Uncertainty vs Risks….part 2

A few months earlier, I talked about the difference between Uncertainty and Risks (https://humblefi.com/2019/07/14/uncertainty-vs-risks/). If you read that post, it would be a really good foundation to understand this post. So, I encourage you to take a peek at that first.

Genuine Uncertainty vs Risk

The basic thesis of the first post was to differentiate between two things:

  • Genuine Uncertainty
    • Events that come of of nowhere like the 2008 global recession
    • Since we do not know when such events happen, how can one create a risk mitigation plan?
  • Risk
    • Events are known and also the probability of occurrence is also known
    • For example, for a recession, here are some possible events with different risk probabilities.
      • Portfolio loss during recession
        • Probability: 80-100%
        • Risk mitigation Plan
          • Keep some cash aside to avoid selling stocks when they are down.
          • Keep some case to keep investing to dollar-cost-average down
      • Job loss during recession
        • Probability: 20%
        • Risk mitigation Plan
          • Emergency fund to last 6 months without a job
          • Life insurance outside of work….
          • Network with people in other companies
          • Always be ready to interview.

Dealing with Genuine Uncertainty and ordinary risks

The basic question that came to me was: what financial system can I set up to deal with both Genuinely Uncertain events and ordinary risk events? Lets capture all the risk events that I want the system to handle.

  • Inflation Risk
    • Cash funds and many bond funds have yields less than 3% inflation.
    • I.e. we need funds with total return (dividends + capital gains) of greater than 3%…mostly implies equity funds.
  • Falling Interest Rates Risk
    • Negative rates anyone…reduces Cash and bond fund returns a lot.
    • This also implies some sort of equity funds.
  • Rising Interest Rates Risk
    • Reduces stock market returns by making borrowing costly
    • Newer bonds will offer more yield i.e. older bonds lose value
    • This implies some sort of bond funds.
  • Longevity Risk
    • If all assets are in cash and bond funds, inflation can eat into them and we may have more life left when the portfolio is down to zero.
    • Historically, inflation protected assets have been stocks, tips, real estate,….
  • Sequence of Returns Risk
    • Retiring when there is a bear market means that stock assets could be worth less than paid for. I.e. drawing down on portfolio which is down, at the beginning of retirement, has been proved to be bad news for a portfolio.
    • For example, 2008 Bear market was a Genuine Uncertainty event
      • Between down market and up market, it took almost 5-7 years
      • Nobody can predict when such an event can happen
    • Dr. Wade Pfau has done a lot of research here which a normal person can read and understand 🙂
  • Job loss risk
    • Need to sustain household expenses for some time until the next job can be found.
    • This time period can be 1-2 years…from seeing folks around me going through some rough times.
  • Health Scare risk
    • Need to have sufficient cash reserves for a health scare when one cannot work
    • Also, need some income protection as well.

After considering the above risks, some of which I have personally experienced and/or have been around people who experienced it, I can sort them into three buckets based on time:

  • Short term risks mitigation for 1-2 years
    • Temporary job loss, health scare, family emergencies like sick parent, etc
  • Medium term risks mitigation for 5-7 years
    • Serious health scare, long term disability, 2008 type bear market (aka sequence of return risk), etc
  • Long term risks mitigation for 30 years
    • investments to overcome longevity risk, overcome inflation risk, etc

System 1: Passive Income Streams

There are two components of this system that I followed for the past 5+ years.

  • Emergency Fund to cover 6-12 months
    • Held in CASH…high yield accounts….appx 1-2% interest rate
    • After taxes on interest and inflation, this is a negative yielding account
  • Passive Income Streams to cover all the expenses
    • Income from Municipal bonds: state and federal tax free
    • Income from Qualified (stock) dividends

Recessions can turn into bear markets. If the bear markets lasted more than 6-12 months, then I would be forced to sell the stocks and/or bonds from my passive income streams.  In addition, many dividend paying companies reduce their dividend payout in bear markets. I.e. I may have to sell stocks when the their prices are down.

Can I come with a better system? Apparently, smart people have already thought about this problem and produced a better system 🙂

System 2: Bucket Investing Strategy

I have always invested until now with Vanguards Risk Levels approach i.e. invest money in different risk buckets to diversify risk (Risk Analysis). The bucket based investing is a much more exhaustive version of the same….a system that can handle both ordinary risk events (job loss, short term education break, etc) and Genuine Uncertain events like 2008 bear market.

Conceptually (imo), the Bucket Investing Strategy has three parts.

  • Bucket 1: Cash Bucket for 1-3 yrs
    • Short term risks mitigation only
    • Goal is liquidity and not return i.e. expected return is 0%
    • 1-3 years of total expenses in this bucket.
    • I have used high yield savings account from Ally Bank, SmartyPig, Capital One 360, etc for this bucket.
    • This is the “Salary bucket”…expenses should not exceed the inflow into this bucket from Buckets 2 and 3.
  • Bucket 2: Bond bucket for 5-7 yrs
    • Medium term risks mitigation only
    • Goal is liquidity and not return.
    • But since Bucket 1 is protecting us for 2 years, we can go up the risk-reward ladder for some more yield but with some more risk.
    • Expected return for this bucket is 2.5%….still does not beat inflation.
    • I have used Muni bonds whose tax equivalent yield is a bit more i.e. barely beats inflation.
    • Income from this bucket flows into “Salary bucket” i.e. Bucket 1.
  • Bucket 3: Equity bucket for as long as it takes 🙂
    • Long term risks mitigation only
    • Since this is an equity bucket, assume 4% return per year.
      • NOTE 4% is conservative w.r.t. the long term equity return of 8%.
    • Since buckets 1 and 2 can provide funds for years 1-7, the goal of this bucket 3 is to keep up with long term inflation by investing in equity alternatives like
      • Dividend growth stocks
      • Capital growth stocks
      • Current income stocks like REITs.
    • Income from this bucket flows into “Salary bucket” i.e. Bucket 1.

Examples for Bucket Sizing

When I am ready to retire (still at least 10+ years away), I would like to have all three buckets set up completely to generate passive income that can deal with all the above discussed risks. Lets take one example design and study two implementations based on that design.

  • Bucket 1:
    • 3 years of full expenses
    • Cash at 0% return
  • Bucket 2:
    • 7 years of full expenses
    • Bonds at 2.5% return
  • Bucket 3:
    • Equity funds at 4% return
    • Since this is an equity bucket, question comes: How much money here?
    • This depends on how much income is needed to be generated from this bucket.

Lets take a couple of examples to understand this.

Case Study 1: $4000 per month passive income

In this case study, the passive income requirement in retirement is $4K pm OR $48K per year. Assume gross for now. So, the bucket portfolio should somehow generate $4K pm in dividends.

  • Bucket 1:
    • 3 years of expenses in cash => 3 * $48K => $144K
    • Since we assumed 0% return for bucket 1, we need Buckets 2 and 3 to generate $48K per year in income.
  • Bucket 2:
    • 7 years of expenses in bonds => 7 * $48K => $336K
    • Since we assumed 2.5% return (I am using MUNIs for this), this bucket will generate $336K * .025 => $8400 pa => $700 pm.
    • So, Bucket 3 will have to generate the remaining ($48K – $8400) => $39,600…appx $40K.
  • Bucket 3:
    • The main requirement for Bucket 3 is to generate $40K.
    • Since this bucket has an assumed return of 4%, the amount needed in this bucket is: $40K / .04 => $1 million 🙂
    • This bucket will have the following types of equity funds
      • Dividend stocks
      • Growth stocks
      • Value stocks
      • REITs
      • etc

Case Study 2: $6000 per month passive income

In this case study, the passive income requirement in retirement is $6K pm OR $72K per year. Assume gross for now. So, the bucket portfolio should somehow generate $6K pm in dividends.

  • Bucket 1:
    • 3 years of expenses in cash => 3 * $72K => $216K
    • Since we assumed 0% return for bucket 1, we need Buckets 2 and 3 to generate $72K per year in income.
  • Bucket 2:
    • 7 years of expenses in bonds => 7 * $72K => $504K
    • Since we assumed 2.5% return (I am using MUNIs for this), this bucket will generate $504K * .025 => $12600 pa => $1050 pm.
    • So, Bucket 3 will have to generate the remaining ($72K – $12600) => $59,400 …appx $60K.
  • Bucket 3:
    • The main requirement for Bucket 3 is to generate $60K of income pa.
    • Since this bucket has an assumed return of 4%, the amount needed in this bucket is: $60K / .04 => $1.5 million 🙂
    • This bucket will have the following types of equity funds
      • Dividend stocks
      • Growth stocks
      • Value stocks
      • REITs
      • etc

Steps to take today

To support generating passive income for ever from the first day of retirement, we have designed the three bucket system above.

  • Bucket 1 is the salary bucket.
    • Income flows into this Bucket 1 from buckets 2 and 3 like a regular pay check.
  • Buckets 2 and 3
    • The pay check, from Buckets 2 and 3, is supposed to overcome all the risks we talked about before: ordinary risks and genuine uncertainties.

Assuming that, what should we do today? From now on, all goals will be targeted to build the buckets to their appropriate sizes. For the two examples listed above,

  • $48K passive income pa
    • Bucket 1: $144K
    • Bucket 2: $336K
    • Bucket 3: $1 million
  • $72K passive income pa
    • Bucket 1: $216K
    • Bucket 2: $504K
    • Bucket 3: $1.5 million

Using the above template, please calculate your own bucket sizes for the amount of  passive income you desire per year in retirement. Hope that helps!

Financial Independence Progress Report for Dec 2019

It is December 2019 now. Somebody recently asked the question: what were your accomplishments in 2019? At that moment, it struck me that 2019 has been a very very busy year….there were a lot of personal and professional issues our family had to deal with….relationship troubles, a job loss, new job and job-change induced relocation, sick parent, moving to a new house, etc. There were some good things as well….but lots and lots of stress. I realized that I need to slow down for a few days and slowly extricate myself from the grind. 

First step is this report 🙂 My last monthly progress report was May 2019. I was supposed to use a new method to track my finances and goals going forward from May. That did not happen for the above reasons. I have used this template since I started this blog…almost 6 years ago. So, lets use it for some more time until I stabilize my life!

That said, let us see how much closer I got to my financial independence targets in Dec 2019.

12/22/2019
Emergency Fund 100.0% 39.27%
College Fund 67.39% 76.20%
Passive Income (2018 vs 2019) $1387.59(12/2018) $732.68 (12/2019)
Retirement Fund 92.52% 95.46%
Roof for our Family Done!
Medical Fund (via HSA) 18.60% 22.30%
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Passive Income Stream
    • This year’s target dividends was $500 pm or $6000 per year. The target is half of last years because I had to sell some investments for a home down payment.
    • The good news is that I have exceeded my target. The total dividends, as of today, is $10,426.89.
    • The bad news is that last year the total dividends were much higher….$16,589. But that was expected….home purchase and all.
  • Additional Investments
    • Investments in taxable accounts
      • Nothing this month. Too many expenses related to Christmas 🙂
    • Investments in tax-deferred account (IRA)
      • Redirected the December REIT fund dividends into VEIPX: Vanguard Equity Income Fund
    • Investments in tax-deferred 401K
      • No change this month…continuing to build a cash position.
      • The way the market is going up, this plan seems stupid…..but I want to have cash when the chips are down much more that the incremental gains this year.
  • Miscellaneous
    • Nothing special.

 

Uncertainty vs Risks…

What is Risk?

The following are the definitions of risk according to the dictionary

  • A situation involving exposure to danger
  • The possibility that something unpleasant or unwelcome will happen
  • A person or thing regarded as a threat or a likely source of danger
  • A possibility of harm or damage against which something is or needs to be insured
  • A possibility of a loss…..ex financial loss

What is Uncertainty?

Many people, including me, have used risk and uncertainty interchangeably. But, if you did deeper, they are different. The dictionary definition of Uncertainty is:

  • The state of being uncertain
  • The state of a lack of certainty

Possible Outcomes and their odds of happening

Let us consider some math now. Consider all possible outcomes of an event like rolling two dice. Listed below are all possible outcomes:

  • (1,1)(1,2)(1,3)(1,4)(1,5)(1,6)
  • (2,1)(2,2)(2,3)(2,4)(2,5)(2,6)
  • (3,1)(3,2)(3,3)(3,4)(3,5)(3,6)
  • (4,1)(4,2)(4,3)(4,4)(4,5)(4,6)
  • (5,1)(5,2)(5,3)(5,4)(5,5)(5,6)
  • (6,1)(6,2)(6,3)(6,4)(6,5)(6,6)

Any time anybody in the world rolls a dice, the outcome *WILL* be one of the above 36 possibilities. In addition, we can also assign odds to each of each of the possible outcomes happening. For example,

  • The odds of getting a 2 is 1 out of 36 possibilities 
    • (1,1) is the only way
    • i.e. its PROBABILITY = 1/36 = .028 OR 2.8%
  • The odds of a getting a 7 is 6 out of 36 possibilities
    • (6,1), (5,2), (4,3), (3,4), (2,5), 1,6)
    • I.e. its PROBABILITY is 6/36 = .17 OR 17%

Uncertainty Redefined

There are two kinds of uncertainties (credit goes to Frank Knight, author)

  1. Type 1:  
    1. We know all the possible outcomes of an event in advance
    2. We may even know the probabilities of each of the outcomes i.e the odds of each outcome happening.
    3. This type of Uncertainty is called RISK.
    4. In the dice example above, we do not know that the possible outcome of a dice roll will be, but we know all the possibilities and their odds and we can plan/bet on them.
  2. Type 2
    1. We do *NOT* know the possible outcomes….let alone their probabilities.
    2. This type of Uncertainty is called GENUINE UNCERTAINTY

Risks and Genuine Uncertainty….Example 1

Two examples of genuine uncertainties that I have personally faced are

  1. 2008 recession
    1. Almost nobody even thought that such an outcome was possible for the US economy.
  2. Private companies
    1. I used to work for a private/startup company…we had identified all possible outcomes:
      1. Go ipo: low probability
      2. Get acquired by a bigger company: High probability since many senior management folks came from the bigger company which was supposed to acquire our company
      3. Competitor: very low probability…we were in a new area and had a super headstart
      4. Etc etc
    2. But a competing startup company came out of stealth mode…a company we did not know even existed. Even more surprisingly the bigger company acquired them *the next day*….and an inferior product to boost. And our company self-destructed….all in the space of 6 months. 
    3. This outcome was not identified and had no probability associated with it.

Risks and Genuine Uncertainty….Example 2

Let us take the example of an ordinary economic recession vs the super duper recession of 2008.

 

  • Ordinary Economic Recession

 

    • The possible outcomes (risks) of such an event can be
      • Possible job loss
        • Probability: 20%
        • Things to plan for:
          • An emergency fund lasting 6 months….done
          • Life insurance out of work…..done
          • Network with people and keep track of which companies are healthy and hiring
      • Possible portfolio loss
        • Probability: 80%
        • Things to plan for:
          • As long as there is no need to withdraw cash, keep investing and dollar cost average down. 
          • If already in retirement and drawing income or cash from portfolio, then keep a larger emergency fund to cover atleast 2-3 years of annual expenses in cash

 

  • 2008 super duper recession

 

    • I did not even dream of such a possibility….just like most of the world’s top economists 😐
      • My portfolio went down 40-50% and I had a conservative portfolio
      • I barely retained my job…but I knew many people who not only lost their jobs but could not get one for another 2 years, went through divorces, and many other hellish scenarios.
      • What if you are already in retirement and drawing money from the portfolio? Withdrawing money when the portfolio is down 30-60% is suicide 😦 

Should we plan for Genuine Uncertainties at all?

By now, we have understood the differences between Genuine Uncertainty and Risks. 

  • Risks can be anticipated because there are a set of possible outcomes. Since the outcomes are known, they can be mitigated by planning. Impact is reasonable.
  • Genuine Uncertainties cannot be predicted and hence there is no way to have a set of possible outcomes to plan for. Impact is very high.

If genuine uncertainties are so rare, then should we plan for it at all? In my personal experience, I have found that the genuine uncertainties are increasingly becoming frequent in the last two decades.

  • Finance:
    • In the last 2 decades, we have seen multiple instances of such unpredictable events in the financial world….2001 dot com bust, 2008 great recession, 2016 election night drop, etc
    • One impact example. I know people who were forced to go through home short sales and take a drastic cut to their standard of living: all cases were induced by job losses.
  • Health:
    • In my social circle, I have lost two people in an instant…heart attack and cancer…how do we deal with such unpredictable events in the personal world?
    • Work stress was the main cause in both. But one of them had reasonable savings and the family got taken care of. The other was a bit of a mess. 
  • Relationships:
    • A close friend got divorced…mainly (imo) due to the pressures induced by two unpredictable events in the finance world
    • A couple of families relocated out of this HCOL area…again due to pressures of the economy.

Going by what I am seeing in the last two decades, planning for Genuine Uncertainties is not an option anymore. WE HAVE TO PLAN FOR IT!

Possible Solutions for Genuine Uncertainties

We will talk about two solutions in a subsequent blog post.

Financial Independence Progress Report for May 2019

May 2019 is done….seems like time is moving faster and faster!! Since the beginning of 2019, I have been studying a bit on different planning strategies for a 40 year retirement. I picked one of the strategies and have been doing a dry run for the past few months. I am ready to make that the main execution vehicle from next month onwards. So, I will introduce the method I chose and also how I am going to track it going forward.

This means that this form of monthly progress update will be the last. I have used this template since I started this blog…almost 6 years ago. So, bit sad to let it go…but time to move on and look to the future.

That said, let us see how much closer I got to my financial independence targets in May 2019.

6/1/2019
Emergency Fund 100.0% Done
College Fund 67.39% 65.34%
Passive Income (2018 vs 2019) $1228.30(05/2018) $1213.09 (05/2019)
Retirement Fund 92.52% 87.8%
Roof for our Family($750K) 00.00%
Medical Fund (via HSA) 18.60% 18.53%
Life Insurance Done (term life insurance policy)

Main Takeaways this month

There is a lot of red in this month’s portfolio….mainly to the stock market tanking by a few points.

  • Passive Income Stream
    • This year’s target dividends was $500 pm or $6000 per year. The target is half of last years because I had to sell some investments for a home down payment….though home search itself has not been successful yet.
    • The good news is that I have met the yearly target of $6000 per year as of this month. The total dividends, as of end of May, is $6060.73.
    • Every dollar of passive income from now on is just a bonus.
  • Additional Investments
    • Investments in taxable accounts
      • Nothing this month.
    • Investments in tax-deferred account (IRA)
      • Used the IRA cash fund to invest into VEIPX: Vanguard Equity Income Fund
      • I.e. Dollar cost average down my VEIPX holdings in light of market drops.
    • Investments in tax-deferred 401K
      • Nothing this month
      • For 401K cash fund, my investment plan is in the following order…have not used it yet….waiting for the market to go down more.
        • Dividend growth fund or
        • US large cap equity fund or
        • US total market fund
  • Miscellaneous
    • Nothing special.

Financial Independence Progress Report for April 2019

April 2019 is done….and spring is almost done and summer is close….yeh!! Imagine how it can be if you were already financially independent? Yummy! With that positive thought, lets see how much closer I got to my financial independence targets in April 2019.

4/02/2019
Emergency Fund 100.0% Done
College Fund 64.50% 67.39%
Passive Income (2018 vs 2019) $911.81(04/2018) $1211.94 (03/2019)
Retirement Fund 94.57% 92.52%
Roof for our Family($750K) 00.00%
Medical Fund (via HSA) 14.12% 18.60%
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Passive Income Stream
    • For 2018, my goal was $12K per year which I achieved.  My passive income goal for 2019 is $500 pm or $6K per year. The main reason for the lower target was a pending home purchase…but I have still not been lucky in finding a home that fits the needs and budget 😐
    • But good news is that my monthly passive income has been higher than my targets 🙂 In addition, I am rebuilding my passive income streams. So, all in the right direction.
  • Additional Investments
    • Investments in taxable accounts
      • Added to my tax efficient passive income stream via MUNI bonds.
        • VCAIX:
          • Vanguard California Muni
          • Federal and State tax free
    • Investments in tax-deferred account (IRA)
      • Added some more $$ to my rainy day investment fund…for use when the next recession comes and brings down asset prices
      • Money market is giving a decent 2.4%…so, am getting paid to wait.
      • My goals are to invest in the following order when the chips are down:
        • For IRA cash:
          • VEIPX: Vanguard Equity Income Fund
        • For 401K cash:
          • Dividend growth fund or
          • US large cap equity fund or
          • US total market fund
          • …..all based on what funds are available in my 401K
  • Miscellaneous
    • Got a super positive surprise for HSA this month.
    • Due to a mistake, my HSA contribution was not getting forwarded to my HSA investment account. It had accumulated to over $4K.
    • Was unhappy that it was not invested…but very happy for the additional $4K!!

Financial Independence Progress Report for March 2019

March 2019 is done….still fighting flu in the family…..flu shots do not seem to be working well this time 😐 But enough of that….lets get on with March.

How much closer did I get to my financial independence targets in March 2019? Lets look at the numbers and find out.

4/02/2019
Emergency Fund 100.0% Done
College Fund 62.54% 64.50%
Passive Income (2018 vs 2019) $1391.30(03/2018) $1211.21 (03/2019)
Retirement Fund 91.00% 94.57%
Roof for our Family($750K) 00.00%
Medical Fund (via HSA) 13.66% 14.12%
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Passive Income Stream
    • For part of 2018, I was on a quarterly dividend system that I later converted to a monthly dividend system. Since March is a major dividend paying month in quarterly system, March 2018 beats March 2019.
    • My passive income goal for 2019 is $500 pm or $6000 pa. For 2018, my goal was $12000 which I achieved. So, there will be lots of RED this year 😦
    • But good news is that I have started rebuilding my passive income streams…more on this below!!
  • Emergency Fund
    • My emergency fund rebuilding is done…I achieved 100% of my target.
    • This sets a floor for the next couple of years where recession and a down market can put pressure on finances, cash flow, etc.
    • No more updates on the Emergency Fund from now on…..will let it grow in the background.
  • Additional Investments
    • Investments in taxable accounts
      • Very happy to have re-started  a tax efficient passive income stream
        • VCAIX:
          • Vanguard California Muni
          • Federal and State tax free
          • Got 85 cents (first) dividend in March 🙂
    • Investments in tax-deferred account (IRA)
      • Added to my portfolio in cash…a rainy day investment fund when the next recession comes in and brings down prices
      • Money market is giving a decent 2.4%…so, am getting paid to wait.
      • My goals are to invest in the following order when the chips are down:
        • For IRA cash:
          • VEIPX: Vanguard Equity Income Fund
        • For 401K cash:
          • Dividend growth fund or
          • US large cap equity fund or
          • US total market fund
  • Miscellaneous
    • Nothing. this week.

Financial Independence Progress Report for February 2019

February 2019 is done….and I realized that I forgot to write the January update! It was a busy life was in the first two months of the year. Mainly fighting the flu and some kid issues. But lets get on with February.

How much closer did I get to my financial independence targets in February? Lets look at the numbers and find out.

3/02/2019
Emergency Fund 80.07% 97.11%
College Fund 55.46% 62.54%
Passive Income (2017 vs 2018) $657.17(02/2018) $1037.33 (02/2019)
Retirement Fund 86.30% 91.00%
Roof for our Family($750K) 00.00%
Medical Fund (via HSA) 12.56% 13.66%
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Passive Income Stream
    • My passive Income for Feb 2019 was $1037.33…looks nice compared to last Feb right?  Not so fast…for part of 2018, I was on a quarterly dividend system…later converted to a monthly dividend system….so, 2018 will catch up to his year in a hurry…
    • My passive income goal for the year is $500 pm or $6000 pa. But I do not have the same higher dividend paying investments this year. So, getting ahead earlier in the year is good!
  • Emergency Fund
    • Rebuilt my emergency fund to almost 100% of my target.
    • Time to take some risks now 🙂
  • Additional Investments
    • Investments in taxable accounts
      • None.
    • Investments in tax-deferred account (IRA)
      • Started two cash fund streams:
        • IRA: Took a 12% gain from selling a portion of a REIT fund
        • 401K: Took a 11% gain from selling some international funds
      • My goal is to set aside 10% of my portfolio in cash…a rainy day investment fund to better dollar-cost-average good investments.
      • Money market is giving a decent 2.4%…so, am getting paid some…
  • Miscellaneous
    • Nothing.

2019 Goals and Quarterly Updates

Last Updated on: 12/22/2019….2019 goals update

My FIRE journey started in 2014…07/21/2014 to be exact is when I write the About section of this blog. It has been almost (4) 5 years now on the FIRE journey and it definitely felt good to reach almost $1400 per month in passive income in 2018.

Here is my FI timeline…..I went from accidentally learning about FI to earning the following Passive Income per month from 2014 to 2018.

  • 2014:      $171.02
  • 2015:      $705.80 …..dumped most of my home down payment here 🙂
  • 2016:      $840.80
  • 2017:     $1040.13
  • 2018:     $1380.78
  • 2019:     $868.90

But, as with many things in life, change is the only thing that is constant. The search for a home for our family has got complicated. What we like we cannot afford and what we can afford we do not like. I cashed out some of the investments in the hope of putting a bigger down payment and creating a better offer to the sellers….a guaranteed 4.5% return on investments! But that did not work out…we failed on 6 offers already….but the good news was that I took much less of a loss in the latter part of 2018 since I cashed out the gains earlier 🙂

So, I am really not sure how to fashion my Passive Income goals for 2019. Will I reach 2018 levels? If we purchase the house, surely not. If we don’t, we *have* to exceed 2018 levels. For now, I will assume that we do buy a house and set a lower target of $500 pm and fight my way back up like a newbie!!

FIRE Target: The end-goal Financial Independence criterion for me are listed in the table below. From this, I will derive the 2019 financial goals listed below the table.

Financial Independence Criterion
Emergency Fund $60k Done
College Fund $80K $100K
Passive Income Streams $4000 per month
Retirement Fund $900k
Roof for our Family $750k…HCOL area
Medical Fund $100k….via HSA
Life Insurance To protect my earning years…..done

2019: For 2019, I have thought about the following goals to get me closer to the financial independence targets listed in the previous table.

Financial Goals for 2019

  1. Payoff car loan
    1. 03/31/2019       Done
    2. 06/30/2019      
    3. 09/30/2019      
    4. 12/31/2019      
  2. Keep scouting for our family home
    1. 03/31/2019       
    2. 06/30/2019      
    3. 09/30/2019      
    4. 12/31/2019      Bought a home finally!!
  3. Contribute $7000 to 529 College Fund 1
    1. 03/31/2019        
    2. 06/30/2019        
    3. 09/30/2019        
    4. 09/30/2019     $10,910.43
  4. Contribute $2000 to 529 College Fund 2
    1. 03/31/2019        
    2. 06/30/2019        
    3. 09/30/2019        
    4. 12/31/2019     $2001.00
  5. Contribute $12k to Passive Income Streams(stretch goal of $24k
    1. 03/31/2019        
    2. 06/30/2019        
    3. 09/30/2019 
    4. 12/31/2019      $4846.00
  6. Max out 401k contributions ($38K total for me and wife)
    1. 03/31/2019        
    2. 06/30/2019        
    3. 09/30/2019        
    4. 12/31/2019        Done
  7. Max out HSA contributions ($7000)
    1. 03/31/2019        
    2. 06/30/2019        
    3. 09/30/2019        
    4. 12/31/2019        Done
  8. Keep eating out expenses under $250 pm
    1. 03/31/2019        Failed
    2. 06/30/2019        Failed
    3. 09/30/2019        Done
    4. 12/22/2019        Failed
  9. Estate Planning (Will, POD beneficiaries, Caretaker for children)
    1. 03/31/2019        Not done
    2. 06/30/2019        Not done
    3. 09/30/2019        Not done
    4. 12/31/2019        We have a house now…so, 2020 seems like the right time!

 

Financial Independence Progress Report for December 2018

December is done….and I realized that November was done before that and I did not update my monthly report! Too late now. I was extremely busy with unsuccessful house hunting. But lets get on with December.

This is the last month I will have passive income for a while….I have sold all my investments and plan to prioritize buying a home for the family. Based on how that purchase goes through, I will re-enter the market with whatever money is left. This was a tough call but in the face of lots of uncertainties, this is the only reasonable path I see. I think I will again become a beginner in dividend investing….lets see how things go the second time around!!

How much closer did I get to my financial independence targets in December? Lets look at the numbers for December and find out.

1/06/2019
Emergency Fund 28.41% 80.07%
College Fund 55.37% 55.46%
Passive Income (2017 vs 2018) $939.90(12/2017) $1387.59 (12/2018)
Retirement Fund 85.72% 86.30%
Roof for our Family($750K) 00.00%
Medical Fund (via HSA) 12.36% 12.56%
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Passive Income Stream
    • My passive Income for Dec 2018 was $1387.59.
    • Compared to this time last year, the total dividends this year through end of December is 32.69% more than 2017.
    • My first year of developing passive income streams was 2014. December dividends in Dec 2017 was $297.68. It has been a good ride with lots of lessons learnt along the way.
  • Additional Investments
    • Investments in taxable accounts
      • Sold some more investments to tax-loss-harvest some gains.
      • Using the proceeds, I continued to rebuild my emergency fund.
    • Investments in tax-deferred account (IRA)
      • Was forced to liquidate some holdings because the 401K plan offerings changed.
      • Invested back into three buckets
        • US Intermediate bond funds
        • International Equity funds
        • US Equity funds
        • Money market fund
          • Building a cash fund because I am seeing a lot of red here.
          • Time to invest more and dollar cost average down the investments will be here soon!!
  • Miscellaneous
    • I was walking through all my investment categories and I am seeing red in many of them.
      • Investments in the  GREEN
        • US Equities :
          • VDIGX
      • Investments in the RED
        • International equities:
          • VIHAX, VTIAX, VEMAX
        • REITs:
          • VGSLX, VGRLX
        • Investment Grade Bonds:
          • VFSTX and VFICX
        • Bonds:
          • VTABX
    • In my experience, when I see such broad declines across many investing categories and across many geographies, then it usually indicates that a storm is gathering. The entire world is connected in many ways and non-performing markets (like emerging markets) have a way of spreading fast.
    • It is time to shift focus on how to not only prepare for a downturn but also how to benefit from a downturn.
      • If you have time, you can read this post I wrote a while back.
      • How to prepare for the next recession?
      • Since I have have been house hunting, it is amazing how similar the scenarios I wrote in 2015 are in comparison to today!!

Financial Independence Progress Report for October 2018

October is done….one more month closer to the end of year. Like last month, I am seeing a lot of red in many parts of my portfolio….bonds and stocks in both taxable and tax-advantages accounts. We have definitely reached the inflection point in the market and choppiness is back with a bang.

How much closer did I get to my financial independence targets in October? Lets look at the numbers for October and find out.

11/02/2018
Emergency Fund 24.56% 28.41%
College Fund 57.67% 55.37%
Passive Income (2017 vs 2018) $711.44(10/2017) $1320.40 (10/2018)
Retirement Fund 88.97% 85.72%
Roof for our Family($750K) 00.00%
Medical Fund (via HSA) 12.45% 12.36%
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Passive Income Stream
    • My passive Income for October 2018 seems a lot more than October 2017. But it is fake 🙂
      • Earlier this year, I redistributed where my funds are invested. Cashed out some gains and converted quarterly dividends to monthly and more importantly more tax efficient monthly dividends.
      • The June, September and December dividends are going to be much less. But, the total dividends for the entire year will be higher though.
      • Compared to this time last year, the total dividends this year through end of October is 38% more than 2017….just distributed differently.
  • Additional Investments
    • Investments in taxable accounts
      • Nothing new to report here as I am out of cash 😐
      • Continuing to rebuild my emergency fund.
    • Investments in tax-deferred account (IRA)
      • No cash here too 🙂
      • But, need to build a cash fund because I am seeing a lot of red here.
        • I.e. time to invest more and dollar cost average down the investments will be here soon!!
  • Miscellaneous
    • I was walking through all my investment categories and I am seeing red in many of them.
      • Investments in the  GREEN
        • US Equities :
          • VDIGX
        • Bonds:
          • VTABX
      • Investments in the RED
        • International equities:
          • VIHAX, VTIAX, VEMAX
        • Municipal Bonds:
          • VCADX, VWIUX
        • REITs:
          • VGSLX, VGRLX
        • Investment Grade Bonds:
          • VFSTX and VFICX
    • In my experience, when I see such broad declines across many investing categories and across many geographies, then it usually indicates that a storm is gathering. The entire world is connected in many ways and bad markets have a way of spreading fast.
    • It is time to shift focus on how to not only prepare for a downturn but also how to benefit from a downturn.