To close the book on 2021, we must first look back and understand how amazing it was … so many things happened. With so much hardship in the country/world, we do feel very blessed to have had a good year (financially and health-wise).
- First, we were in the 2nd year of a pandemic. We got our Pfizer shots and booster and that gave us some confidence to do some things we didn’t dare in 2020. We know people that have died of the virus and that kept us on edge. We’ve been very careful to avoid crowds and that strategy has paid off though we are ready to start getting back out in public.
- I got a promotion, which increased my base pay and increased two of my bonus structures. This helps the pension and it will help pump up the portfolio savings contribution rate too.
- My oldest daughter got a job she desired and moved out of the house.
- The youngest daughter got a promotion and an increase in pay by about 33%.
- My wife and I become 100% debt-free in 2021.
- I crossed the $300,000 work income barrier for the first time. My income in 2022 should be around $330,000. With the promotion, I suspect my total income by the time I retire will be in the $350,000-$375,000 and that will make it tough to walk away (retire).
- I went from 0% invested in tax-free accounts to 10% of my assets this past year. My goal is to have about 35-40% in tax-free accounts by the time I retire in 3 years. This will happen with Roth In-Plan conversations and contributing to a Roth 401k at work.
- In my taxable investment portfolio, I bought my first government I-bonds ($20,000 annual maximum) and finally ventured into real-estate crowd funding with a $5,000 investment at Fundrise.
Overall, things we well given state of the union and I feel blessed.
Income
With the promotion in 2021 and the two bonuses I received, a new gross work income high was achieved. Being debt-free, it’s enabling our income to be used mainly to save but also set-up some changes to our home that we’ve been wanting to make. We’re setting aside money for a jaccuzi plus we are focused on kitchen and bathroom remodeling over the next few years. We are even entertaining the possibility of purchasing a trailer but not with inflation increasing to 40-year highs plus significant increase of RV demand.
I’ll make nearly $335,000 in 2022 and I suspect that my income will likely be upwards to $350,000 by the time I consider retirement in 3-years. It’s going to be tough walking away from that income, for each year I wait makes us more likely to be 100% successful. If you didn’t notice, I finally used the word “consider” because it will be tough. Waiting just one more year will put us in better shape and increase our probability for success. Life’s a gamble so we’ll see how things shape up.
Savings Rate
A record savings rate was hit in 2021 at 45%. It would have been higher but we got aggressive last year and paid off our mortgage. I suspect our savings rate would have been ~55% or better if we didn’t do that. With no debt in 2022, our future savings rates should be 60%+. Because of some aggressive Roth In-Plan conversions ($55,000 in 2021), we’ve got to pay for those taxes and that will hurt our ability to save. I’m not sure we’ll hit 69% in 2022 but I’m hoping to hit 55-60%. Either way, we’ll hit a personal best in savings rate this year.
I’ll say it again though, the most important tool we have to make sure we can retire in 3-years is to have the highest savings rate possible. Sure, having returns that match or beat the market are fantastic but our late savings start means we don’t have much compounding over the next few years. Our compounding will come post-retirement, likely in our mid-70’s and into our 80’s.
This chart above is a perfect example of why our savings rate is critical. If you look at all four quarters of 2021, the light blue “capital deployed” sections is a function of our savings rate. I suspect that 20-years from now, the green “capital gains” and dark blue “dividends” sections will dominate the graph. That’s why you need to start early in your savings journey.
Asset Location
Other than becoming debt-free in 2021, our biggest adjustment was moving assets into tax-free accounts. Prior to 2021, we had only taxable and tax-differed accounts and that was going to create a tax problem in retirement. The reason is because I’ve got a pension that will pay about $80,000 annually. Combine the pension with dividends and social security and our retirement would tax the heck out of our tax-deferred accounts.
This becomes especially important when I turn 72 and the dreaded required minimum distributions are added to the income mix. And that’s whether I need the income or not (which I don’t plan to need). So, why get taxed on distributions when you don’t need the distributions from an income perspective. The answer was simple and we owe it to my company for creating the opportunity.
First, I finally had the opportunity to fund a Roth 401k. I’ve been asking for this opportunity for years and it finally came (though with only 4-years until retirement). Either way, it allowed me to move both my maximum contribution and catch-up contribution (since I’m over 50) into tax-free accounts. Of course, this meant my taxable income was higher but it needs to happen.
Second, and very significant, is my company also allows me to do Roth In-Plan Conversions. For the next few years until I retire, I’ll be moving money from my regular 401k to my Roth 401k. Sure, I’m taking a tax hit now but I can fund it with work income plus I’m doing some other stuff to help keep me in the 24% tax bracket. In 2021, I moved $55,000 from tax-deferred status to tax-free status.
In a nut shell, I started the year with 0% of my money in tax-free accounts and I finished the year with 10% in tax-free. I’ve got 3 more years to keep doing these Roth In-Plan Conversions before I retire. Whatever is still in my regular 401k (actually, it will be moved to a IRA Rollover account after I retire) will likely be moved to a Roth IRA between the ages of 67-70. At 70, I will start taking social security and my income will go back up again. I’m hoping all my tax-deferred accounts (non-qualified 401k and regular 401k) will be either paid out or moved to tax-free status.
By the time I take social security at 70, I should only have taxable and tax-free accounts. That will create lots of flexibility while I’m in my drawdown phase of retirement.
Investment Portfolio and Forecast
With only 3 short years left until I retire, there’s a lot going on with my investments. I’ve got 4 main investment types:
- Regular Tax-Deferred Company 401k – I don’t contribute to this anymore but my company match goes into this account. My focused since 2021 is using Roth In-Plan Conversions to move these funds to the Roth 401k.
- Roth Tax-Free Company 401k – Each pay period I put the maximum that I’m allowed plus my catch-up contributions (since I’m over 50).
- Tax-Deferred Company Non-Qualified 401k (Restoration Fund) – Since I’m classified as a highly compensated employee, they limit what I can contribute in my 401k but this account is made available to me. I’m currently put the maximum 15% of my gross income into this fund. It’s basically a bond on the company where I work. This is a tax-deferred account and will payout over five years when I retire. I’m using it as part of my bridge spending (along with my pension) to have some fun the first 5 years post retirement.
- Taxable Account – This account is getting most of my attention until I retire. Just a few years ago it had only $20,000 in the account but I’ve built it to $223,000 as of 12/31/21. This account is very important for the first 8 years of my retirement (62-70). I’m delaying social security until 70 so this account will be funding most of our discretionary funds.
I was talking to a retired person the other day, he’s got to be upwards of about 80 or more. He owns a home in Washington and Arizona and he retired at 55 years old. I’m not sure what he did for a living but he did well enough to enable his wife and him to retire early. He gave me only one bit of advice … “retire as early as you can and don’t ever look back.”
Taxable Account
Most of the assets in the taxable account will be dividend paying stocks. Probably the biggest moves I made in 2021 to the taxable account were:
- Stocks – Adding Unilever (UL) to my portfolio and building British American Tobacco (BTI) into one of my top positions. And as I’ll continue doing, keep adding to other stocks that I already own. Last year, I added to Johnson & Johnson (JNJ) and Pfizer (PFE). UL and BTI were my big purchases though. As we head into 2022, I’ve already got some new positions on my radar: adding some technology names plus a few new dividend paying companies (Medtronic, 3M, and Air Products & Chemicals to name a few).
- Real Estate Crowdfunding – I finally started a $5,000 position in Fundrise, one of the top crowdfunding platforms. I’m in their Growth eREIT since I’m using this to be more growth focused and I won’t need the money for another 9-10 years. I’ll probably build this position to at least $50,000, which is where I’ll switch it to more income focused (versus growth).
- Government I-Bonds – These inflation bonds are acting as my cash cushion and will be used as needed between the ages of 67-70. Again, at 70 I’ll be taking social security so I’m just using bridge assets (like I-bonds) to help get me to that point.
From here until retirement, these 3 areas (stocks, crowdfunding, and I-Bonds) will get the full funding of my excess savings. If you remember my bucket strategy, this taxable portfolio is my income with some growth bucket that will get me to social security and beyond.
Dividend Income
Within the taxable account, I’m growing my stock dividend income. My goal is to have about $15,000 by the time I retire in 3 years. I’m on track and this doesn’t include any crowdfunding dividends I’ll receive in retirement either.
I suspect I’ll need about $400,000 in dividend paying stocks (at 3.75% yield) to reach my $15,000 in dividend income. Basically, I’ll need to double my taxable stock portfolio in 3 years. The only way this is going to happen is with a higher savings rate, which is the plan.
Debt-Free in 2021
This was the biggest and most important moment for our household in 2021 – becoming debt-free. Car loans, home equity loans, and the mortgage are all gone. Paying off the mortgage early is controversial but less so for those close to retirement. Financial “gurus” like Suze Orman or Dave Ramsey hate debt and usually ask you to pay it all off ASAP. Obviously, that’s not a path I took in my life but the good news is it’s all gone now.
As evidenced by the chart, we attacked our home equity and mortgage debt aggressively in the past few years. Funny thing, we felt better paying off the home equity a few years ago than we did becoming totally debt-free last year. I think that’s because paying off our home equity (nearly $86,000) was the first real milestone we hit when we got our financial act together.
Ever since then, we’ve been focused on the mortgage and savings rate. So, when we became debt-free, our attention just turned to the one thing that stood in the way of retirement …. saving as much as possible.
My recommendation is to stay out of debt. Credit card debt is evil and so are car and home equity loans. Mortgage debt on a reasonably priced home is a legitimate debt. But I still think people should pay a little extra on the mortgage principal balance with each payment. Eventually, that extra $200 per month will make a big difference in 10 years. At that point, paying off the mortgage becomes possible and realistic.
Summary
For the next 3 years, I’ve got only one thing in focus – save as much as possible. We hope to have over $900,000 in our portfolio by the end of 2022 and we should be on-track to about $1,350,000 within a few years. You have to have a game plan, a forecast, a vision but it’s the execution that is absolutely critical. Year by year, your savings rate has got to be pushing everything you can put into the portfolio.
What do we control? Savings rate is the one thing you control. We also control the investments we choose plus how we spread those investments around (asset allocation). And other than savings rate, our behavior might be the most important thing we control. This means trading or trying to time the market. Are we getting scared when the market drops and then we sell or do we hang in there or add more to our portfolio? What we control is critical and it’s how we win the game.
Mix your investments around – individual stocks, bonds, real estate, mutual funds, I-bonds, etc… – but just keep on saving. Focus on quality and long-term investments. Moving things around too much means you either don’t have the right plan or you don’t have a plan at all. Use new investment funds to balance your portfolio, that way you don’t have to sell much.
Sure, I’d feel more secure with $1,500,000 or even $1,700,000 but that would likely require an extra 1-2 years of working. This is not something I’m prepared to do but we’ll see how it plays out. My work income should be about $350,000 annually by the time I retire in 3 years so that will be hard to walk away from.
And let’s not forget, I’ve got a pension that will payout about $80,000 per year. That’s the equivalent of having an extra $1,700,000 in assets. With no debt and bridge assets enabling us to take social security at 70, we should be fine. We’ll take it year by year once I get to 62 but we’ll see what else the world will throw our way.
Thanks for reading!
Mr. TLR