In Defense of Working One More Year (OMY)

Posted on June 15, 2020 // 3 Comments

In early retirement discussion forums, you’ll often see the term OMY, which refers to people who have reached their calculated retirement savings target, but decide to keep working “One More Year”. Sometimes that one more year becomes two more years, three more years, and so on. This leads to OMY being seen as an irrational behavioral quirk like hedonic adaptation. However, are the potential benefits of working one more year being under-appreciated?

In the Medium article How important is asset allocation versus withdrawal rates in retirement?, EREVN (he lives in Vietnam) compares the power of picking the optimal asset allocation vs. saving more money. Investors often worry about whether they own the right mix of stocks and bonds. Do you own enough stocks, as to get a high enough return? Do you own enough bonds, so you don’t freak out during a market drop?

EREVN points out that historically, the optimal asset allocation in terms of having your portfolio last the longest is almost always 100% stocks. (98% of the time.) Even including the other 2%, how much of a benefit is it to hold the optimal asset allocation?

Read the entire article for full understanding of the assumptions taken, but here is the summary of his experiments. We usually optimize asset allocation based on highest return, but that’s not exactly the same as withdrawal rate. Note: Whenever you see “4% withdrawal rate”, that’s the same as having 25 times your annual expenses. 3% withdrawal rate = 33.3x expenses, 2% withdrawal rate = 50x expenses, etc. I added the stuff in the brackets [].

Even with perfect hindsight, choosing the best possible asset allocation is only equivalent to going from a 4% withdrawal rate to a 3.7% or 3.8% withdrawal rate. [25x expenses to 26x or 27x expenses.] In other words, saving 1 or 2 extra years of expenses dominates getting the asset allocation decision perfectly correct. In reality, we don’t have perfect hindsight and our asset allocation will be sub-optimal.

The powerful conclusion:

Instead of stressing about trying to pick “the right” asset allocation, you’re better off picking anything reasonable and ignoring every other asset allocation internet discussion for the rest of your life… and then working an extra six or twelve months to pad out your retirement fund before retiring.

I like the paring of working one more year and being able to drop the worry about asset allocation now and forever! You don’t want to work forever, but this does make OMY have multiple benefits (existing portfolio can grow another year, might even save more, stop worrying about asset allocation).

Here are a few related posts on “Saving More vs. XXX” from the archives:

Image via GIPHY.

Filed Under: Investing, Retirement //

Don’t Expect Too Much From Exotic Asset Classes

Posted on June 12, 2020 // 6 Comments

If you like having a complicated portfolio and owning exotic asset classes for diversification, you might want to prepare yourself before reading Skating Where the Puck Was: The Correlation Game in a Flat World by William Bernstein. Most of the exotic classes you’ve ever thought about owning will be struck down:

  • Commodities futures? – disaster.
  • Private equity? – nope.
  • Hedge funds? – don’t bother.
  • Gold? – sorry, even the Permanent Portfolio would have been better off historically without gold if you measure since 1980 (after going off gold standard).

The basic premise is “Rekenthaler’s Rule”: If the bozos know about it, it doesn’t work any more.

Even international stocks are not nearly as useful a diversifier as they used to be. The book included a chart of the correlation between the S&P 500 (developed large-cap US stocks) and EAFA (developed large-cap international stocks), but I found a more recent one from Morningstar. International stocks used to offer high returns and low correlations, the ideal asset class to add to any portfolio! Not so much recently:

Now, there are still reasons to invest in international stocks – primarily the “big picture” deep risk of investing in a single country over a long period of time. But your short-term volatility is not going to be dampened much anymore.

So, what is left?

The best alternative asset class for the average investor may be in truly private investments, such as already mentioned, owner-managed (the owner being you) residential and commercial real estate in distressed markets, or in other private businesses in which you have special expertise.

I would be careful with this too, as there are many bad (quiet) real estate investors and failed/struggling businesses that you don’t hear about. Be sure you really have “special expertise”. However, one benefit of owning private real estate or a private business is that you don’t get daily price quotes. Nobody is going to tell you “Well, if you sold TODAY, the best price you could find is 50% of what you could have gotten last month! Tomorrow, it could only be 40%! Do you want to sell?!”. This means less likelihood of panic selling and more long-term investors.

Filed Under: Book Reviews, Investing //

The Rare Stock Market Do-Over

Posted on June 9, 2020 // 2 Comments

It used to be that you were supposed to use your experience from the 2008 stock market drop to help understand your true risk tolerance. Well, now we have a more recent reference point in the 2020 stock market drop. Allan Roth reminds us that thanks to the unprecedented recovery, we have A Rare Second Chance to Protect Nest Egg Savings.

Remember that the purpose of money is to give you choices in life. I’ve seen many people take unnecessary risks with their money and have to either go back to work or drastically cut back on their lifestyle. So use this second chance the market gave you to assess how much risk you want to take with your financial freedom. Let me repeat — don’t blow this second chance.

I’m still struggling a bit with this as it’s often hard to separate if you’re doing something because you have learned something new about yourself and/or permanently changed your investment philosophy, or are you just responding to what happened recently? I certainly don’t know what is happening next, but I am definitely nervous.

If you are near retirement, it is always a good idea to check if you’ve won the game and can stop playing with part of your portfolio.

Filed Under: Investing //

William Bernstein and Safe Withdrawal Rates

Posted on June 4, 2020 // 3 Comments

A recurring theme in investing is that you start out learning the simple basics, then you feel like you can optimize things and spend a lot of effort trying to do so, and eventually you realize that simple is probably just fine. No matter how closely you mine the past, you can’t predict the future. As the Buffett quote goes, “If past history was all there was to the game, the richest people would be librarians.” That’s what came to mind when I read William Bernstein on safe withdrawal rates in retirement:

Even the most sophisticated retirement projections contain so much uncertainty that the entire process can be summarized as follows: Below the age of 65, a 2% spending rate is bulletproof, 3% is probably safe, and 4% is taking chances. Above 5%, you’re taking an increasingly serious risk of dying poor. (For each five years above 65, add perhaps half of a percentage point to those numbers.)

Source: The Ages of the Investor: A Critical Look at Life-cycle Investing.

Something to keep in mind when you become obsessed about getting from a 98% success rate to a 99% success rate on a simple retirement calculator from Vanguard or a fancy one like FIRECalc. (Not that I’ve done that, ever, of course…)

Filed Under: Book Reviews, Investing, Retirement //

Best Interest Rates on Cash – June 2020

Posted on June 3, 2020 // 11 Comments

Another month of slight rate drops, although bank accounts can still beat out Treasury bonds and/or brokerage cash sweep options by a significant margin.

Here’s my monthly roundup of the best interest rates on cash for June 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. 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 6/2/2020.

High-yield savings accounts
While the huge megabanks make huge profits while paying you 0.01% APY, it’s easy to open a new “piggy-back” savings account and simply move some funds over from 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.

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 (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. Marcus has a 7-month No Penalty CD at 1.20% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 1.20% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 1.15% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Lafayette Federal Credit Union has a 12-month CD at 1.61% APY ($500 min). Early withdrawal penalty is 180 days of interest. Anyone can join via partner organization for one-time $10 fee. Note that you will have to park $50 in a share savings account while a member.

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are NOT FDIC-insured and thus come with a possibility of principal loss, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 0.32% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.20%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 1.61% SEC yield ($3,000 min) and 1.71% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 1.87% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 1.83% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. Note that there was a slight drop in net asset value during the recent market stress.

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. 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. Right now, this section probably isn’t very interesting as T-Bills are yielding close to zero!

  • 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 6/2/2020, a new 4-week T-Bill had the equivalent of 0.12% annualized interest and a 52-week T-Bill had the equivalent of 0.17% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 0.57% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -.04% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL. Expect that GBIL yield to drop significantly as it is updated.

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. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between May 2020 and October 2020 will earn a 1.06% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2020, 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.

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 capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. 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.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, but there are many hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. I don’t use any of these anymore.

  • Consumers Credit Union Free Rewards Checking (my review) still offers up to 4.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. The Bank of Denver has a Free Kasasa Cash Checking offering 3% APY on balances up to $25,000 if you make 12 (temporarily 6) debit card purchases and at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a savings account that pays 2% APY on up to $50k. Thanks to reader Bill for the tip. 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.

  • Lafayette Federal Credit Union has a 5-year certificate at 2.02% APY ($500 min). Beware that the early withdrawal penalty is 600 days of interest! Anyone can join via partner organization for one-time $10 fee. Note that you will have to park $50 in a share savings account while a member.
  • Pen Air Federal Credit Union has a 5-year certificate now at 1.85% APY ($500 minimum). Early withdrawal penalty is 180 days of interest. Their other terms are competitive (relatively), if you want build a CD ladder. Anyone can join this credit union via partner organization ($3 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. Vanguard has a 5-year at 1.05% APY right now. Be wary of higher rates from callable CDs listed by Fidelity.

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. Watch out for higher rates from callable CDs from Fidelity.
  • 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 which is quite low (currently a sad 0.10% rate). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. As of 6/2/2020, the 20-year Treasury Bond rate was 1.24%.

All rates were checked as of 6/2/2020.

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

The Role of Luck in Long-Term Investing, and When To Stop Playing The Game

Posted on June 1, 2020 // 10 Comments

I am re-reading a series called “Investing for Adults” by William Bernstein. By “Investing for Adults”, Bernstein means that he assumes that you already know the basics of investing and that he can skip to more advanced insights. There are four parts:

A commonly-cited part of the first book The Ages of the Investor is the question “Once you have won the game, why keep playing?”. If you have enough money to buy a set of safe assets like inflation-adjusted annuities, delayed (and thus increased) Social Security payments, and a TIPS ladder to create enough income payments for life, you should seriously considering selling your risky assets and do exactly that. (This is referred to as a liability-matching portfolio, or LMP. You can keep investing any excess funds in risky assets, if you wish.)

A wrinkle to this plan is that you won’t know exactly when the stock market will help make that happen. Before you reach your “number”, you’ll most likely be buying stocks and hoping they grow in value. Let’s say you saved 20% of your salary and invested it in the S&P 500*. How long would it take you to “win the game”?

Historically, it could be as little at 19 years or as long as 37. That’s nearly a two-decade difference in retirement dates! Same savings rate, different outcomes.

This paradigm rests on too many faulty assumptions to list, but it still illustrates a valid point: You just don’t know when you’re going to achieve your LMP, and when you do, it’s best to act.

If, at any point, a bull market pushes your portfolio over the LMP “magic number” of 20 to 25 times your annual cash-flow needs beyond Social Security and pensions, you’ve won the investing game. Why keep playing? Start bailing.

If you don’t act, the market might drop and it could take years to get back to your number again. This is one of the reasons why some people should not be holding a lot of stocks as they near retirement. Some people might need the stock exposure because the upside is better than the downside (they don’t have enough money unless stocks do well, or longevity risk), but for others the downside is worse than the upside (they DO have enough money unless stocks do poorly, or unnecessary market risk).

I find the concept of a risk-free liability-matching portfolio (LMP) much harder to apply to early retirement, as it is nearly impossible to create a truly guaranteed inflation-adjusted lifetime income stream that far into the future. Inflation-adjusted annuities are rare, expensive, and you’re betting that the insurer also lasts for another 50+ years if you’re 40 years old now. Social Security is subject to political risk and may become subject to means-testing. TIPS currently have negative real yields across the entire curve, and only go out to 30 years. (As Bernstein explores in future books, you’ll also have to avoid wars, prolonged deflation, confiscation, and other “deep risk” events.)

* Here are the details behind the chart:

As a small thought experiment, I posited imaginary annual cohorts who began work on January 1 of each calendar year, and who then on each December 31 invested 20% of their annual salary in the real return series of the S&P 500. I then measured how long it took each annual cohort, starting with the one that began work in 1925, to reach a portfolio size of 20 years of salary (which constitutes 25 years of their living expenses, since presumably they were able to live on 80% of their salary). Figure 11 shows how long it took each cohort beginning work from 1925 to 1980 to reach that retirement goal.

Filed Under: Book Reviews, Investing, Retirement //

Suze Orman’s Updated Financial Advice 2020

Posted on May 20, 2020 // 8 Comments

The NYT has a new Suze Orman comeback piece called Suze Orman Is Back to Help You Ride Out the Storm. I’m old enough to feel nostalgia over the peak Suze Orman years, and it was interesting to read how some of her advice as changed:

Some of Ms. Orman’s advice has shifted since the Great Recession of a decade ago. The coronavirus has led her to the belief that having an emergency fund for food and health care is more important than concerns over debt. That’s why she’s telling people in financial trouble to scrape their money together and put it aside for emergencies, regardless of the damage it may do to a FICO score.

“Can you believe Suze Orman’s telling you to ‘please use your credit cards’?” she said on “Today.” “And only pay the minimum amount due. You might even want to call your credit card companies and ask them to expand your credit limit.”

Those who are in a slightly better situation frequently ask Ms. Orman what they should do about their stock holdings. Once upon a time, Ms. Orman was an evangelist for municipal bonds and an opponent of the stock market. But that changed as the interest on them descended to “almost nil,” as she put it.

So Ms. Orman’s recommendation now is to dollar-cost average in the stock market: purchasing a little bit every month, mostly in index funds, regardless of whether markets rise or fall.

I guess she has enough money now to feel less conservative these days – she went from muni bonds to sharing about her stock market timing prowess.

I don’t see any new TV episodes, but she does have an active podcast. I always thought her original slogan was rather clever: “People first. Then Money. Then Things.”

Filed Under: Investing //

Tastyworks Brokerage Bonus: 100 Free Shares, Worth $100 to $600

Posted on May 18, 2020 // 9 Comments

Free stock shares are the trendy bonus nowadays – WeBull, SoFi, Robinhood, Public, and more – but how about 100 free shares? Tastyworks wants your attention by offering 100 free shares of a randomly-picked stock valued between $1 and $6 per share. That means the total value will be between $100 and $600, with an average total value of $200-$220. Offer now extended until 6/30/2020. Details below.

The odds of specific stock allocation is implemented as follows: there is a 70% chance of receiving Stock priced under $2.00 per share, and a 30% chance of receiving Stock priced over $2.00 per share. The value of Stock received will average $200-$220 USD based on the price of shares at which the Stock is purchased by tastyworks.

Tastyworks is a discount brokerage targeted at active options traders. They offer $0 comission stock trades and options commissions at $1 to open and $0 to close. That means a open/close roundtrip on options costs $1.00. TD Ameritrade, Schwab, Fidelity, and E-Trade all charge $0.65 per contract, which is $1.30 for open/close roundtrip. Thus, Tastyworks is 30% cheaper than the big brokers for options trading while also having the full fancy options interface.

For this promotion, you have to fund a new account with at least $2,000. You get the 100 bonus shares after a week, but you have to keep your $2,000 plus the value of the bonus shares for at least 3 months (otherwise they yank it back). See quoted fine print below:

The funds deposited to Qualified Customer’s account, plus the initial value of the Stock received (less any losses on the Stock) are required to remain in Qualified Customer’s account for a minimum of three months starting the day shares deposited into account, subject to extension from date of entry, before withdrawal in order for Qualified Customer to receive the value of the Stock (“Three Month Period.”) The value of stock Qualified Customer receives will be credited to their account upon deposit, but will be debited out of Qualified Customer’s account if the Three Month Period requirement is not met, and will not count toward Qualified Customer’s buying power until the end of the Three Month Period. Qualified Customers can sell their Stock once deposited into their account, but the proceeds will be subject to the foregoing Three Month Period requirement.

All that fine print aside, a $200 average payout on a $2,000 deposit with a minimum 3 month holding period is a good ratio. Just don’t go nuts with the options trading!

Filed Under: Deals & Offers, Investing //

Morningstar Target Date Retirement Fund Rankings 2020: Not All The Same

Posted on May 17, 2020 // Leave a Comment

The default option inside many employer-sponsored retirement plans are Target Date Funds (TDFs), which adjust their portfolio holdings automatically over time based on a specific target retirement date. Morningstar just released their 2020 Target-Date fund report. You’ll need to provide your name and e-mail to download the free full report. There is a lot of in-depth analysis for industry insiders, although many individual investors are basically stuck with the one fund series that is available in their 401k/403b plan. Besides looking up your fund, here are a few broader takeaways.

Here is the average glide path across 53 different TDF series (taken from 2019 report). On average, most TDFs have an asset allocation close to 90% equity and 10% bonds in the early years, with the equity percentage dropping (and bond percentage rising) as time goes on. At the year of retirement, the average asset allocation is roughly 45% equity and 55% bonds.

Glide paths stick closer to the average across funds during the early accumulation years, but differ much more as you near retirement. Near-retirees take notice! The chart below shows the historical percentage difference in quarterly return between funds with the same target dates. (All the 2020 funds were compared, all the 2030 funds were compared, etc.) You can see that during the “COVID crash” in Q1 2020, the biggest difference in performance actually came from the funds meant for those in retirement.

Some TDFs maintain a higher equity allocation and keep lowering it gradually “through” the retirement date, while others decrease more sharply right up “to” the retirement date and then hold things steady. For a 2020 fund, this could mean a 15% difference in the amount of stocks being held in 2020 (ex. 45% stocks vs. 30% stocks). The situation actually flips a decade after retirement and the “through” funds end up holding less stocks on average.

The past performance of TDFs often hinges on recent stock market performance and which funds are holding the most stocks (or most domestic stocks). Both the “through” and “to” methods have their pros and cons, but one might fit your own preferences better. I personally think that people do respond differently to market drops after they stop working completely and have fully exhausted their “human capital”. (Once you can’t make any more money, you start to stare at your balance more often…) Perhaps the gradual “through” funds would work better for those that also stop working gradually, while the “to” funds would be better for those that stop work completely.

You can adjust your volatility level by picking a different date. You probably only have one TDF series as opposed to a wide menu. If it’s too stock-heavy for you, then just pick a retirement date that is earlier. If it holds too many bonds, then just pick a retirement date that is earlier. There is no rule that you have to pick your actual retirement year, or even any single one.

Gold or Silver-rated Target Date Funds. Morningstar changed up their ratings methodology in November 2019. A very detailed explanation and full rankings are in the report. Here are the gold/silver-rated funds and whether they are “through/to”:

  • Blackrock LifePath Index (To)
  • JPMorgan SmartRetirement Blend (To)
  • Fidelity Freedom Index (Through)
  • Fidelity Freedom (Through)
  • JPMorgan SmartRetirement (To)
  • State Street Target Retirement (Through)
  • Vanguard Target Retirement (Through)
  • American Funds Target Date Retirement (Through)
  • T. Rowe Price Retirement (Through)

All other things equal, I’d still prefer a passive index approach with rock-bottom costs, but I’m glad to see even the actively-managed TDFs have lower expense ratios now than before.

Some of these TDF series are not available to retail investors outside of a employer-sponsored retirement plan. The Vanguard Target Retirement fund series remains the most popular with a 37% market share as of March 2020, and is also available to retail investors with a $1,000 minimum investment.

Bottom line. Although we often don’t have much choice in the matter, the good news is that every year the average target date fund gets cheaper and more competitive. Any of the gold/silver fund series above are able to provide a simple all-in-one solution. Added together, these “top-rated” options make up 78% of all TDF assets. However, it is still important to understand how your fund’s asset allocation changes as it nears the target retirement year, and know that you can pick a different year to adjust your risk level. If your fund is one of the bottom-dwellers, you may want to use this report to bug the HR department.

Filed Under: Investing, Retirement //

Best Interest Rates on Cash – May 2020

Posted on May 6, 2020 // 8 Comments

The Federal Reserve is buying everything in sight (even junk bonds apparently), so it has been rate drops all around. Bank accounts now offer much higher available rates than Treasury bonds. I’d also recommend checking on your brokerage money market sweep fund as most are back to very low rates.

Here’s my monthly roundup of the best interest rates on cash for May 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. 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 5/6/2020.

High-yield savings accounts
While the huge megabanks make huge profits while paying you 0.01% APY, it’s easy to open a new “piggy-back” savings account and simply move some funds over from 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.

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 (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. Marcus has a 7-month No Penalty CD at 1.55% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 1.50% APY with a $25,000 minimum deposit. CIT Bank has a 11-month No Penalty CD at 1.40% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Comenity Direct has a 12-month CD at 1.70% APY ($1,500 min).

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are NOT FDIC-insured and thus come with a possibility of principal loss, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 0.57% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.40%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 2.00% SEC yield ($3,000 min) and 2.10% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 2.47% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 2.48% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. Note that the higher yield come partly from a drop in net asset value during the recent market stress.

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. 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. Right now, this section probably isn’t very interesting as T-Bills are yielding close to zero!

  • 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 5/6/2020, a new 4-week T-Bill had the equivalent of 0.09% annualized interest and a 52-week T-Bill had the equivalent of 0.16% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 0.57% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 0.14% SEC yield. GBIL appears to have a slightly longer average maturity than BIL. Expect that GBIL yield to drop significantly as it is updated.

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. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between May 2020 and October 2020 will earn a 1.06% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2020, 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.

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 capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. 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.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, but there are many hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. I don’t use any of these anymore.

  • Consumers Credit Union Free Rewards Checking (my review) still offers up to 4.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. The Bank of Denver has a Free Kasasa Cash Checking offering 3% APY on balances up to $25,000 if you make 12 debit card “signature” purchases and at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a savings account that pays 2% APY on up to $50k. Thanks to reader Bill for the tip. 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.

  • The Federal Savings Bank has a 5-year certificate at 2.05% APY ($10,000 minimum). Early withdrawal penalty is 365 days of interest.
  • Pen Air Federal Credit Union has a 5-year certificate at 2.20% APY ($500 minimum). Early withdrawal penalty is 180 days of interest. Their other terms are competitive as well, if you want build a CD ladder. Anyone can join this credit union via partner organization ($3 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. Vanguard and Fidelity both have a 5-year at 1.00% APY right now. Be wary of higher rates from callable CDs listed by Fidelity.

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. Watch out for higher rates from callable CDs from Fidelity.
  • 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 which is quite low (currently a sad 0.10% rate). I view this as a huge early withdrawal penalty. You could also view it as a hedge against prolonged deflation (again if you can hold on for 20 years). As of 5/6/2020, the 20-year Treasury Bond rate was 1.16%.

All rates were checked as of 5/6/2020.

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

Savings I Bonds May 2020 Interest Rate: 0.00% Fixed, 1.06% Inflation Rate

Posted on May 6, 2020 // 15 Comments

sb_poster

Update May 2020. The fixed rate will be 0.00% for I bonds issued from May 1, 2020 through October 31st, 2020. The variable inflation-indexed rate for this 6-month period will be 1.06% (as was predicted). The total rate on any specific bond is the sum of the fixed and variable rates, changing every 6 months. If you buy a new bond in between May 2020 and October 2020, you’ll get 1.06% for the first 6 months. See you again in mid-October for the next early prediction for November 2020.)

Original post 4/13/20:

Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. You could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the May 2020 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a April 2020 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a May 2020 purchase.

New inflation rate prediction. September 2019 CPI-U was 256.759. March 2020 CPI-U was 258.115, for a semi-annual increase of 0.53%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 1.06%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be very different than one from recent years.

Tips on purchase and redemption. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in April 2020. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.20%. You will be guaranteed a total interest rate of 0.20 + 2.02 = 2.22% for the next 6 months. For the 6 months after that, the total rate will be 0.20 + 1.06 = 1.26%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2020 and sell on April 1, 2021, you’ll earn a ~1.55% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. Comparing with the best interest rates as of April 2020, you can see that this is lower than a current saving rate or 12-month CD.

Buying in May 2020. If you buy in May 2020, you will get 1.06% plus a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS. In the past 6 months, the 5-year TIPS yield has dropped to a negative value! My best guess is that it will be 0.00%. Every six months, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (total bond rate has a minimum floor of 0%).

Buy now or wait? In the short-term, these I bond rates will definitely not beat a top 12-month CD rate if bought in April, and most likely won’t if bought in May either unless inflation skyrockets. Thus, if you just want to beat the current bank rates, I Bonds are not a good short-term buy right now.

If you intend to be a long-term holder, then another factor to consider is that the April fixed rate is 0.2% and that it will likely drop at least a little in May in my opinion. You may want to lock in that higher fixed rate now, which is higher than the real yield on TIPS right now.

Honestly, I am not too excited to buy either in April or May, but if I liked the long-term advantages of savings bonds (see below), I would consider buying now in April rather than May due to my guess of a higher fixed rate. You could also wait, as things might change again during the next update in mid-October.

Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.

Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

For more background, see the rest of my posts on savings bonds.

[Image: 1946 Savings Bond poster from US Treasury – source]

Filed Under: Investing, Retirement, Savings Bonds //

2020 Berkshire Hathaway Annual Shareholder Meeting Video, Transcript, and Notes

Posted on May 3, 2020 // 3 Comments

The 2020 Berkshire Hathaway Annual Shareholder Meeting was on May 2nd, 2020 and is now available as a recorded video on Yahoo Finance and a handy Rev.com transcription. As usual, I recommend listening or reading on your own, as my notes always differ slightly from what the business media chooses to highlight.

What makes Berkshire Hathaway (BRK) interesting to me is that it all started out as Buffett investing his own money alongside a few close family and friends. He’s always had nearly all of his own money in it. Even today, Berkshire is the main investment vehicle for many family members. People you run into at the store. People with whom you’ve shared a meal. This changes the types and amounts of risk you take.

And, now, I would never take real chances with money, of other people’s money under any circumstances. Both Charlie and I come from a background where we ran partnerships. I started mine in 1956 for really seven either actual family members or the equivalent. And Charlie did the same thing six years later. And we never, neither one of us, I think, I know I didn’t, and I’m virtually certain the same is true of Charlie, neither one of us ever had a single institution investment with us.

Buffett has stated that when he writes his annual letters, he imagines his sister reading them. That’s how I try to write as well, as an enthusiast making careful shares and recommendations to family. This overall sentiment helps you understand how BRK is run.

He started out with a familiar story of “betting on America”. This country has been though a lot, and it will recover again.

One of the scariest of scenarios, when you had a war with one group of States fighting another group of States, and it may have been tested again in the great depression, and it may be tested now to some degree, but in the end the answer is never bet against America, and that in my view is as true today as it was in 1789, and even was true during the civil war, and the depths of the depression.

In terms of investing, this means holding onto stocks for 20 or 30 years. But to survive the shocks during those times, you should never borrow money to invest in stocks, you need to have adequate reserves in 100% safe cash, and you need the proper psychological temperament.

The American tailwind is marvelous. American business represents, and it’s going to have interruptions, and you’re not going to foresee the interruption, and you don’t want to get yourself in a position where those interruptions can affect you either because you’re leveraged or because you’re psychologically unable to handle looking at a bunch of numbers.

You just don’t know what’s going to happen. You know, at least in my view, you know that America’s tailwind is not exhausted. You’re going to get a fine result if you own equities over a long period of time. And the idea that equities will not produce better results than the 30-year Treasury bond, which yields one and a quarter percent now, it’s taxable income. It’s the aim of the Federal Reserve to have 2% a year inflation. Equities are going to outperform that bond. They’re going to outperform Treasury bills. They’re going to outperform that money you’ve stuck under your mattress.

Simple, low-cost S&P 500 index fund for growth. Avoid the salespeople.

So find businesses. Get a cross section. And in my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there’s more money in it for them if they do. And I’m not saying that that’s a conscious act on their part. Most good salespeople believe their own baloney. I mean, that’s part of being a good salesperson. And I’m sure I’ve done plenty of that in my life too, but it’s very human if you keep repeating something often enough.

100% backed-by-the-government cash for safety. For them, it means Treasury-backed bills. For individual investors, this extends to FDIC-insured savings accounts and certificates of deposit.

And that means we own nothing but treasury bills. I mean, we’ve never owned, we never buy commercial paper. We don’t count on bank lines and a few of our subsidiaries have them, but we basically want to be in a position to get through anything. And we hope that doesn’t happen but you can’t rule out the possibility anymore than in 1929 you could rule out the possibility that you know you would be waiting until 1955, or the end of 1954, to get even.

Ignore the two things above if you have credit card debt.

My general advice to people, I mean, we have an interest in credit cards. But I think people should avoid using credit cards as a piggy bank to be rated. I had a woman come to see me here not long ago, and she’d come on some money. Not very much, but it was a lot to her. She’s a friend of mine, and she said, “What should I do with it?” I said, “Well, what do you owe on your credit card?” She says, “Well, I owe X.” I said, “Well, what you should do…” I don’t know what interest rate she was paying, but I think I asked her and she knew. It was something like 18% or something. I said, “I don’t know how to make 18%.” I mean, if I, owed any money at 18% the first thing I do with any money I had would be to pay it off. It’s going to be way better than any investment idea I’ve got. That wasn’t what she wanted to hear.

Be safe with your finances at this time. You don’t sell your airline stocks at a multi-billion dollar loss if you think a V-shaped recovery is likely. Just because we are still recovering from one horrible event, doesn’t mean another might not happen.

I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.

After listening to this entire Buffett talk and reading this Munger interview, the overall takeaway is definitely that of safety. They have been safe and will stay safe, no matter who complains about their cash levels. The world has changed, and just because something has a lower price today than in January, doesn’t automatically mean it is a better deal than in January.

Here is a NYT Dealbook article by Andrew Ross Sorkin, who has attended many shareholder meetings in person and also sensed a different tone this year.

You can find links to previous years’ Berkshire Hathaway Shareholder Meeting Full Videos, Transcripts, and Podcasts here.

Filed Under: Investing, Retirement //
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