31 years old, just sold my business, early semi-retirement?

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AlanDistro
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31 years old, just sold my business, early semi-retirement?

Post by AlanDistro » Tue Dec 23, 2014 12:25 am

Emergency funds: I have six months cash in my checking account.

Debt: $180,676 mortgage at 3.375%, 10 year ARM (nine years left on the locked rate), house value is $250k, I put 20% down and have made a few extra payments this year.

Tax Filing Status: Single

Tax Rate: ~25% effective Federal, ~6% effective State (last year, going forward they will be much lower due to dramatic drop in income)

State of Residence: Montana (MT)

Age: 31

Desired Asset allocation: 50% stocks / 50% bonds (not sure really, proposed portfolio below)

Desired International allocation: 20-25% of stocks

Please provide a hint as to the size of your current total portfolio: very very low seven digits.

Current retirement assets:

Taxable
80% cash (for investing – do not include emergency funds)
5% T.Rowe Price Capital Appreciation (PRWCX) (0.71%)
10% Realty Income (O)

His 401k
N/A

His Trad IRA
5% Target Retirement 2045 (VTIVX) (0.18%)

Total of All Accounts Together (not each account individually) should equal 100%.

Contributions:

New annual Contributions
$5,500 his IRA

Questions:

First, a little introduction: I co-founded my own small business six years ago, so I haven't had a 401k or any company matches. However, I have maxed out my Traditional IRA every one of those years, and then put everything else into a taxable account. This summer I sold my share of the business and, after estimated taxes, cleared just over seven figures. That is sitting in cash in my taxable account. I'd like to consider myself retired early and live off of this investment money along with some fun side-gig projects.

I've made a plan for all that cash, but I'm here for you more experienced guys and gals to take a look at my plan and point out any holes or potential problems.

My goal is to produce about $40,000 in dividends/cap gains payments annually. I know that's not the most efficient way to go with a taxable account, but I really like the idea of receiving a "paycheck" every year from my investments. Including estimated taxes going forward (which will be much lower than the above previous year's numbers), my annual spending budget comes out to about $39,000 including spending money, gifts, estimated tax payments, etc.

Here is my proposed taxable portfolio:
32.5% Realty Income (O)
32.5% Vanguard Wellesley (VWINX) (0.25%)
5% T.Rowe Price Capital Appreciation (PRWCX) (0.71%)
22.5% Total US Stock Market (VTSMX) (0.17%)
7.5% Total Intl Stock Market (VGTSX) (0.22%)

[new proposed portfolio below based on thread recommendations/information]

13% Realty Income (O)
5% T.Rowe Price Capital Appreciation (PRWCX) (0.71%)
10% Vanguard Wellesley (VWINX) (0.25%)
60% Lifestrategy Moderate Growth (VSMGX) (0.16%)
10% High-Yeild Tax-Exempt (VWAHX) (0.20%)


The Trad IRA will remain 100% VTIVX, and because I can't touch that for another 31 years, I'm pretending it doesn't exist for the rest of my plan (I'll max the Trad IRA each year and continue 100% in VTIVX).

Going back and averaging the last ten years of dividends and cap gains distributions, the above taxable portfolio should produce $41,669 annually. I realize some years will be more than that, other years less, but that's the annual average when looking at the last ten years of distributions.

So that covers my annual spending and taxes, with ~$2,500 excess wiggle room. Again, on average. But that portfolio should also produce some equity growth, along with a growth in dividends (O has consecutively increased dividends 77 times since 1994, for example).

That will be my baseline. Part of my deal with the company sale was that I'd retain a 10% royalty on any of the products I designed while with the company. I didn't personally design many products, but that 10% royalty on those few products results in $5k - $10k annually when looked at over the last few years (and they've offered that royalty on any new products I might design for them in the future, even though I am no longer an officer at the company). That will provide the earned income for my annual Trad IRA contribution.

Additionally I've had a freelance DBA business on the side for some IT and graphic design work, which usually pulls in another ~$5,000 per year. So even on the lower dividend years, covering the $39k budget without selling any shares should be totally do-able.

I don't have any kids. I don't want any kids. Neither does my long-term girlfriend (she's been with me since just after the start of the business, and still works for the business). So aside from her and my brother getting something when I pass, I am not worried about leaving an inheritance to anyone. So if/when I dip into principal, I'm okay with that.

I plan to pay down the mortgage on schedule until the 10 year ARM is up in nine years, and then I will either pay it off in one check (selling shares in the taxable account), or keep the monthly payments depending on what interest rates look like in nine years. If the mortgage were paid off today, that would drop my spending budget by $10k to only $29k per year (which includes the property taxes).

I guess you could consider this an early semi-retirement. I don't have to do any work to maintain those 10% product royalties, and my IT/graphic design work is infrequent and fun! So I don't consider it a job. Luckily, my hobbies are inexpensive (I'm a film buff and music buff, so I'm mostly buying used $3 CDs and $9 blurays to keep myself entertained). I don't care for travel or expensive foods, just good tunes and good flicks.

I'd love some advice on the proposed portfolio and any holes or potential problems with my "early retirement plan". Thanks in advance!
Last edited by AlanDistro on Mon Dec 29, 2014 7:09 pm, edited 1 time in total.

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market timer
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Re: 31 years old, just sold my business, early semi-retireme

Post by market timer » Tue Dec 23, 2014 1:07 am

My first thoughts:
1. Have you worked long enough to qualify for Social Security? It would be a priority for me to make sure I've paid into SS the necessary 40 quarters.
2. I'd pay off the mortgage.
3. I would not put 32.5% in a single company. That's way too much concentrated risk. If you insist on a high dividend yield, there are many other options that will give you diversification.
4. Are you planning to get Obamacare? If so, and you are close to 400% of the poverty limit, you might want to rethink your strategy of buying high dividend stocks and bonds in taxable. Look into the subsidies you might get with lower income.

Overall, I think your plan sounds very good. Lots of people who receive windfalls do stupid things. If you continue living as you did before, and are okay living on $40K/year, I think it's unlikely you'll ever have to work again.

HIinvestor
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Re: 31 years old, just sold my business, early semi-retireme

Post by HIinvestor » Tue Dec 23, 2014 1:16 am

You have to have active income to contribute to an IRA. I don't see anything that is active income in your plan, unless you will be actively managing your real estate rental?

It seems 31 is pretty young to semi-retire, especially if some day you decide you may wish to relocate to a higher cost of living area and your dividend income won't be enough to support that.

Some fields can be tough to re-enter, especially if there is a significant gap in work history and Dian the road you want to go back to a career.

These are just a few thoughts. I can see my S being in a similar position in some years from now, but so far he's pretty happy with his balance of career and free time and flexibility. Time will tell.

Topic Author
AlanDistro
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Re: 31 years old, just sold my business, early semi-retireme

Post by AlanDistro » Tue Dec 23, 2014 1:26 am

market timer wrote:My first thoughts:
1. Have you worked long enough to qualify for Social Security? It would be a priority for me to make sure I've paid into SS the necessary 40 quarters.
I've worked full-time since I was 19, so 12 years. The early years I didn't make much, but the last three I've grossed about $250k, and then over four times that this year. That should satisfy the 40 quarters. And I will continue to have earned income via the product royalties and DBA freelancing going forward.
market timer wrote:2. I'd pay off the mortgage.
Definitely something I've considered. If I do, my spending would be only $29k per year, and the 10 year average of the proposed portfolio would produce about $34k with the reduced initial cash needed to pay off the mortgage. So more wiggle room in that scenario, but less liquid investments.
market timer wrote:3. I would not put 32.5% in a single company. That's way too much concentrated risk. If you insist on a high dividend yield, there are many other options that will give you diversification.
This did seem like the biggest problem area, I'm all ears on an alternative here. O's past performance has just been so attractive, for decades. I know that doesn't ensure future performance, but after enough years it looks "safe" to me. Even if the equity should bounce around, the dividends have never been cut. Again, I know, not a future guarantee, but an almost 5% yield and growing equity sure is attractive.
market timer wrote:4. Are you planning to get Obamacare? If so, and you are close to 400% of the poverty limit, you might want to rethink your strategy of buying high dividend stocks and bonds in taxable. Look into the subsidies you might get with lower income.
I had Obamacare last year, and have renewed my plan for 2015. My LLC didn't offer health care, just a partial reimbursement on premiums. I've factored the entire cost into my budget now that I am no longer at the company. Obviously I hadn't qualified in previous years, and don't for next year as my tax return shows a seven figure cap gains this year. But this might be a concern in the next few years. Right now, I'm happy with the premiums I'm paying, I've had private insurance for the last six years since starting the company.
market timer wrote:Overall, I think your plan sounds very good. Lots of people who receive windfalls do stupid things. If you continue living as you did before, and are okay living on $40K/year, I think it's unlikely you'll ever have to work again.
Thanks for your reply. That's the dream. =) Luckily I've always lived on very little, coming from a poverty level family, and when the business took off I squirreled away a lot of it after seeing my parents struggle with money. It's nice now to have the resources to treat myself and the girlfriend when I want, but we're both very happy with quiet inexpensive lives.

Topic Author
AlanDistro
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Re: 31 years old, just sold my business, early semi-retireme

Post by AlanDistro » Tue Dec 23, 2014 1:31 am

HIinvestor wrote:You have to have active income to contribute to an IRA. I don't see anything that is active income in your plan, unless you will be actively managing your real estate rental?
The 10% product royalties and the DBA side business both produce earned income that qualifies for IRA contributions. Both of those are in addition to the estimated dividend income.
HIinvestor wrote:I can see my S being in a similar position in some years from now, but so far he's pretty happy with his balance of career and free time and flexibility. Time will tell.
That's awesome. I left the business because we had built up a great team that handled all the day-to-day and I was no longer having fun with the corporate duties that were left over for me. And just as I started thinking about it, a very generous offer came along and I couldn't say no. Best of luck to your son with his business!

HIinvestor
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Re: 31 years old, just sold my business, early semi-retireme

Post by HIinvestor » Tue Dec 23, 2014 1:32 am

You can check with SS to be sure you have the required number of quarters for SS and Medicare A, if you want to be sure. If the employer didn't pay and report your earnings to SS for a least 40 quarters, you may have to see about getting the needed quarters.

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CaliJim
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Re: 31 years old, just sold my business, early semi-retireme

Post by CaliJim » Tue Dec 23, 2014 1:52 am

A million isn't what it use to be. I don't think a 4% withdrawal rate is safe (sustainable) for 50 years in retirement. 2.5%, maybe. Read what Jim Otar and Wade Pfau have written on this. 4% withdrawal, with limited SS. Nope. I say...pay off the mortgage, work a bit more, and sock away another $500k. And DIVERSIFY. My $0.02
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Re: 31 years old, just sold my business, early semi-retireme

Post by market timer » Tue Dec 23, 2014 2:06 am

CaliJim wrote:A million isn't what it use to be. I don't think a 4% withdrawal rate is safe (sustainable) for 50 years in retirement. 2.5%, maybe. Read what Jim Otar and Wade Pfau have written on this. 4% withdrawal, with limited SS. Nope. I say...pay off the mortgage, work a bit more, and sock away another $500k. And DIVERSIFY. My $0.02
Agreed that 4% is too high a withdrawal rate for a 31-year-old; however, OP's assets are worth more than one million. The cash alone is "just over seven figures." Call it $1mn exactly. Cash is 80% of liquid assets, that means the rest is at least $250K. Throw in home equity ($70K) and an estimate for the present value of Social Security ($130K), and he's up to $1.45mn. That should be able to sustain his $29K/year spending easily (I've excluded mortgage pay down, as I recommend he pay it off). Lastly, his expenses may drop another few K once he is eligible for Obamacare subsidies.

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patriciamgr2
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Re: 31 years old, just sold my business, early semi-retireme

Post by patriciamgr2 » Tue Dec 23, 2014 2:31 am

I haven't had time to review your entire portfolio. You could have 60+ years in retirement. I encourage you to use a Monte Carlo type calculator (see Wiki for details). Your sustainable withdrawal rate is likely to be below 1.9% of your portfolio value each year (adjusted for inflation).

I want to add to other posters' cautions about the investment in O. Not only is that a large concentration in a single REIT, I'm also concerned about (1) not taking a total return approach to your portfolio, (2) holding a less tax-efficient investment in your taxable accounts; and (3) whether O faces challenges going forward.

Many of us on the Forum don't limit ourselves to investments which generate the income we need. We invest for total return even if that means liquidating investments (& paying capital gains tax) to replenish cash reserves used for daily expenses. The Wiki has information on this approach & Vanguard has lots of investor info on total return investing. One of the benefits is that an investor can avoid taking on excess risk just to produce income. (I know how appealing it is to get a "check" from your portfolio, but IMO it's more important to have diversified investments to maintain your purchasing power over the long term & hold some short-term debt to finance a few years' living expenses.)

Most of us hold REITs in tax-sheltered accounts. Again, the Wiki has information on asset location for tax efficiency. While your new tax bracket will be lower, it's not 0.

O has been a favorite of Morningstar research for ages, On 11/6/2014, Todd Lukasik of M* issued a new report outlining some risks due to 2013 acquisition of ARCT & the move into non-retail properties. M* rates O as 2 stars; it's clearly one of their favorite REIT management teams, but they outline some challenges. I'd suggest you read that report. In any event, I'd never have as much of a concentration in any one stock as you propose,

You've accomplished so much! You & your lady are living in a state I regard as heaven on earth. I'm confident you will develop an excellent financial plan. Best of Luck

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CaliJim
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Re: 31 years old, just sold my business, early semi-retireme

Post by CaliJim » Tue Dec 23, 2014 2:35 am

By my calcs... I like a margin of error.
$250k non cash- 180k mortgage=60k
Npv of ss=not much

Dude' got a little over a mil and will soon have seen all the movies he cares to watch.

Look... Retirement is not some glory filled place that is the end all and be all. A 31 year old needs a purpose.

Now he can work at something he enjoys and let his egg compound untouched.
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Re: 31 years old, just sold my business, early semi-retireme

Post by Caduceus » Tue Dec 23, 2014 5:23 am

That's awesome - congrats.

Semi-retirement definitely sounds doable and doing some work has advantages. You can create tax-advantaged space in semi-retirement if you work, and Roth space in particular if you stay in the 15% bracket. So even some part-time work (even low paying ones) will allow you to shift your investments into tax-protected space at relatively low tax cost.

The NPV of future SS payments are high for the initial contributions.

You might open a Roth Solo 401(k)

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Re: 31 years old, just sold my business, early semi-retireme

Post by obgyn65 » Tue Dec 23, 2014 7:07 am

I agree with this.
CaliJim wrote:A million isn't what it use to be. I don't think a 4% withdrawal rate is safe (sustainable) for 50 years in retirement. 2.5%, maybe. Read what Jim Otar and Wade Pfau have written on this. 4% withdrawal, with limited SS. Nope. I say...pay off the mortgage, work a bit more, and sock away another $500k. And DIVERSIFY. My $0.02
"The two most important days in someone's life are the day that they are born and the day they discover why." -John Maxwell

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Re: 31 years old, just sold my business, early semi-retireme

Post by Watty » Tue Dec 23, 2014 11:40 am

CaliJim wrote:A million isn't what it use to be. I don't think a 4% withdrawal rate is safe (sustainable) for 50 years in retirement. 2.5%, maybe. Read what Jim Otar and Wade Pfau have written on this. 4% withdrawal, with limited SS. Nope. I say...pay off the mortgage, work a bit more, and sock away another $500k. And DIVERSIFY. My $0.02
+1

You can also run your numbers in Firecalc to see what you historical success rate would have been.

The good news is that if you start going through your money faster than expected then you should be able to go back to work even if it some different, and possibly lower paying, career some day. Even if you start off on some withdraw rate that only has a 75% success rate, then failure in your case might mean that you would have to work half time 20 years from now. The key is to recognize this while you can still work so that you don't run out of money when you are 75.

I agree with paying off the house. You would be getting a 3%+ safe return and since but it will lower your withdraw rate so you will have less "sequence of returns" risk. Being able to deduct the mortgage interest may be worth very little if anything to you.

The formulas are a bit complicated but in calculations that determine how large your social security check will be the first $10,000 a year in income counts at 90% compared to only 32% at the next level. (This is grossly oversimplified). Along with reducing your withdrawal rate and helping your eventual social security check and being able to make retirement account contributions having $10,000 in wage income each year would be a good plan. It was not clear if you were still working or not but if you have a choice you might want to officially retire a month or two into 2015 to get the income in that tax year.

http://www.ssa.gov/oact/cola/piaformula.html

You will also need to figure out and file your estimated taxes in 2015 but I would assume that with the sale of the business that you already have good tax advice.

If you have any income space in the 15% tax bracket you might want to also do Roth conversion up to the top of the 15% tax bracket each year.

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Re: 31 years old, just sold my business, early semi-retireme

Post by Valuethinker » Tue Dec 23, 2014 11:45 am

If you want a workable SWR I would say that it is around 1.5% or even lower. Long run, inflation will deplete your capital by c. 2% pa. Throw in the impact of taxes and it looks worse.

Real interest rates are negative and you cannot afford to deplete (in effect annuitize) capital when you are 31 years old.

Situation changes when you are in your 50s, but that's a long time away. You have to plan to live to your mid 90s.
Last edited by Valuethinker on Tue Dec 23, 2014 11:46 am, edited 1 time in total.

edge
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Re: 31 years old, just sold my business, early semi-retireme

Post by edge » Tue Dec 23, 2014 11:46 am

So...you sold your stake in a business for only 4x the income it provided you?

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Re: 31 years old, just sold my business, early semi-retireme

Post by Valuethinker » Tue Dec 23, 2014 11:47 am

obgyn65 wrote:I agree with this.
CaliJim wrote:A million isn't what it use to be. I don't think a 4% withdrawal rate is safe (sustainable) for 50 years in retirement. 2.5%, maybe. Read what Jim Otar and Wade Pfau have written on this. 4% withdrawal, with limited SS. Nope. I say...pay off the mortgage, work a bit more, and sock away another $500k. And DIVERSIFY. My $0.02
Yes. And work on a 1.5% withdrawal rate, or a 1% one. In fact at this stage, 0%.

Its a rare person, indeed, who can work for 13 years say, and then retire for another 64.

Think what we have seen in 64 years. Inflation. Energy Crises. Financial Crashes. Near depression. The next 64 are not likely to be any quieter. What happens to office buildings if we all telecommute because oil is $250/bl? Or if environmentally it becomes impossible to commute every day? What happens to retail centres if we do everything on line? One can always find alternative scenarios and uses, but the US has changed a lot between 1950 and now (legal segregation to a black president, for one) and will do so again in the next 64 years.

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AlanDistro
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Re: 31 years old, just sold my business, early semi-retireme

Post by AlanDistro » Tue Dec 23, 2014 12:16 pm

edge wrote:So...you sold your stake in a business for only 4x the income it provided you?
My salary was only $60k, the other $190k each year was distributions of profits. The other owners wanted to stop taking distributions completely to reinvest more in the business. The business is not one I see surviving for more than ten years or so, as it heavily relies on YouTube personalities, and that is a very volatile scene. The new investors think otherwise, but I've been involved in YouTube businesses since 2006 and I've seen how fast these things rise and fall. I felt it was time to cash out, luckily while others wanted to buy in.

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AlanDistro
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Re: 31 years old, just sold my business, early semi-retireme

Post by AlanDistro » Tue Dec 23, 2014 12:20 pm

Valuethinker wrote: Its a rare person, indeed, who can work for 13 years say, and then retire for another 64.

Think what we have seen in 64 years. Inflation. Energy Crises. Financial Crashes. Near depression. The next 64 are not likely to be any quieter. What happens to office buildings if we all telecommute because oil is $250/bl? Or if environmentally it becomes impossible to commute every day? What happens to retail centres if we do everything on line? One can always find alternative scenarios and uses, but the US has changed a lot between 1950 and now...
And this is what I'm worried about. The reason I was seeking some guidance here. And why I plan to continue working at least a bit each year. I want to continue maxing my IRA, and covering some business expenses (health care, software and computer purchases) with earned income, then the dividends/interest only have to cover the standard utilities and groceries, etc.

WorkToLive
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Re: 31 years old, just sold my business, early semi-retireme

Post by WorkToLive » Tue Dec 23, 2014 12:25 pm

Congrats on your sale!

My only hesitation with your plan is the possibility of adding kids to the mix. If you and your girlfriend wish to remain child-free, I see no issues, but if that's NOT the plan, I would reconsider. Kids are expensive. Not when they are babies, but as they get older. Not only do you have to consider food and healthcare, including possible medical issues, you may want to live in an area with more opportunities for education and enrichment, have a larger car or house, may want to enroll them in activities, may want to fund their college educations, etc. These things are not cheap.

Now if you see yourself returning to work in that scenario, then fine--but don't plan on this working out long-term if you decide to procreate.

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Re: 31 years old, just sold my business, early semi-retireme

Post by dbr » Tue Dec 23, 2014 12:41 pm

I wouldn't discourage you from taking a semi-retirement provided you are alert to how fast you are spending money, how well your investments actually return, how much you continue to earn, and how well you maintain the market value of your skills. Other posters are right on that life is uncertain and many things happen.

I don't like your thought process of identifying what you can spend with the payouts from dividends, interest, and distributions. Money is fungible and the only complete accounting is your return compared to your withdrawals whatever the mechanism by which you withdraw. Spending only the distributions may result in a fairly conservative withdrawal rate or it may cause you to allocate your investments in irrational ways to chase yield and spend too much money. As an example, aligning specific distributions with specific types of expenditure is mental accounting which only results in the end in irrational thinking.

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AlanDistro
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Re: 31 years old, just sold my business, early semi-retireme

Post by AlanDistro » Tue Dec 23, 2014 12:57 pm

patriciamgr2 wrote:I want to add to other posters' cautions about the investment in O. Not only is that a large concentration in a single REIT, I'm also concerned about (1) not taking a total return approach to your portfolio, (2) holding a less tax-efficient investment in your taxable accounts; and (3) whether O faces challenges going forward.

O has been a favorite of Morningstar research for ages, On 11/6/2014, Todd Lukasik of M* issued a new report outlining some risks due to 2013 acquisition of ARCT & the move into non-retail properties. M* rates O as 2 stars; it's clearly one of their favorite REIT management teams, but they outline some challenges. I'd suggest you read that report. In any event, I'd never have as much of a concentration in any one stock as you propose,

You've accomplished so much! You & your lady are living in a state I regard as heaven on earth. I'm confident you will develop an excellent financial plan. Best of Luck
It appears I need a Morning star subscription to read the full article, but I'll search google for other opinions on the same topic.

I'll spend some of this morning looking at a few REIT mutual funds to see if I can provide a similar dividend, but with diversification. Thanks!

dbr
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Re: 31 years old, just sold my business, early semi-retireme

Post by dbr » Tue Dec 23, 2014 12:59 pm

AlanDistro wrote: I'll spend some of this morning looking at a few REIT mutual funds to see if I can provide a similar dividend, but with diversification. Thanks!
Don't distort your investment strategy by chasing dividends.

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Pajamas
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Re: 31 years old, just sold my business, early semi-retireme

Post by Pajamas » Tue Dec 23, 2014 1:09 pm

The idea of providing a base income level is a good one, but you have the expectation of at least a half a century of lifespan and that increases uncertainty. Who knows what will happen over the next fifty or sixty years? So, I would emphasize the "semi" over the "retirement."

Continue to earn income from labor and continue to increase your investments. You will have the freedom to do what you enjoy doing with income being the secondary consideration.

When you get to two or three million in investments, that would provide more security.

Before you put a significant portion of your assets into one REIT, O, look at this chart comparing it to ARCP. You may be better off with a REIT fund rather than an individual REIT.

https://www.google.com/finance?chdnp=0& ... 3w8wbjk4F4

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Re: 31 years old, just sold my business, early semi-retireme

Post by surfstar » Tue Dec 23, 2014 1:49 pm

Take these worrisome posters' advice with some huge grains of salt!

Congrats on your success and foresight to get out while its good.

You will be fine with your assets and proposed semi-retirement plans. Enjoy! :sharebeer

FuzzyButtons
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Re: 31 years old, just sold my business, early semi-retireme

Post by FuzzyButtons » Tue Dec 23, 2014 1:57 pm

Pajamas wrote:Before you put a significant portion of your assets into one REIT, O, look at this chart comparing it to ARCP. You may be better off with a REIT fund rather than an individual REIT.

https://www.google.com/finance?chdnp=0& ... 3w8wbjk4F4
Is that the chart you meant to link to? For me it shows O clearly outperforming ARCP. :D

To the original question, I echo the advice of those recommending a total return approach to your taxable investments, rather than a dividend or REIT income stream. Not only does total return generate more growth over time, but it benefits from the favorable tax rates on capital gains. With your low spending levels, you might be able to keep all your capital gains in the 0% bracket! By relying on income streams that are taxed as ordinary income, you're essentially saying you want to receive less money and pay more taxes on it.

Either way, though - I think you'll be good as semi-retired. Heck, with the drive and intelligence you have shown to do so well this far, I bet you'll end up pursuing something in the future that leads to even more income than you know what to do with. Cheers! :beer

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Re: 31 years old, just sold my business, early semi-retireme

Post by generalzodschicken » Tue Dec 23, 2014 2:13 pm

AlanDistro wrote:I don't have any kids. I don't want any kids. Neither does my long-term girlfriend
FWIW, I've heard this many, many times from people who now have kids. I said this myself for about 15 years - now have kids. People tend to assume that they will think the same way at 41 that they do at 21 or even 31 - rarely the case. Even if you don't change your mind, your girlfriend/wife might. And sometimes that leads to either having kids or divorce. Just saying I wouldn't totally rule out the possibility.

Ganacel
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Re: 31 years old, just sold my business, early semi-retireme

Post by Ganacel » Tue Dec 23, 2014 3:16 pm

OP, as someone else who wants to take early retirement in my 30s, I highly recommend that you start reading sites like the Mr. Money Mustache blog and the Extreme Early Retirement blog. Lots of people will tell you how what you want to do is impossible, and it *is* impossible if you live a normal consumer-oriented lifestyle, especially an upper-middle class one. But if you can cut back your expenses to the point that you don't need that kind of income, then $1 million in a taxable account is definitely enough to sustain you to age 59 1/2, when you will be able to start using your retirement accounts. It's possible even if you do change your mind and decide to have kids; MMM supports himself, his wife, and their child on ~$27,000/yr in Colorado. He can do that because he has no debt and doesn't buy a lot of stuff. As a single guy, you can probably find some room to cut back your spending by at least 25%, even if you don't choose to go extreme and dump your car and a lot of your other possessions like EER recommends. Seriously, check both sites out. And major congrats on your success. I hope to join you in five more years!

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Pajamas
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Re: 31 years old, just sold my business, early semi-retireme

Post by Pajamas » Tue Dec 23, 2014 3:21 pm

FuzzyButtons wrote:
Pajamas wrote:Before you put a significant portion of your assets into one REIT, O, look at this chart comparing it to ARCP. You may be better off with a REIT fund rather than an individual REIT.

https://www.google.com/finance?chdnp=0& ... 3w8wbjk4F4
Is that the chart you meant to link to? For me it shows O clearly outperforming ARCP. :D
Yes, that's the right chart. The point is, it could have been the opposite!

N52570
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Re: 31 years old, just sold my business, early semi-retireme

Post by N52570 » Tue Dec 23, 2014 5:08 pm

CaliJim wrote:By my calcs... I like a margin of error.
$250k non cash- 180k mortgage=60k
Npv of ss=not much

Dude' got a little over a mil and will soon have seen all the movies he cares to watch.

Look... Retirement is not some glory filled place that is the end all and be all. A 31 year old needs a purpose.

Now he can work at something he enjoys and let his egg compound untouched.
Exactly!
"Nobody knows nothing"! Raymond

billfromct
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Re: 31 years old, just sold my business, early semi-retireme

Post by billfromct » Tue Dec 23, 2014 5:50 pm

So if the "product royalties" and "side business" income is considered "earned income" in order to fund a traditional or Roth IRA, are you paying self employment tax (the employer & employee social security & medicare tax)?

As mentioned, you may want to log onto the SS website and into your own account to see the estimates for SS @ 62, full retirement age (67 for you) and age 70. This will give you an idea what you would get if you keep working at your current wage.

You may also want to investigate a Solo 401k (Roth or traditional) if you have "earned" income (non W2 income from a side business).

bill

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AlanDistro
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Re: 31 years old, just sold my business, early semi-retireme

Post by AlanDistro » Tue Dec 23, 2014 6:17 pm

billfromct wrote:So if the "product royalties" and "side business" income is considered "earned income" in order to fund a traditional or Roth IRA, are you paying self employment tax (the employer & employee social security & medicare tax)?
Yes, I pay self-employment tax on that money. I'm paid as a contractor and have a DBA account that it gets paid to.
billfromct wrote:As mentioned, you may want to log onto the SS website and into your own account to see the estimates for SS @ 62, full retirement age (67 for you) and age 70. This will give you an idea what you would get if you keep working at your current wage.
For all those asking, I logged into SSA's website just now and it says I do qualify for Social Security, quote:
You have earned enough credits to qualify for retirement benefits. At your current earnings rate, your estimated payment would be:

At full retirement age (67): $2,150 a month
At age 70: $2,666 a month
At early retirement age (62): $1,514 a month

Your estimates are based on the assumption that you will earn $63,700 a year from now until retirement.
That doesn't take into account this year's massive income. But of course, I won't continue making $63,700 a year going forward, at least, not in the beginning. I'm sure I will continue to work on projects and may even start a new company in the future, but for now earnings would be reduced to $10k-$15k in earned income for next year. (I'm not sure if the dividend income would count towards SS, I know it's taxed, but I also know it's taxed less than regular income, this is why I have a good CPA because I am continuously confused with various income being taxed differently.)

HIinvestor
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Re: 31 years old, just sold my business, early semi-retireme

Post by HIinvestor » Tue Dec 23, 2014 6:32 pm

SS has a max that it deducts from your earnings, no matter how much above that max you earn. SS is more concerned about how many quarters you earn (and contribute) toward it in calculating your benefits. The benefits are based on the 40 highest quarters, I believe and how many quarters you contributed at least the minimum. Of course, the employer (or if self employed you) have to contribute to SS as well for the employer portion as well as you contributing for the employee portion.

Did you also check to see if you qualify for Medicare A based on your contributions to date? If you don't, you have to pay a monthly premium when you turn 65 to get Medicare A (hospitals, etc.)

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CaliJim
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Re: 31 years old, just sold my business, early semi-retireme

Post by CaliJim » Tue Dec 23, 2014 8:40 pm

Don't chase returns.

Buying 2 or 3 or 4 or 5 different REITS is not really much diversification. All of REITS are just one corner of the Small Cap universe, and Small Caps are one tiny corner of the entire equities market.

The markets are pretty darn efficient when it comes to pricing risk and return. There is a reason one REIT has a higher return than another. Once you know and really understand what that reason is, you will be closer to understanding "TANSTAAFL". Higher return === higher risk. Pretty much everywhere and always.

Buying a particular fund or REIT in this case, because it did well last year, or the last 3 years, or the last 5 years is NOT a good selection criteria. "the SEC requires funds to tell investors that a fund's past performance does not necessarily predict future results". This is TRUTH.

Pete Townshend had a song about your situation (sort of) .... https://www.youtube.com/watch?v=rypER2gHdcs :beer
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market timer
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Re: 31 years old, just sold my business, early semi-retireme

Post by market timer » Tue Dec 23, 2014 9:45 pm

AlanDistro wrote:For all those asking, I logged into SSA's website just now and it says I do qualify for Social Security, quote:
You have earned enough credits to qualify for retirement benefits. At your current earnings rate, your estimated payment would be:

At full retirement age (67): $2,150 a month
At age 70: $2,666 a month
At early retirement age (62): $1,514 a month

Your estimates are based on the assumption that you will earn $63,700 a year from now until retirement.
My guess is you'll get around $1K/month at age 67 if you don't pay anything else into SS. I retired at roughly the same age and SS earnings profile as you, and that's what I'll get (plus another 50% in spousal benefits--something to keep in mind if you get married).

As others have said, much can happen over the next ~50 years of your life expectancy. Having a part-time job / business is a great way to offset some of the long term risks that financial assets cannot insure against. I'd also see what you can do to cut expenses slightly without reducing quality of life. For example, your 2015 Obamacare premiums are based on 2015 earnings, not 2014 earnings (those are just used as estimates). With your lower income, I expect you will qualify for some subsidies. Definitely check into this. Also, as others have noted, you should adopt a total return approach to your portfolio, rather than relying on dividends. The former is more tax efficient. Take this downtime and learn all you can that's relevant about taxes. You should not have to hire a CPA.

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AlanDistro
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Re: 31 years old, just sold my business, early semi-retireme

Post by AlanDistro » Mon Dec 29, 2014 7:20 pm

I wanted to thank everyone again for the information and resources and recommendations. Spending the last week reading up on total return vs dividend investing, actively managed vs index, and lump-sum vs DCA... I've revised my proposed portfolio to the following:

13% Realty Income (O) (already owned)
6% T.Rowe Price Capital Appreciation (PRWCX) (0.71%) (already owned)
10% Vanguard Wellesley (VWINX) (0.25%) (new purchase)
60% Lifestrategy Moderate Growth (VSMGX) (0.16%) (new purchase)
10% High-Yeild Tax-Exempt (VWAHX) (0.20%) (new purchase)
1% cash

The shares of O and PRWCX represent what I already own, I won't be buying more with this lump-sum purchase, but I won't be selling any either, the gains are large on both and I'm at the highest tax bracket I suspect I'll ever be in this year. Plus, I really like those two funds.

The other three will be lump-summed on January 2nd unless the forum believes I still need to revise this portfolio.

I'd like to keep my AA at around 50/50 to 60/40 and this falls in that range (57% equities with the above proposed portfolio). I realize this money needs to grow to keep pace with inflation, but I also don't need to take unnecessary risk with it as I have a substantial amount of money right now for my age.

I'm going to take $180k cash and pay off my mortgage, that'll reduce annual spending by almost exactly $10k. This proposed portfolio should still throw off about $30k in distributions every year (almost $4k of them tax-exempt), more than covering my annual spending budget of $28k, but that's just a happy accident as I took the total return approach with the above selections.

Again, my eyes and ears are open for anyone who would like to make other suggestions. If not I will implement this plan on Jan 2nd. Thanks again.

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CaliJim
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Re: 31 years old, just sold my business, early semi-retireme

Post by CaliJim » Mon Dec 29, 2014 9:17 pm

AlanDistro wrote:I wanted to thank everyone again for the information and resources and recommendations. Spending the last week reading up on total return vs dividend investing, actively managed vs index, and lump-sum vs DCA... I've revised my proposed portfolio to the following:

13% Realty Income (O) (already owned)
6% T.Rowe Price Capital Appreciation (PRWCX) (0.71%) (already owned)
10% Vanguard Wellesley (VWINX) (0.25%) (new purchase)
60% Lifestrategy Moderate Growth (VSMGX) (0.16%) (new purchase)
10% High-Yeild Tax-Exempt (VWAHX) (0.20%) (new purchase)
1% cash

The shares of O and PRWCX represent what I already own, I won't be buying more with this lump-sum purchase, but I won't be selling any either, the gains are large on both and I'm at the highest tax bracket I suspect I'll ever be in this year. Plus, I really like those two funds.

The other three will be lump-summed on January 2nd unless the forum believes I still need to revise this portfolio.

I'd like to keep my AA at around 50/50 to 60/40 and this falls in that range (57% equities with the above proposed portfolio). I realize this money needs to grow to keep pace with inflation, but I also don't need to take unnecessary risk with it as I have a substantial amount of money right now for my age.

I'm going to take $180k cash and pay off my mortgage, that'll reduce annual spending by almost exactly $10k. This proposed portfolio should still throw off about $30k in distributions every year (almost $4k of them tax-exempt), more than covering my annual spending budget of $28k, but that's just a happy accident as I took the total return approach with the above selections.

Again, my eyes and ears are open for anyone who would like to make other suggestions. If not I will implement this plan on Jan 2nd. Thanks again.
Good progress. Well done. You are almost there. But your learning isn't over yet.

Don't do anything yet. There is no rush.

Sit on this for a few weeks and go read a few book on the reading list in the wiki.

I suspect that you are not using the correct criteria for selecting funds. You are still looking at past returns instead of just asking what asset classes you want to be invested in, and how you want to get access to those asset classes.
-calijim- | | For more info, click this Wiki

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patriciamgr2
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Re: 31 years old, just sold my business, early semi-retireme

Post by patriciamgr2 » Tue Dec 30, 2014 10:45 am

Bumping this for comments on the new portfolio proposed by OP. (I'm travelling, so I can't review the suggested portfolio for tax efficiency & other considerations).

In general, I suggest that newer investors (who've experienced great returns recently) project what their portfolio's loss would have been in eg 2008. Please make sure you're prepared to accept losses of that magnitude without selling. "Staying the course" during the inevitable market downturns is key. [As a successful entrepreneur, the OP likely has the correct attitude toward risk; sometimes, losses can be difficult to tolerate when you no longer have as much money coming in from your business.]

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Re: 31 years old, just sold my business, early semi-retireme

Post by Miakis » Tue Dec 30, 2014 11:53 am

My husband and I also sold a business for over seven figures (he was 30 and I was younger). Everything looked sweet and we retired. Then Ye Olde Great Recession came along.

It was tough to watch our income generating assets slip away in a bad economy and it made us lose confidence. It's a long retirement to plan for, with many uncertainties. Our biggest fear was running out of money as elderly people, when a couple of extra years of work in our 30s might have saved us from that.

I chose to go back to work. My husband remained essentially retired (like you, he has dabbled in a few royalty-generating projects). I quickly opted to become self-employed - you'd be surprised at how short your patience is for the 9-5 culture of corporate America when you have a 7 figure net worth!

What do you know - the economy bounced back, and so did our assets. All our worries appear to have been for naught. But that sucker punch to the gut is still pretty fresh in our memories.

So my advice to you is to continue to generate some kind of non-investment income, so that when you inevitably have to weather a recession, you don't panic or get an ulcer. You'll want that little extra security blanket to stop you from making bad investment decisions at exactly the wrong moment.

But boredom? Pfft. Retiring (even semi) at 30 is awesome.

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Re: 31 years old, just sold my business, early semi-retireme

Post by reneeh63 » Sat Jan 03, 2015 6:50 pm

You've gotten some great advice...I also would caution you about being so certain that your future will be the same as you envision it now. Certainly, you may end up revisiting the idea of kids..and accidents do happen. Even that you said you have no expensive hobbies or desire to travel...at 31 and only now having considerable free time I would guess that over the years your interests could change quite a lot and you don't want to stuck sitting at home. Yeah, being retired can be pretty boring if ALL you're doing is watching movies.

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Re: 31 years old, just sold my business, early semi-retireme

Post by TradingPlaces » Sat Jan 03, 2015 10:02 pm

.....

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