Consulting

Part 4: Measure, Plan, Track and Adjust

In the first three parts of this series, I outlined my retirement plan and tracked it until 2012. I showed how I measured that the plan was failing and then described how I began an exit from the stock market and based my retirement plan on real estate. As I had projected home values in the Sacramento area have bounced back quickly, 73% since 2012, and continue to rise, 13% projected for 2016. Rents are currently also rising and my portfolio is back on track in just 3 years time. This is in spite of the fact that the value of the part of my portfolio remaining in the stock market performed at a measly 4% gain for two years, and then dropped 15%, during the most recent market corrections. Thanks Greece and China, although I really don’t understand why you get the credit or the blame.

2015

I am now taking all of the remaining money out of the stock market and putting it all into more real estate. That’s right all eggs in one basket, or at least in one neighborhood. The people who most strongly recommend otherwise are the ones who can’t recommend a better alternative other than leaving some in the stagnate stock market.

In order to make the plan work at the current recovered real estate values, I am leveraging my new investments with special non-recourse loans designed for 401k real estate investing. An interesting note is that 3 years ago I could only find one bank offering these kinds of loans and the rate and cost of these loans was exorbitant. So I did not leverage those investments. Had I done so I could have bought almost twice as many and would have made an even bigger gain. Now when I shopped I was able to get term sheets from 8 banks and chose one with a 4% rate and 65% loan to value. These competitive rates tell me I am not the only one investing this way.

Looking forward, I am projecting that the market values will continue to increase at a more conservative 5% and hopefully, continue at that rate, without needing another real estate correction anytime soon. Even with a correction, rents have historically been stable, even during the recent and historical bubble bursts, increasing at about the same rate as inflation. So, the plan is to retire on the net from rental income and still have the properties themselves as backup or legacy.

2023

That slight decline in the actual graph at 2015 is due to the China drop that occurred while I still had some in stocks plus some purchase and rehab costs for the new real estate. The graph to the right of that is projection based on 5% growth and repayment of the loans from rent proceeds.

At retirement the gross value of the real estate will be as much as my original plan, probably more, but I am still going to retire with a bit of reduction in income using just rents. Remember my original plan expected 5% return on the gross value for income. Not something you can count on in bonds, CDs or dividend stocks anymore, nor from rent in buy-and-hold real estate investments. It also may take as much as a year longer than my retirement age goal to eliminate the debt. However, if I take into account my income grew to a larger value than I expected, and I will  no longer need to contribute 15% and I can add in Social Security at 62 I think I can manage on just the rental income.

What this series of blogs all represent is a personal anecdote. The point is not that I recommend real estate over the stock market for everyone. In fact, it may very well make sense for me to liquidate my real estate at some time should sanity return to the stock market or insanity return to real estate.  My main point is to make a plan, track it often and make adjustments. My second point is don’t believe everything “they” say, be proactive, and trust yourself. I could have become a more savvy stock and bond investor or a hard money lender or an angel investor. The point is I quit trying to hire a professional and took charge. Only you can really, always have your best interest as a priority.

For those interested in real estate investing inside a 401k here are some links I found useful

http://www.irafinancialgroup.com/

http://www.sensefinancial.com/non-recourse-lenders/

https://www.biggerpockets.com/

I got a kindle version of this book for free when I contact the bank back in 2012

http://www.iralending.com/book.htm

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Part 3: Measure and Adjust

In the first two parts of this series, I outlined my retirement planning which started in 1984 and showed how my plan was on track through to 2007. And then what happened? Complete turmoil, real-estate bubble burst, economic downturn, first broker/manager leaves his firm for violating rules and hands me to a second one, who also leaves his career due to stress, passing me to a third. By 2011, it looks hopeless to get back on plan and I am looking at where I will be if I have to recalculate with the contemporary numbers I outlined in part 1. Thanks to the new normal and the market corrections I am actually behind where I would be, even if I had used today’s bleak numbers when I started in 1984. In other words when you factor in so called market corrections, like 2002 and 2008, today’s normal is the normal and was the normal.

2011

Projecting those bleak numbers out from 2011 it appeared that I was going to have to adjust my plan in a totally new manner. A suggested adjustment I was hearing from money managers, from our government and from many of my friends and colleagues was that the answer to bad retirement planning and performance is to work longer and contribute more. No one should expect to retire at 59.5. Your 60’s is the new 50’s. Nope, not for me it isn’t.

2011plan

So, in 2012 I started pulling the plug on stock market investing. Since I am essentially self-employed, an employee of my own chapter S corporation, I could create my own 401k plan and in doing so allow investments in other than just stocks and bonds and products made available by Wall Street vendors. Instead I chose to buy an investment I understood and one that was at that time at the lowest I could ever see it go. I took about 60% of my nest egg and bought real estate. Not REITs but actual 3 bedroom homes in the Sacramento area. Homes that I chose, in an area I chose, at a price point I negotiated. I hired a property manager whose decisions I direct and had them rented to tenants I approved at rental rates I determined. This is all inside my tax deferred 401k plan.

And in part 4, the last of this series, I will show how this new plan has performed and where I project to be for retirement and more importantly when.

Part 2: Measure and Track

In part 1 of this series, I outlined my retirement plan from 1984 based on saving 10% of my salary into a 401k and expecting a 12% return on investement(ROI). I also outlined that although these numbers were appropriate for 1984 they are way too optimistic in today’s markets.

So, how did my original plan go? Was it more like the eighty’s or more like the current day? Well of course it went like the ninety’s and the ought’s; In other words, half and half. At the end of 2000 I was actually way ahead. My Salary had grown by an average of over 10% annually. And although I had a late start to fully contributing to the plan, I had caught up because of my salary growth and by contributing an average 15%, instead of 10%, of my salary when I finally did start. I also experienced 18% ROI during the nineties.

2000

Then 2000 brought the dot-com bubble burst and the portfolio dropped 16% each of the first two years of the new millennium. This took away all of my headroom on my original plan. However this was followed by an average of 15% growth the next 5 years. So, my retirement saving was still ahead of plan. During this time and as a result of the dot-com burst my field, my career and my annual income started gyrating. I worked for a start-up for 4 years and then went independent and started my own consulting business. I rolled my 401k out of my prior employer’s plan and hired a broker/manager. I continued to contribute 15% and by 2007, I was still on track. But the salad days were coming to an end. Part 3 of the series, like in a good play, thickens the plot.

2007

Part 1: Measure and Plan

In 1984, I had just started at a new job at a big company and was presented with the benefits package and all of its glossy information booklet and all of the redundant name, address and social security number forms. Inside the package was a gimmicky card board calculator. A series of wheels on a pivot and sandwiched between two more pieces of cardboard with windows exposing numbers on each wheel. I don’t remember exactly how it worked but essentially you rotated each wheel to select parameters in some windows and then read results from other windows.

What I remember was I selected to save 10% of my salary each paycheck into a 401k plan.  I also predicted a modest salary increase every year (3%), a reasonable return on my investments (12%) during growth and a safe rate during my income period at retirement (5%). The result was I could retire comfortably at 59.5, which was the earliest time you could draw on a 401k without penalty. I have since replicated this calculation in a spreadsheet and the results are a retirement net worth which provided an income at retirement that seemed huge in 1984. I would actually get nearly a 20% increase in income on the day of retirement and I would only be living on the interest from my savings.  I would still have the savings itself for emergencies or legacy. Of course that income would erode with inflation unless some of the interest was left invested for growth to compensate.

Plan1

Remember, that in 1984, all of these assumptions were reasonable for the time but were completely different than they would be today. In 1984 the prime rate was 12%, mutual funds were regularly earning 18% and you could earn 5% to 8% in a bank savings account or a 5 year CD. So my numbers were actually conservative for the time.

The economy was booming and I was in one of the fastest growing fields of automotive electronics. If I was just starting out today and were to do the same calculation with numbers from the last 5 to 10 years it would be a completely different picture.  I would have choose a 6% ROI during the growth period, keeping the 3% annual salary increase and then to achieve a reasonable income at retirement I would have to annuitize the principal at a more conservative 3% growth during retirement for a 40 year life starting from 59.5. To make that plan achieve a reasonable  retirement income,  I would need to contribute 25% of my annual salary and accept a 20% decrease in income at retirement. I would then have to hope I don’t live past 100 or need any lump sums during retirement because at age 100, it would all be gone.

Plan2

Now the thing is this is still what the financial planners are selling. Their numbers may be somewhere in between these two scenarios to make their product more appealing. The other change in their plans is that you should plan to work longer, eventually that red curve will get up there, but not until your 60’s or your 70’s. Unless of course you can get a government job that still pays a pension. But even these plans are not promising what they used to. No more 20 and out like we used to hear.  No more golden parachutes when your service years and age equals 75. No more gold watches, a party and one way tickets to Florida as soon as the kids graduate.

Retirement Planning Series

One of my favorite engineering sayings is “You can’t improve what you don’t measure.” So as an engineer I tend to measure a lot and a favorite tool is spreadsheets. In the next few blogs I am going to share a measurement that started over 30 years ago and is still many years from being complete. I have prepared 4 blogs to outline my experience in retirement planning. I will be posting them over the next few weeks.

I Need a Wake-up Call

Buy low and sell high is one of those obvious sayings in the investment field. And then there is the law of supply and demand for price setting. So, right now I have a supply of time and not a lot of demand. So my time in theory is a little cheaper and I am investing it in three fronts. First, I am trying to get the word out that I am available for contract, in other words marketing to increase demand. This post is just such a contribution. I am also working with a past client that has some ideas but is not ready to pull the funding trigger so I am doing a little pro bono in another effort to increase demand. And thirdly, I am working on an open source based project that might turn into an entrepreneurial product if I can ever get out of the quagmire that is open source (more on that later).

So, which of these investments will provide future income? If future performance matches past experience then none of these will. To date, the only means for my gaining a new client engagement has come from someone I have worked with in the past, knowing of an opportunity, and strongly suggesting me for the effort. Even though I have and continue to search job sites, cold call managers and companies, presented at a conference and talked at length with agency recruiters, none of these efforts have ever produced a new client engagement. One of my most fruitful engagements for both me and my client came when a past neighbor who knew me because my kids babysat his kids and he suggested I might know something about FPGA to a client he worked with in the RF field.

I am somewhat reminded of what Mona Lisa Vito said at the end of one of my favorite movies: “ You know, this could be a sign of things to come. You win all your cases, but with somebody else’s help. Right? You win case, after case, – and then afterwards, you have to go up to somebody and you have to say- “thank you“! Oh my God, what a nightmare!”.  It may not be a nightmare but while you are waiting for your next win, and the help that you depend on to get that win, it can be a bit scary when you feel that it is not totally in your control. So, to all of you who have recommended me and continue to recommend me, Thank You again. And to you and everyone else, please send me a new wake-up call soon before my dream job gets to the nightmare stage.

Call Me First and Get a Discount

If it is not obvious from my greatly increased blog activity, let this post make it clear that I my most recent contracted engagement expired about a month ago. Yes, I don’t seem to do much blog wise or otherwise when I am fully contracted. My most recent contract started last May and was originally for 6 months to assist an ASIC company with the emulation of their next generation network adaptor product. They asked me to take the lead on the emulation process and after that was established and they had hired a team to support the effort, they extended my contract to maintain the process until they delivered the emulation product to its first internal firmware development customer. Of course, just as we reached that milestone the company’s management purchased a competitor’s effort for a similar ASIC product and canceled their own. So although the emulation effort was successfully on track the product it was supporting no longer existed and a lot of good work was abandoned. Worse than that a lot of good people were released and of course the purchased competitor division is offshore and so on. That’s the bad news. The good news is I have recent experience with Xilinx Vivado and Virtex 7, experience with state of the art ASIC partitioning to FPGA and exposure to extensive use of  System Verilog code. If you are reading this you have probably already been contacted by me and directed to this blog site, which along with my LinkedIn profile, is my primary web presence. If you haven’t then call me and tell me you saw this first and I will give you a 50% discount on your first 20 hours of contracted service.