Getting better work-life balance

Have really made some progress with better work-life balance in the last 6 months. Realizing the power of "and" rather than false tradeoffs

Have switched to a leading a startup business unit within my firm and effectively chosen a version of Option A in my post in August


While that created a initial paycut, the work is much more rewarding and the upsides are considerable. Also with more independence and less immediate client work, my hours per week have gone down from 80 to a more manageable 60. Also have been able to schedule vacations for the first time on a planned basis -- taking one week off each in June, July, August and October. So its not classically part-time work right now, but it's an option of much more entrepreneurial work and much more manageable hours -- will shoot to get to around 40 / wk

Given the higher taxes in an Obama administration, getting more $ per hour of work and trading off money for time is a high-yielding strategy. Count me in for a more "European" approach to life until the inevitable conservative backlash comes in the US

Enough

Read a great book for the times -- Jack Bogle's book "Enough"

I cannot say enough good things about this book and how it brings up the right questions we all should be asking. How much is enough as it relates to money, business and life.

On leaving behind inheritance "as it sometimes said -- enough so that they can do anything they want, but not enough that they can do nothing"

A great role model in advocating for investors and consumers to reform the financial institutions of this country. An important point on how financial innovation has mainly served to extract value out of the system and enrich the owners and the innovators rather than the consumers. From 2005 back to 1980 (25 years).

Average return of S&P 500 12.3%
Average equity fund fund 10.0%
Average return actually earned by investors 7.3%

Therefore over a 25 year period of time fund investors in an index fund would have had an increase of capital of 1718 percent compared to what the average return was which was 482 percent. A four-fold difference!!!

In other news today, Forbes reported that public pension plans are likely to bankrupt most of states and cities. Because of constitutional law, most legislatures will be unable to modify these provisions, but instead will need to go bankrupt to modify these overly rich pensions.

We see greed around us all and the next few years we as a society will need to redefine proper behavior of the front line if we are to get through this.

I fear that the first move of the Obamaites -- which is to create a pork laden stimulus package which spends less than 20% of the stimulus this year is not a good first start. Examples of Daschle and Geithner both not paying their taxes is a poor second example.

People who pay the nanny taxes like myself are getting taken for a ride . . .

Review of stages of growth

Here's a retrospective review of the rocket launch of networth growth.

Stage One: 1990-96: 7 years. Starting NW(-170k); End NW 0K. Savings 12% of gross salary, Interest expense - investment income 7%, Effective growth 12% of gross salary but 19% of gross salary going towards savings and net interest. We were in a big hole when we started working due to student loans. Everything was focused around debt payment and we were maxing out on retirement accounts and that was it. No other savings. A memorable day of hitting the cross over point! In first couple of years, interest expense was much higher (12% of income) making it hard to make real progress, but by year 5 the investment income had started to increase. Not really saving anything post-tax.

Stage Two: 1997-2003; 7 years; Starting NW 0k; End NW +786k. Savings rate 13%, Interest expense - investment income (4%), Effective growth 17% of gross salary. Retirement accounts are automatic, but again little savings outside of retirement. Investment income starts to nudge ahead of interest expense. Savings rate did not increase significantly due to "ramping up" lifestyle with salary increases and getting into additional interest and expense (cars, home). Although I really liked "Your Money or Your Life" principles I could not effectively ramp down my lifestyle (or my wifes)with an expanding family. Two biggest changes that occurred was decision to change my career in 1999, which took about 4 years to pay off. And changing my money psychology in 2002 - "that it was OK for me to make big money". Changing that psychology allowed me to start to make some active investments in real estate and double down on my career. Spent a lot of time on trying to figure out active investments; took quite a while to settle on existing plan of asset allocation of passive investments plus active investments in real estate.

Stage Three: 2004-June 09; 5 years; Starting NW +786k; planned end NW 3.2+ M Savings (to date) 29% of gross salary, Interest expense - investment income (25%), Effective growth 54% of gross salary. Plan all starts to come together. Deliberately ramped up gross savings targets to numbers recommended by Michael Masterson. Salary accelerates, and investment income is now significantly greater than interest expense, which really fuels the rocket. I thought about setting debt free as a goal but decided that in this stage, cheap leverage is reasonable as long as it's not too high a percentage of net worth.

Right in the middle of this stage at this point and the real question is whether I should keep going full-time past June and get this to a higher number (e.g., 5M while working full time).

Option A. In a scenario where it is part-time it could look like this: July 09-2013+ ; 4.5+ years ; Starting NW 3.2+ M; end NW 5.0+ M. Savings ~10%, Interest expense - investment income (~50%), Effective growth 60% of gross salary. Plan at this stage is to slow down work to < 40 hours / wk from 70+ hours / wk and decrease income but keep combination of savings and net investment income ~350k+. Main goal here is to ensure momentum (not acceleration)and make sure that the rocket doesn't break by having much more time with family and friends. Will evaluate debt targets from risk / return / tax perspective and likely decrease debt over time.


Option B. The alternative is to continue stage three until the end of December 2010 -- I could get to a NW of 5+M if I'm able to still perform at a high level at my job. And then go part-time with a much higher margin of safety.

So to frame the issue is whether to keep push pushing at full time for 8 months or 26 months. Still figuring this out.

Setting the right goals

Over the last 30 days, my wife and I have been working hard to readjust our monthly expenses. There's been a significant creep over the last 2.5 years and it makes it hard to ramp down on such a high burn rate.

Setting a goal to transition out of my full-time job by next June to a 50%-60% position either with my same employer or a different arrangement. The major barrier is setting the right financial goal. When I run the numbers it always makes sense to keep going full time "for a few more years" - but a couple of years from now it could still be the same result.

I have been working through some of the principles articulated in the "4 hour work-week" by Timothy Ferriss to cut out unproductive work. Progress is intermittent and have cut 5-10 hours of work time / week but there's a lot more upside with some hard work and different thinking. Lot more time spent planning and leveraging myself through getting more effective teams than just my work alone.

The current financial plan would be to work part-time to cover the expenses and not draw down for the portfolio "in the next stage to not draw down any assets for the next 15-20 years but just let them grow. Our part-time jobs would then need to cover our living expenses. That will also keep our burn rate down. Seems to be the right balance needed anyway with young kids (a 3 and 7 year old).

Why this approach? I have not been able to create a practical full early retirement plan given the 3-5% safe withdrawal rate necessary for a retirement before age 50. This creates too high of a "number" to create a practical full early retirement plan with current expense rates. I know I need to get expenses down and will do that independently. But I like the idea of not trying to spring to a number, but try to get to a more creative blend of work-life.

If I don't touch the assets for a while, the numbers will work well with a targeted return of at least 2 doubles over 15-20 years.

Ramping down should put me a better position to respond to likely changes in taxes. If an Obama administration is going to increase marginal rates to 60%+ , I'm certainly not going along with the program willingly. Ramping down before will also allow me to minimize tax rates with a planned 2010 Roth conversion. Don't think Congress will change the law in the next 2 years, they are way too short-term minded to change it now (it's going to be a big revenue boon in 2010).

Market opportunities

Lots of market mayhem out there. With Fannie and Freddie on verge of getting taken over by the government, this looks like gloom and doom and blood in the streets.

Will work on a way to do some more long-term buying over the summer -- I think that there's bound to be a good election rally in the fall once uncertainty is removed.

Experimenting with a Different path towards Financial Freedom

Up until around 12 months ago, I had a set of goals similar to a lot of people who are shooting for early retirement. Try to get to “a number” and then get to retirement living off those assets.

There have been two problems with that approach that have led me to revise this strategy.

The first problem is that “the number” is awfully high to get to if you live at a moderately high percentage of your income. With an assumption of a 4% safe withdrawal rate that’s usually 30 years of hard work for people who aren’t getting large raises. We have been living on less than 30% of our gross income for a while. Our family could reach that number in another 5-6 years at the current pace. Of course, we could ramp down our standard of living and get there immediately. It is an option and I understand I'll probably get a lot of recommendations to that effect.

The second problem is I’m not sure that “early retirement” and stopping work is all that its cracked up to be. I actually like my work a great deal – it’s just simply too much. I’ve probably have been working some 60-70 hours a week since going into college, grad school, med school, 3 different careers for 25-30 years. The ideal balance would be 20 hours / wk, lots of vacations and much more time with family, friends and adventure

So over the last few months I’ve been creating a different plan that I will be executing in the next 12 months. The goal is to move from 100% time to 50% time by next June, hopefully with the same employer and generate enough income to fully cover expenses. My wife is already at 50% time.
Our goal would be to cover expenses, but not plan to save anything else. We would just leave our assets alone for another 15 years at a minimum. Since we have a 3 and a 7 year old there’s still another 15 years until the youngest goes to college.

So the focus of my time in the next year will be less on how to increase the return from my investments but more on how to be extraordinarily effective with work. I’ve been reading “the Four Hour Work-week” by Timothy Ferriss, which has had a number of interesting suggestions. I’ve implemented a few and so far cut out 5-10 hours of unnecessary time / wk. My goal is to see if I can get the same amount of effectiveness at 50 hours / wk that I did at 70 hours / wk during this year. (First steps first). Then I’ll be much more confident that I will be able to “hold the gains” when I move to 50%.

Once, I’m there, will plan to continue to tinker with the formula (e.g., potentially create some entrepreneurial cash flow ventures). I think this will be more of a challenge in some ways to find the right formula – our culture has created a situation where many of the most interesting positions demand 60-70 hours / week of time.

I’ll update everyone on the journey as it evolves.

Consumption Smoothing

Read "Spend till the End" by Scott Burns and Lawrence Kotlikoff. Had a copy of ESPlanner which I had used before but hadn't appreciated all of the features.

Any of their insights on their own is not that surprising for those who have thought about personal finance, but all of them together make for a fairly unconventional personal finance book.

Essentially they try to challenge the timing and the amount of consumption that someone should have in their lifetime. Most of these variables are so complicated that simple rules of thumb don't apply anymore instead they become "rules of dumb".

What's great about the software is that you can fine tune your goals and spending including legacy, portfolio and work and it will create a financial plan until age of 100 along with Monte Carlo analyses.

The software confirms that I could move to part-time in the next 12 months without a decrease in living standards which will be the major goal for me.

Getting the right work-life balance

On the verge of making some major shifts in my life in terms of work-life balance.

For the past few years, I've been working at a high powered job - I've been rewarded with great great intellectual challenge, good colleagues and a great income. But the stakes keep getting raised and I'm not sure I have the passion to keep up. Things are getting stale and I have been sabotaging myself at work as I have not had the same concentration and passion as the years before.

What happens as well is that the expense side starts to creep up with the income. In my situation, it happens less as a result of my decisions, but more because of my wife decisions, often times to "make up" for the time that I'm not home.

Looking to change that balance and will be developing a strategy to get that to happen in the next 12 to 18 months.

Rather than "retire", I will be looking to "move into something more sustainable".

The foundation of the financial plan is to not touch assets or passive income on an ongoing basis; if we do that, our assets should hit 8 figures by age 60. That's more than 15 years away so we need to think carefully through this.

Instead, we will have our combined jobs / active investments create enough income to cover our expenses. Right now, we have been saving almost 40% of my income on a year to year basis, so there's room to cut down hours if I can find the right place in the marketplace that will pay me the same amount per hour.

My wife is already at 3.5 days a week ; I've been clocking about 70 hours a week. The right balance looks like this

1. Work -- 25-30 hours / wk - potentially switch to a contractual role or negotiate a part time job with one of the companies I work with now. While today I travel 2-3 nights a week, will be looking to find something that has minimal or no travel
2. Active investments -- look to either scale up commercial real estate ; multi-family units ; potentially consider buying a business in the wellness space
3. Travel -- increase the amount of travel -- 8-12 weeks a year -- surfing, mountaineering, volunteer global medical work
4. Family -- spend the rest of time with friends and family and putter around the farm.
5. Expenses -- we would need to cut our non interest expenses by about 20% . However, it has gone up in the past 3 years by 30% so there's room to go. I am separating out all interest because the decisions to leverage our assets are really a separate decision than our expenses. Need to figure out the cash flow consequences though.
   

This would be a major change in my life -- will be developing the ideas further in the weeks to come and look to take some major actions.

Financial Planning

Met with a financial planner yesterday.

Tried one a few years ago, but all he wanted to do was to manage money and get commissions. This one seems much better, willing to do fee based counsel as well as give access to other professionals as needed.

He definitely had some good thoughts and was a good person to bounce all types of ideas off of. We had some spirited conversations about strategies to either buy a business, go part-time and the merits of Roth conversion in 2010. The best insight I got was his challenging of the amount of money I had in retirement accounts and whether to be concentrated in one particular set of hedge funds -- he would strongly recommend I not add too much more to them. And reading 7M to 7 year's recent blog entry on the topic [ I don’t even know how much is in my own Retirement Accounts ] added further fuel to the fire.

However, most of these guys' tendencies is to want to be the quarterback or to put all of your financial assets on their platform. That's not what I want -- rather would appreciate some quarterly / yearly objective counsel.

Market's started to go down again -- am modestly up for the year 1%. Focused on adding more to positions for the rest of the year than changing asset allocations at this point.

Variable Annuities: Is there a one and done decision?

I am starting to think about how I can take advantage of some of my employers’ benefits before I leave, which may be in a couple of years (e.g., after doing the Roth conversion strategy in 2010 and paying a boatload of taxes).

One of the benefits would be buying a variable annuity as it seems like they’ve negotiated a good deal. Current product features: Charges for mortality and expenses of 43 basis points a year; no surrender fees for switching between funds or making a tax-exempt section 1035 transfer to another variable annuity carrier; I can invest the annuity in the same hedge funds I have access to now.

I am thinking about buying into the variable annuity now, holding it for 16 years, rolling it over at age of 60 and then buying Vanguard’s inflation protected lifetime annuity (SPIA) that would be sufficient to cover minimum expenses. I could draw from the equity accounts, but wouldn’t need to.

A “roll my own” defined benefit plan that I wouldn’t be able to do as easily once I become self-employed. So the specific issues I still need to determine are:

1. Is this a decent deal for a variable annuity?

2. Is converting to the SPIA from a variable annuity a tax-efficient way to get inflation protected expenses?

Reviewing Actual Performance

Did a reality check on my portfolio performance after blogging and rereading William Bernstein's Asset Allocation book.

	2001	2002	2003	2004	2005	2006	2007	Average
Actual Results	-5.6%	0.8%	9.2%	19.2%	12.0%	13.5%	10.4%	8.5%
BENCHMARKS
S&P Return	-12.2%	-23.3%	22.2%	7.7%	3.5%	11.1%	4.2%	1.9%
Aggressive benchmark	-7.8%	-16.1%	23.5%	9.6%	4.5%	13.4%	7.7%	5.0%
Aggressive Managed Portfolio	3.5%	7.5%	30.2%	15.2%	13.0%	18.5%	21.0%	15.6%
DIFFERENCE
S&P Return	6.6%	24.1%	-13.0%	11.5%	8.5%	2.4%	6.2%	6.6%
Aggressive benchmark	2.2%	16.9%	-14.3%	9.6%	7.5%	0.1%	2.7%	3.5%
Aggressive Managed Portfolio	-9.1%	-6.7%	-21.0%	4.0%	-1.1%	-5.0%	-10.6%	-7.1%

• Aggressive benchmark is 50% Russell 3000, 20% MSCI EAFE, 15% Lehman Brothers Aggregate Bond Index, 15% US TIPs Index
  
• Aggressive Managed Portfolio is a managed portfolio that I have access to and these results are net of fees
  
• Average is a simple arithmetic average (should do the IRR and backsolve, but was lazy)
  

So can I handle the truth? To be honest, it wasn't easy and I had some stomach acid when looking at results compared to the aggressive managed portfolio. Would give the portfolio performance a B, but it can certainly be improved.

1. Performance has been above traditional benchmarks which is good. Big issue was in 2003, when I believe I had some short positions and tried to time the market (will need to go back and investigate this further).
2. However, if the actively managed portfolio is beating me hands down year over year, I think I'm ready to say uncle and move a good chunk of my money into that instead. Will be trying to figure this out, this month. But in retrospect, if I had done that, I would be a few 100k up with less work -- that's a powerful argument.