Stockholm Banco vs. FTX: Creating Money From Nothing in 1661 vs. 2022

Posted on November 17, 2022 // 2 Comments

As with the rest of the finance world, I’ve been following the collapse of FTX and Sam Bankman-Fried (SBF). There are many explainers (Matt Levine is my fav, but paywall?), while new details keep emerging. Crypto the newborn currency is growing up and finding out the hard way why traditional finance has all the rules it has. Central bank? FDIC insurance? Independently-audited financials? A board of directors? Not being allowed to buy personal houses with company money and having other expenses approved with emojis? 💸 From the most recent bankruptcy filing and written by the new FTX CEO of less than a week:

Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.

As a fitting follow-up to the idea of timeless financial wisdom, Doomberg (also paywall) brings us historical perspective from Stockholm Banco, which in 1661 was the first European bank to print banknotes. I found this detailed history of Stockholm Banco [pdf] on the website of Sveriges Riksbank. A single person was granted great and unsupervised power to effectively create unlimited currency. What could go wrong?

In 1656, Johan Palmstruch was finally granted the country’s first bank charter by the King of Sweden after multiple rejections. (His proposal only succeeded after he promised half the profits to the Crown.) At the time, people had to use cumbersome copper and silver currency (see above) that fluctuated in value based on industrial demand for those metals. The slab of copper above was “10 dalers” and the size of two sheets of letter paper and weighed 43 pounds!

It was the inconvenience of copper plate money that the exchange bank would remedy. Institutions and the general public could deposit their plate money in the bank in exchange for a receipt, which could then be used in transactions with other parties. This was a great relief for commerce. In the bank charter, Karl X Gustav emphasised ‘the good convenience our subjects thereby obtain, that in this way they are rid of much subtraction and addition, hauling and dragging and other trouble that the copper coin entails in its handling’. The weighty plates boded well for the success of the exchange bank.

A simple piece of paper could now represent any amount of dalers (100 daler note below):

The charter allowed the creation of an exchange bank. People could deposit their slabs of copper and silver at the bank, and instead receive a paper note promising that it could be redeemed back again at any time. Convenient! The charter also allowed the creation of a loan bank. The bank lent out money, and charged interest. The exchange bank and the loan bank were supposed to be separate. But look at all those pretty deposits just sitting there!

The charters treated the exchange bank and the loan bank as separate entities but this was not observed in practice. Although the exchange bank was no more than a depository for its clients’ money, which could be withdrawn without notice, the Bank started to lend its holdings. This state of affairs continued until 1664.

Soon the deposits were all lent out. But people still wanted loans! There was money to be made! If only there was a way to keep the whole things spinning…

Palmstruch found a solution. According to Erik Appelgren, a bank commissioner, ‘Not long afterwards, credit notes became a supplement invented by Herr Director for the shortage of money’. The bank would issue notes declaring that the holder had a claim on Stockholms Banco for a specified sum of money; the Bank would redeem the notes in exchange for cash. […]

This was a novelty in European banking. Earlier attempts to introduce notes had invariably tied them to deposits. Such certificates of deposit could be transferred as a token of value to business associates, who in turn could pass them on in the same way. In contrast, Palmstruch’s notes were not backed by particular deposits; instead, they relied on public confidence that the Bank would redeem them on demand. The system relied on the Bank’s credibility.

Success! Print as much money as you want! Expansion! Even the Crown and other high-ranking officials borrowed money.

Thanks to the credit notes, lending by the Bank ceased to be dependent on deposits. Loans could be provided for as much as the Bank was prepared to issue notes. After a tentative start, the flood gates were opened during 1663. The Crown borrowed 500,000 d km, Chancellor De la Gardie took a total of 255,000 d km for himself, the tar company borrowed 200,000 d km. More and more loans were unsecured. The business flourished; branches were opened in Abo, Falun and Goteborg; in Skane (ceded to Sweden by Denmark in 1658) the three upper Estates requested a separate branch in either Malmo or Landskrona.

What if… something spooked the customers… and people actually wanted all their deposits back?

However, reality soon caught up. On 12 September 1663, Joachim Schuttehielm, a bank secretary, reported to Palmstruch, who was away in Vasteras, that so much money had been withdrawn that the Bank had less than 4,000 d km in ready cash. To make matters worse, a depositor had announced that he wished to withdraw 10,000 d km. Schuttehielm asked Palmstruch to send money as soon as he could but the Director had nothing to send.

The bank collapsed after only six years. During the cleanup, audits revealed tons of missing money. Palmstruch was sentenced first to execution (later reduced to jail), and died only a year after his eventual release.

The Court of Appeal was not impressed. On 22 July 1668 Palmstruch was dismissed as director and sentenced to the loss of his privileges. He was banished for life and ordered to compensate within six months for ‘all the deficiency and shortage in the Bank that can demonstrably be proven’. If he failed to pay what he owed, he would be executed.

Let’s compare to the current FTX situation. Started out with a simple idea and got out of control very fast. FTX is less than 4 years old. Everyone was easily distracted by getting rich, all greased by the political donations and naming rights that spread the money around and the “effective altruism” that the media loved. The power to create unlimited currency for a while – FTX claimed billions of SRM and FTT tokens as assets – essentially things that FTX made out of thin air and knew it. Eventually, the desperate loaning out (aka stealing) of $10 billion in customer deposits to help themselves out of a jam. The panicked discovery. The coming criminal proceedings.

Individual investors are again reminded why FDIC and NCUA insurance exists – counterparty risk is real. It doesn’t matter what you own if you let the wrong place hold it for you.

Filed Under: Banking, Debt, Investing //

Contemporary Art vs. S&P 500: Paul Allen’s $1.6 Billion Art Sale

Posted on November 14, 2022 // 5 Comments

The trend in many alternative asset classes is to make previously illiquid and high-value investments like art, collectibles, farmland, and music royalties more accessible to us common folk by offering fractional ownership. From the comfort of my smartphone, I can buy a $250 fractional share of a Shelby Mustang and hope to sell my equivalent of a turn signal stalk at a tidy profit in the future.

Masterworks does this for art, letting you invest as little as $500 into multi-million dollar works of art by artists like Basquiat, Picasso, and Banksy. The pitch is pretty direct:

Contemporary art has outperformed the S&P for the past 25 years, but there has been no way to invest in it. Masterworks is the first company to offer investment products within the art market.

The Masterworks website claims that the Contemporary Art asset class has returned 13.8% annualized from 1995-2021, much more than the 10.2% from the S&P 500. This data “reflects value-weighted price appreciation for all Contemporary Art (works produced after 1945) sold at least twice at public auction.”

In addition, this chart from a 2022 Citi Art Market report shows that Contemporary Art had a very low or even slightly negative historical correlation with stocks (Developed Equities, -0.04) and bonds (Investment Grade Fixed Income, 0.15).

Here’s what Citi says about future art prices:

Citi Private Bank’s proprietary strategic asset allocation methodology does not address art. We instead approach art primarily from the collector perspective of the clients whom we serve rather than strictly as an investment. In any case, art does not lend itself to an objective cash flow-based analysis as equities, fixed income, and real estate do. In this regard, it has more in common with commodities. As such, rigorous estimates of future long-term returns are not possible.

Alright, how about some more data points then? Recently, the estate of Paul Allen sold off a record-breaking $1.6 billion of art, most of which was also both bought and sold at a public auction. This gives us both the purchase and sell prices and the ability to calculate annualized return. This Axios article included an analysis and created the chart below.

Some sales are impressive, like a Cézanne that was bought for ~$38 million and sold for ~$138 million less than 20 years later. A cool $100 million profit ain’t too shabby. However, once you calculate the overall return including the holding periods, the annualized return was only 6.2% annualized over an average holding period of 18 years. Axios notes that the S&P 500 grew at 8.9% annualized over the past 18 years, which allows them to drop this zinger:

The bottom line: Allen would have made more money just buying an S&P 500 index fund.

I can see art as as an asset class having positive long-term returns in the future, and I can see it having a relatively low correlation to stocks, but I suppose that I have a hard time seeing it return something amazing and consistently better than the S&P 500. Especially for any basket of specific pieces, it may return 4% more than the S&P 500 annually, or it may return 4% less than the S&P 500 annually. This would be more of a fun, amusing thing – “I own a flower petal from that Monet!” – that might retain permanent value in the future.

(I can’t tell a Stella from a Seurat, so I have no personal investment in Masterworks.)

Filed Under: Investing //

4% Guaranteed Withdrawal Rate (Inflation-Adjusted) with TIPS Ladder

Posted on November 8, 2022 // 15 Comments

Retirement income planning would be so much easier if you could buy a known amount of guaranteed lifetime income that automatically adjusted for inflation. However, the reality is that not a single insurance company in the entire world is willing to take on that long-term inflation risk. The only possibility left is to ladder inflation-linked bonds (TIPS) so that each year you would cash out some bonds and interest to create your own DIY inflation-adjusted income.

Thanks to the rising real yields of TIPS, you can now create a 30-year TIPS ladder that will create effectively a 4% guaranteed real withdrawal rate. If you put $1,000,000 into a 30-year TIPS ladder right now, you will get $40,000+ income for year 1 and then another $40,000 adjusted for inflation (CPI-U) annually for the next 29 years. All backed by the US government.

Allan Roth did the hark work and bought a 30-year TIPS ladder x 4.3% real withdrawal rate using $100,000 of his own money on the secondary market. He also introduced me to eyebonds.info, which has a lot of helpful spreadsheets for the hardcore DIY TIPS and Savings I bond investor.

Such a TIPS ladder will only go for 30 years, and you end up with nothing at the end, so it does have some limitations. If you retire at 65 and spend your 4% every year, this portfolio will be completely depleted by age 95. If you start at 55, it will end at 85. Therefore, this tool would work best as a supplement to your Social Security benefits and perhaps keeping some stocks for potential upside…

Now, Allan Roth also wrote about the “No Risk” portfolio where you put most of your money in zero coupon bonds that will guarantee you don’t lose any dollars but put the rest in stocks for upside potential. It feels good to know you’ll both start and end with at least, say $100,000. However, the reality is that you are still exposed to inflation risk, as $100,000 in 10 years may be worth a lot less than $100,000 today.

What if you simply replaced those traditional-style bonds with TIPS as your super-safe base? You’d remove the inflation risk while still keeping minimal credit risk. Enter the concept of Upside Investing by Lawrence Kotlikoff (author of Money Magic).

Upside Investing, as I described in recent Forbes and Seeking Alpha columns, is simple as pie.

– You invest in the S&P and TIPS/I-Bonds and specify a period during which you’ll convert your stocks to TIPS/I-Bonds.

– You build a base living standard floor assuming all stock investments are lost.

– You increase your living standard floor only when and if you convert stocks to TIPS/I-Bonds.

If you can lock in your TIPS ladder at a decent real yield, you could have an intriguing combination of a very safe base income, while still giving you a very good chance of a higher income with stock returns anywhere close to historical averages.

In rough terms, what if a 75% TIPS/25% stock portfolio offered a minimal guaranteed withdrawal rate of 3% real for 30 years (only this low if stocks go to zero!) with the good probability that you would likely be able to withdrawal 4% and quite possibly more. For a conservative investor, knowing you have a rock-solid safe floor would allow you to spend freely with the rest. 🥳 Something to investigate further while TIPS real yields are decent again.

Filed Under: Investing, Retirement //

Best Interest Rates on Cash – November 2022 Update

Posted on November 6, 2022 // 5 Comments

Here’s my monthly roundup of the best interest rates on cash as of November 2022, roughly sorted from shortest to longest maturities. We all need some safe assets for cash reserves or portfolio stability, and there are often lesser-known opportunities available to individual investors. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 11/6/2022.

TL;DR: 5% on up to $10,000 from Juno. 4% APY on up to $6,000 for liquid savings at Current with no direct deposit requirement. Merchants Bank of Indiana Money Market at 3.82% APY. 1-year CD at 4.30% APY. 5-year CD at 4.42% APY. Compare against Treasury bills and bonds at every maturity (12-month near 4.75%). 6.89% Savings I Bonds still available if you haven’t maxed out 2022 limits.

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

  • 5% on up to $10,000. Juno now pays 5% on all cash deposits up to $10,000 and 3% on cash deposits from $10,001 up to $250,000. $50 direct deposit bonus. Please see my Juno review for details.
  • 4.00% APY on $6,000 with no direct deposit requirement. Current offers 4% APY on up to $6,000 total ($2,000 each on three savings pods). No direct deposit required. $50 referral bonus for new members with $200+ direct deposit with promo code JENNIFEP185. Please see my Current app review for details.
  • 4.00% APY on up to $250,000, but requires direct deposit and credit card spend. Currently a waitlist for new applicants. The top tier requires you to maintain positive cashflow in the checking account each month, $500 in total monthly direct deposits, and $500 in credit card purchases each month. Existing customers will get 4% APY through April 2023, with requirements waived through March 2023. Please see my updated HM Bradley review for details.

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

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

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. CIT Bank has a 11-month No Penalty CD at 3.30% APY with a $1,000 minimum deposit. Ally Bank has a 11-month No Penalty CD at 3.10% APY for all balance tiers. Marcus has a 13-month No Penalty CD at 2.55% APY with a $500 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Banesco USA has a 12-month certificate at 4.30% APY. $1,500 minimum. Early withdrawal penalty is 90 days of interest.

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

  • Vanguard Federal Money Market Fund is the default sweep option for Vanguard brokerage accounts, which has an SEC yield of 3.24%. Compare with your own broker’s money market rate.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 4.14% SEC yield ($3,000 min) and 4.24% SEC Yield ($50,000 min). The average duration is ~1 year, so there is some term interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 3.81% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 4.09% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

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

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 11/4/2022, a new 4-week T-Bill had the equivalent of 3.66% annualized interest and a 52-week T-Bill had the equivalent of 4.77% annualized interest.
  • The iShares 0-3 Month Treasury Bond ETF (SGOV) has a 2.82% SEC yield and effective duration of 0.10 years. SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 2.78% SEC yield and effective duration of 0.08 years.

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

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

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

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

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

  • The Bank of Denver pays 4.00% APY on up to $15,000 if you make 12 debit card purchases of $5+ each, receive only online statements, and make at least 1 ACH credit or debit transaction per statement cycle. Thanks to reader Bill for the updated info.
  • Presidential Bank pays 3.75% APY on balances between $500 and up to $25,000 (3.00% APY above that) if you maintain a $500+ direct deposit and at least 7 electronic withdrawals per month (ATM, POS, ACH and Billpay counts).
  • Liberty Federal Credit Union pays 3.45% APY on up to $20,000. You’ll need at least 15 debit transactions and other requirements every month.
  • Lake Michigan Credit Union pays 3.00% APY on up to $15,000. You’ll need at least 10 debit transactions and other requirements every month.
  • 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 a 5-year certificate at 4.42% APY ($500 min), 4-year at 4.32% APY, 3-year at 4.22% APY, 2-year at 4.11% APY, and 1-year at 3.80% APY. Early withdrawal penalty can be quite severe though, with the 5-year CD penalty being 600 days of interest. Anyone can join this credit union via partner organization ($10 one-time fee).
  • First Internet Bank has a 5-year certificate at 4.39% APY ($1,000 min), 4-year at 4.33% APY, 3-year at 4.28% APY, 2-year at 4.23% APY, and 1-year at 4.18% APY. The early withdrawal penalty for the 5-year is 360 days of interest.
  • 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. Inventory is limited and right now, but I see a 3-year CD at 4.85% (non-callable). Be wary of higher rates from callable CDs, which means they can call back your CD if rates drop later.

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

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. You might find something that pays more than your other brokerage cash and Treasury options. Right now, I see a 10-year CDs at 5.15% (non-callable) vs. 4.17% for a 10-year Treasury. Watch out for higher rates from callable CDs where they can call your CD back if interest rates drop.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently 0.10%). This feature is not currently interesting because as of 11/6/2022, the 20-year Treasury Bond rate was 4.49%.

All rates were checked as of 11/6/2022.

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

The Value of Not Checking Your Investment Statements

Posted on November 2, 2022 // 2 Comments

The WSJ asks an interesting question: Public REITs Are Down, Nontraded REITs Are Up. Which Is Right? (paywall?). Public REITs are traded on an open market with daily liquidity, and prices are down ~26% overall this year. Non-traded private REITs are simply assigned a value by the sponsors of the REIT, have very limited liquidity windows, and have somehow increased their net asset values (NAVs) slightly this year. That seems rather… convenient.

The valuations differ because public REITs are valued at whatever their shares are trading for on the stock market. Nontraded REITs are valued monthly by their sponsors working with independent appraisers analyzing how much the commercial property they own is worth.

As usual, I agree with whatever Allan Roth says:

“With nontraded REITs increasing their valuations while markets are punishing public REITs, I’d run for the hills,” said Allan Roth

Again, as usual, Matt Levine has a clever take with People Will Pay for Illiquidity:

Another, funnier sort of financial innovation is about subtracting liquidity. If you can buy and sell something whenever you want at a clearly observable market price, that is efficient, sure, but it can also be annoying. Consider the following financial product:

You give me the password to your brokerage account.
I change it.
You can’t look at your brokerage account for one year, because you don’t have the password.
At the end of the year, I give you back your password and you pay me $5.

[…] “It is well known that one of the best services a retail broker can provide is not answering the phones during a crash,” I once wrote; in this product I am charging you for that service. Your mileage will vary — perhaps you are good at market timing — but this service might well be worth more than $5 to you.

This explains one reason why private equity has become ever more popular amongst large institutions:

By being illiquid, the private equity fund can look less volatile. Getting similar returns with less volatility is good; getting similar returns and feeling like you have less volatility also might be good.

The inability to sell your non-traded REITs is a feature! So is accepting a made-up NAV instead open market pricing! It’s better that they hide the true volatile nature of “Mr. Market” from you. Kind of like telling your kids about how the dog went away to live on the farm. It doesn’t change the truth, but maybe they’ll feel better about it.

If seeing volatile market prices is bad, the best thing a passive DIY investor can do (besides own privately-held businesses) is not look at their brokerage statement. If you are truly a “long-term investor”, then what’s the point in looking at daily, weekly, or even monthly fluctuations? You don’t need the liquidity, so we should use that as a feature. People also love to anchor to the all-time high of their portfolio, even though it is really just an arbitrary moment in time. If you only check once a year, then you’ll most likely have missed a peak or a trough.

Filed Under: Investing //

Savings I Bonds November 2022 Interest Rate: 6.48% Inflation Rate, 0.40% Fixed Rate

Posted on November 1, 2022 // 14 Comments

November 2022 rates officially announced. May 2022 rate confirmed at 9.62%. 11/1/2022 press release. The variable inflation-indexed rate for I bonds bought from November 2022 through April 2023 will indeed be 6.48% as predicted. Every single I bond will also earn this rate eventually for 6 months, depending on the initial purchase month. The fixed rate for I bonds bought from November 2022 through April 2023 will be 0.40% (up from zero, and right in the midpoint of my guess), for a composite rate of 6.89% for 6 months. Still a good deal, either buying now or in January when the purchase limits reset.

See you again in mid-April for the next early prediction for May 2023.

Original post 10/13/22:

Inflation still 🚀 😬 Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. With a holding period from 12 months to 30 years, 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 November 2022 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a October 2022 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a November 2022 purchase.

New inflation rate prediction. March 2022 CPI-U was 287.504. September 2022 CPI-U was 296.808, for a semi-annual increase of 3.24%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 6.48%. You add the fixed and variable rates to get the total interest rate. The fixed rate hasn’t been above 0.50% in over a decade, but if you have an older savings bond, your fixed rate may be up to 3.60%.

Tips on purchase and redemption. You can’t redeem until after 12 months of ownership, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A simple “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 – same 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 October 2022. If you buy before the end of October, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed a total interest rate of 0.00 + 9.62 = 9.62% for the next 6 months. For the 6 months after that, the total rate will be 0.00 + 6.48 = 6.48% for the subsequent 6 months.

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 October 31st, 2022 and sell on October 1st, 2023, you’ll earn a ~7.01% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you theoretically buy on October 31st, 2022 and sell on January 1, 2024, you’ll earn a ~6.90% annualized return for an 14-month holding period. Comparing with the best interest rates as of October 2022, you can see that this is much higher than a current top savings account rate or 12-month CD.

Buying in November 2022. If you buy in November 2022, you will get 6.48% plus a newly-set fixed rate for the first 6 months. The new fixed rate is officially unknown, but is loosely linked to the real yield of short-term TIPS. My guess is somewhere between 0.1% and 0.6%, but who knows. If I Every six months after your purchase, 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 (based on purchase month, look it up here) + variable rate (total bond rate has a minimum floor of 0%). So if your fixed rate was 1%, you’ll be earning a 1.00 + 6.48= 7.48% rate for six months.

Buy now or wait? Given that the current I bond rate is already much higher than the equivalent alternatives, I would personally buy in October to lock in the high rate for the longest possible time. I would grab the “bird in the hand”, even though you might get a slightly higher fixed rate in November. I already purchased up to the limits first thing in January 2022, and I’ll probably buy again in January 2023. However, I am also buying TIPS as the real yield right now is higher than that of I bonds.

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 consider it part of the inflation-linked bond allocation inside my long-term investment portfolio. Right now, the inflation protection “insurance” is paying off with high yields and no principal risk.

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. You can only 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 I 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. TheFinanceBuff has a nice post on gifting options if you are a couple and want to frontload your purchases now. TreasuryDirect also allows trust accounts to purchase savings bonds.

Note: Opening a TreasuryDirect account can sometimes be a hassle as they may ask for a medallion signature guarantee which requires a visit to a physical bank or credit union and snail mail. This doesn’t apply to everyone, but the takeaway is don’t wait until the last minute.

Bottom line. Savings I bonds are a unique, low-risk investment that are linked to inflation and only available to individual investors. You can only purchase them online at TreasuryDirect.gov, with the exception of paper bonds via tax refund. For more background, see the rest of my posts on savings bonds.

[Image: 1950 Savings Bond poster from US Treasury – source]

Filed Under: Banking, Investing, Retirement, Savings Bonds //

The Average Portfolio Asset Allocation of a Millionaire (You Might Be Surprised)

Posted on October 25, 2022 // 4 Comments

The current issue of the Journal of Financial Economics has a new paper titled Millionaires speak: What drives their personal investment decisions? about how millionaires invest their money (via Alpha Architect):

We survey 2,484 U.S. individuals with at least $1 million of investable assets about how well leading academic theories describe their financial beliefs and personal investment decisions. The wealthy’s beliefs about financial markets and the economy are surprisingly similar to those of the average U.S. household, but the wealthy are less driven by discomfort with the market, financial constraints, and labor income considerations.

To be honest, I found most of the stated “beliefs” to be rather unsurprising. I’d rather just see what they actually own, which is revealed in this table:

I’ve gone ahead and simplified and rounded-off the averages above into a pie chart:

Over 1/3rd of the assets of millionaires are held in either cash, bonds, or the equivalent. The rich certainly have their riskier business ownership assets, but they also have a lot of cash. This is somewhat surprising since you’d think the rich wouldn’t need that much free cash lying around, but perhaps they feel that to stay a millionaire, you have to survive all the emergencies and liquidity crunches that inevitably occur from time to time.

Filed Under: Investing //

Target Date Retirement Fund Average Glidepath Trends 2012-2022

Posted on October 24, 2022 // Leave a Comment

Everyday investors now have trillions of dollars invested inside Target Date Funds (TDFs) with their “set-and-forget” simplicity that provides “industry-standard” investment advice for a relatively low cost. Many people are out there selling better solutions, but I think TDFs are a good default that lets you focus on the saving. Another benefit of TDFs is their structure tends to encourage inaction – There was relatively little TDF selling activity during the March 2020 temporary market drop.

The Callan article Target Date Funds and the Ever-Evolving Glidepath reminds us that “industry standard” investment advice is not written in stone. It’s set by big institutions with marketing departments and does change over time. You are handing over the reigns to the fund provider, be it Fidelity, Vanguard, T. Rowe Price, Blackrock, etc.

Here are the overall trends to TDF asset allocation from in the decade from 2012 to 2022:

  • Growth assets (stocks, REITs, junk bonds) went up across the board. Ex. At age 25, growth asset allocation grew from 89% in 2012 to 94% in 2022.
  • Fixed income (bonds) have gotten slightly riskier credit ratings at younger ages (presumably to boost yield a bit).
  • Inflation-sensitive assets (TIPs, commodities) went down across the board in 2021/2022 than in 2012, only to tick up slightly looking forward in 2022.

What I see are big institutions making small, gradual changes to the glidepath, with the directions almost certainly to be towards mild performance chasing. Nobody gets fired from the executive suite for doing that. From 2012-2022, the stock market has done quite well (more of that!), bond yields have been tiny (let’s crank up the risk to boost yield!), and inflation was very mild (less of that, we don’t need to worry about infla-whoops!). If the next decade has low stock returns, high bond interest rates, and lots of inflation, I would expect a reactionary-but-slow turning of the enormous cruise ship.

Filed Under: Investing, Retirement //

Multi-Year Guaranteed Annuity (MYGA) to Immediate Annuity Example (Rates Now 5%+)

Posted on October 19, 2022 // 13 Comments

Many people hold a blanket assumption that all annuities are bad investments. Indeed, many annuities offer confusing promises with high hidden expenses, but I believe that certain annuities can be a very useful tool in retirement planning. First, the annuities must be transparent with clear, contractual guarantees such that you can directly comparison shop different products against each other. Two of the most simple types of annuities fit this definition:

  • Single premium immediate annuities (SPIA). These are for lifetime income in retirement. You pay an upfront lump sum (single premium), and you immediately start receiving a guaranteed monthly income check for the rest of your life (or joint life).
  • Multi-year guaranteed annuity (MYGA) fixed deferred annuity. These are for the accumulation stage. You put up your principal and similar to a bank certificate of deposit, you receive a fixed, guaranteed rate of return for a certain number of years. The investment growth is tax-deferred until age 59.5 when you withdraw your funds without the 10% IRS penalty. At that time, you could also roll into an SPIA.

As of this writing, MYGA rates are over 5% at the 5-year term and longer. (Image above is a sample chart of the growth of a $10,000 investment for a 5-year MYGA at 5.10%.) These rates are still higher than prevailing bank certificate rates and Treasury bond rates, while also offering the potential for tax-deferred growth while in the annuity wrapper.

There are additional wrinkles of course like early withdrawal penalties and annual withdrawal allowances, but the most important part is that you you can compare apples to apples at websites like Blueprint Income, Stan the Annuity Man, and ImmediateAnnuities.com.

MYGAs 101: Who are MYGAs a good fit for? They aren’t for everyone. I wondered how a MYGA would fit into something like the Standardized Personal Finance Advice Flowchart.

  • You have adequate emergency funds.
  • You don’t have debt besides primary mortgage.
  • You have maxed out your available Roth IRA, 401k/403b/457, and HSA contributions.
  • As part of your asset allocation, you would like more room for a CD/fixed-income style investment in a tax-deferred vehicle.
  • You are saving for close to a traditional retirement age (i.e. don’t need any liquidity until age 59.5).
  • You have looked at your state-specific guaranty limits and will stay below them for any single insurance issuer. You understand what the state guaranty system does and doesn’t provide.

I have written in more detail about MYGAs here:

Low-Risk MYGA to SPIA $100,000 Example. Let’s say you are a risk-averse 50 yo investor (Texas resident) with $100,000 and want to retire at age 60. Based on actual rates available as of this writing (10/19/2022), you could put the $100,000 into a 10-year MYGA at 5.20% today and in 10 years you will have $166,019 due to the tax-deferred compounding. Both the initial and final values are well within the Texas state guaranty limits of $250,000 per insurer and the insurer Oceanview is rated A-.

I can’t tell you the future, but let’s say you are 60yo and have that $166,019 today. At current rates, with $166,019 you can get an immediate annuity from Nationwide Insurance paying between $955 a month or $11,500 a year (female) and $11,800 a year or $987 a month (male) for the rest of your life. This will stack with your Social Security to create a very stable income base to complement your riskier growth assets, even if you live to 110. Note that you may owe income taxes on the pro-rated amount of your income that is marked as capital gains.

You are giving up the possibility of higher returns via the stock market in exchange for a slow-and-steady option with no stock market volatility. If you were going to invest in bonds anyway for part of your portfolio, this option offers the potential for higher returns in a tax-deferred wrapper (like with a Traditional IRA, you still owe taxes on gains at the end).

Bottom line: MYGAs can be a good tool to keep an eye upon. Each unique tool available has different features for the right situation. For example, a no-penalty CD offers the unique combination of a rate that you can always ratchet upward but will never go down (savings accounts can drop whenever they want), plus you have instant liquidity whenever you want. In contrast, this MYGA offers a significantly higher rate with tax-deferral benefits that can really add up over time, but you have extremely harsh early withdrawal penalties and you must do your due diligence and diversify to minimize any risk involved. You might find them useful for a portion of your portfolio, or you might not ever need either one.

Filed Under: Annuities, Banking, Investing, Retirement //

Firstrade Broker Deposit or ACAT Transfer Bonus: Up to $4,000

Posted on October 16, 2022 // 19 Comments

Firstrade is a broker unique in that they include $0 online stock/ETF trades, $0 options + $0 per contract, and $0 mutual fund trades (including no-load). Most of the major brokers charge per options contract and for no-load mutual fund trades. They are also unique in that they originally started out catering to the Chinese-speaking community in New York, and thus offer a Chinese language version of their site (Simplified and Traditional) and Chinese-speaking customer service reps (Mandarin and Cantonese). Right now, the are offering up to a $4,000 ACAT transfer bonus depending on the size of transferred assets:

  • $50 with $5,000 in transferred assets or deposits
  • $100 with $10,000 in transferred assets or deposits
  • $300 with $25,000 in transferred assets or deposits
  • $700 with $100,000 in transferred assets or deposits
  • $1,500 with $500,000 in transferred assets or deposits
  • $3,000 with $1,000,000 in transferred assets or deposits
  • $4,000 with $1,500,000 in transferred assets or deposits

Offer details.

  • New taxable and IRA accounts are eligible.
  • Firstrade will also cover up to $200 in ACAT transfer fees and up to $25 in wire transfer fees.
  • You must keep the assets there for at least 12 months.
  • Must open by 11/10/22 and fund within 30 days of account opening.

Offer valid for new Firstrade Brokerage or IRA accounts opened from 10/10/2022 to 11/10/2022 and funded within 30 days of account opening with $5,000 or more. To be eligible for the bonus, the new account must be opened using the specific “Open an Account” button associated with this promotional offer. Limit one offer per account type.

This offer is open to U.S. residents only and excludes current and former Firstrade account holders who have closed their accounts within the past 90 days. This offer is not transferable.

Important: The account must remain open for 12 months with the minimum funding or assets required for participating in the offer (minus any trading losses), or Firstrade may charge the account for the cost of the offer at its sole discretion. Firstrade reserves the right to restrict or revoke this offer at any time.

Commentary. This is an overall solid promotion, although right now other offers may be slightly better at any given tier amount. For example, the Public offer of $10,000 for $1,000,000 in new assets is still tops. However, I would classify Firstrade as a much more established and reputable broker with a history of solid customer service than the Public app. (I know that some people had some concerns about moving a million dollars of assets to a little-known startup.) Also, Public doesn’t allow IRAs, which is where a lot of people have their assets held. The highest ratio they offer is the $300 for $25,000 tier at slightly over 1%. Historically, paying out a 0.3% ratio ($3,000 for $1,000,000 transferred) is not bad at the $1,000,000 tier. Note the 12-month minimum holding period.

Reminder: Brokerage Asset Bonuses vs. Bank Deposit Bonuses. There is an important difference between brokerage asset bonuses and bank deposit bonuses. A bank deposit bonus pays you extra interest for holding a certain amount of cash with them. A brokerage asset bonus requires you to transfer over your existing investments like index funds, individual shares of Apple or Berkshire Hathaway, individual shares of REITs, and so on. You still own the asset and it’s still doing its thing. The brokerage bonus is on top.

In this example, if you really wanted to compare it directly against an interest rate, you should at least assume you will be holding a T-Bill ETF like GBIL or BIL (current SEC yield roughly 2.5%) and then adding this bonus on top of the yield. However, the real benefit for patient, long-term investors that you can just keep your existing assets and essentially get paid a DIY “management fee”.

Filed Under: Deals & Offers, Investing //

Public Stock Brokerage App: Up to $10,000 ACAT Transfer Bonus (New Tiers)

Posted on October 11, 2022 // 16 Comments

Update January 2023: Public has been gradually making the bonus tiers higher and/or the bonus amount lower, but the offer is still alive. Please visit the offer page for the most current tiers and terms.

Updates 10/11/22: Here are a few updates to my original post below:

  • The promotion now has an expiration date of 12/31/22. Of course, they always reserve the right to end it even earlier.
  • There is also now a 12-month required holding period for the $1 million asset level bonus (still 6 months holding for all other levels).
  • I have successfully received my $2,000 cash bonus for a $100,000+ ACAT transfer. I chose this bonus because 2% of assets is a very good ratio. I had to wait the full month after the transfer initiation date. The ACAT transfer itself took about 5 business days from initiation date, which was a little concerning because there were a few days where the assets were gone from my Fidelity account and hadn’t showed up at Public yet.
  • Public only has individual accounts (no joint), so you have to transfer individual accounts (no joint). Here was my process. I created a new individual brokerage account at Fidelity. I called Fidelity and asked them to transfer X shares of Y stock worth a little over $100,000 from joint to the new individual account. I transferred the entire new individual account to Public. Fidelity charged zero fees.
  • I e-mailed Public customer service a few times and they responded the same day within a few hours. I have been pleasantly surprised by the responsiveness and quality of replies.
  • I still have the same shares of the same stock, and I’ll probably buy $2,000 more with this bonus during this little market drop. 🤑

Original post 9/7/22:

Public is a stock brokerage app that has a similar user interface to Robinhood, but has a big focus on the social aspect of sharing your trades and following the stock trades of other users (thus the name). $0 stock commissions, no account minimums, Android or iOS app-only (no desktop). Interestingly, Public no longer accepts Payment for Order Flow (PFOF). Right now, they are offering up to a $10,000 cash bonus to gather more assets via ACAT transfers, depending the value of assets that you move over. Found via DoC.

  • $150 with $5,000 – $24,999 in transferred assets
  • $500 with $25,000 – $99,999 in qualifying new money
  • $2,000 with $100,000 – $499,999 in qualifying new money
  • $5,000 with $500,000 – $999,999 in qualifying new money
  • $10,000 with $1,000,000+ in qualifying new money

$500/$2,000 is 2% of $25,000/$100,000, and $10,000 is 1% of $1,000,000. As a percentage of assets transferred, these are relatively high bonus amounts at those asset levels. The minimum holding period is 6 months, per their terms:

*Cash bonus will be applied to qualifying accounts one (1) month after the transfer initiation date. Transferred funds must stay in your Public account for at least 6 months or bonus will be revoked.

As with all similar ACAT transfer offers, you can transfer over your existing stock holdings and the cost basis should also transfer over with no tax consequences. You just keep your same shares of Apple or index ETFs at a different broker. If you want to hold cash, you could also own things like Treasury bill ETFs or ultra-short term bond ETFs and earn interest on top of the bonus.

Public will also cover your former broker’s outgoing ACAT transfer fee (usually around $75) if you transfer at least $500:

Public charges no fees for incoming transfers. If your current brokerage charges you on the way out, we’ll even cover the fee if your incoming account is over $500.

Public appears to have created their own tool with a nice user interface to transfer the assets, but on the backend they use the same underlying clearing firm as many other brokerage apps (including SoFi, Stash, Betterment, WeBull, and formerly Robinhood), namely Apex Clearing. More details from their bonus FAQ:

Download the Public app and once your account is set up, go to your Settings. In the “Account” section, you’ll see an option to transfer your stocks to Public.

This offers appears to be available to both new and existing Public users. I am considering doing a partial ACAT transfer of $100,000 in ETFs as that looks like the sweet spot.

New customer to Public? Their referral program offers “free stock” worth between $3 and $300 if you open with a referral code and deposit $20+ (referrer also gets whatever you get). My referral code is mymoneyblog which you can enter on the second page of the transfer promo link above. Thanks if you use it! Alternatively, the shopping portal Swagbucks is offering $16 worth of Swagbucks points right now. If you go the Swagbucks route, it looks like you should first open the account and then go for the transfer bonus.

Side note: If Public doesn’t make money by selling your trade flow, how do they make money? For one, it earns interest on your idle cash by paying you tiny interest as many other brokers do. For another, it lends out your shares of stocks to short-sellers (and keeps all the interest). The strange thing here is that that it appears to do so by default, whereas most other brokers you must opt-in (and they split the interest with you). However, you can opt out at any time:

You may opt out of Apex’s Fully-Paid Securities Lending Program at any time by sending an email to us at support@public.com with “Securities Lending Opt-Out” in the subject.

I would opt out, as if they lend out the shares and aren’t paid back, there is counterparty risk involved if the company fails. I am not always opposed to Fully Paid Lending, but (1) I want a share of the profits and (2) I want the broker to be rock-solid financially. Read more at Loan Out Your Stocks For Extra Interest? Fully Paid Lending Income Programs. I e-mailed Public and they replied the same day with confirmation:

Thank you for reaching out! I have added you to our opt-out list. Please allow 24-48 hours for your request to be fully processed by our clearing firm.

Filed Under: Deals & Offers, Investing //

MMB Portfolio 2022 3rd Quarter Update: Dividend & Interest Income

Posted on October 5, 2022 // Leave a Comment

Here’s my quarterly income update for my Humble Portfolio (2022 Q3). I track the income produced as an alternative metric for performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), which helps encourage consistent investing. Imagine your portfolio as a factory that churns out dollar bills.

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

In the US, the dividend culture is somewhat conservative in that shareholders expect dividends to be stable and only go up. Thus the starting yield is lower, but grows more steadily with smaller cuts during hard times. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total US Stock ETF (VTI), courtesy of StockAnalysis.com. Currently, 31% of VTI’s net earnings are sent to you as a dividend. Notice how it grows gradually, with the current annual dividend 80% higher than in September 2013:

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that means the dividends move up and down with earnings. Thus the starting yield is higher but may not grow as reliably. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total International Stock ETF (VXUS). Currently, 47% of VXUS’s net earnings are sent to you as a dividend. Notice how it stays more stable (but also dropped during 2020 due to COVID), with the current annual dividend only 20% higher than in September 2013:

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

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

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

  • $1,000,000 invested in my portfolio as of January 2014 would have generated about $24,000 in annual income over the previous 12 months. (2.4% starting yield)
  • If I reinvested the income but added no other contributions, today in 2022 it would have generated ~$53,000 in annual income over the previous 12 months.

This chart shows how the total annual income generated by my portfolio has changed. It’s not all about current yield.

TTM income yield. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar (checked 10/5/22), which is the sum of the trailing 12 months of interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed (usually zero for index funds) over the same period. The trailing income yield for this quarter was 3.33%, as calculated below. Then I multiply by the current balance from my brokerage statements to get the total income.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield Yield Contribution
US Total Stock (VTI) 25% 1.74% 0.44%
US Small Value (VBR) 5% 2.30% 0.12%
Int’l Total Stock (VXUS) 25% 4.18% 1.05%
Emerging Markets (VWO) 5% 3.95% 0.20%
US Real Estate (VNQ) 6% 3.89% 0.23%
Inter-Term US Treasury Bonds (VGIT) 17% 1.42% 0.24%
Inflation-Linked Treasury Bonds (VTIP) 17% 6.24% 1.06%
Totals 100% 3.33%

 

Commentary. My ttm portfolio yield is now roughly 3.33%. (This is not the same as the dividend yield commonly reported in stock quotes, which just multiplies the last quarterly dividend by four.) Both US and international stock prices have gone down, and my ttm dividend yield has gone up. The price of my Treasury bonds have also gone down as nominal rates have gone up, but the yield will eventually go up as the money is reinvested into new bonds at higher rates. My TIPS yield has gone up significantly as it tracks CPI inflation. Of course, the NAV on my TIPS has also gone down, as real yields have gone up (again will be better as money is reinvested). TIPS are a bit complicated like that.

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

Even if do you reach that 25X or 30X goal, it’s just a moment in time. The market can shift, your expenses can shift, and so I find that tracking income makes more tangible sense in my mind and is more useful for those who aren’t looking for a traditional retirement. Our dividends and interest income are not automatically reinvested. They are another “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again to compound things more quickly. Even if we spend the dividends, this portfolio paycheck will still grow over time. You could use this money to cut back working hours, pursue a different career path, start a new business, take a sabbatical, perform charity or volunteer work, and so on.

Right now, I am happily in the “my kids still think I’m cool and want to spend time with me” zone. I am consciously choosing to work when they are at school but also consciously turning down any more work past that. This portfolio income helps me do that.

Filed Under: Goals, Investing, Retirement //
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