. Do you expect that cost to remain the same, or increase? You also mention that you have set aside four years of funding for their college expenses. That alone would account for a large part of your assets, especially if you and your wife's attitude as to the value of an "exclusive" education doesn't change. Your children's "choice" of a college may be your financial undoing.

It is estimated that the cost of raising a child averages around $250,000. The costs of raising your children will be considerably more, and of course this is only one aspect of your admitted overindulgence.

I would ask myself if drawing 4% of assets a year from what should be pigeonholed for retirement is a good idea. Those of us who have seen the effects of a black swan incident in our lives cringe at the attitude of myopic over spending.

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Re: Drawing down a windfall...

Post by vested1 » Sun Sep 07, 2014 9:25 am

Another aspect I haven't seen mentioned in this thread is the effect of inflation on your liquid assets. You are currently drawing down your windfall, defeating any gain that would somewhat counter inflation. Once depleted, your account balances will be unable to keep pace with rising costs, leaving you in dire straights at the worst possible time.

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Re: Drawing down a windfall...

Post by mwm158 » Sun Sep 07, 2014 11:02 am

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cherijoh
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Re: Drawing down a windfall...

Post by cherijoh » Sun Sep 07, 2014 12:51 pm

Tarkus wrote:We have no debt to speak of... $300K of mortgage on a $1 million house.
STOP - read that statement back. In what alternate reality is $300K in mortgage considered "no debt to speak of"? Before you bought this dream house what was your mortgage?
Tarkus wrote:This year we've done a great job of cutting all of these expenses -- we've been more disciplined and our YTD expenses have outpaced our income by $20K... oh, except we added on to our house and have spent another $150K on top of that. :oops: So, maybe we're not really that disciplined yet.
You already had a $1M house in a "not-particularly expensive city" - what in the world did you add on? Where did you get the money - from your investments or a HELOC? Is that included in the 300K in mortgage debt?

You stated earlier that
We are now left with $2.8 million in “liquid investments”, meaning taxable investment accounts, retirement accounts, and 529 accounts.
Tarkus wrote: So we'll have to reconsider the 4% we have been taking, which would amount to $115K next year if we continued on the same path.
Since $115K/.04 = 2.875M, you are clearly taking your 4% out of your "liquid assets" in TOTAL. :oops: What percentage of your TAXABLE investment accounts are you withdrawing? Keep in mind, you are currently only paying capital gains tax on appreciation. If you start breaking into the retirement assets, you will have to pay tax at your MARGINAL tax rate PLUS the 10% penalty for early withdrawal. (The 529 accounts are for the kid's education, so I'm not sure if you could get to that money, but if so it would have the same issue as your tax-deferred retirement accounts). So when you run out of taxable portfolio, the net amount of the withdrawal available for spending will go way down!

We have been having extraordinary returns from the stock market - have you considered what happens when the stock market makes a correction and you lose 25% of your portfolio - possibly overnight - and you continue to take these huge withdrawals? NOTE: If you placed all your bonds in the retirement accounts, that hit would be strictly in your taxable investments. You need to run some simulations in FIRECALC. Only then might you realize that the situation is A LOT MORE DIRE than it appears on the surface.
Tarkus wrote: I should be employable, but I doubt if I will ever earn $250K outside my own company.

You can't sustain your lifestyle on your current salary, how do you expect to meet your expenses - even if you cut them back dramatically - when you have considerably less salary coming in? How much salary did you take when you started your business? New businesses generally mean rolling most of the income back into the business.
Tarkus wrote: I don't really want to stop working.
That is a good thing considering the way you have frittered away your windfall.

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Re: Drawing down a windfall...

Post by cynthia fitz » Sun Sep 07, 2014 7:19 pm

I agree with the stronger of the replies that were made to your post.
Also, I agree that your numbers do not add up.
There is a thorough misunderstanding of the fabled "4% rule." I've studied this topic many times and disagree strongly with it's usefulness.
It's of great concern that you are not in a greater state of urgency over the loss of wealth. At 44 years old with two small children and a million dollar house, the spending is unsustainable. You seem to be a very hard worker and businessman, but a poor investor. I'd even go so far as to suggest that you might be a threat to your financial health, and you may want to set aside a million in a trust, as another poster suggested.
I also agree that your wife must understand and support the situation; that is, the extensive expenditure reduction - it's going to be humbling, and could result in divorce if you're both not on the same page.
Good luck.

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Re: Drawing down a windfall...

Post by kaudrey » Mon Sep 08, 2014 10:52 am

Tarkus wrote:So… I guess I am wondering if we are crazy to be withdrawing from our portfolio to fund our lifestyle. There’s simply not a lot of advice available on people who are drawing down their investments even prior to retirement.

Are we on the right track or misplaying our hand? What would you do in my shoes?
I am glad you are thinking that you are spending too much. I think if my portfolio shrank that much in 3 years I'd be addicted to sleeping pills because there would be no way I could sleep at night. One problem with living a higher lifestyle when you are working is that it is hard to reduce that lifestyle in retirement, so it becomes a cycle of perpetually needing more money.

If I were you:

1) put your kids in public school
2) vacation budget = $10K
3) shopping budget = $10K (what are you buying for $57K???)
4) keep that car for 10 years at least, next car should be under $30K
5) find other ways to cut expenses

Because your income situation is questionable in 2 years, at the MOST, I would live on the $250K (ALL expenses, including taxes). I would save the $80K rental income, and stop withdrawing any money from your portfolio. If you want any hope of being able to spend anything near that in retirement, you have to be building up your portfolio, not reducing it. Or are you thinking that when you turn 65, suddenly you will be OK living on $50K or even $100K?

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Re: Drawing down a windfall...

Post by technovelist » Mon Sep 08, 2014 11:02 am

You are overspending very seriously. Watch "The Lottery Changed My Life" (http://www.tlc.com/tv-shows/other-shows ... videos.htm) to see what happens next...
In theory, theory and practice are identical. In practice, they often differ.

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