Dividend ETF Comparison: Total Market vs. High Dividend vs. Steady Dividend Growth

Posted on May 19, 2019 // 4 Comments

After my post on mailbox money last week, I did some poking around comparing different dividend-focused ETFs. Specifically, the idea of focusing on companies with a steadily growing dividend, not a high dividend yield. Here are three different ways that you could buy an ETF and live off the dividends:

  • Vanguard Total Market ETF (VTI). The CRSP US Total Market Index includes ALL of the US companies in proportion to their size (market cap). SEC yield was 1.83% as of 4/30/19.
  • Vanguard High Dividend Yield ETF (VYM). The FTSE High Dividend Yield Index screens for companies with high dividend yields. SEC yield was 3.25% as of 4/30/19.
  • Vanguard Dividend Appreciation ETF (VIG). The NASDAQ US Dividend Achievers Select Index screens for companies with at least ten consecutive years of increasing annual regular dividend payments. SEC yield was 1.86% as of 4/30/19.

We see that buying the high-dividend ETF would definitely get you bigger quarterly dividends upfront. But what about total return (share price appreciation + reinvested dividends)? We don’t know the future, but let’s see how things worked out through the Great Recession. Both of the dividend ETFs started in 2006, so here is what would have happened to $10,000 invested in each of the ETFs as of January 1st, 2007. I used Morningstar charts for this.

Here are two main takeaways:

  • At the depths of the crash in early 2008, the high-dividend ETF (VYM) suffered the worst drawdown, while the steady dividend ETF (VIG) had the mildest drawdown. Your $10,000 would have gone down to $5,175 with VYM, $5,564 with VTI/VTSAX, and $6,400 with VIG.
  • The total return numbers are relatively similar over the long run. Right now, the steady dividend ETF (VIG) is even leading slightly. As of 5/18/2019, your final values for the $10,000 invested in 1/1/2007 are $24,267 with VYM, $26,610 with VTI/VTSAX, and $26,831 with VIG.

What about consistency of dividends? One of the difficult things about retirement investing is that while the price of things can vary, most people like the idea of a steady income. We can look back and see if the steady dividend ETF really delivered even through the 2008 Great Recession. Here’s are the quarterly dividends from 2007 to 2018 for both the Vanguard High Dividend Yield ETF (VYM) and Vanguard Dividend Appreciation ETF (VIG):

The Vanguard Dividend Appreciation ETF (VIG) did provide a much more steady “paycheck” through 2008 and 2009 than the Vanguard High Dividend Yield ETF (VYM). If you relied on this money to pay your monthly bills, a steady dividend that didn’t drop with the overall stock market would be greatly appreciated.

Bottom line. Simply buying stocks with high dividends is not the solution to all your problems, as that high dividend may drop significantly during a bear market. In this historical comparison, the steady dividend method worked out pretty well. Since 2007, you got a lower drawdown during the bear market, solid long-term returns, AND a steady dividend check throughout. The future may not turn out the same way, but it’s definitely something to research further. One might even accept a little bit less total return for a more reliable stream of income.

Disclosures: I own VTI, aka the entire haystack. I don’t own VIG or VYM.

Filed Under: Investing, Retirement //

Charlie Munger: Financially Independent at Age 38 in 1962

Posted on May 12, 2019 // 4 Comments

Despite the fresh packaging, we should remember that the “FIRE” concept (Financially Independent, Retire Early) is anything but a new concept. Even I can’t help being a little intrigued by the clickbait title “This Secret Trick Let This Couple Retire at 38”. Such an article could have been written about the 95-year-old Charlie Munger before he started investing alongside Warren Buffett:

The first 13 years I practiced law, my income [from practicing law] was $300,000 total. At the end of that 13 years, what did I have? A house. Two cars. And $300,000 of liquid assets. Everyone else’d have spent that slender income, not invested it shrewdly, and so forth.

I just think it was, to me, it was as natural as breathing, and of course I knew how compound interest worked! I knew when I saved $10 I was really saving $100 or $1,000 [because of the future growth of the $10], and it just took a little wait. And when I quit law practice it was because I wanted to work for myself instead of my clients, because I knew I could do better than they did.

Net worth analysis. According to his Wikipedia bio, the 95-year-old Munger graduated from law school in 1948. Let’s say he practiced law from 1949 to 1962. At the end of those 13 years, he states that he had $300,000 in liquid assets, a house, and two cars. The median value for a Los Angeles area house in 1962 was about $15,000. The median cost of a new car in 1962 was about $3,000. Adding this all up means his net worth in 1962 was about $321,000.

That was a significant amount of money in 1962. According this CPI inflation calculator, that is the equivalent of $2.7 million in 2019 dollars. In other words, the Munger household was financially independent when he was 38 years old.

Income analysis. He also states that in those 13 years as a lawyer, he made $300,000 total. For the sake of simplicity, let’s just say he earned the same income every year. That works out to $23,000 per year. This was a relatively high income – $193,000 per year in 2019 dollars. According to this source, the median family income in 1962 was $6,000 per year. That means he was earning about four times the median average household income.

Super-saver, super-investor, or a little of both? Maybe he shared this somewhere else, but I don’t know his saving rate or his investment return. He does boast of both not spending all that “slender” income and also about investing it “shrewdly”. We have his annual income and his final ending net worth, so you can set one and figure out the other using a compound return formula. I’m assuming everything is after-tax for simplicity again.

  • Let’s say he was a super-saver with a 50% saving rate. That means he saved $11,500 every year and invested it for 13 years. That would work out to an 10.5% annual compounded rate of return.
  • Let’s say he was a super-investor with a 20% annual compounded rate of return. That would work out to an annual savings of $5,500 per year, or a 24% savings rate.

I found that the annualized return of the S&P 500 index from January 1949 to January 1962 was about 18% when you include dividends (source). Thus, my guess is that he was somewhere between these two markers: 50% savings rate/10.5% annual investment return and 24% savings rate/20% annual investment return. These stats are definitely admirable and impressive, but also show that he didn’t hit the lottery or anything crazy.

Munger’s example reaffirms that if you have a relatively high income, save a high percentage of that income, AND invest that money into productive assets, your net worth will grow quite quickly.

A criticism of financial independence seekers is that it is pitched to “everyone” but only works for the rich. It is absolutely true that it is the easiest for high-income earners. How could it be any other way? At the same time, there are many households that earn high incomes that spend 95%+ of it every year. If these folks realize they have financial independence within their grasp, and then change their behavior to achieve it, I still view that as a positive thing. It’s always hard to spend less than the people you hang around with.

In our case, we both eventually earned six-figures, but not the entire time. When we earned a combined $60,000 a year, we lived on $30,000. When we earned a combined $100,000, we lived on $50,000 per year. When we earned $200,000, we lived on under $100,000. Would we have been able to maintain the 50% savings rate on a $60,000 income for 15 years? I’ll never know. I know it would have been much more difficult, and I’m glad we didn’t have to try. I’m also glad we started when we were young and without kids.

Managing expenses (frugality) alone will not get you there, but I still believe it is an important factor once you get your income to a certain level. I would argue that a household earning $100,000 and spending $50,000 per year is much better off in the long run than a household earning $150,000 and spending $125,000 or even $100,000 per year. Now, if someone is making minimum wage, it will be hard to have a lot left over to invest. Your efforts would be best focused on the income side of the equation.

Bottom line. Charlie Munger was born in 1924 and reached financial independence at age 38 from his earnings as a lawyer (before he became partners with Warren Buffet). While he is now best known as a billionaire investor, he took a familiar path to financial independence: solid 9-5 income, consistently high saving rate, and prudent investment of the difference. The same formula he started using in 1949 remains available 70 years later to someone starting in 2019.

Filed Under: Frugal Living, Inspirational, Investing, Retirement //

Immediate Annuities vs. Safe Withdrawal Rates

Posted on May 7, 2019 // 20 Comments

Annuities have a rather mixed reputation, which I think is mostly deserved. Some are amazingly complex and expensive (the word “Indexed” can be bad in this world). Then there are simple, straightforward ones that are worth consideration, including single premium immediate annuities (SPIA). The most basic version lets you convert a lump-sum payment into a regular stream of income payments that is guaranteed and doesn’t ever vary, period.

Michael Edesess has an article Are Annuities the Best Strategy to Fund One’s Retirement?. The article is on a site meant for financial advisors, so it’s got a lot of jargon inside. However, I do like that it provided some hard numbers to consider.

Here are current market rates:

In other words, a 65-year-old male hands over $100,000 and will get $6,720 per year ($560 per month), every year, for the rest of his life. Putting up $1,000,000 will get you $67,200 per year ($5,600 per month). Whether he lives to 68 or 108, he will end up with zero dollars. A female would get a bit less due to a longer average lifespan, and a joint annuity even less than that as the likelihood of at least one person living a long time is higher.

The article then compared the annuity payout against the “safe withdrawal rate” as calculated by popular industry methods. The Bengen method has a fixed payout percentage every month, adjusted annually for inflation. The HWS strategy uses a variable payout with a floor rate and allows a higher payout if the portfolio has high returns. I’ll just share one of them.

As you can see, the immediate annuity offers a higher annual payout in almost all cases. This is good.

However, you are giving up certain things in exchange for this higher income. Once you die, there is nothing left for heirs or charity. Thus, part of your return is simply them giving your own money back to you (return of principal). You have lost permanent control of that money, with no liquidity if for any reason you had a big expense. Finally, unless you buy a special inflation-adjusted annuity with a much lower initial payout, your monthly payment will buy less and less as inflation eats away at it over time.

I would also read about your applicable state guaranty limits and always stay under them. It is rare for an insurance company to fail, but it has happened. Read about the Executive Life Insurance Company. The state guaranty association system is not as good as FDIC insurance, but being within the limits is much better than being above the limits!

Bottom line. I would research single-premium immediate annuities as a source of retirement income once your reach age 59.5. I would avoid any annuity that is linked or “indexed” to the stock market. Personally, I am thinking of annuitizing a fraction of my portfolio (less than 10%) once I reach a certain age, but only if it remains under state guaranty limits.

Filed Under: Investing, Retirement //

The Personal Finance Index Card: Book Version Differences

Posted on April 22, 2019 // 7 Comments

After rediscovering the young adult versions of fitting personal finance advice on an index card, I decided to go back and read the book The Index Card: Why Personal Finance Doesn’t Have to Be Complicated by Helaine Olen and Harold Pollack. (I was able to find it via library eBook.)

I noticed that the book version of the “index card” was slightly different. The original card had 9 items, but two of them were merged away into each other (401k/IRAs) and (Pay Attention to Fees/Buy Index Funds). I bolded the new additions below. (You can see all chapters on the Amazon page.)

  1. Strive to Save 10 to 20 Percent of Your Income
  2. Pay Your Credit Card Balance in Full Every Month
  3. Max Out Your 401(k) and Other Tax-Advantaged Savings Accounts
  4. Never Buy or Sell Individual Stocks
  5. Buy Inexpensive, Well-Diversified Indexed Mutual Funds and ETFs
  6. Make Your Financial Advisor Commit To a Fiduciary Standard
  7. Buy a Home When You Are Financially Ready
  8. Insurance – Make Sure You’re Protected
  9. Do What You Can To Support the Social Safety Net
  10. Remember The Index Card

Here again is the original:

Here are my notes on the newly-addressed topics of home-buying and insurance.

Home-buying. This will always be a hard topic because it mixes in emotion, personal history, peer pressure, and all that fuzzy stuff. If you want to own a home, you need to make sure the purchase won’t blow up your overall financial picture. Nothing really surprising, but still good advice.

  • Get your debt under control first.
  • Save up as close to a 20% down payment as you can.
  • Stick with a 15 or 30 year fixed-rate mortgage.
  • Prioritize what you really want and need in a home. Stay within your budget.
  • Location, location, location.

Insurance. There are low-probability events that can destroy decades of hard work, and that’s why humans invented insurance to spread the risk. Here are their cut-to-the-chase bullet points:

  • Emergency fund – Maintain one!
  • Life insurance – If you’re young(ish), just buy 30-year level term insurance.
  • Property insurance – Raise your deductible as high as you can handle.
  • Health insurance – Always sure you stay in-network.
  • Liability insurance – Coverage for at least twice your net worth.

I’m glad that this book still retained its “quick-and-dirty” nature. No single rule will cover every scenario, but it’s good to have a clear and concise collection of the big points along with just enough explanation that you understand the basic reasoning behind it.

Filed Under: Book Reviews, Budgeting, Credit Cards, Insurance, Investing, Real Estate, Retirement //

Blue Zones: Financial Lessons From the World’s Oldest People

Posted on April 18, 2019 // 4 Comments

While learning about Okinawan centenarians, I also came across the idea of Blue Zones – places where a high concentration of people live past 90 without chronic illnesses. While the eating habits of Blue Zone residents have been mentioned a lot, Richard Eisenberg of NextAvenue wrote a three-part series focusing on the financial aspects of their longevity. Here is Part 1, Part 2, and Part 3.

Rather than focusing on the residents’ diets, he reports on how the oldest people in the Blue Zones make their money last and what Americans and America can learn from this.

Here are my notes:

The Nicoya Peninsula of Costa Rica

  • Close-knit family structure. Rely on immediate and extended family members. Nursing homes and assisted living facilities are rare.
  • Government-run public health care system with minimal out-of-pocket expenses.
  • Small government-run pension systems.
  • Low cost-of-living. Lower spending due to low consumerism. Rarely travel.
  • Rare to find elderly that own stocks or mutual funds.

Okinawa, Japan

  • They form a “moai”, which is a group of about 20 close-knit older friends who look out for each other both financially and emotionally. This acts as a replacement for assistance from blood relatives.
  • Government-run public health care system with minimal out-of-pocket expenses.
  • Low cost-of-living. Low consumerism. Low debt.

Sardinia, Italy

  • Close-knit family structure. Rely on immediate and extended family members. There are no long-term care facilities in Sardinia.
  • Government-run public health care system with minimal out-of-pocket expenses.
  • Low cost-of-living. Low spending due to self-reliant farming culture.

Ikaria, Greece

  • Close-knit family structure. Rely on immediate and extended family members. Nursing homes and assisted living facilities are rare.
  • Government-run public health care system, but no long-term care program.
  • Low cost-of-living. Low consumerism. Low spending due to self-reliant farming culture.

Loma Linda, California, USA

  • Technically, the Blue Zone consists of the members of the Seventh Day Adventist religious community.
  • Close-knit religious group that helps each other out.
  • Has a culture of self-discipline, planning, and preparation.
  • Tend to be wealthier with significant investments.
  • Tend to have frugal spending habits.

Commentary. One common thing that I notice about this list is that many are small, isolated communities, either by geography (islands), ethnicity, or religion. I feel that smaller groups more acutely appreciate the advantages of helping each other out. You can have long-term trust that you will raise your kids when they are young, and they will in turn watch over you when they are adults. When you get into larger cities, people seem to separate and start worrying mostly about themselves.

Of course, a bigger version of this is government-run health care, where everyone pitches in and agrees that nobody will become destitute due to a hospital bill. The American healthcare system is so complex and ingrained with powerful inertia that the idea of efficient, transparent, high-quality healthcare remains a huge puzzle waiting be (even partially) solved.

(I’m not saying we need the same system as Japan or Greece. But even billionaire capitalists Jeff Bezos, Warren Buffett, and Jamie Dimon realize that our bloated healthcare system is hurting our economy. Their new combined venture Haven has a goal of “simplified, high-quality and transparent health care at a reasonable cost.”)

On the smaller front, many familiar concepts still apply. Start saving early and plan ahead. Practice self-discipline in spending and lower your consumeristic appetites. If possible, move to a place where there is a lower cost-of-living. It’s so much easier to spend less when everyone around you spends a lot less! Get yourself involved in a close-knit community, whether based on blood, ethnicity, neighborhood, or religion.

Filed Under: Family, Frugal Living, Retirement //

The Lifestyle Secrets of Okinawan Centenarians

Posted on April 9, 2019 // 3 Comments

CNN has a new series called “Chasing Life with Dr. Sanjay Gupta”, and its first episode examines the lifestyles of the impressive centenarians of Okinawa, Japan.

Nearly two-thirds of the residents of Okinawa are still functioning independently at age 97. That meant they were in their own homes, cooking their own meals and living their lives fully — at nearly 100 years old!

Here are three factors noted in the show:

Ikigai. This means having a sense of purpose in life. Gupta says that one way to figure this out is to first imagine that you no longer needed to do anything for money. In that case, what would you regret not doing with your life? What do you love, and what does the world need?

ikigai

Here is a previous post on Ikigai – Finding Your “Reason For Being”. I have noticed that many people who seek out financial independence feel something “wrong” about their current trade-your-life-for-money environment. They are not living a life aligned with their “ikigai”.

Moai. This means having a social group within the community that has common interests and can provide both financial and emotional support. Family is important, but this appears to be an additional support system. This social component of longevity is critical and should not be overlooked.

Hara hachi bu. This means that you should stop eating when you are 80% full (and thus still a little bit hungry). People in Okinawa eat fewer calories in general, and the calories that they do eat tend to come from sweet potatoes, soybeans (legumes), a variety of vegetables, and only a little meat.

Okinawans centarians have also been examined in the book Blue Zones: 9 Lessons for Living Longer From the People Who’ve Lived the Longest (which I have not yet read). Here is another Venn diagram from the Wikipedia entry that shows the common characteristics between Okinawa and two other Blue Zones (Loma Linda, USA and Sardinia, Italy).

Bottom line. It’s not just living for a long time, but it’s living an active, engaged, happy life for a long time. You won’t get this by taking the right pills from orange bottles. You need to spend your time doing something that you feel matters to the world. You need love and support from other humans. You need to eat natural foods, but not too much.

Filed Under: Family, Inspirational, Retirement //

The Most Common Sacrifices Investors Make to Reach Their Financial Goals

Posted on March 26, 2019 // 3 Comments

According to a Wells Fargo/Gallup survey of U.S. investors, 78% say they are at least fairly disciplined in reaching their financial goals. About 50% of investors say they will have to sacrifice a “fair amount” or “a lot” to reach their financial goals, while the other half only expects to sacrifice “only a little” or “nothing”. Investors are defined as adults with $10,000 or more invested in stocks, bonds or mutual funds, either within or outside of a retirement savings account.

In what areas do they expect to sacrifice? Here is a chart showing the most popular ways in which the polled investors say they have and/or expect to sacrifice to reach their personal financial goals:

Filed Under: Budgeting, Career, Family, Retirement //

My Money Blog Portfolio Income and Withdrawal Rate – March 2019 (Q1)

Posted on March 20, 2019 // 13 Comments

dividendmono225One of the biggest problems in retirement planning is turning a pile of money into a reliable stream of income. I have read hundreds of articles about this topic, and I have not yet found a perfect solution to this problem. Everything has pros and cons: stocks, high-dividend stocks, bonds, annuities, real estate, and so on.

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. With a total return-oriented portfolio, I am more confident that the (lower initial) income will grow at least as fast (and hopefully faster) than inflation.

Starting with a more traditional portfolio, I then 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.

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 3/15/19) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)		 25% 1.81% 0.45%
US Small Value
Vanguard Small-Cap Value ETF (VBR) 		5% 2.03% 0.10%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		25% 2.89% 0.72%
Emerging Markets
Vanguard Emerging Markets ETF (VWO) 		5% 2.63% 0.13%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 4.21% 0.25%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX) 		17% 2.86% 0.49%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX) 		17% 3.09% 0.53%
Totals 100% 2.67%

 

Using this metric, my maximum spending target is a 2.67% withdrawal rate. One of the things I like about using this number is that when stock prices drop, this percentage metric usually goes up… and that 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, tracking yield adjusts in a very rough manner for valuation.

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 get equity in a business.

Filed Under: Goals, Investing, Retirement //

My Money Blog Portfolio Asset Allocation and Performance, March 2019 (Q1)

Posted on March 17, 2019 // 9 Comments

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Here’s my quarterly portfolio update for Q1 2019. Most of my dividends arrive on a quarterly basis, and this helps me decided where to reinvest them. These are my real-world holdings, including 401k/403b/IRAs and taxable brokerage accounts but excluding our house, cash reserves, and a few side investments. The goal of this portfolio is to create sustainable income to cover our household expenses for the next (hopefully) 40+ years. We are currently “semi-retired”, meaning we both work part-time while also spending a portion of our dividends and interest from this portfolio.

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, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
Vanguard Small Value ETF (VBR)
Vanguard Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VNQ, VGSIX, 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 to 65/35 or 70/30.) With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and taxes.

Holdings commentary. On the bond side, I still like 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”. Right now, my bond portfolio is about 1/3rd muni bonds, 1/3rd treasury bonds, and 1/3rd inflation-linked treasury bonds (and savings bonds).

On the stocks side, everything has had a nice bounce back up since the drop in late 2018. I didn’t really sweat the ride down, so I’m not celebrating the ride up. 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.

Performance commentary and benchmarks. According to Personal Capital, my portfolio went up 8.6% already so far in 2019. I see that during the same period the S&P 500 has gone up over 12%, Foreign Developed stocks up nearly 11%, and the US Aggregate bond index was up nearly 2%.

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 +8.6% for 2019 YTD. This quarter, I’m right at this benchmark with my customized portfolio.

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

Filed Under: Goals, Investing, Retirement //

Roth vs Traditional Pretax 401k? Compare With These Example Worker Profiles

Posted on February 26, 2019 // 13 Comments

T. Rowe Price has an article Evaluating Roth and Pretax Retirement Savings Options by Roger Young that covers the basics on the choice between a “Traditional” pretax or Roth IRA or 401k account:

The primary factor to consider is whether your marginal tax rate will be higher or lower during retirement. If your tax rate will be higher later, paying taxes now with the Roth makes sense. If your tax rate will be lower, you want to defer taxes until then by using the pretax approach.

With the Traditional pretax, you get to avoid paying income taxes on the contribution now, but you must pay taxes up on withdrawal. With the Roth, you pay income taxes now, but you don’t own any taxes upon withdrawal. However, I am linking to it because it also includes a table with some sample worker profiles. This may help clarify things for people who are still confused about which to pick.

There are other considerations due to our overly-complex tax code, but I think this is still a helpful tool.

Filed Under: Investing, Retirement, Taxes //

A Sense of Urgency: Money Can’t Buy You More Time

Posted on February 24, 2019 // 14 Comments

Over the weekend, I read the NYT Magazine article America’s Professional Elite: Wealthy, Successful and Miserable about the rich and unhappy, which included a man who earned $1.2 million a year in Manhattan and hated his job:

“I feel like I’m wasting my life,” he told me. “When I die, is anyone going to care that I earned an extra percentage point of return? My work feels totally meaningless.” He recognized the incredible privilege of his pay and status, but his anguish seemed genuine. “If you spend 12 hours a day doing work you hate, at some point it doesn’t matter what your paycheck says,” he told me. There’s no magic salary at which a bad job becomes good. He had received an offer at a start-up, and he would have loved to take it, but it paid half as much, and he felt locked into a lifestyle that made this pay cut impossible. “My wife laughed when I told her about it,” he said.

Based on a short conversation in a class reunion, it’s easy to extrapolate endless stressful hours at work, a huge mortgage, fancy private school tuition, expensive vacations, and a high-maintenance spouse. Such a picture makes all of us not earning $1.2 million a year feel better about ourselves. But is he really that miserable?

I suspect it is more like the same situation a lot of people are in. They aren’t happy, but things aren’t bad enough to keep them from still doing the same thing. It’s easy to just say OMY (One More Year) because change is scary. I’d certainly rather be in that position while earning a million bucks a year, rather than earning $40k. He has a lot more optionality than most.

Ever since my post on Retirement Nest Egg Calculators: Running Out of Money vs. Running Out of Time, this following statistic has been stuck in my mind:

If you’re 40, you have a 10% chance of dying before even reaching 65.

What is your likelihood of dying within the next 20 years? Here are mortality tables based on Social Security actuarial data for US citizens, sorted by age and gender. Below are the rough numbers, along with an edited screenshot of the source at the very bottom.

  • A male, age 30 has a 1 in 20 chance of dying in the next 20 years (age 50).
  • A male, age 40 has a 1 in 10 chance of dying in the next 20 years (age 60).
  • A male, age 50 has a 1 in 5 chance of dying in the next 20 years (age 70).
  • A female, age 30 has a 1 in 35 chance of dying in the next 20 years (age 50).
  • A female, age 40 has a 1 in 15 chance of dying in the next 20 years (age 60).
  • A female, age 50 has a 1 in 7 chance of dying in the next 20 years (age 70).

I try to use these numbers to motivate myself and create a sense of urgency. I’m 40 years old now. There is a 1 in 10 chance that I won’t be old enough to see my daughters even finish college. The person profiled in this article is also probably around 40 years old (15-year reunion of business school). I’m sure there are plenty of 60-year-olds who say “60 isn’t old!” and it isn’t, but that is literally survivorship bias. We all know people who didn’t make it to 60, and these are the overall odds.

Time is your most precious resource. It doesn’t matter what your income is, you only have so much time. Therefore, you should spend it in a way that aligns with your values. Look for ways to get closer to that. If you can’t quit, do the same job with a better employer. Keep working, but switch to a different job within that field/skillset with more personal meaning. Saving more can mean you can get by working fewer hours. If you think you can retire but just can’t seem to pull the trigger, you need to directly confront those last few worries.

Are you unhappy with your situation and still in the same spot as a year ago? Try to find something psychological that will create a sense of urgency. I tell myself “Why am still wasting my time with [insert task]? 1 in 10.”

Filed Under: Behavioral Economics, Family, Retirement //

Historical IRA Contribution Limits 2009-2019

Posted on January 28, 2019 // 3 Comments

ira_heartIndividual Retirement Arrangements (IRAs) are way to save money towards retirement that also saves on taxes. For 2019, the annual contribution limit for either Traditional or Roth IRAs increased to $6,000 (it is roughly indexed to inflation). The additional catch-up contribution allowed for those age 50+ stays at $1,000 (for a total of $7,000). You can’t contribute more than your taxable compensation for the year, although a spouse can contribute with no income if the other person has enough income.

Historical limits. Since I enjoy visual aides, here’s an updated historical chart and table of contribution limits for the last 11 years. I’m happy to say that we’ve both done the max since 2004. Consistently saving for a decade can result in some fat nest eggs!

Year IRA Contribution Limit Additional Catch-Up Allowed (Age 50+)
2009 $5,000 $1,000
2010 $5,000 $1,000
2011 $5,000 $1,000
2012 $5,000 $1,000
2013 $5,500 $1,000
2014 $5,500 $1,000
2015 $5,500 $1,000
2016 $5,500 $1,000
2017 $5,500 $1,000
2018 $5,500 $1,000
2019 $6,000 $1,000

 

Traditional IRAs. If you are covered by a retirement plan at work, deductibility of your contribution to a Traditional IRA is based on your modified adjusted gross income (MAGI) and tax-filing status. See the IRS page on IRA deduction limits. However, there are no income restrictions as to who can contribute to the full contribution limit for a Traditional IRA.

Roth IRAs. It doesn’t matter if you are covered by a retirement plan at work for the Roth IRA, and contributions to a Roth are never deductible (but they aren’t taxed on upon qualified withdrawal). However, the contribution limit and overall eligibility may be capped based on your modified adjusted gross income (MAGI) and tax-filing status. See the IRS page on Roth IRA contribution limits. But wait… high-income earners may be able to get around these income restrictions with a Backdoor Roth IRA (non-deductible Traditional IRA + Roth conversion). Yeesh, I really wish they would simplify all this stuff.

Saver’s Credit. If your income is low enough (less than $63,000 AGI for married filing joint), the Saver’s Credit can get you back 10% to 50% of your contribution (of up to $2,000 per person) when you file your taxes.

Also see: 401k, 403b, TSP Historical Contribution Limits 2009-2019

Sources: IRS.gov, IRS.gov COLA Table [PDF]

Filed Under: Investing, Retirement //
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