Tuesday, January 17, 2017

My Goals for 2017 and after

Another year has passed here in dividend growth investing land. This was a year with a lot of changes for me. It is time to evaluate what happened, and see if we can learn anything from all of this.
Before I write things down, I want to let you know that I actually try to focus my efforts on building systems rather than goals. In other words, I believe that focusing my energy on those five items within my control will ultimately lead to me to my ultimate goal of living off dividends in retirement:

1) Growing my income
2) Saving as much as possible
3) Investing wisely, without overpaying for investments
4) Keeping investment and tax costs low
5) Remaining patient ( not chasing yield, not overpaying, not churning my portfolio)

I believe that by focusing too much on earning a certain dividend income in a certain year I am pressuring myself to do things for the sake of doing things. This is an example of short-term thinking, which I try to discourage on this blog. I am all for long-term dividend investing, not chasing short term targets. I would rather pursue only good opportunities that would result in a lifetime of sustainable dividend income instead.

For example, I have seen investors discuss that they want to generate a certain amount of dividend income. In order to get there, they may end up chasing yield, which is dangerous and a short-term in nature.

Other investors may end up investing at inflated valuations, even if there are not many opportunities, merely to increase their dividend income. It makes no sense to overpay for a dividend stock, merely to hit your annual income targets. It also makes little sense to buy a high yielding stock whose dividends are not safe, merely to hit your annual income targets. You may be able to hit your short-term goals, but this could be at the expense of sacrificing long term objectives.

A third group of investors will not max out retirement accounts, simply because they are limited in investing in low yielding index funds there. This third group is willingly losing out on hundreds of thousands of dollars in tax benefits throughout their lifetimes, merely because they want to have the highest dividend income today, and merely because they do not want to learn skills to better themselves. The "inconvenience" of tax-deferred accounts is something I am willing to take any day, since it could provide lifetime benefits in the amount of hundreds of thousands of dollars for me and my family. Remember, your goal is to generate sustainable dividend income that you can rely on for your 30 – 50 years of retirement. Whether you generate that $24,000 in annual dividend income in 2020 or in 2022 should be meaningless.

I believe that creating a system for finding quality investments at attractive prices, and investing savings every month, will foster the habits to ultimately reach those objectives. Following your system will help you through the inevitable ups and down. Following the system also becomes second nature. It is also important to keep improving over time, in order to improve your overall situation, rather than chase overly specific goals that may end up costing you, even if you reach them.

For example:

1) if you can reduce your housing costs from $12,000/year to $4,000/year for a cost of $100,000, this may be a better option for you than chasing yield and investing all the money at a high dividend yield that is not sustainable. You may not hit your dividend income targets, but you will manage to cut expenses dramatically.You are better off overall.

2) I also provided some examples on how using tax deferred accounts can help dividend investors tremendously. Example: If you earn $12,000 in annual dividend income from your Roth 401 (k), this is the same for me as earning roughly $15,000 in qualified dividend income per year. (Due to the 15% tax on dividends at the federal level and 4% - 5% tax at the city/state level).

So why am I posting this post? Well, it is likely due to peer pressure, or probably because you readers want to read stuff like that. The main reason may also be because I find it helpful to write things down, and then reevaluate a year or two later.

My year was a year of change. That is good, because change forces us to grow and become better versions of ourselves.

1) My forward annual investment income is now close to $16,600. This was a nice increase from the zero amount of forward dividend income I had in 2007. I usually write about my forward number once per year, rather than look in detail every single month. I think that posting my dividend income and net worth monthly is an overkill, which would lead me to discuss random changes due to share prices going up or down with the market ( or explain every single time the cyclical nature of month to month dividend income changes since most of my dividend income is generated in March, June, September and December, and the least being in January, April, July and October). Sometimes I believe that even annual mentions are meaningless. It is much more important to have a system to save and invest intelligently, that I can stick to, rather than drown you in meaningless regular reporting minutiae. That being said, I am on track to hit and exceed my objective of $18,000 in annual dividend income by 2018, merely by reinvesting distributions. So I will be financially independent by early 2018. But do not pop the champagne yet.

2) I managed to live off dividends and side income in 2016. I saved my entire salary in my pre-tax and after-tax 401 (k), Health Savings Accounts (HSA) & my Roth IRA. I will also save a portion of my side income in my SEP IRA in a few weeks. This was despite the fact that I had major one-time expenses in 2016. The amount of tax savings generated from this activity is equivalent to more than half of my estimated annual dividend income. This exercise doesn't even include the amount of tax savings on dividends generated in tax deferred accounts.

3) I got married in 2016. So while my personal expenses are still in the $18,000 - $24,000 range, it is silly to only look at myself for the purposes of tracking progress towards financial independence. Since we are a one single household unit, it makes sense to look at combined finances. This one is still a work in progress at the time of writing. I would guess that our combined household expenses are roughly $30,000 - $35,000/year. I know my own personal expenses because I have lived on less than $18,000/year over the past 15 years. But we need to track things better as a couple in 2017 in order to get to a better gauge of things, and have more than one year of actual data for review. Plus, we need to get a better sense of our combined list of assets, in order the check investment income, try to streamline things etc. So while I am on track to be financially independent by 2018, I am not going to call myself FI, until our family as a whole is financially independent. It would be silly to call myself FI, if my spouse is still working because she has to. Of course, depending on where we go from here, we may be in a better position than stated above. I also wanted to share all of this context, rather than tell you that my forward dividend income is up to $22,000 - $23,000,without sharing that we have two persons savings to account for, rather than simply mine. Since I have only talked about my personal situation over the past 8 – 9 years, I am unsure whether I should keep it that way for consistency purposes, or not.

4) Remember how I mentioned that our annual expenses are likely 30,000 – 35,000/year, but that they are also in a state of flux? We are considering purchasing a home within the next year or two, and paying it off aggressively within a few years. If we achieve that, our combined expenses will drop by roughly $8,000/year.

5) Thinking of expenses, we also went abroad this year and explored a low cost of living country in Eastern Europe. We can easily live an upper middle class lifestyle there on $24,000/year. Of course, this is something that may not happen until 10 - 15 years from now. I will try to post something about geographic arbitrage in the next couple of weeks. The better half already has some real estate there.

6) This will be the ugly part of the update. Most bloggers will only share the rosy pictures of their lives, and avoid talking about any real struggles they may be facing. I actually try to paint a bleaker picture, because motivating people to do things without sharing everything can be dangerous for them. I think healthcare is one of those things that many simply brush off. Myself included.

In 2016, we had a large amount of medical expenses unfortunately. A large portion of those were paid by our insurance company, but we still had a good sized chunk that we had to pay out of pocket. This was an eye opening year for me to see how broken the healthcare system in the US really is. The way that things work is that you get some procedures done, and get billed to the insurance company.

Even if a procedure is covered, the insurance company may not pay for months, dragging its feet along the way. You end up wondering if you will have to foot the bill to the medical provider, which starts sending out bills asking for payments. Usually, the excuse given for dragging their feet is that there was no documentation received from the doctor/provider. This meant we had to take time out of our busy lives talking to the doctor office multiple time in order to to make sure the documentation is sent. The next step is talking to the insurance company multiple times in order to make them do their job. Even worse, the insurance company denied claims several times for no apparent reason. This is for things that were covered per the summary plan description. Once they denied claims, they went ahead and told the health provider that we were the ones responsible for an astronomical sum of money. So this involved more discussions with them, and the healthcare provider, to get everyone on the same page. This is sickening how the insurance company plays hardball with people who have rightful claims to a service.

I  am starting to wonder, if I get some sort of a life threatening disease that costs hundreds of thousands of dollars, it would be painful to go through those personal medical issues while fighting with insurance companies along the way. Imagine that you are already under the heavy pressure of fighting your disease, and now you also have to fight the insurance company which is dragging its feet. It is sad that healthcare is out of control. For those of you who want to avoid sin stocks, you should avoid investing in health insurers. I believe that Altria is a more ethical company than health insurers and drug companies.

The other fun part, where what I learned from studying business was reinforced, is the fragmented pricing for drugs and procedures. The same drug or medical procedure costs different amounts depending on whether the insurance company pays, or you pay out of pocket. All of this increases the odds that we retire outside the US, when we choose to finally call it quits. As a person, I am hopeful that the healthcare system is fixed. As an investor, I realize that this may translate into reduced profitability for many companies in the healthcare sector. As usual, life is full of tradeoffs.

7) Either way, it is nice to see that despite all the pressures on the budget in 2016, we still managed to max out our 401 (k), H S A, Roth IRA’s. This is where having multiple streams of income really helps out. My income includes wages, side income, dividends, capital gains, and interest income. Now we are also adding a second wage earner as well to the mix. In a few decades, we may be eligible to also generate social security income. Having multiple diversified streams of income is helpful, as it makes it easier to take on the curveballs that life throws out at you. I am very thankful that I have been able to save and invest for the past decade, throughout the bear market of 2007 – 2009 and the 2009 – 2017 bull market. I believe that one day owning our home, will also provide some additional diversification benefits, as it will include an asset class which is not dependent entirely on health of the financial markets. The ability to live free and clear in a home, and the fact that its value is not quoted daily, will have a calming effect when the stock market finally embraces the next bear market. Having some allocation to fixed income also helps as well.

8) The one thing I worry about is a potential for a bear market down the road. It would surely hurt to see drops in net worth, even for those like myself who have followed the markets for the past 20 years. By focusing on the dividend income produced by my collection of assets, rather than the value that fluctuates daily, I believe I have a more staying power and I am less likely to panic and sell everything at the bottom. The fact that I am allocating money automatically every two weeks in tax-deferred accounts is helpful too. The fact that I have a system to allocate after-tax money at quality dividend stocks selling at attractive valuation is another helpful tool at my disposal. My most helpful tool is my patience. I am going to aim for as low turnover as possible in 2017. This should be the goal of every long-term investor.

How was your year?

Thank you for reading!

Relevant Articles:

Financial Independence Is Easier to Model with Dividends
From zero to $15,000 in dividend income in 8 years
How to Grow Dividend Income Much Faster With Tax Advantaged Accounts
Getting Started – The Hardest Part About Dividend Investing
Use these tools within your control to get rich

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