Andrew Luck is Doing Early Retirement Perfectly

Posted on August 27, 2019 // 6 Comments

The big news in sports yesterday was the retirement of Andrew Luck from professional football at the age of 29. Here are two takes from The Ringer: Andrew Luck and the Afterburn of Early Retirement and Andrew Luck Gave Up Fame, Riches, and Football Because He Is Unapologetically Himself. He seems like a stand-up guy. The thing that struck me was the chorus of boos from Colts fans (some burning his jersey) and a few snarky remarks from some (supposedly) professional sports commentators.

That’s how I knew that Andrew Luck was doing justice to my definition of “retirement”. To me, retirement means:

  • You are NOT optimizing your time for money. Elite quarterbacks rarely retire early because they can make tens of millions of dollars just holding a clipboard as a backup until they are 40 years old. Luck is walking away from anywhere from $10 million to hundreds of millions.
  • You are NOT following other people’s expectations, and definitely not what random angry internet people think. I’m sure many Colts fans are disappointed, and even he admitted that the boos hurt. But Luck only gets one life and one body. The fans won’t be there when you can’t walk right for the rest of your life.
  • You may NOT be doing what you are most talented at. Sometimes things come easier to you than others, but that doesn’t mean you find joy in the act. I think it can be noble to keep working at something to support your family, but this is retirement. Retirement means that if you want, you can do the thing you are least talented at. He could switch to painting with boxing gloves.

That’s why I call myself “semi-retired”. Am I talented at raising small children? No. Probably below average. Am I good at it? No. Nobody would ever hire me to watch their kids. If I wanted to optimize for money, I would never have done this. If we both kept working full-time and paying for full-time daycare, we could have earned at least a million dollars more during their childhoods. I am spending half my time doing something that doesn’t make much sense, so I call that half-retired even though I am still exhausted at the end of every day. At the same time, I am grateful because I know that it took a lot of luck and the gracious support of my wife and family to even have this choice.

Let’s not forget why this is all possible. Luck combined his unique talents, hard work, family support, and some luck to earn over $100 million in his career. He is financially free, even if he hits a few bumps along the way. We don’t know all his struggles, and he never needs to explain it to us.

Filed Under: Retirement //

The Other Side: Reasons Why You Might Not Want To Retire at 40

Posted on August 25, 2019 // 6 Comments

Previously, I wrote about how you might consider retiring earlier if you have adequate flexibility to decrease your spending temporarily and/or earning additional money. If you have early good luck with market returns, you will gain many more years of freedom.

Now I’d like to present the other side of that argument. If you retire in your 40s or 50s, there are hopefully many years of fun times ahead of you. However, there is also a higher chance for events that significantly increase your expenses and decrease your ability to earn more money.

Let’s say you and your spouse/life partner are both 40 years old and have saved up $2 million and are pretty confident that you can live off of $60,000 to $80,000 per year. That’s may seem like a lot of money. However, here are some things that can throw a wrench into your plans.

Yourself

  • You may become disabled and become unable to work. Your daily healthcare expenses may also rise significantly.
  • Your spouse may have a health event or pass away prematurely, which will affect your household finances.
  • You may be the subject of a liability lawsuit.
  • There may be an expensive accident – Home fire, theft, fraud.

Many of these situations can be offset by proper insurance. Disability, life, homeowners, long-term car, and/or umbrella liability insurance.

Your spouse (Divorce)

A divorce can be devastating, both emotionally and financially. There are many articles about increasing divorce rates amongst those aged 40+ and 50+. Even if you split your assets equally into two parts, a couple can usually live more efficiently than two individual households. In addition, you may no longer be eligible for the full spousal portion of a pension, healthcare package, and/or Social Security.

Parents, Elderly Relatives and/or Siblings

  • You may have a perfect financial situation, but your parents (or other close family members) may not.
  • You can’t control your parents (or siblings) and their decisions. They may develop dementia, fall for fraud, have substance abuse issues, or simply be bad with money.
  • Some people may be able to easily separate themselves from the responsibility of taking care of their relatives, but many will find it very difficult. Every person’s sense of familial duty is different.
  • Fulfilling what you believe is your responsibility may require great deals of time, energy, and money.
  • Your parents’ ongoing health issues may permanently change your life for decades. See NYT: At 75, Taking Care of Mom, 99: ‘We Did Not Think She Would Live This Long’

Children

  • If you are in your 40s, your kid status is not set in stone. If you don’t have kids, you still might have some. If you already have some, you might have more. Even if you don’t want kids now, you might change your mind. I know of many friends who had at least one kid well into their 40s.
  • Even though kids don’t necessarily need everything they seem to get these days, kids do require significant time, energy, and money.
  • Your child may have special needs. Imagine a multiple of that time, energy, and money.
  • Your child’s special needs may permanently change your life. It may not stop after 18 years.
  • Your child’s special needs may not become apparent until they are 5 months old, 5 years old, or 15 years old.

I may be wrong, but my impression is that early retirees are more likely to be childless than the general population. Perhaps knowing that you have less people to be responsible for makes it easier to take the retirement leap. I strongly believe that you should only have kids if you want to have kids, not because your parents or society wants you to have them. I can’t imagine how I would get through a single day with my kids if I didn’t want to be a parent.

It may be my own personal situation coloring my view, but the 30s, 40s, and 50s feels like the “sandwich decades” where you are most likely to be responsible for both parents and children. Retiring very early may permanently impair your ability to earn any more money, which in turn may be a source of future regret. You can (and should) insure against certain things, but not everything.

My take. Retirement timing is a form of regret minimization. You want to minimize the regret of “I should have retired earlier and had more freedom time”, but also minimize the regret of “I wish I made more money so my limited freedom time is more enjoyable”. It’s hard to find that happy medium where you give yourself enough financial wiggle room while keeping an eye on your mortality.

I started down the path of “semi-retirement” in 2012 with the birth of our first child. “Semi-retirement” is a rather generous take on our reworking of the traditional one full-time working spouse and one full-time parent arrangement so that we were both 50/50. Since then, we have both had the urge to try to live solely off our investments, but we are also keenly aware of the large number of people that we are responsible for caring for. In the end, we’re still both working part-time as that seems to be the solution with most optionality for now.

Filed Under: Family, Insurance, Retirement //

There Is No 100% Safe Portfolio: The Future May Not Look Like The Past

Posted on August 19, 2019 // 8 Comments

Last week, the yield on the 30-year US Treasury bond dropped below 2% for the first time in history. Many other articles will try to explain why this happened, and what this means for the future. Not me. I have no clue what’s coming and don’t think anyone else does either. Here’s the historical yield chart via Financial Times:

Reader skg recently shared that the original 1992 edition of Your Money or Your Life by Vicki Robin and Joe Dominguez is now available online (partially to promote the new 2018 edition).

I rate this book a “must read” for those interested in a philosophical inspiration behind financial independence. However, the specific investing advice inside was to put all of your money into a ladder of 30-year US treasury bonds. Here an excerpt from the book on what they were looking for:

1. Your capital must produce income.
2. Your capital must be absolutely safe.
3. Your capital must be in a totally liquid investment. You must be able to convert it into cash at a moment’s notice, to handle emergencies.
4. Your capital must not be diminished at the time of investment by unnecessary commissions, “loads,” “promotional” or “distribution” expenses (often called “12b- 1 fees”), management fees or expense fees.
5. Your income must be absolutely safe.
6. Your income must not fluctuate. You must know exactly what your income will be next month, next year and twenty years from now.
7. Your income must be payable to you, in cash, at regular intervals; it must not be accrued, deferred, automatically reinvested, etc. You want complete control.
8. Your income must not be diminished by charges, management fees, redemption fees, etc.
9. The investment must produce this regular, fixed, known income without any further involvement or expense on your part. It must not require maintenance, management, geographic presence or attention due to “acts of God.”

That sounds pretty good, right? But then you have to remember that Joe retired about 1970 and this book was written about 1990. Look again at rates from 1970-1990 in the chart above. Another excerpt:

For most of this century, up until the late 1960s, interest rates were under 5 percent. Since their peak in 1981, long-term interest rates have been wending their way back down toward their historical norms. You did not need to catch the bond market at those abnormal highs in order to reach FI. Even at 5 or 6 percent, this program will work.

In 1969, when Joe reached FI, his capital was invested in bonds with interest averaging 6.85 percent and maturities extending into the 1990s. Through a few judicious bond swaps, and with no income other than the income from the bonds, his portfolio now has an average yield of 9.85 percent and maturities extending to the year 2007 on average.

Note that bolded quote “Even at 5 or 6 percent, this program will work”. Well, what about 2%? It probably wasn’t even on his radar as a possibility at that time. I’m sure something else will happen in the next 30 years that isn’t on my radar now.

Even buying the safest bonds in the world and locking them in for the longest period possible is not free from risk. Long-term bonds can still be one component of a diversified portfolio, assuming you understand when it will do well and when it won’t. However, it is important to realize that owning 100% long-term bonds at 2% leaves you very vulnerable to future inflation.

This is only a small part of the book, and there is additional discussion about being flexible in your own spending:

Your choices, attitudes, beliefs, habits, tastes, fears and desires have the ultimate effect on your bottom line.

Bottom line. Every time I see the line “for the first time in history”, I am reminded that no portfolio is 100% safe. We can look back at history as guide, but also accept its limitations. Even buying the safest bonds in the world and locking them in for the longest period possible is not free from risk. Preparing for retirement isn’t just about your investment portfolio, but also having adequte insurance coverage and your ability to be flexible in both spending and earning.

Filed Under: Investing, Retirement //

Maximizing Retirement Time: Being Flexible in Both Work Income and Spending

Posted on August 15, 2019 // 9 Comments

When it comes to Financial Independence Retire Early (FIRE), many people get turned off because they define retirement as “never, ever working again for money”. Financial independence fits better with my goal of spending the most of your limited time on Earth aligned with your values.

If the idea is to maximize your independent time, then you have to accept that luck matters. This chart from Michael Kitces explores equally likely scenarios from someone spending down a $1,000,000 portfolio of 60% stocks and 40% bonds.

Equally likely:

  • Ending up broke or feel alarmingly like you are headed towards broke.
  • Ending up with many, many times more money than you started with.

Is retiring as soon as you reach the 4% rule too risky because you might run out of money? Or is working longer for 3% too risky because you might have wasted years of your life working when you didn’t need to?

Let’s look again at some charts from Engaging Data. Here are sample results for the early retirement scenario at 4% withdrawal rate at age 40 ($40k from a $1m 65/35/5 portfolio, retirement horizon 50 years, female longevity table).

  • Red – Alive, but ran out of money.
  • Light green – Alive, with less money than you started with.
  • Green – Alive, with between 100% and 200% of what you started with.
  • Dark green – Alive, with over 200% of what you started with.
  • Grey – Dead.

Here is retired at 40 with a lower 3% withdrawal rate ($30k from a $1m 65/35/5 portfolio, retirement horizon 50 years, female longevity table):

Notice at even with the riskier 4% withdrawal rate, you have roughly a 60% chance that your portfolio never goes below the starting balance for as long as you are alive. That means you just spend your 4% every year and it just replenishes itself over and over. Sure, the 3% chart looks safer as there is no red “failure” area. But is that chance of failure worth working maybe another 10 years to go from 25x expenses (4%) to 33x expenses (3%)?

If your portfolio value drops early in retirement, flexible withdrawals are one important tool to improve your portfolio survival odds. However, what about flexible income as well?

What if you retired earlier so that if things go well, you get more retirement years, but if things go bad, then you fall back on some part-time back-up work? Your main risk is of poor returns in the first 10 years of retirement or so. You would accept the chance that you might have to do a little work again to prop your portfolio up during that time. A good part-time job would have the following characteristics:

  • Scales up and down easily. Ideally, you could spend 10 hours a week, 20 hours a week, or 40 hours a week on it as necessary. This could mean hourly shift work or flexible self-employment.
  • Higher-paid skilled work that is at least partially satisfying. Unskilled work will be the easiest to obtain, but the pay will be low. Uber/Lyft driver, food delivery, home health aide, retail, warehouse, etc. You want something where your special skills are compensated accordingly.
  • Minimal maintenance. For some jobs, if you aren’t constantly putting in hours, you’ll become obsolete and won’t be able to start back up again. There may be professional licenses to maintain, etc.

Here’s a brief list of ideas:

  • Healthcare. Many positions in the healthcare field can be part-time and hourly, from doctor to nurses to technician positions.
  • Elder care. This may be related to healthcare, but the overall aging population is another trend to consider.
  • Accounting. An accountant or someone with similar skills can usually find work during tax season, assisting other accountants.
  • Tech. There is often consulting or project work available, if you keep your contacts and skills up-to-date.
  • Passion work. Turn your hobbies into work. You could be a travel guide, taking people on hikes, tours, kayaking, etc. Carpentry projects could turn into an Etsy store. If you like to fix things, become the neighborhood handyperson.
  • Real estate. I tend to break up residential real estate investing into two parts – the actual ownership and the property management. Property management is basically a part-time job which you can do yourself, and the effective wage can be quite high if you are skilled at managing tenants. (The catch is that you can also lose money if you are unskilled at it.)
  • Teaching and kid-related. People are having fewer kids, but spending more on each one. Sleep training consultant. Potty training consultant. Academic tutoring at any age. Sports coaching at any age. Chess coaching. Language coaching. Musical coaching. These all command premium hourly rates.

I am a conservative person at heart, and I know that I would worry about my family’s finances if my portfolio dropped significantly from my retirement date. Therefore, I am both using a conservative withdrawal method and maintaining a semi-retired work schedule for the time being. I don’t have the luxury of a full traditional retirement, but I like the balance so far.

Bottom line. Living off of an investment portfolio of stocks and bonds depends a lot on luck. One way to deal with this is to be flexible with your withdrawals. Good luck means spending more, bad luck means spending less. This flexibility may allow you to retire earlier with a smaller portfolio balance. However, you could also plan for a little work income to offset early bad luck with portfolio returns. If you instead have early good luck with market returns, then you’ve just won many more years of free time.

Filed Under: Career, Investing, Retirement //

Portfolio Charts Tool Tests Flexible Withdrawals in Retirement

Posted on August 14, 2019 // 3 Comments

You’ve probably heard of the “4% rule” when withdrawing income from a retirement portfolio. I think using such a rule is fine when you are early in the accumulation phase, although I like the “3% rule” better for early (long) retirements. But heck, reach 25x expenses first and then reassess. However, when it’s actually time to spend down that money, the execution can be tricky. If you start out taking 4% on a $1,000,000 portfolio ($40,000) and then the market drops 50%, will you really take $40,000 (8%) out of your sub-$500,000 portfolio the next year?

Being flexible in your withdrawals works better with both theoretical backtests and natural tendencies. If my portfolio drops 50%, I’m going to tighten the belt and spend less money the next year. Some people may not want to admit this, but I would consider taking on a part-time job again in a severe event. I collect part-time job ideas as part of this Plan B.

On the flip side, if you’ve used a lot of portfolio simulators like FIRECalc and Engaging Data, you’ll notice that your portfolio sometimes gets crazy huge. If your portfolio doubles in size, you might decide to live it up a bit and spend more than 4% of your original amount (inflation-adjusted).

Accordingly, I was impressed to see that Portfolio Charts updated their already-useful Retirement Spending Tool to account for flexible portfolio withdrawals. Everything has been elegantly simplified into four variables:

Withdrawal Rate: the percentage of the portfolio you withdraw every year to fund your retirement expenses

Change Limit: The maximum amount that a withdrawal can increase or decrease from year to year

Account Trigger: A simple rule for when you’re allowed to increase or decrease spending based on how the portfolio is doing relative to its original value

Withdrawal Limit: The minimum or maximum withdrawal you realistically need to pay the bills and live a happy life regardless of what a flexible spending strategy might recommend

Keep in mind that the spending is already inflation-adjusted, i.e. it increases each year with inflation even with no change. Here’s a screenshot:

Take some time to play around with the many combinations. You could see what happens if you let the withdrawals vary wildly. You could see what happens if you only allow the withdrawal amount vary within a tight range. How does your portfolio balance change? For example, I thought about starting with a relatively conservative number like 3% base withdrawal rate, but also be willing to drop it to 2.7% (10% less) if the portfolio drops by 10% in value. Meanwhile, I’d wait until the portfolio increases by 50% before I start paying cash to fly business class everywhere (#goals).

If I were to have a wish list for a new feature, I would like it to show me the minimum balance that the portfolio reached during any of the scenarios. This would let me know the maximum drawdown experienced using my set of variables, as the chart is a little hard to read.

Filed Under: Investing, Retirement, Tools & Calculators //

Vanguard Personal Advisor Services Portfolio Rebalancing Rules

Posted on July 26, 2019 // 2 Comments

vglogoIf you read about investing in stocks and bonds, there is a lot of discussion about rebalancing your portfolio. Should you rebalance? When? How often? How much? Carl Ozeck contributes his thoughts on the Vanguard Blog article Capital gains are a good thing. However, sometimes you just like to see what the professionals actually settle on.

In Vanguard Personal Advisor Services®, we use a “time-and-threshold” blend for our rebalancing strategy. We review the portfolio quarterly and rebalance if its asset allocation has deviated by 5 percentage points or more. Blending these triggers results in a more complex strategy, but it has merit. If we use this strategy on a 60% stock, 40% bond portfolio, the average portfolio turnover would be about 1.95%2 and average Sharpe ratio about 0.51. This shows that rebalancing can help you mitigate your risk while spreading out rebalancing events over time.

Vanguard Personal Advisor Services (my review) is an add-on service where they actually manage your portfolio and perform the trades on your behalf. The cost is 0.30% of assets annually. Their paid service performs a quarterly check-in, and rebalances if a 5% threshold band is exceeded. I think this is a good rule to save as a “default” and then adjust as needed for your own circumstances.

For our portfolio, I also perform quarterly check-ins and then rebalance with the free cash from dividends and interest. If possible, investments from work income are also directed in a manner to help rebalance. I only rebalance further if a 5% threshold has still been exceeded after all that for at least two quarterly check-ins.

Filed Under: Investing, Retirement //

Jack Bogle on Mailbox Money

Posted on June 24, 2019 // 4 Comments

While poking around the Bogleheads investing forum, I came across a thread discussing a 2015 ETF.com interview with the late Jack Bogle that touches on the topic of mailbox money in retirement. First, a nice dose of Bogle common sense:

If anybody were to give you a blueprint, I would say put your hand over your wallet. There are no blueprints. There is common sense, and the obvious principle here is to be more conservative and more protective when you’re older than when you’re younger. When you’re young, you have a small amount of capital, you can take more risk, you’ve got years to recoup, and you don’t care about income. When you’re older you want to protect what you have; if you’re wrong, you don’t have a lot of time to recoup, and on balance you want more income.

Bogle on the idea of Social Security and stock dividends as mailbox money:

But you ought to think about all sources of your retirement income. Having said that, when you own an equity portfolio, don’t get into it for market reasons, get into it for income reasons. Oversimplifying, what you want to do when you retire is walk out to the mailbox on Social Security day and on dividend payment day for the funds—assuming they’re the same day—and make sure you have two envelopes out there. One is your fund dividend and the other is your Social Security check. The Social Security will keep up with inflation year after year, and dividends are likely to increase year after year. They have been going up. Every once in a while there is an interruption, such as the Great Depression of the early 1930s. And many bank stocks eliminated their dividends in 2008, so there was obviously a drop. But it has long since recovered, and then some.

Bet on the dividends, and not on the market price. You’ve got those two envelopes and that’s your retirement. If you have a pension plan (one that is not likely to go bankrupt—and a lot of them are likely to) that is a third envelope. You want to be concerned about whether you have enough income to pay utility bills, pay for your food, pay your rent or your mortgage, whatever it might be, every month. You want income to help you pay those bills. And in the retirement stage, that’s what investing should be about—regular checks from dividends and/or from Social Security and/or from a pension account.

The problem is that the yield on the Vanguard Total US Stock Market (VTSAX) or S&P 500 Index fund is only about 2%. That’s a lot less income than most people would like out of their portfolio. Here’s Bogle on a high-dividend stock strategy:

If you really need the dividend income, I see nothing wrong with overweighting high-dividend stocks, knowing you’re taking a small risk of falling significantly behind the total market. But you can own blue chip stocks, and you’re going to get a higher dividend, a situation I think would be attractive to an awful lot of investors. But once you depart from the market portfolio, you’re taking on extra risk. Any strategy may have done very well in the past, but in this business, the past is not prologue.

The draw here is that the low-cost Vanguard High Dividend Yield Index Fund (VHYAX) sends out bigger income “checks”, currently an SEC yield of 3.37% as of 5/31/19. However, roughly speaking, the dividend payout from high-dividend stocks is going to be more likely to drop with poor market conditions.

Alternative #1: Low-cost Value funds. While not from this interview, Bogle has said elsewhere that he thinks that Large-Cap Growth and Large-Cap Value stocks will have roughly the same average returns over the long run. The difference is that in Value you’ll get a slightly bigger share of returns in the form of dividends and a little less in share price appreciation. Growth is the opposite – less dividends and more price appreciation. Therefore, if you wanted to create a little more “mailbox money” than the S&P 500, you may consider buying the Vanguard Value Index Fund (VVIAX) or Vanguard Value ETF (VTV) with a current SEC yield of about 2.8%.

Alternative #2: Low-cost Dividend Appreciation fund. I can’t find any Bogle commentary on this strategy, but you could also buy into the Vanguard Dividend Appreciation ETF (VIG), which invests in companies with at least ten consecutive years of increasing dividends. This fund also has a ~2% yield similar to the S&P 500, but historically they offer a more stable and steadily growing income stream without sacrificing too much in total return.

In the end, treating your dividend checks as retirement income is not all that different than taking out about conservative 3% a year from your portfolio. If you really wanted to make your income checks equal 3%, you can do some tweaks like going with the Vanguard Value Index fund and the Vanguard Total Bond fund and get very close without “reaching for yield” with junk bonds or niche investments. My portfolio is different and yet the income still gets close to 3% when I track the dividends and interest every 3 months.

Bogle would also remind you to make sure you are investing in low-cost, passive funds so you aren’t giving away 1% off the top to a fund manager. If you have a DIY mindset, you also avoid paying a financial advisor taking out another 1%. Paying both of those and you’ll be missing 2/3rds of your potential mailbox money.

Filed Under: Investing, Retirement //

Even A Little Paid Work Makes You Happy

Posted on June 24, 2019 // 3 Comments

Over the weekend, I saw a local news piece on how the “average person needs only eight hours of work per week to be happy”. The source was a paper in the Social Science and Medicine journal titled A shorter working week for everyone: How much paid work is needed for mental health and well-being? The study used data from the UK Household Longitudinal Study, which tracked over 70,000 people living in the UK aged between 16 and 64 across the last decade (2009–2018). Per the abstract, here are the two major questions posed.

Q: What is the minimum amount of paid employment needed to deliver some or all of the well-being and mental health benefits that employment has been shown to bring?

A: 8 hours is sufficient. When going from unemployed/stay-at-home-parent/injured/disabled to working up to 8 hours a week, there was a significant increase in mental wellbeing. ScienceDaily stated that self-reported life satisfaction in men increased by around 30% with up to eight hours of paid work, although women didn’t see a similar jump until working 20 hours.

Q: What is the optimum number of working hours at which the mental health of workers is at its highest?

A: There was no single optimum number. There was basically no improvement (or deterioration) in mental wellbeing for working additional hours, up to 48 hours per week.

The authors claim that these findings support shorter work-week policies, while the local newspeople didn’t really think of much of that – “Yeah, well, I’d like to only work 8 hours a week too, but that’s not going to happen…”

My main takeaway is that having some form of paid work, however small, improves mental wellbeing. This can be an important lesson for retirees, those seeking financial independence, and even those who are stay-at-home parents. If you know that you actually want to work a certain amount, that can change your early retirement numbers. You might plan to work fewer hours per week for more years.

It’s true that not all jobs are good fits with part-time work, but I think finding something that does fit that could (should?) be part of the retirement planning process. A medical professional like a nurse has a lot of part-time options, an experienced accountant can line up a job helping out during the busy tax season, an engineer can grow a network of contacts that can supply limited-time consulting gigs, and so on.

This also aligns with my personal experience. After my wife and I found out we were able to have kids, we had to figure out how to balance childcare duties. Long story short, it turns out that neither of us wanted to be full-time stay-at-home parents. (We also didn’t want to go with full-time daycare and were fortunate to be able to make that happen financially.) Now, instead of one person being full-time employed and one person being stay-at-home, we both work part-time and that makes us both happier!

If you look closely at a lot of “retired” people, a lot of them still take on paid work. I think this is one of those things that I would put on a list of “Top 10 Secrets of Early Retirees.” Even if you no longer have to work to make your mortgage payment, it still feels good to add some purpose to your day and to be perfectly honest, get paid money!

Filed Under: Retirement //

My Money Blog Portfolio Income and Withdrawal Rate – June 2019 (Q2)

Posted on June 13, 2019 // 3 Comments

dividendmono225One of the biggest problems in retirement planning is making sure a pile of money lasts through your retirement. I have read hundreds of articles about this topic, and still haven’t a perfect solution to this problem. Most recently, I looked into the idea of buying a ETF that tracks stocks with 10+ year histories of growing dividends.

The imperfect (!) solution I chose is to first build a portfolio designed for total return and enough downside protection such that I can hold through an extended downturn. As you will see below, the total income is a little under 3% of the portfolio annually. I could easily crank out a portfolio with a 4% income rate, or even 5% income. But you have to take some additional risks to get there.

Starting with a more traditional portfolio, only then do I try to only spend the dividends and interest. The analogy I fall back on is owning a rental property. If you are reliably getting rent checks that increase with inflation, you can sit back calmly and ignore what the house might sell for on the open market. With this method, I am more confident that the income cover our expenses for the rest of our lives.

I track the “TTM Yield” or “12 Mo. Yield” from Morningstar, which the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. (Index funds have low turnover and thus little in capital gains.) I like this measure because it is based on historical distributions and not a forecast. Below is a very close approximation of my investment portfolio (2/3rd stocks and 1/3rd bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 6/13/19) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)		 25% 1.99% 0.50%
US Small Value
Vanguard Small-Cap Value ETF (VBR) 		5% 2.20% 0.11%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		25% 3.00% 0.75%
Emerging Markets
Vanguard Emerging Markets ETF (VWO) 		5% 2.69% 0.13%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 3.96% 0.24%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX) 		17% 2.79% 0.47%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX) 		17% 2.66% 0.45%
Totals 100% 2.65%

 

Over the last 12 months, my portfolio has distributed 2.65% of its current value as income. One of the things I like about using this number is that when stock prices drop, this percentage metric usually goes up – which makes me feel better in a gloomy market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too happy. This also applies to the relative performance of US and International stocks. In this way, this serves as a rough form of a valuation-based dynamic withdrawal rate.

In practical terms, I let all of my dividends and interest accumulate without automatic reinvestment. I like to look at this money as my “paycheck” arriving on a regular basis. Then, as with my real paycheck, I can choose to either spend it or reinvest in more stocks and bonds. This gets me used the feeling of living off my portfolio and learning to ignore the price swings.

We are a real 40-year-old couple with three young kids, and this money has to last us a lifetime (without stomach ulcers). This number does not dictate how much we actually spend every year, but it gives me an idea of how comfortable I am with our withdrawal rate. We spend less than this amount now, but I like to plan for the worst while hoping for the best. For now, we are quite fortunate to be able to do work that is meaningful to us, in an amount where we still enjoy it and don’t feel burned out.

Life is not a Monte Carlo simulation, and you need a plan to ride out the rough times. Even if you run a bunch of numbers looking back to 1920 and it tells you some number is “safe”, that’s still trying to use 100 years of history to forecast 50 years into the future. Michael Pollan says that you can sum up his eating advice as “Eat food, not too much, mostly plants.” You can sum up my thoughts on portfolio income as “Spend mostly dividends and interest. Don’t eat too much principal.” At the same time, live your life. Enjoy your time with family and friends. You may be more likely to run out of time than run out of money.

In the end, I do think using a 3% withdrawal rate is a reasonable target for something retiring young (before age 50) and a 4% withdrawal rate is a reasonable target for one retiring at a more traditional age (closer to 65). If you’re still in the accumulation phase, you don’t really need a more accurate number than that. Focus on your earning potential via better career moves, investing in your skillset, and/or look for entrepreneurial opportunities where you own equity in a business.

Filed Under: Goals, Investing, Retirement //

My Money Blog Portfolio Asset Allocation Update, June 2019 (Q2)

Posted on June 10, 2019 // 6 Comments

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Here’s my portfolio update for the second quarter of 2019. Most of my dividends arrive on a quarterly basis, and this helps me determine where to reinvest them. These are my real-world holdings, including 401k/403b/IRAs, taxable brokerage accounts, and savings bonds but excluding our house, cash reserves, and a few side investments. The goal of this portfolio is to create sustainable income that keeps up with inflation to cover our household expenses for the next (hopefully) 40+ years.

Actual Asset Allocation and Holdings

I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings. The Personal Capital financial tracking app (free, my review) automatically logs into my accounts, adds up my balances, tracks my performance, and calculates my asset allocation. I still use my manual Google Spreadsheet (free, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation.

Here are my YTD performance and current asset allocation visually, per the “Holdings” and “Allocation” tabs of my Personal Capital account, respectively:

Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
Vanguard Small Value ETF (VBR)
Vanguard Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VNQ, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard Intermediate-Term Treasury Fund (VFITX, VFIUX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
Fidelity Inflation-Protected Bond Index Fund (FIPDX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Target Asset Allocation. Our overall goal is to include asset classes 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 make a small bet that US Small Value and Emerging Markets will have higher future long-term returns (along with some higher volatility) than the more large and broad indexes, although I could be wrong. I don’t hold commodities, gold, or bitcoin as they don’t provide any income and I don’t believe they’ll outpace inflation significantly.

I believe that it is important to imagine an asset class doing poorly for a long time, with bad news constantly surrounding it, and only hold the ones where you still think you can maintain faith based on a solid foundation of knowledge and experience.

Stocks Breakdown

  • 38% US Total Market
  • 7% US Small-Cap Value
  • 38% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 50% High-quality, Intermediate-Term Bonds
  • 50% US Treasury Inflation-Protected Bonds

I have settled into a long-term target ratio of 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. I will use the dividends and interest to rebalance whenever possible in order to avoid taxable gains. (I’m fine with it drifting a bit either way.) With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and taxes.

Holdings commentary. On the stocks side, everything has had a nice bounce back up since the drop in late 2018. I know that US stocks have beaten international stocks for a while, but I remain satisfied with my mix, knowing that I will own whatever successful businesses come out of the US, China, or wherever in the future.

On the bond side, my primary objective is to hold high-quality bonds with a short-to-intermediate duration of under 5 years or so. This means US Treasuries, TIPS, or investment-grade municipal bonds. I don’t want to worry about my bonds “blowing up”. I then tweak the specific breakdown based on my tax-deferred space available, the tax-effective rates of muni bonds, and the real interest rates of TIPS. Right now, it is roughly 1/3rd Treasuries, 1/3 Muni bonds, and 1/3rd TIPS.

Performance commentary and benchmarks. According to Personal Capital, my portfolio went up 9.9% so far in 2019. I see that during the same period the S&P 500 has gone up over 15%, Foreign Developed stocks up nearly 11%, and the US Aggregate bond index was up nearly 5%.

An alternative benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund and 50% Vanguard LifeStrategy Moderate Growth Fund – one is 60/40 and the other is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of +10.97% for 2019 YTD.

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

Filed Under: Goals, Insurance, Retirement //

Vanguard Target Date Retirement Funds Nudge Younger Investors To Own More Stocks

Posted on June 4, 2019 // 12 Comments

Vanguard has a blog post about their Target Retirement 20XX funds (TDFs) with a few interesting stats (via Abnormal Returns):

  • 97% of all Vanguard retirement plan participants had a target-date fund as an available investment option.
  • 77% of all Vanguard retirement plan participants owned a target-date fund.
  • 52% of all Vanguard retirement plan participants owned a target-date fund as their sole investment.

These all-in-one funds are getting more and more popular. So what is the effect of owning these TDFs as compared to the old method where you had to do your own mixing and matching of various funds? In general, the effect was to nudge younger investors to own more stocks. Here’s their chart comparing asset allocation holdings by age in 2004 and 2018. (The earliest TDFs were born in 2003 and still had a small percentage of assets in 2004.)

I find the 2004 “hump” curve to be interesting. The average young investor in 2014 was risk-averse and increased their stock holding up until the peak at about age 40, gradually going back to owning more bonds after that. The youngest investors (under 25) used to only hold 55% stocks on average, as opposed to 88% stocks today (90% stocks is the what the current Vanguard target-date funds own at that age). On an individual level, did most of them hold a 50/50 split or were half of them 100% stocks and the other half 100% cash?

I have recommended the Vanguard Target Retirement Funds to my own family members for its low costs and broad diversification. Vanguard obviously thinks this modern glide path is an improvement, but I hope that young people will keep holding onto the fund during the next bear market. That’s the true test of whether this new system is better.

Filed Under: Investing, Retirement //

Nomadland Book: What Really Happens When You Don’t Save Enough For Retirement?

Posted on May 22, 2019 // 5 Comments

I’m reading Nomadland: Surviving America in the Twenty-First Century by Jessica Bruder. Essentially, it’s the story what happens to a group of people when their plans for retirement fall apart. Here’s the book blurb:

From the beet fields of North Dakota to the campgrounds of California to Amazon’s CamperForce program in Texas, employers have discovered a new, low-cost labor pool, made up largely of transient older adults. These invisible casualties of the Great Recession have taken to the road by the tens of thousands in RVs and modified vans, forming a growing community of nomads.

You’ll probably retire earlier than you expect. Consider this EBRI chart showing the big difference between when workers expect they will retire (dark blue) and when people actually retired (light blue). One-third (34%) of all workers ended up “retired” by the time they reached 60, but the majority didn’t see it coming (which I assume means it was mostly involuntary).

Going through the book, here is a rough breakdown of the stages that the people went through:

Plan A: Ideal retirement. You have plenty of savings and income in retirement. I’m all set with a rock-solid pension, Social Security, and a big pile of investments.

Plan B: Make everything more modest. I don’t have as much as I’d hoped. Maybe I don’t need that beach condo? Maybe I’ll move into a smaller primary house. It’ll be easier to clean. I’ll just have to take less vacations. No problem.

Plan C: Work longer. Hmm, not still enough. That’s okay, I’ll just keep my job a little longer. I have lots of valuable work experience. I’m still healthy.

Plan D: Find any job. I’ve been laid off, and now I’ll have to find something that is full-time and offers benefits. The easiest targets are retail: Walmart, Home Depot, McDonald’s.

Plan E: REALLY cut expenses. My house is going into foreclosure. I have to sell all my other assets, including whatever life insurance policies, 401k plans, jewelry, and anything else of value that I have accumulated.

Plan F: Ask for assistance from extended family or friends. I can’t find any steady work that pays the bills (or may no longer be healthy enough to do so). I need to find cheaper living arrangements, immediately. I might crash with my children or other family/friend.

This corresponds well with this EBRI survey that I found afterward:

What happens if none of this works? That’s the common thread through many of the people profiled in this book. Not only did Plan A fail, but their backup plans also failed. Many had a late divorce. Many lost their high-paying jobs in their 50s, when they were planning to work until 70. Others had medical issues that racked up huge bills. They worked retail for a while, but it never added up to a decent full-time income. There just aren’t as many jobs for someone in their 60s and 70s. They lived with their children for while, but their kids are struggling as well.

One solution that some came up with in this book with is to change “homeless” to simply “houseless”. You buy a big van or small RV for well under $10,000 and you live in it. As long as you can find a place to park it, you’ve just cut your housing cost down drastically. People figure out to live on $500 a month. You can also now travel for temporary work – Amazon warehouse picker, campground manager, agricultural farm worker. As more and more people do this, they have formed communities and annual gatherings to support each other.

The book has me switching between two feelings: empathy for what brought them to this place, and curiosity about the mechanics of their day-to-day life as modern-day nomads. For now, one big takeaway is that people can and do fall through the cracks. The folks in this book are still taking action and working to survive and hopefully once again thrive.

Filed Under: Book Reviews, Frugal Living, Retirement //
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