Free Investing Book PDF – Two Funds For Life (Merriman and Small Value)

Posted on February 5, 2023 // 2 Comments

Paul Merriman is a long-time financial advisor known for his “Ultimate Buy-and-Hold Portfolio” that utilized a more complex 10-fund version of a low-cost index fund portfolio that includes additional exposure to certain asset classes. Although now retired from advising, he continues to add new content to his website for the Merriman Financial Education Foundation that is geared more towards to DIY investors.

More recently, he has been pushing the idea of a more simple “Two Funds for Life” portfolio that is essentially holding mostly an all-in-one Vanguard Target Retirement Fund (or a similarly low-fee alternative) and the rest in US Small Cap Value ETF or mutual fund. This concept is described in detail in the book 2 Funds for Life: A quest for simple & effective investing strategies by Chris Pedersen, Director of Research at The Merriman Financial Education Foundation. (Amazon links on the website.)

Right now, you can download the PDF for free if you sign up for their free e-mail newsletter. You also get a free PDF download of their other book, We’re Talking Millions!: 12 Simple Ways to Supercharge Your Retirement by Paul Merriman and Richard Buck. I would recommend downloading it now and saving it to read later. Both books also contain a lot of general personal finance advice, but if you want to understand why you hear the term “small cap value” (SCV) a lot in DIY investment circles, this book may be of interest.

2 Funds for Life strategies augment target-date funds to reduce risk with age, increase expected returns, raise safe withdrawal rates, and achieve higher overall survival rates.

Small Cap Value has long periods of severe underperformance, but also many periods of outperformance against the overall total US market and S&P 500. The hard part is to keep holding SCV through those years of consecutive underperformance. Here is a chart of asset class returns by decade that illustrates this point:

Filed Under: Deals & Offers, Investing //

Steady Investing Returns: $833 a Month x 10 Years = $145,000 (2013-2022)

Posted on January 29, 2023 // 2 Comments

Instead of only looking at year-to-date or last year’s return numbers that are often quoted in the media, I also like to take a longer-term perspective (especially on down years). How would a steady investor have done over the last decade?

Target date funds. The Vanguard Target Retirement 2045 Fund is an all-in-one fund that is low-cost, globally-diversified, and available both inside many employer retirement plans and to anyone that funds an IRA. When you are young (up until age 40 for those retiring at 65), this fund holds 90% stocks and 10% bonds. It is a solid default choice in a world of mediocre, overpriced options. This is also a good benchmark for others that use low-cost index funds.

The power of consistent, tax-advantaged investing. For the last decade, the maximum allowable annual contribution to a Traditional or Roth IRA has been roughly $5,000 per person. The maximum allowable annual contribution for a 401k, 403b, or TSP plan has been over $10,000 per person. If you have a household income of $67,000, then $10,000 is right at the 15% savings rate mark. Therefore, I’m going to use $10,000 as a benchmark amount. This round number also makes it easy to multiply the results as needed to match your own situation. Save $5,000 a year? Halve the result. Save $20,000 a year? Double the numbers, and so on.

The real-world payoff from a decade of saving $833 a month. What would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 10 years? With the interactive tools at Morningstar and a Google spreadsheet, we get this:

Investing $10,000 every year ($833 a month, or $384 per bi-weekly paycheck) for the last decade would have resulted in a total balance of $145,000. That’s $100,000 in steady contributions and $45,000 in investment gains.

It gets even better over time. There is a popular example of the power of compound interest that shows how someone who started saving at age 25, saves and invests for 10 years but then stops and never saves a penny again still beats someone who starts saving at 35 and keeps on saving for 30 years. Acorns provides a nice illustration:

The “Rule of 72” shows us that with just 7.2% annual returns, your money will double every decade from now on. After another 10 years, every $100k will be $200k. After another 10 years, that $200k will be $400k. Once you have that initial momentum, it just keeps going.

Here are my previous “saving for a decade” posts:

Bottom line. Saving now can be hard, especially when you see your investment balances drop. But over time, with consistency and starting early, things smooth out. You can truly build serious wealth with something as accessible and boring as an IRA/401k plan and a Vanguard Target Retirement fund (or a simple collection of low-cost index funds).

Filed Under: Inspirational, Investing, Retirement //

Callan Periodic Table of Investment Returns 2022 Year-End Update

Posted on January 17, 2023 // 1 Comment

It’s the same at the end of every year. People will explain 2022 to you like it was obvious that cash would be king, and the proceed to make confident predictions about 2023. Humility may not get you a lot of social media followers, but it’s a better long-term bet at making and keeping you wealthy.

Callan Associates updates a “periodic table” annually with the relative performance of 8 major asset classes over the last 20 years. You can find the most recent one at their website Callan.com. The best performing asset class is listed at the top, and it sorts downward until you have the worst performing asset. Above is the most recent snapshot of 2003-2022 (click to enlarge). I find it easiest to focus on a specific Asset Class (Color) and then visually noting how its relative performance bounces around.

The Callan Periodic Table of Investment Returns conveys the strong case for diversification across asset classes (stocks vs. bonds), capitalizations (large vs. small), and equity markets (U.S. vs. global ex-U.S.). The Table highlights the uncertainty inherent in all capital markets. Rankings change every year. Also noteworthy is the difference between absolute and relative performance, as returns for the top-performing asset class span a wide range over the past 20 years.

Key takeaway: The best you can do is to identify assets that are a good long-term investment, with the acceptance that the short-term ride will be unpredictable and it will never be at the top every single year.

dilbert_divers

(Dilbert comic source)

Filed Under: Investing //

Best Interest Rates on Cash – January 2023

Posted on January 10, 2023 // 3 Comments

Here’s my monthly roundup of the best interest rates on cash as of January 2023, roughly sorted from shortest to longest maturities. We all need some safe assets for cash reserves or portfolio stability, and there are often lesser-known opportunities available to individual investors. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 1/9/2023.

TL;DR: 5% on up to $25,000 from fintech. Short-term rates up a little. 4.35% APY available on liquid savings. 4.60% to 5% APY available on short-term CDs Compare against Treasury bills and bonds at every maturity (12-month near 4.70%). 6.89% Savings I Bonds can be bought with 2023 annual limits now.

Fintech accounts
Available only to individual investors, fintech companies often pay higher-than-market rates in order to achieve fast short-term growth (often using venture capital). “Fintech” is usually a software layer on top of a partner bank’s FDIC insurance.

  • 5% on up to $25,000. Juno now pays 5% on all cash deposits up to $25,000 and 3% on cash deposits from $25,001 up to $250,000. No direct deposits required. If you set up direct deposit and qualify for their Metal tier, you may be able to upgrade to 5.5% interest. Please see my Juno review for details.
  • 4.00% APY on $6,000. Current offers 4% APY on up to $6,000 total ($2,000 each on three savings pods). Must maintain a direct deposit of $200+ every 35 days. $50 referral bonus for new members with $200+ direct deposit with promo code JENNIFEP185. Please see my Current app review for details.
  • 4.00% APY on up to $250,000, but requires direct deposit and credit card spend. Now again accepting new applicants. The top tier requires you to maintain positive cashflow in the checking account each month, $500 in total monthly direct deposits, and $500 in credit card purchases each month. Existing customers will get up to 4% APY through April 2023, with requirements waived through March 2023. Please see my HM Bradley review for details.

High-yield savings accounts
Since the huge megabanks STILL pay essentially no interest, I think every should have a separate, no-fee online savings account to accompany your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • The leapfrogging to be the temporary “top” rate continues. MySavingsDirect at 4.35% APY. All America/Redneck Bank is at 4.25% APY for balances up to $75,000 ($500 to open, no min balance).
  • SoFi Bank is now up to 3.75% APY + up to $275 new account bonus with direct deposit. You must maintain a direct deposit of any amount each month for the higher APY. SoFi has their own bank charter now so no longer a fintech by my definition. See details at $25 + $250 SoFi Money new account and deposit bonus.
  • There are several other established high-yield savings accounts at 3.30%+ APY that aren’t the absolute top rate, but historically do keep it relatively competitive for those that don’t want to keep switching banks.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (plan to buy a house soon, just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. CIT Bank has a 11-month No Penalty CD at 4.10% APY with a $1,000 minimum deposit. Ally Bank has a 11-month No Penalty CD at 3.50% APY for all balance tiers. Marcus has a 13-month No Penalty CD at 3.50% APY with a $500 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • INSBANK has a 12-month certificate at 4.85% APY. $2,500 minimum. Early withdrawal penalty is 90 days of interest.
  • NASA FCU has a special 9-month certificate at 4.60% APY. $10,000 min, new money required. Anyone can join this credit union via partner organization membership.

Money market mutual funds + Ultra-short bond ETFs*
Many brokerage firms that pay out very little interest on their default cash sweep funds (and keep the difference for themselves). * Money market mutual funds are regulated, but ultimately not FDIC-insured, so I would still stick with highly reputable firms. I am including a few ultra-short bond ETFs as they may be your best cash alternative in a brokerage account, but they may experience short-term losses.

  • Vanguard Federal Money Market Fund is the default sweep option for Vanguard brokerage accounts, which has an SEC yield of 4.22%. Odds are this is much higher than your own broker’s default cash sweep interest rate.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 4.36% SEC yield ($3,000 min) and 4.46% SEC Yield ($50,000 min). The average duration is ~1 year, so there is some term interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 4.57% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 4.51% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks and are fully backed by the US government. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes.

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 1/9/23, a new 4-week T-Bill had the equivalent of 4.24% annualized interest and a 52-week T-Bill had the equivalent of 4.70% annualized interest.
  • The iShares 0-3 Month Treasury Bond ETF (SGOV) has a 3.94% SEC yield and effective duration of 0.10 years. SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 3.87% SEC yield and effective duration of 0.08 years.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit for electronic I bonds is $10,000 per Social Security Number, available online at TreasuryDirect.gov. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888.

  • “I Bonds” bought between November 2022 and April 2023 will earn a 6.89% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More on Savings Bonds here.
  • In mid-April 2023, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See below about EE Bonds as a potential long-term bond alternative.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are severely capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore, as I feel the work required and the fees charged if you mess up exceeds any small potential benefit.

  • Mango Money pays 6% APY on up to $2,500, if you manage to jump through several hoops. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.
  • NetSpend Prepaid pays 5% APY on up to $1,000 but be warned that there is also a $5.95 monthly maintenance fee if you don’t maintain regular monthly activity.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops which usually involve 10+ debit card purchases each cycle, a certain number of ACH/direct deposits, and/or a certain number of logins per month. If you make a mistake (or they judge that you did) you risk earning zero interest for that month. Some folks don’t mind the extra work and attention required, while others would rather not bother. Rates can also drop suddenly, leaving a “bait-and-switch” feeling.

  • Pelican State Credi Union pays 5.11% APY on up to $10,000 if you make 15 debit card purchases, opt into receive only online statements, and make at least 1 direct deposit, online bill payment, or automatic payment (ACH) per statement cycle. Anyone can join this credit union via partner organization membership.
  • All America/Redneck Bank pays 4.50% APY on up to $15,000 if you make 10 debit card purchases each monthly cycle with online statements.
  • The Bank of Denver pays 4.00% APY on up to $15,000 if you make 12 debit card purchases of $5+ each, receive only online statements, and make at least 1 ACH credit or debit transaction per statement cycle. Thanks to reader Bill for the updated info.
  • Presidential Bank pays 4.00% APY on balances between $500 and up to $25,000 (3.00% APY above that) if you maintain a $500+ direct deposit and at least 7 electronic withdrawals per month (ATM, POS, ACH and Billpay counts).
  • Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • Navy Federal Credit Union has a special 15-month CD at 5% APY. Open now with just $50, but you can still add on more deposits later. You must have a military relationship to join NavyFed.
  • Lafayette Federal Credit Union has a 5-year certificate at 4.63% APY ($500 min), 4-year at 4.58% APY, 3-year at 4.52% APY, 2-year at 4.47% APY, and 1-year at 4.42% APY. They also have jumbo certificates with $100,000 minimums at even higher rates. These are competitive rates to build a CD ladder, but know that the early withdrawal penalty for the 5-year is very high at 600 days of interest. Anyone can join this credit union via partner organization ($10 one-time fee).
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Right now, I don’t see any 5-year non-callable CDs. Be wary of higher rates from callable CDs, which means they can call back your CD if rates drop later.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. You might find something that pays more than your other brokerage cash and Treasury options. Right now, I see a 10-year CDs at (none available, non-callable) vs. 3.60% for a 10-year Treasury. Watch out for higher rates from callable CDs where they can call your CD back if interest rates drop.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate, currently 2.10%. As of 1/9/23, the 20-year Treasury Bond rate was 3.83%.

All rates were checked as of 1/9/2023.

Filed Under: Banking, Deals & Offers, Investing //

MMB Portfolio 2022 Year-End Update: Dividend & Interest Income

Posted on January 9, 2023 // 1 Comment

Here’s my 2022 Year-End income update for my Humble Portfolio. I track the income produced as an alternative metric for performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), which helps encourage consistent investing. I imagine my portfolio as a factory that churns out dollar bills.

Short recap about dividends. Stock dividends are a portion of net profits that businesses have decided to distribute directly to shareholders, as opposed to reinvesting into their business, paying back debt, or buying back shares directly. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation.

In the US, the dividend culture is somewhat conservative in that shareholders expect dividends to be stable and only go up. Thus the starting yield is lower, but grows more steadily with smaller cuts during hard times. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total US Stock ETF (VTI), courtesy of StockAnalysis.com. Unfortunately, they recently shortened their lookback period on their charts.

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that also means the dividends move up and down with earnings. Thus the starting yield is higher but may not grow as reliably. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total International Stock ETF (VXUS).

The dividend yield (dividends divided by price) also serve as a rough valuation metric. When stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market. Here’s a related quote from Jack Bogle (source):

The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

My personal portfolio income history. I started tracking the income from my portfolio in 2014. Here’s what the annual distributions from my portfolio look like over time:

  • $1,000,000 invested in my portfolio as of January 2014 would have generated about $24,000 in annual income over the previous 12 months. (2.4% starting yield)
  • If I reinvested the income but added no other contributions, over the year of 2022 it would have generated ~$51,500 in annual income over the previous 12 months.

This chart shows how the annual income generated by my portfolio has increased over time and with dividend reinvestment.

TTM income yield. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar (checked 1/6/23), which is the sum of the trailing 12 months of interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed (usually zero for index funds) over the same period. The trailing income yield for this quarter was 3.33%, as calculated below. Then I multiply by the current balance from my brokerage statements to get the total income.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield Yield Contribution
US Total Stock (VTI) 30% 1.66% 0.50%
US Small Value (VBR) 5% 2.03% 0.10%
Int’l Total Stock (VXUS) 20% 3.09% 0.62%
Int’l Small Value (AVDV/EYLD) 5% 4.36% 0.22%
US Real Estate (VNQ) 10% 3.91% 0.39%
Inter-Term US Treasury Bonds (VGIT) 15% 1.74% 0.26%
Inflation-Linked Treasury Bonds (TIP) 15% 6.96% 1.04%
Totals 100% 3.13%

 

My ttm portfolio yield is now roughly 3.13%, a bit lower than last quarter’s value. (This is not the same as the dividend yield commonly reported in stock quotes, which just multiplies the last quarterly dividend by four.) US dividends went up a bit, international dividends went down a bit, Treasury bond yield is catching up, TIPS yield is still high from tracking CPI inflation.

What about the 4% rule? For goal planning purposes, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 33 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (before age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). It’s just a quick and dirty target, not a number sent down from the heavens. I keep the 3% number in mind, while also tracking dividends and interest (and inflation). During the accumulation stage, your time is better spent focusing on earning potential via better career moves, improving in your skillset, and/or looking for entrepreneurial opportunities where you can have an ownership interest.

As a semi-retired investor that has been partially supported by portfolio income for a while, I find that tracking income makes more tangible sense in my mind and is more useful for those who aren’t looking for a traditional retirement. Our dividends and interest income are not automatically reinvested. They are another “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again to compound things more quickly. Even if we spend the dividends, this portfolio paycheck will still grow over time. You could use this money to cut back working hours, pursue a different career path, start a new business, take a sabbatical, perform charity or volunteer work, and so on.

Right now, I am happily in the “my kids still think I’m cool and want to spend time with me” zone. I am consciously choosing to work when they are at school but also consciously turning down work that doesn’t fit my priorities and goals. This portfolio income helps me do that.

Filed Under: Goals, Investing, Retirement //

MMB Humble Portfolio 2022 Year-End Update: Asset Allocation & Performance

Posted on January 5, 2023 // 4 Comments

portpie_blank200Here’s my quarterly update on my current investment holdings as of the end of 2022, including our 401k/403b/IRAs and taxable brokerage accounts but excluding real estate and side portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but just to share our real, imperfect, low-cost, diversified DIY portfolio. Wouldn’t it be nice if everyone else did the same? (Many people do track the 13F filings of well-known investors.)

“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have in their portfolio.” – Nassim Taleb

How I Track My Portfolio
Here’s how I track my portfolio across multiple brokers and account types. There are limited free options nowadays as Morningstar recently discontinued free access to their portfolio tracker. I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings:

End of 2022 Asset Allocation and YTD Performance
Here are updated performance and asset allocation charts, per the “Allocation” and “Holdings” tabs of my Personal Capital account.

Target Asset Allocation. I call this my “Humble Portfolio” because it accepts the repeated findings that individuals cannot reliably time the market, and that persistence in above-average stock-picking and/or sector-picking is exceedingly rare. Costs matter and nearly everyone who sells outperformance, for some reason keeps charging even if they provide zero outperformance! By paying minimal costs including management fees and tax drag, you can essentially guarantee yourself above-average net performance over time.

I own broad, low-cost exposure to productive assets that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I have faith in the long-term benefit of owning businesses worldwide, as well as the stability of high-quality US Treasury debt. My stock holdings roughly follow the total world market cap breakdown at roughly 60% US and 40% ex-US. I add just a little “spice” to the vanilla funds with the inclusion of “small value” ETFs for US, Developed International, and Emerging Markets stocks as well as additional real estate exposure through US REITs.

I strongly believe in the importance of knowing WHY you own something. Every asset class will eventually have a low period, and you must have strong faith during these periods to truly make your money. You have to keep owning and buying more stocks through the stock market crashes. You have to maintain and even buy more rental properties during a housing crunch, etc. A good sign is that if prices drop, you’ll want to buy more of that asset instead of less. I don’t have strong faith in the long-term results of commodities, gold, or bitcoin – so I don’t own them.

I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the recent past will necessarily create superior future returns. You’ll find that whatever model portfolio is popular in the moment just happens to hold the asset class that has been the hottest recently as well.

Find productive assets that you believe in and understand, and just keep buying them through the ups and downs. Mine may be different than yours.

I have settled into a long-term target ratio of roughly 70% stocks and 30% bonds (or 2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. My goal is more “perpetual income portfolio” as opposed to the more common “build up a big stash and hope it lasts until I die” portfolio. My target withdrawal rate is 3% or less. Here is a round-number breakdown of my target asset allocation.

  • 30% US Total Market
  • 5% US Small-Cap Value
  • 20% International Total Market
  • 5% International Small-Cap Value
  • 10% US Real Estate (REIT)
  • 15% US Treasury Nominal Bonds or FDIC-insured deposits
  • 15% US Treasury Inflation-Protected Bonds (or I Savings Bonds)

Commentary. The goal of this “Humble Portfolio” is to create sustainable income that keeps up with inflation to cover our household expenses. According to Personal Capital, my portfolio went down about 16% for 2022. There was only a little minor rebalancing to be done this quarter.

Due to the rising real yield on TIPS, I have shifted back to a target bond allocation of roughly 50% US Treasury/Bank CDs and 50% TIPS/I Savings Bonds. My traditional Treasuries are of intermediate term, and I may convert to a manual ladder of them in the future. My TIPS are also of intermediate to long-term, depending on the real yields available at the time of purchase. I have been manually buying individual TIPS of longer terms this quarter. 1.6% real yield may not be terribly exciting, but it’s a lot better that was available for a long time, and it may be better that what will be available in the future.

I’ll share about more about the income aspect in a separate post.

Filed Under: Goals, Investing, Retirement //

Personal Capital: $100 Visa Gift Card For Financial Advisory Sales Call (Expired)

Posted on January 5, 2023 // 12 Comments

Update: This offer is now expired and not currently available. I am leaving up the details for those that did the deal previously.

Expired offer:

$100 offer is back. You must sign up by 1/31/23 and have your meeting by 2/28/2023. Personal Capital is an investment advisory service that offers several free online financial tools as a way to introduce themselves to potential clients. I mention them once a quarter, as I use them to track my Humble Portfolio performance and asset allocation across various brokerage and 401k accounts. They also have various retirement planning tools for projecting required savings rates and future income. Below is a screenshot from my own account. (Morningstar recently started charging for their Portfolio X-ray service, leaving Personal Capital as one of the few such services left.)

After you sign up for their free tools, Personal Capital will usually call you once and introduce themselves and their services. They want to help you manage your portfolio for a management fee that is somewhere between the cost of the average 100% digital robo-advisor and a traditional human advisor from a Big Firm. If you politely decline, as I did, they won’t hard-sell and won’t call you again. (Much more pleasant than trying to cancel my cable service!) You can keep using their free software after that without hassle.

Now through 1/31/2023, Personal Capital will explicitly pay you a $100 Visa gift card if you sign up for their free tools and receive a financial advisory analysis and sales call from them. You will need to sync up your investments accounts showing total investable assets of at least $250,000. You do not need to accept the proposal or pay for financial advice, but you do need to listen to their presentation.

The next conversation you have could come with $100. Here’s how:

– Sign up for our free, easy-to-use financial tools including our Retirement Planner
– Link your bank and investment accounts
– Receive your free financial analysis after talking with an expert
– Treat yourself with your FREE $100 Visa® gift card**

Offer fine print:

Offer available through Feb 28, 2023. If you schedule an appointment with a Personal Capital Advisor and participate in both an initial call and a second call in which you receive a recommendation and proposal for paid investment advisory services by Feb 28, 2023 (a “Recommendation”), then you will receive receive a $100 Visa®* Gift Card (the “Gift Card”). The Gift Card will be provided via email no later than Mar 31, 2023 through Thnks.com (“Thnks”), an independent third-party gifting platform. By participating in this promotion, you are agreeing to allow Personal Capital to share your email address with Thnks for Gift Card fulfillment purposes and agreeing that information collected from promotion participants may be used by PCAC or affiliates for marketing or solicitation of paid products or services.

The Gift Card is only available to prospective clients who receive a promotional offer. To qualify as a prospective client, you must: (1) have a minimum of $250,000 in investable assets, (2) not have redeemed a Personal Capital promotion in the previous 24 months, and (3) answer a suitability survey posed at the beginning of the initial call with a Personal Capital Advisor at which time the Advisor (at his or her sole discretion) will make a determination as to whether you qualify as a prospective client for paid advisory services offered by Personal Capital Advisors Corporation. Using an ad blocker may adversely affect our ability to determine your account eligibility in the program. This offer is not transferable and cannot be redeemed in any other manner. Final determination of eligibility is at Personal Capital’s sole discretion.

I am now an affiliate of Personal Capital Advisors Corporation (“PCAC”) and will be compensated if you sign up for this offer though my link above. To be blunt, if you don’t want to listen to a full presentation, I would just sign up for the free tools and skip the advisor call. The free tools are truly useful just on their own and Personal Capital has never bothered me again after their initial call. But if you do want to hear what they have to say and maybe get a little free advice, then right now you can get a $100 gift card on top (instead of nothing).

Filed Under: Deals & Offers, Investing //

2023 Retirement and Benefit Account Contribution Limits: 401k, 403b, IRA, HSA, DCFSA

Posted on January 5, 2023 // Leave a Comment

The beginning of the year is also a good time to check on the new annual contribution limits for retirement and benefit accounts, many of which are indexed to inflation. Our income has been quite variable these last few years, so I regularly adjust our paycheck deferral percentages based on expected income for the year. I still try to max things out if I can, or at least stay on pace to do so. This 2023 SHRM article has a nice summary of 2023 vs. 2022 numbers for most employer-based retirement and benefit accounts.

401k/403b Employer-Sponsored Accounts.

For example, I would break down the applicable limit down to monthly and bi-weekly amounts:

  • $22,500 annual limit = $1,875 per monthly paycheck.
  • $22,500 annual limit = $865.38 per bi-weekly paycheck.

The higher maximum limits are useful are for those folks that have the ability to contribute extra money into their 401k accounts on an after-tax basis (and then potentially perform an in-service Roth rollover), or those self-employed persons with SEP IRAs or Self-Employed 401k plans.

If you are contributing to a pre-tax account instead of a Roth, you could also use a paycheck calculator to find the detailed impact to your after-tax “take home” pay.

The investment options in 401k plans have also improved on average steadily over the years with lower fees and costs, allowing your money to compound even faster.

Traditional/Roth IRAs. The annual contribution limits are up $500 from last year, now $6,500 with an additional $1,000 allowed for those age 50+.

  • $6,500 annual limit = $541.67 per monthly paycheck.
  • $6,500 annual limit = $250 per bi-weekly paycheck.

Most brokerage accounts (Vanguard, Fidelity, M1 Finance) will allow you to set up automatic investments on a weekly, biweekly, or monthly basis. As long as you have enough money in your linked checking account, the broker will transfer the cash over and then invest it on a recurring basis. You may even be able to sync it to take out money the very same or next day as when your paycheck hits.

Health Savings Accounts are often treated as the equivalent of a “Healthcare IRA” due the potential triple tax benefits (tax-deduction on contributions, tax-deferred growth for decades, and tax-free withdrawals towards qualified healthcare expenses). This assumes that you have a high-deductible health insurance plan (more popular every year as they are cheaper for employers too), you can cover your current healthcare expenses out-of-pocket, and you can still afford to contribute to the HSA. Up a little for 2023.

Healthcare Flexible Spending Accounts are still an commonly-available option for others. Up a little for 2023.

Dependent Care FSAs are easy tax savings if you have children in daycare and/or preschool. These are not indexed to inflation.

Even if you aren’t hitting the limits, just increasing your salary deferral contribution rate 1% higher than last year can make a substantial difference if you keep it up. Simple evergreen advice. The easiest way for me not to eat potato chips is not the have them in the house. (Looking at you, Costco bag of Himalayan Salt Kettle Chips…) The easiest way to make sure you don’t spend the money that you want to invest, is to never have it touch your bank account.

Filed Under: Investing, Retirement //

Portfolio Asset Class Returns, 2022 Year-End Review

Posted on January 3, 2023 // 1 Comment

yearendreview

Happy New Year! I enjoyed a little winter nap. This worked out fine as successful investing does not require constant attention. To be honest, if all my research and/or experience showed that lot of trading activity led to greater returns, I’d probably be happily trading away right now. But the opposite is closer to the truth, which means I have to make up rules to keep myself from unnecessary action. Here is the obligatory Warren Buffett quote:

Benign neglect, bordering on sloth, remains the hallmark of our investment process.

I used to login to look at my portfolio daily. Then I switched to tracking monthly returns on my low-cost index fund holdings across various asset classes. Now, I only rebalance with incoming cashflows based on my quarterly portfolio updates, and only check my official performance numbers and make major adjustments (selling something) at most once a year. Per Morningstar, here are the annual returns for select asset classes as benchmarked by popular ETFs after market close 12/30/22.

Commentary. Unlike years like 2020 and 2021 where nearly everything went up, 2022 was a year when nearly everything went down. Considering how high inflation was as well, there really was no place to hide.

The “set and forget” Vanguard Target Retirement 2055 fund (roughly 90% diversified stocks and 10% bonds) was down 17.5% in 2022, the biggest loss since the Financial Crisis in 2008. Still, if you have been a steady investor over the past several years, your average return over that span certainly isn’t horrible:

In my mind, this was one of those “inevitable” years. Sooner or later, all that money being pumped into the economy was going to lead to inflation. I had no idea it would be this year, but it was. As such, nobody can predict what 2023 will hold. I still like what I own overall. I just have to make sure our financial position allows us to survive any short-term panics in order to stay invested for the long-term.

Filed Under: Investing //

Lower Stock Valuations + Higher Interest Rates = Higher 3.8% Base Safe Withdrawal Rate

Posted on December 14, 2022 // 5 Comments

Investing for the long run is easier if you temper your emotions with the knowledge that lower stock and bond prices today suggest higher future returns (and vice versa). Morningstar has just released the 2022 edition of their research paper The State of Retirement Income (e-mail required, intro article), where they point out this silver lining:

Because equity valuations have declined and cash and bond yields have increased, the forward-looking prospects for portfolios—and in turn the amounts that new retirees can safely withdraw from those portfolios over a 30-year horizon—have enjoyed a nice lift since we explored the topic last year.

Whereas last year’s research suggested that a 3.3% withdrawal rate was a safe starting point for new retirees with balanced portfolios over a 30-year horizon, this year’s research points to 3.8% as a safe starting withdrawal percentage, with annual inflation adjustments to those withdrawals thereafter.

I haven’t processed the entire 29-page paper yet, but here’s a chart summarizing the differences between the future outlooks in 2021 and 2022. Quite a difference in only a year.

None of these numbers are guaranteed of course (in fact they are virtually guaranteed to be wrong), but step back and look and the big picture. Lower P/E ratios and a higher starting interest rate definitely provide a stronger investing base. You are buying businesses at a lower price and your bonds can again provide cushion now that interest rates have room to fall. As long as you are a buyer, this is a good thing.

Filed Under: Investing, Retirement //

Fixed Index Annuities: What’s Behind “Market Upside with No Downside”?

Posted on December 12, 2022 // 7 Comments

My inbox has been seeing an uptick about structured products and fixed indexed annuities that offer “market-linked performance” or “market upside” with “downside protection”. While below is my usual take on these products, I wanted to provide some tools for your own due diligence.

via GIPHY

Any time you have some “magic box” that takes the stock market returns and advertises nearly the same high returns without the volatility and risk, you should know that there is no free lunch. You must pay a price.

The thing is, I might actually be okay with that. Insurance companies are in the risk transfer business. There should be some price at which I would pay for this downside protection. You offer me 90% of the stock market’s long-term return but I’ll never lose money? Sold. The problem is that (1) the actual cost is much higher than that and (2) never explicitly clear.

If the annuity industry was willing to strip away the obfuscation and opaque marketing, they could create a standardized product. For example, it might track the S&P 500 total return (no other index) but with a clear set of withdrawal penalties (surrender charges), annual fees, participation rates, etc. As a transparent and commoditized product, insurance companies would have to compete on price, like what we (somewhat miraculously) have with index funds and index ETFs.

Instead, every single fixed index annuity is different with 25 different variables and a complicated contracts with various ways that they can change many those variables in the future. “Point-to-point”. “Rate spreads”. A high “participation rate” will be advertised, but will only apply to custom “index” that was created last Tuesday but backtested to perfection. A 3% monthly cap or 10% annual cap on returns will be quietly added, knowing that the average buyer won’t know that history shows that cap lowers the overall average returns significantly. The “illustrations” will usually include 2001 and 2009. Oh, and they never include dividends from the index they track.

Now, a fellow personal finance writer was sued out of existence by an insurance company, so I will write this carefully. By the way, here are two current rate cards from two examples of popular products here and here. Notice the multitude of options, confusing terminology, and index names that sound kind of familiar but you really have no idea what’s inside.

Now, let’s say a fictional insurance company offers a 6-year fixed index annuity that tracks the S&P 500 index with a 65% participation rate. This is actually a very competitive rate. (Not any other random index. Always look for S&P 500.) Let’s assume straight-up direct crediting without annual or monthly maps.

The total average annual return of the S&P 500 index from 1926 to present (2022) with dividends reinvested is 10% annually. (Source.) So let’s just assume the stock market goes up by 10% a year. The higher the S&P 500 returns, the more this annuity will lag, so we’ll just go with average.

Every single fixed index annuity I’ve ever seen excludes dividends. If you remove dividends, the historical S&P 500 index price-only return is only about 6.1%. Does the average person on the street know this? Is this fact included in the annuity free steak dinner pitch? 🤥

This is a huge deal! Here’s a comparison of $1 invested in the S&P 500 in 1930 with and without dividends. Yes, the final numbers are ~$200 vs. ~$6,000. (Source: S&P.)

Even for shorter periods, the compounding effect of removing dividends is significant:

We haven’t even multiplied by the participation rate of 65% yet, after which you are only left with 4%. You’ve now gone all the way from 10% annual return to only 4%. You could also reach this number by using an average total return of 8% and dividend yield of 2%. You’d still end up with 4% (take the 6% price-only return and multiply by 0.65).

But wait, my principal is protected, so it’s worth it! That just means your minimum return is 0% if the stock market does poorly. But 0% is not the proper comparison point.

The true downside is the guaranteed rates that you are giving up! For example, today you can find a 6-year plain-vanilla MYGA fixed annuity paying 5.40% guaranteed. At 5.40% annually guaranteed, in MYGA worst-case scenario $100,000 will become over $137,000 after 6 years. Meanwhile, the fixed index annuity might only give you… $100,000.

MYGAs are commoditized annuities that compete based on price (and safety rating) and offer the same tax-deferral possibilities. Since they compete on price, they also pay lower sales commissions than fixed index annuities. Would you want to buy something that would pay 4% if long-term averages hold (0% minimum), or 5.4% guaranteed (5.4% minimum)? MYGAs aren’t perfect either, but at least I can explain how any MYGA works very easily.

This is a simple hypothetical illustration to help you realize the high price you might be paying for “upside potential with principal protection”. I understand the desire to avoid market volatility, but there may be cheaper and more transparent ways to get there. My main issue is not that the price is high, it’s that the price is nearly impossible to pin down due to intentional complexity. If we could see price tags, we could comparison shop!

Filed Under: Annuities, Investing, Retirement //

Retirement Income and Inflation: 30-Year TIPS Ladder vs. SPIA Annuity + Excess Account

Posted on December 7, 2022 // 1 Comment

This is inadvertently turning into a multi-part series, mostly revolving about taking advantage of long-term TIPS to build guaranteed inflation-adjusted income. Are the current real TIPS yields worthy of locking in? The previous parts:

Following up on the Gerstein article from that last post, a final chart that was interesting compared the cumulative income from a low start that adjusts with inflation and a higher start that stays fixed. Starting with a $1 million portfolio, consider two simple theoretical scenarios. First, a 4% initial withdrawal rate ($40,000 in Year 1) that adjusts upward to keep up with 4% steady annual inflation. Second, a fixed annuity-style payment of $70,000 a year. Here’s how that plays out:

In such a scenario, their chart shows that the total cumulative income paid out would even out around year 27.

I was happy to see that William Bernstein – highly respected in index investing circles but relatively spare with words these days – wrote a new article Playing Inflation Russian Roulette in Retirement with a lot of good nuggets. He compares the retirement income from a single-premium immediate annuity and a 30-year TIPS ladder.

The comparison gets a bit complicated (see article to fully explain chart below), but I did take away the idea that even if you start with $70,000 annuity income like in the above scenario, you only spend $40,000 and put excess ($30,000 in year 1) rest aside in a “for future inflation” side account. You can still increase your $40,000 a year of spending annually, but keep putting the difference into the excess side account. This excess amount will decrease over time until the inflation-adjusted spending reaches and surpasses $70,000 a year, at which time you start withdrawing from the excess side account. In addition, we should consider the money left over in case of early death.

In the end, Bernstein seems to lean towards the TIPS ladder as he points out the danger of high inflation. He reminds us that “worst-case historically” doesn’t actually mean “worst-case”. How many times recently have we read the words “biggest [something] ever”?

One is reminded of Nassim Taleb’s dictum that “this so-called worst-case event, when it happened, exceeded the worst case at the time.” In other words, 5.4% long-term inflation is nowhere near the worst-case scenario. Even a casual glance at the global history of fiat money in the twentieth century shows that hyperinflation is the rule, not the exception. During the above-mentioned 1966-1995 period, U.S. debt/GDP averaged around 50%; now, it’s more twice that level and rising rapidly, and given the hundreds of trillions of dollars of additional implicit debt (promises to Social Security and Medicare, and to backstop future emergencies – think military aid to Ukraine and weather or terrorism disaster relief) it won’t take much to tip things over into a debt spiral, especially if the Treasury has to roll its debt over at higher interest rates for very long.

He also reminds us that we don’t have to do either one – the easiest way for most of us to access additional inflation-adjusted income is to delay taking Social Security:

It would be nice if one could purchase inflation-adjusted annuities, but those products have gone the way of disco, and I suspect that proposing their revival would not be a career enhancing move for any insurance company executive who suggests it. The best that one can do in this regard is to “purchase” the inflation-adjusted annuity offered by spending down one’s retirement assets to defer Social Security until age 70.

Finally, I wanted to include his relatively-conservative views on safe withdrawal rates:

The single most important factor that determines how to do that is the nest-egg burn rate (your annual spending divided by the size of your retirement portfolio). I suggest the following rule of thumb: if your burn rate is below 2% at age 60, below 3% at age 70, or below 4% at age 80, a standard stock/bond portfolio will nicely see you through your retirement, and you have no need to annuitize your assets.

I plan to keep an eye on real TIPS yields, and may readjust within the bond portion of my portfolio to purchase individual TIPS at longer maturities.

Filed Under: Investing, Retirement //
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