Time flies! It’s been six months already since our inaugural Net Worth report. For some reason, we never did a Q2 update! Actually, there is a reason. Watching the ERN family portfolio progress is a little bit like watching paint dry. It’s slooowwww, at least in percentage terms! Every year in the first quarter, we get a nice noticeable bump when the annual bonus rolls in, but outside of bonus season, we feel a bit like living paycheck to paycheck! OK, that’s an exaggeration because we still max out our 401k contributions and pay down the mortgage principal (which we consider savings). But about half of our savings come from one single paycheck and the other half is spread over the remaining 23 paychecks. That’s the privilege of working in the finance industry! So in Q2 and Q3, we might have added a little bit of savings, but the growth in our net worth came mostly from the pretty solid returns in our different investments.
Let’s look at the numbers in detail…
So, here’s the Net Worth update for Q3, and I throw in the Q1 and Q2 numbers for comparison as well: Almost $200k higher than six months ago! Unless there’s a $65,000 tax bill in the mail that we don’t know about yet, our net worth crossed the three million dollar mark and grew to $3,064,822 as of 9/30! Awesome!
A few comments about where the growth came from:
- Our total Net Worth is up by 6.67% since 3/31. The growth rate would be 8.55% if we look only at the assets outside of our primary residence home equity.
- For the most part, we benefited from the strong performance in stocks. Since 3/31, the S&P500 gained about 7.7% with dividends reinvested!
- In the accounts where we still make regular contributions (401k, HSA, 529) we see the largest percentage increases, quite a bit higher than even the S&P500 return. Makes sense!
- Our various real estate investments currently pay roughly an 8% p.a. dividend (i.e. 4% during the two quarters). It’s paid out in monthly and quarterly installments. We transfer the dividends to the other accounts every month, so the growth in the value of the Real Estate investment portfolio came entirely from an additional capital call (contribution) into one of the funds.
- Our options trading strategy performed really well over the past two quarters. The 7.93% gain even understates the actual return by a bit because there was a net outflow from this account to fund the capital call in the real estate fund. Not bad considering that an 8% return is actually what we budget the strategy will make per year once we’re in retirement.
- According to Zillow, our home value went down in each quarter. Note, this value already takes into account the transaction costs (broker, fees, etc.). The home equity increased a little bit in Q2 but only due to paying down the mortgage. But in Q3 the home price fell further and even the mortgage principal paydown couldn’t reverse that. To be sure, the change was a small percentage of the home equity and an even smaller percentage decline of the home value, but this is definitely something we’ll monitor. One more reason to argue that a home is not an investment. It’s a consumption good!
Where do we go from here?
In our Q1 2017 net worth update, we had assumed a $3.1m retirement goal for our retirement date in Q1 of 2018. Wow, we almost reached that already on September 30! Hoping I don’t jinx anything, I’ll increase the net worth target to $3.2m for March 31, 2018. With moderate equity returns and a nice bonus in Q1, we should be able to get there even if the property prices in our area keep going sideways or even slightly down.
A few changes in the plan since last time: We don’t believe we’ll sell our apartment by 3/31. Likewise, we will likely not get access to the deferred compensation plan until the second half of 2018, maybe even early 2019. I think my company wants to make sure Big ERN hasn’t been running a secret Ponzi Scheme at the office and will hold back part of the compensation until later, just to be sure. The things we deal with in the finance industry!
Once we sell our home and get the loot from the deferred plan we’ll start shopping for a house in our new (tax-friendly!) location and put the rest into the options trading strategy, one of the cornerstones of our drawdown strategy. Actually, capital preservation plan would be a more appropriate term!
So, it looks like our retirement plan is getting more concrete. We will pull the plug in early 2018 and also go public around that time! In fact, the first public event for me will be the Camp FI in Virginia in April next year! If you want to attend, too, make sure you secure your tickets soon. I hear they are close to selling out!
Congrats, Big ERN.
I’m Q1/2 2019 and feeling pretty good about it, thanks in large part to you and your excellent information and analysis. I found your SWR series early on and now am excited every Wednesday to see what new things I might learn.
I was largely ignorant of investment and retirement strategies for most of my life. Just got lucky with some windfalls on a condo and company stock going crazy. Found Bogleheads to start my Vanguard account and then was trying to figure out a sensible drawdown timeline on my own. Didn’t know what SWR even meant, let alone how it works. I thought I was probably almost okay (maybe?), but I knew I was making some simple assumptions and couldn’t figure out how to take into account sequence of return risk. Your work and Google sheet have been incredibly helpful in understanding the 4% (now 3.5%) ‘rule’, how it applies to me, and that I can be comfortable with my decision (at least as comfortable as you can be!).
Thanks again, keep up the outstanding work.
Thanks for the compliment, Trevor! You rock! Best of luck for your own FIRE journey! Glad you like the SWR series!
Hi, Big ERN,
What items (or categories) fall under the “other assets” category, and howmliquid are they?
Thanks, VBMD
This is a hodgepodge of assets that I don’t consider when calculating withdrawals. There’s a car in there (depreciating asset), other durable goods, a Prosper.com account (not very liquid), two small whole life insurance policies (don’t ask!), and a cash reserve invested in Muni Bonds (very liquid). The latter is money I had dedicated to paying off the HELOC balance but I put that in Munis for two reasons: 1) higher after-tax yield than the HELOC, 2) liquidity, just in case the HELOC gets shut down in the next crisis and I can’t use it as my emergency fund anymore.
Cheers!
Thank you for the clarification. I think we all have some financial skeletons in the proverbial closet. Thank you for sharing some of yours.
VBMD
something is definitely afoot with zillow. i’m seeing declines in two of my three properties. suspect either there’s something getting unwound that was wrong with zillow’s algorithms, or… real estate may becoming more reasonably priced
Some new construction in my neighborhood. Definitely, the home price appreciation has taken a break. But I agree that Zillow is not that good pricing. Zillow estimates have come down here but we still had some extremely high-priced sales in our building this Summer. Very strange.
We had our home appraised recently and it came in below Zillow. I always used Zillow to get a ballpark number. The only number that counts in real life is the appraised number.
Good point! Zillow has some nice features where you can search for comparables yourself. Will look into that.
The only number that counts is what we get offered from the buyers, of course! 🙂
Our home also recently appraised about $30k higher than what Zillow is projecting. So like ERN said take whatever Zillow says with a grain of salt.
Nice! Thanks for sharing!
Congrats Big ERN! As a new reader here, I’m going back to your archives to understand your options strategy. It’s very rare to read about derivatives in the FI community. I can’t wait to learn more. Thanks for sharing.
Indeed, not many FI bloggers go into options trading. I like the fact that these strategies have shorter drawdowns which should help with Sequence Risk in early retirement. A plain covered call writing strategy is extremely simple and should be manageable for most. What I’m doing (naked puts with leverage), would take some more experience: option pricing and risk management knowledge.
Thanks for stopping by!
Congratulations Big ERN! I also work in the financial industry, i’ll send you over a message, would be great to meet someone else in the same industry working towards similar goals.
Thanks! Yes, let’s connect and compare notes!
Cheers,
ERN
Way to cross over that $3 Million mark! Do you recall when you first hit the $1 Million mark? As they say, the first million is the hardest. I wasn’t keeping track all that closely, but I remember seeing my investments pick up that second comma, and it’s amazing how quickly that number doubled and then some in this lovely bull market.
Cheers!
-PoF
Thanks, Dr. PoF! Yes, indeed, I remember: it was around early 2013. Amazing how going from zero to $1m takes decades and then we could go from 1 to 3 in such a short time. Thanks to the bull market and some pretty aggressive savings as well, of course!
Thanks for stopping by! Cheers!
Haha! Similar feelings in Q1 when my bonus comes in and restricted stock vests! Rest of year seems like a failure on saving.
Nice increases all round. Large pinch of salt with Zillow. Until you get a realtor who can do local comps, hard to really nail down home equity. We just engaged a couple,of realtors and have landed on one we will go with. Both came in with similar valuations within a few thousand. Good enough for us.
Our international funds are the outlier this year so far in terms of performance. Well, other than our bond funds !!
Speaking of bonds, we will,be talking to Vanguard fixed income desk next year on the bond ladder and what we are trying to achieve. Hopefully that will go fine. You know that background history with us, so thanks mucho for the advice and getting us thinking more broadly.
Our plan remains the same. July 2018. You know our numbers so we should hopefully do fine unless our brains melt to mush and we go on a dramatic spending bonanza….
Need to take a peek at the April 2018 Camp FI in Virginia and consider a trip!!
All the best!
Dr. PIE
Thanks, Dr. PIE! Yes, it feels a bit like treading water outside of bonus season! The main reason why I’m outta here once the bonus check clears. 🙂
Wow, you must have some pull at Vanguard! Best of luck with that bond ladder! Looks like a bunch of us will pull the plug next year. I hope we’ll run into each other at upcoming conferences (Camp FI, FinCon, etc.)! All the best back to you!!!
ERN
your portfolio is remarkable, you are about to achieve an amazing goal. congrats and thanks for sharing your story.
Thanks! Glad you enjoyed this NW update! Everybody can reach FI with patience and high savings rates! Best of luck to you! Cheers!
Sorry if this question was asked/answered elsewhere.
Is your 3.25% withdrawal based on the 3.2M including home equity?
Or what is your view on including primary residence equity for the swr analysis?
Good question!
Depends: Initially, we might rent. That means the proceeds will go into the options trading portfolio and have to earn returns to finance our increased monthly expenditures.
Once we buy a house (likely with cash, no mortgage) we’ll no longer multiply that value by 3.25%, of course. We also have lower expenses once we don’t pay rent anymore.
Cheers!
I always dither about whether to include deferred comp. It never really feels real until it’s in my hands! So nice to see you include it. For you it doesn’t really move the needle, but it makes me feel better to include it. Way to go – great progress!
Looks like you’re set for Q1 2018. Keep at it. Your net worth is looking really good.
I’ve been annoyed with Zillow. Their estimates seem inaccurate. They change too much.
Haha, thanks! Well, in Zillow’s defense I have to admit that it’s a complicated problem to estimate the values from “similar” prior sales. Too many loose parts! I will take their values with a grain of salt, given how many uncertainties there are. 🙂
Cheers!
I may have missed it but where is your “Tax Friendly” location?
You haven’t missed it. We haven’t announced it yet! 🙂
Stay tuned until March 2018!!!
Before you announce your tax friendly location, would be interested in your thoughts on what makes the short list and why. I am trying to do some analysis in this area so would be interested in your thoughts as well. Lots of tradeoffs here so looking for all inputs.
Agreed. I am trying to figure this out also and would like to hear what Big ERN thinks about it — and what others say in comments.
A couple thoughts of my own: Tax charges in retirement are typically different from charges while working full-time, and the differences can be significant. E.g., NH is a great place to live while working full time (earned income is tax-exempt), but its tax on dividends and interest is a negative for many retirees.
Also, it makes sense to consider a state’s fiscal soundness. A state that whose obligations are woefully out of balance with its revenues (KY is one example) will need to restructure its obligations or, if that is politically inexperienced or deemed undesirable, will will need to increase taxes significantly. Put another way, fiscal soundness is a predictor of a state’s future tax environment.
Correcting typos: A state whose obligations are woefully out of balance with its revenues (KY is one example) will need to restructure its obligations or, if that is politically inexpedient or deemed undesirable, will need to increase taxes significantly.
Definitely something to consider when picking the retirement location. I would not want to live in a state that’s close to going over the fiscal edge. 🙂
My short list included all the no-income tax states (except Alaska, which is too remote and cold and expensive). Add to that Arizona and maybe Colorado. There are some additional criteria besides tax rates, of course. Property taxes, schools, outdoor activities, close to relatives, etc.
Stay tuned! 🙂
Congrats ERN! Glad it’s coming together well for you. March will be here in no time!
Thanks, Green Swan! Yup, everything on schedule here. All the best to you!