2016 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.
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.
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.
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.
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