2016 Investments Year-End Review

Investments Year-End Review

Hello everyone! Thanks for stopping by The Green Swan today. It is that time of the year where I reflect back on our financial progress in 2016 and make goals for 2017. I am recapping my year-end review in a two part series. Last week’s post, Part 1, focused on how we did budgeting and managing our expenses in 2016 with a look ahead for 2017. Today’s post, Part 2, delves into investment performance with my annual model going forward.

Investments Background

As you may know, I am on the path toward a Smilodon size investment portfolio (approximately $3 million) for me to reach FIRE status. And I don’t just leave it to blind chance, there is definitely a plan in place and I model out my path a few different ways. When modeling it out, my general philosophy is K.I.S.S. (keep it simple stupid)!

There are so many variables that I could control for or model that just over complicates the process and adds more noise to it than actual real solutions. And things tend to change over time anyway, life happens (like having another kid or switching jobs, etc), so my “perfectly” modeled world and path toward retirement could be worth nothing more than the paper it’s written on when things change.

The other philosophy I live by is trying to be approximately right rather than precisely wrong. All models are going to be wrong, it’s just a matter of how precisely wrong you want to be…for me approximately right does the job.

So with that said, my simple (and probably more accurate) model relies on three assumptions: My rate of return on my equity investments (8%), annual contributions to our investments, and the increase to those contributions each year thereafter (3%).

  • 8% has always seemed to be a fair estimate for the long term growth expected from the stock market, as I laid out in my Invest to Win post.
  • 3% originated as a basis for inflation and expected cost of living increases to my salary which I would slide straight into investments (no presumed lifestyle inflation).

What is included below solely represents my investments assets (which does include my small business investment). It doesn’t include cash held in my checking/savings accounts which was over $25K at year end (built up to make IRA contributions in January), equity in our primary residence, or equity in our vehicles. All told, our net worth comes in over $1.1 million right now. Also, note that the chart below assumes I continue working past reaching Smilodon status for informational purposes only.

Investments Year End Review

As you may expect, we keep a very close eye on our investments. We use Personal Capital to aggregate and track our various investment accounts which I then easily transfer into my excel file which allows me to cut and slice the data in more personalized ways. Personal Capital simplifies my life immensely and is free. If you don’t already use Personal Capital you should consider signing up today!

2016 Talking Points

All told, 2016 was a good year. Our investments increased from $781K from January 1, 2016 to $985K at December 31, 2016. However, this was driven mostly by contributions mostly and our rate of return actually under-performed the S&P 500 due to a couple factors. The most important of which is probably the fact I pulled out approximately $150K from my taxable brokerage account in the July / August time frame in order to buy a small business and so that money did not experience the broader market increases subsequent to the US Presidential Election.

I’ve continued to value my investment in the small business at $150K even though there have been some very positive developments which would result in a more favorable valuation. I’ll save these details for a post sometime in the future. But my brothers and I haven’t had a discussion yet to formally document what our estimated Company value would be in light of the positive developments.

In reality, adjusting for the improved valuation for the small business, my investments assets have eclipsed the $1 million mark and my return is likely more in line with the S&P 500 for 2016. Once my brothers and I have determined the value, I will retroactively adjust these numbers and projections.

Projection Talking Points

Let’s address the elephant in the room quickly. You may have noticed contributions tail-off in 2017 compared to 2016. There is a two part answer to why this will happen. First, we are expecting our second baby in early April! Yay! But as far as my investments are concerned…bummer! That means Lucy and I will incur significant labor and delivery charges as well as added daycare expenses. Yikes! Secondly, and quite simply, I’m being conservative regarding my take-home pay, and specifically, the bonus I expect in a couple months. So in 2017 I will be happy if we contribute $115K.

Our Contributions will be going to:

  • We’ll continue to max out our tax sheltered contributions including $5,500 for both Lucy and I invested in our traditional IRAs (since we are in a high tax bracket today…a mistake I learned after 2016), as well as $18,000 for our respective 401(k) accounts.
  • We’ll also max out our Health Savings Account contributions. However, since Lucy is pregnant we elected to keep her off my high-deductible health plan and instead on a more traditional (lower deductible although higher premium) health plan in order to minimize our out of pocket costs. As such, I’ll only be able to contribute which amounts to $2,600 in 2017.
  • A total of $25,000 to $30,000 will be invested in our kids 529 plans in 2017. This will result in kid #1’s account being fully funded and just the initial contributions being made to kid #2’s account.
  • The remaining amount of contributions will all funnel into our taxable brokerage account.

Other Talking Points:

  • My FIRE-Starter investment inflection point continues to get pushed back as my wife and I continue to bring home more and more income, of which mostly all falls straight to our taxable investment account. As outlined in the chart above, this is the point where my returns exceed my contributions, thereby making my contributions significantly less important as the years go by. At this point, I estimate reaching my FIRE-Starter in 2020.
  • My somewhat squishy targeted FIRE number is $3 million, or what I’ve previously referred to as my Smilodon. This is squishy because it is still years away and many things can change between now and then, i.e. what I think my expenses will inflate to in retirement, the health insurance landscape and other tax related considerations. However, I don’t foresee myself ever wanting to work an additional 11 years after reaching Smilodon status in order to reach Woolly Mammoth status of $10 million.
  • I also highlighted what the investment values will be at age 40. 40 is my anchor. I don’t want to work past that without specific timelines or needs identified (perhaps my mansion fantasy…). Basically, there needs to be a dang good reason for me having to still work and it better be short term thereafter.
  • Some of you may be wondering how I expect this to change with a potential move to London. Short answer is that I don’t expect it to change for the worse. While Lucy and I may be willing to make the move for effectively less pay (net of the cost of living adjustments to expenses), my hope and expectation would be a sufficient pay adjustment to at least offset the increased expense in London.

Summary

I’m happy with where we are sitting at the end of 2016. I update and adjust my projection each year (8 years running now). We’ve done well continuing to save and invest as much as we can while letting the market do its thing. It was just four years ago, shortly after moving to Charlotte, that I was modeling a more modest $790K by the end of 2016. While cumulative market returns have added approximately $40K more than I projected, the primary factor has been increased contributions as we continue to grow and develop in our careers.

I don’t foresee our contributions slowing down much in the coming years. After our second is born in early April, Lucy plans to return to work yet and her added salary will continue to fuel our FIRE dreams.

As you know from last week’s post detailing our 2016 budget and results, our annual expenses were approximately $60K. While daycare for a second child will bump this up next year, eventually when the kiddos are in school I’d expect our expenses to come down modestly.

Year in and year out I think $50-$60K would be a reasonable estimate. With a conservative 3% safe withdrawal rate in retirement, that would result in a FI target of $2 million. Based on the projection above, I estimate we’ll reach FI in about four years from now. I can handle four more years. Then a load will be lifted off my shoulders, I can work a few more years to build a cushion, and then call it good.

Thoughts?

How did your investment year-end review turn out? Did you beat the market? Did you increase your contributions compared to last year? Let me know in the comments below.

Thanks for taking a look!

The Green Swan

 

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  • [email protected]

    Looks like you had a good year! My review turned out well, all things considered. We added solid contributions toward our goals and our investments matched the market (Vanguard investor since the early 2000’s here). No one needed any surgeries this year, although medical expenses continue to be quite high. Here’s to a great 2017!

    • JW

      That’s great, Liz! Keep building that snowball up. Here’s to an even better 2017!

      Thanks for the comment!

  • Full Time Finance

    Question wouldn’t 3m be your Sabre tooth tiger not your dire wolf? Dire wolf per your definition was minimum viable. With 3m even at 3 percent your living off 90k a year. That’s hardly roughing it.

    We had a massive increase in contributions this year, coupled with a market matching return. Next year’s contributions will be significantly less unless my wife’s side hustles pay off simply because she’s no longer working in the corporate world. Her transition out of the workforce bought a flood of money in vacation payouts and bonuses with no associated day care. That means even if she were still working last year would be a savings anomoly. Savings vues in 2016 approached 2x expenditures. I’m expecting closer to 1x in 17.

    • JW

      Ah yes that would be the Sabre Tooth, thanks for the correction! 🙂

      Enjoy that boost in savings from 2016!

      Thanks for the comment, FTF.

  • Mrs. Picky Pincher

    It sounds like you had a great 2016! It’s all about growing that moolah, after all. 🙂

    Mr. Picky Pincher and I contributed to my Roth IRA and his 401k with employer match this year. Our priority is still on getting out of debt, so we haven’t started investing too heavily yet, since the interest rate on our loans beats out investment returns.

    • JW

      Good for folks on focusing on debt and making a dent in it. Hopefully it turns soon that all extra money goes to padding the investments!

      Thanks for the comment, Mrs Picky Pincher!

  • [email protected]

    We are targeting $60K a year in retirement too. But our pensions will cover that (and more…). You had an awesome year and kudos to you for being so well prepared for Baby #2. It will be an exciting (and busy) year for many blogger friends having babies!

    • JW

      Wow, your pension will cover that much!? Solid!

      Yes, there are so many bloggers due this year…must be something in the water! 🙂

  • Mrfirestation

    Congratulations on meeting the million dollar mark in your nest egg. That’s a big milestone! We had a good year in 2016. It was our first year of early retirement and our net worth went up a lot more than expected. Our portfolio return was close to 8% – on par with the S&P 500. Stock options in my former employer drove much of the game, and offset the fact that we carried a lot of cash – three years of spending dash into retirement. Looking forward to another great year in 2017!

    • JW

      Thanks FireStation! Congrats on your first year, it has certainly sounded like a good one for you and your family.

      Solid return for you, hopefully the market continues to do its thing in 2017!

      Thanks for the comment!

  • Amber tree

    Great terms you use…
    Well done on the first 1 Million…! Especially since this excludes home and car equity, just like I calculate it as well.
    Smilodon looks to be a great point to stop working!

    • JW

      Ha thanks, ATL, you mean like K.I.S.S.?

      Yup, the investments are what matter the most since that is what dictates FIRE.

      Thanks for the comment, ATL!

  • Kalie @ Pretend to Be Poor

    Yes, congrats on reaching a million this year! That’s quite a milestone.

    I know there are lots of factors including your insurance plans, the probably of complications, etc, but I will just say that I had my second baby on a high deductible plan and the total cost was less than if I’d been paying higher premiums. And it allowed us to use the HSA to pay for it. We negotiated a discount for paying before we left the hospital, too. (Though that wouldn’t apply for copays.) It never hurts to ask!

    • JW

      Thanks! That’s an interesting point that I hadn’t really thought much of before. But being a cash payer (or using the H.S.A.) can provide for the opportunity to negotiate. And I’ve heard some hospital more than others have really been open to cutting deals so it is worth exploring.

      Thanks for the comment, Kalie!

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  • Go Finance Yourself!

    Thanks for the update, Swan, and congrats on another good year. I ended with a really good 2016 and I’m really excited for 2017. I just hope that the current optimism in the market/economy lasts. But as we all know, that can turn on a dime. Regardless, I’m looking to keep pumping in more to my investment accounts and continue striving for FI.

    • JW

      Right on, GFY, I have the same mindset as you. I’ll leave it up to the market to keep doing its thing as I continue to poor excess cash into it.

      Thanks for the comment and here’s to a strong 2017!

  • Jon @ Be Net Worthy

    Well done JW and congrats on crossing over the $1 million mark! We had a good year as well. Investments were up and overall returns were at 9.9%, so I can’t complain. Post coming out on it soon.

  • Josh

    Reading this post gave me inspiration to work harder to help accomplish my own goals for 2017. Congrats on the upcoming addition, we have baby #2 arriving in April as well and having to make some budget changes as well.

    • JW

      Congrats to you as well! Just another wrinkle in the budget…:)

      Thanks for the comment, Josh!

  • SMM

    Congrats on reaching the $1M mark and all the best with family and financial goals in 2017! I’m trying to save the max in 401k contributions this year and have to sit down and do a line by line analysis on where I can cut back. Of course our investments have gone up like everyone else due to the market, but I wouldn’t mind a downturn so I can buy more for less either :-).

    • JW

      Thanks, SMM! Being able to max out 401k contributions is quite a milestone accomplishment. Best of luck on getting there!

      Thanks for the comment!

  • FinanciaLibre

    You guys are killing it! Congratulations on all the success and fantastic planning.

    Obviously lots of great stuff to be very happy and proud about – as y’all well should be.

    Nice work!

    • JW

      Thanks, Libre! We still have a ways to go so the march continues!

  • earlyretirementnow

    Congrats, the first million is the hardest! As you showed in your Fire-Starter post, once the investment income takes hold, there is no holding back the portfolio. The % increases year-on-year might get smaller because the contributions get smaller relative to the NW, but the $ increases start taking off. Even with the expenses for the baby!
    Also, completely agree: don’t get greedy and work all the way to the woolly mammoth! Time and life and youth are too precious! Just make sure you come back to this post in a few years and remember not to fall into the “one more year trap” 🙂

    • JW

      Yes absolutely! And what matters most are the dollar increases. Good luck going to the store to buy groceries with percentages! 🙂

      And good point on the OMY trap. But I can see how easy it is to fall into that mindset. Life is precious and it’s good to know when enough is enough and to stick to it!

      Thanks for the great comment, ERN!

  • Amanda

    Congratulations on the first million and a great year! Looking forward to following your journey and hearing about the new addition this year! 🙂

    • JW

      Thanks Amanda! Lots of excitement to come this year!

  • Mustard Seed Money

    Awesome job JW!!! Being a millionaire at 30 is being in some rare air. On top of that reaching your smilodon by 40. Wow, sounds like you have some awesome plans in place and are well on your way to achieving all your dreams. Can’t wait to watch your financial journey!!!

  • Leo T. Ly @ isaved5k.com

    It’s very impressive that you are able to save more than 50% of your income and more than $100k in annual savings. Most people dream of making the six figures, but you saved six figures. From following the PF community, most people have a 50% saving rate or higher with the help of a budget. I am not a budgeted and I think that it’s time I take a closer look.

    For my 2016 performance I did reasonably well and also became a millionaire like you ?

    • JW

      Thanks Leo! It’s the benefit of growth in my career and a few promotions in recent years. I haven’t always been able to save six figures!

      Tracking expenses and having a budget has done wonders for me. I’ve been tracking for about ten years and it’s very enlightening knowing where your money is going and it easily allows you to target high expense areas to cut back on.

      Congrats on reaching millionaire status! Thanks for the great comment!

  • A Machinator Rambles

    Once you get to that $2 million mark, you’ll have to let us all know if the first million was the hardest!
    Congrats on a great year!

    • JW

      Haha you bet! I sure hope that’s the case.

      Cheers to a great 2017! Thanks for the comment!

  • Great progress GS and nice entry in the 7 figure club. Love your new website design, btw. Wish I had those skills. Keep up the great work and best wishes for the new family addition on the way.

    • JW

      Thanks so much, 10! 2017 will be an exciting year and the baby will be here in no time!

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