Four Pillars of Retirement: Money, Purpose, People, and Health

Posted on March 25, 2021 // 4 Comments

While it is understandable that most talk about “retirement planning” concerns money, a truly successful retirement requires more than that. Coincidentally, the same week I was pondering the Components of Happiness, I also stumbled upon a 6-year leanFIRE update from LivingaFI. It was a very honest and thoughtful story of someone who carefully planned and quit their job at age 37. I usually focus on my reason for financial indepedence as “spending my time as I wish”, but now I realize that it may help to specifically address certain areas regularly.

For your consideration, here are The Four Pillars of Retirement*:

  • Money: You need enough money to pay for housing, transportation, food, healthcare, and everything sold at Walmart/Target/Amazon/Costco.
  • Purpose: You need to feel that you are useful, moving forward, pursuing a goal, and/or making the world a tiny bit better.
  • People: You need love. Love and social interaction from your life partner, children, family, friends, and/or animal companions.
  • Health: You need to feel physically healthy, or be at peace with your level of health.

Imagine each pillar as one of the legs of a square table. We have to maintain and shore up any cracks before it gets serious. If you are lacking in any one of these pillars, your retirement gets wobbly. If any two are crumbling, that’s enough to make the entire thing tip over.

Most people say that they hate work, but working takes care of more than just the money pillar. In addition to income, work can provide a sense of purpose and self-worth, as well as a wide social circle. Some people just like having something fixed to build their routine around; they flounder with “nothing to do”. People often imagine retirement as a perpetual weekend – playing golf, eating out, travel, shopping, etc. – but it can get weird when all your friends are still working. Here is a WSJ article on how leaving work can put a lot of strain on couples.

It can be difficult to get out of the “I must be busy and productive” mindset. When you retire, use the opportunity to sit in the quiet and ponder what is most important to you. Choose your hard thing.

Finally, even if you have done all you can to be prepared, life still happens. The author of LivingaFi had nearly $1 million in assets, reasonable expenses, a committed life partner with a similar level of assets, lots of outside interests, and good health. This is not judgment, but a scary reminder for all of us: jobs, bull markets, relationships and good health can all end faster than you think. Your actions matter, but luck matters too. For example, the Social Security Administration says that a 20-year-old worker has a 1-in-4 chance of being disabled before retirement age. (Where available, we should buy adequate life, health, and disability insurance.)

My biggest blind spot was that if you have children, any one of them may also develop a health condition or other special needs that may require additional financial support indefinitely. I really didn’t appreciate the hidden struggles that so many families go through that is no fault of their own. I also didn’t fully appreciate how lucky I was to not have to deal with any of these things while growing up as a kid.

If you accept that luck matters in your investments, then the optimal choice might be to retire earlier with a more modest amount so that if things go well, you get more retirement years, but if things go badly, then you fall back on some part-time back-up work. Being willing to be flexible can pay off. You have to balance your odds of running out of money with the odds of running out of time.

On the other hand, if you are a high-earner, it might be better to work “One More Year” while you work on planning for the other pillars. Finding a new purpose, finding new friends, finding a new routine, it can be quite difficult. Looking back, I am thankful that we did not attempt to retire early and instead adjusted our hours (and income) downward while still keeping our foothold in the workforce. I’m still working on these pillars myself, but our middle path has worked well for us.

(* A nod to the classic The Four Pillars of Investing, one of the first investing books I ever read and reviewed here way back in 2004.)

Filed Under: Family, Frugal Living, Retirement //

Scott Galloway’s Algebra of Wealth (or: How To Become Rich)

Posted on February 25, 2021 // 1 Comment

Scott Galloway shares in The Algebra of Wealth his thoughts on how to achieve financial security (be rich). You should read the entire thing, but the ingredients in his formula are Focus, Stoicism, Time, and Diversification. I’m only including a few notes and personal interpretations here.

Focus. If you want to get rich, you have consciously take action to make it happen. It rarely happens by accident. Look for a good wave to ride when you are young. Look carefully for the right life partner.

Successful people often unwittingly head fake young people with the humblebrags of “follow your passion” and “don’t think about money.” This is (mostly) bullshit. Achieving economic security requires hard work, talent, and a tremendous amount of focus on . . . money. Yes, some people’s genius will be a tsunami that overwhelms a lack of focus and discipline. Assume you are not that person.

Stoicism. Develop some self-discipline and character. Be generous and helpful to others. This will help you spend less money.

Determine what you can and can’t control. You can control your reactions to temptation — a lack of discipline is the antichrist to economic security. Our society of superabundance makes this difficult. Billions of dollars are spent every year on schemes to manipulate our natural impulses into spending more money, consuming more fat, and believing everyone around us is more successful than we are. The upgrade from economy to premium to business to first class to private jet can seem like an investment in yourself — it’s not. The most powerful forward-looking indicator of your financial freedom is not how much you earn, but how much you save.

Time. Steady improvements over time can supercharge your results. Don’t focus only on the short-term. As the saying goes, “Time in the market is more important than timing the market.”

Compounding is not just a financial thing. The most important returns in life come from the compounded effects of our investments over time, whether in our finances, careers, hobbies, or relationships.

Diversification. Never expose yourself to a fully catastrophic loss. Make sure you can walk away to fight another day. If you do it right, you only need to get rich once.

Diversification is the kevlar that protects you — with it, bad decisions will still hurt, but they won’t prove fatal. Diversification, in other words, is your bulletproof vest. […] That doesn’t mean I don’t look for opportunities that offer asymmetric upside — I do. I just don’t ever take off my kevlar. You don’t need to be a hero to get to economic security.

There is no simple step-by-step plan to become financially independent, otherwise everyone would be rich. Luck matters too, but working on all of these factors helps maintain maximum exposure to good luck.

Filed Under: Career, Entrepreneurial, Family, Inspirational, Investing, Retirement //

Vanguard – How The Boring, Long-Term Focused Part of America Invests

Posted on February 21, 2021 // 7 Comments

Vanguard recently released a report on “How America Invests”, based on the 5 million households with Vanguard retail accounts (taxable and IRAs, not 401ks). It looked at investor behavior from 2015 through 2019, along with the first quarter of 2020, when there was a sharp market decline due to the COVID-19 pandemic. There is a lot of information packed inside, but here are a few quick takeaways.

The average portfolio of a Vanguard household. The averages seem reasonable, but I was a bit surprised that 16% of households are 100% bonds. Even if I was extremely conservative, I would still own something like 20% stocks to hedge against the risk of inflation and rising rates.

The typical Vanguard household holds a long-term, risk-taking portfolio that’s both diversified and balanced. The average portfolio consists of 63% equities (stocks), 16% fixed income (bonds), and 21% cash (short-term reserves). However, there are substantial differences in risk-taking across investors, with equity risk ranging from conservative to aggressive for investors with otherwise similar asset levels or ages. At the extremes, 16% of households hold no equities, while 22% hold very risky portfolios containing at least 98% equities.

Self-directed investor glide path vs. what Vanguard thinks is best. It is interesting to see what people actually own when they are self-directed, as compared to what Vanguard recommends in their Target-date Retirement Fund and their Vanguard Personal Advisory Services (VPAS) that charges an 0.30% annual fee.

This chart compares the asset allocation (% in stocks) of self-directed investors (blue line is median) against that of Vanguard target-date funds (red line). We see that there is a lot of variation amongst self-directed investors, but overall they do decrease their exposure over time like nearly all target-date funds. However, they don’t decrease it nearly as much as Vanguard’s target-date funds past the age of 65. (Click to enlarge.)

This chart compares the asset allocation (% in stocks) of self-directed investors (dark beige is median) against that of those being advised by Vanguard Personal Advisory Services (light blue line is median). Here, the recommended median asset allocation is much closer to that of the self-directed median. Comparing with the chart above, we see a gap betwewn VPAS and their own Target Retirement funds. Why are their target-date funds so much more conservative? (Click to enlarge.)

Mutual funds are still the most popular, but ETFs are gaining. Only 13% of Vanguard households hold any ETFs at all as of 2019, but that number is double that of 2015.

Younger investors tend to own index funds, while older investors still hold a lot of actively-managed funds. This chart tracks the usage of index funds/actively-managed funds/cash vs. age. I’m actually a little surprised at how much actively-managed funds are held by the older cohorts. Contrast this with the fact that roughly 2/3rd of Vanguard’s global assets under management are in their index funds/ETFs. (Click to enlarge.)

Vanguard account owners are not active traders! Over 75% of Vanguard households place zero trades per year. The Vanguard stereotype would probably be the polar opposite of the Robinhood stereotype. (As someone with the majority of their assets at Vanguard and only a small percentage in trading apps, I’m quite fine with that!) Check out this quote (emphasis mine):

Fewer than one-quarter of Vanguard households trade in any given year, and those that do typically only trade twice. Most traders’ behavior is consistent with rebalancing or is professionally advised.

During the COVID-19 market volatility, Vanguard households stayed boring and long-term focused. The quote below essentially says “they did nothing different”.

Twenty-two percent of households traded in the first half of 2020—a rate typical of trading for a full calendar year. Despite the increase in trading, less than 1% of households abandoned equities completely during the downturn, while just over 1% traded to extremely aggressive portfolios. The net result of the portfolio and market changes was a modest reduction in the average household equity allocation, from 63% to 62%.

Filed Under: Investing, Retirement //

My Money Blog Portfolio Income Update – February 2021

Posted on February 10, 2021 // 6 Comments

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While my February 2021 portfolio is designed for total return, I also track the income produced. Stock dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation. Interest from bonds and bank deposits are steadier, but these days it actually lags inflation a bit.

I track the “TTM” or “12-Month Yield” from Morningstar, 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 over the same period. I prefer this measure because it is based on historical distributions and not a forecast. Below is a close approximation of my portfolio (2/3rd stocks and 1/3rd bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 2/10/21) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)		 25% 1.43% 0.36%
US Small Value
Vanguard Small-Cap Value ETF (VBR) 		5% 1.65% 0.08%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		25% 2.13% 0.53%
Emerging Markets
Vanguard Emerging Markets ETF (VWO) 		5% 1.85% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 3.92% 0.24%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Treasury ETF (VGIT) 		17% 1.53% 0.26%
Inflation-Linked Treasury Bonds
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) 		17% 1.19% 0.20%
Totals 100% 1.76%

 

Trailing 12-month yield history. Here is a chart showing how this 12-month trailing income rate has varied since I started tracking it in 2014.

Portfolio value reality check. One of the things I like about using this number is that when stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market.

This quarter’s trailing income yield of 1.74% is the lowest ever since 2014. At the same time, my portfolio value is also bigger than ever. This just confirms that much of the recent US stock market price rise has been due to P/E ratio expansion, as opposed to higher earnings and profits. Either prices will drop quickly and then the future will look brighter, or prices won’t drop and the future will simply hold lower returns.

I choose to treat this income as a “no-stress, perpetual withdrawal rate”. There are countless articles debating this topic, but I support a 3% withdrawal rate as a reasonable target for planning purposes if you want to retire young (before age 50) and a 4% withdrawal rate as a reasonable target if retiring at a more traditional age (closer to 65). If you are not close to retirement, your time is better spent focusing on earning potential via better career moves, investing in your skillset, and/or looking for entrepreneurial opportunities where you own equity in a business asset.)

How we handle this income. Our dividends and interest income are not automatically reinvested. I treat this money as part of our “paycheck”. Then, as with a real paycheck, we can choose to either spend it or reinvest in more stocks and bonds.

Although we are not retired, this portfolio income does enable us to have more flexible working hours as parents of three young kids. If we’re being honest, I don’t think either of us truly wants to be a full-time stay-at-home parent while the other works for money full-time. Nor do we want to be the sole full-time worker while the other stays at home. This works best for us.

We are very thankful for this financial flexibility (always, but especially during this pandemic), which has been both a result of conscious preparation over 15+ years and good fortune. Others may use their portfolio income to pursue new interests, start a new business, sit on a beach, do charity or volunteer work, and so on.

Filed Under: Family, Goals, Investing, Retirement //

MMB Portfolio Asset Allocation Update, February 2021

Posted on February 9, 2021 // 5 Comments

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A central idea here is skin in the game, showing what someone really does with their own money. Too often, what the “experts” tell you to do is quite different than what they own themselves. Here’s my current portfolio as of February 2021, including our 401k/403b/IRAs, taxable brokerage accounts, and savings bonds but excluding our house, cash reserves, and a few side investments. I use these updates to help determine where to invest new cash to rebalance back towards our target asset allocation.

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 different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation. Once a quarter, I also update 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 some performance and asset allocation charts, per the “Allocation” and “Holdings” tabs of my Personal Capital account, respectively:

Stock Holdings
Vanguard Total Stock Market (VTI, VTSAX)
Vanguard Total International Stock Market (VXUS, VTIAX)
Vanguard Small Value (VBR)
Vanguard Emerging Markets (VWO)
Vanguard REIT Index (VNQ, VGSLX)

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

Target Asset Allocation. I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the recent past will necessarily create superior future returns. I mainly make sure that I own 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.

While you could argue for various other asset classes, 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 through those fearful times. I simply don’t have strong faith in the long-term results of commodities, gold, or bitcoin. (In the interest of full disclosure, I do own tiny bits of gold and BTC, but at less than 1% of net worth.)

My US/international ratio floats with the total world market cap breakdown, currently at ~57% US and 43% ex-US. I think it’s okay to have a slight home bias (owning more US stocks than the overall world market cap), but I want to avoid having an international bias.

Stocks Breakdown

  • 43% US Total Market
  • 7% US Small-Cap Value
  • 33% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 33% US Treasury Bonds, intermediate (or FDIC-insured)
  • 33% High-Quality Municipal Bonds (taxable)
  • 33% US Treasury Inflation-Protected Bonds (tax-deferred)

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 plan to only manually rebalance past that if the stock/bond ratio is still off by more than 5% (i.e. less than 62% stocks, greater than 72% stocks). With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and taxes.

Holdings commentary. I should be happy that my portfolio numbers seem to keep going up and up after the March 2020 scare, but instead I am mentally preparing myself for some low future returns over the next decade or so. I’m not making any big moves, but in keeping with my investment plan, I will be selling some US stocks this month as part of normal rebalancing. I remain optimistic that capitalism, human ingenuity, human resilience, and our system of laws will continue to improve things over time.

I’ve been seeing various articles about how to adjust your investing after the Gamestop short squeeze. Given that my holding strategy doesn’t require me to follow any market news at all, I don’t need to do any adjusting! 🙂

Performance numbers. According to Personal Capital, my portfolio ended up about 14% over all of 2020. 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 +14.5% for 2020 YTD as of 11/3/2020.

The goal of this portfolio is to create sustainable income that keeps up with inflation to cover our household expenses. I’ll share about more about the income aspect in a separate post.

Filed Under: Goals, Investing, Retirement //

What If You Invested $10,000 Every Year For the Last 10 Years? 2021 Edition

Posted on January 5, 2021 // 10 Comments

Instead of focusing only on what happened in 2020, how about stepping back and taking the longer view? How would a slow-and-steady investor have done over the last decade? Most successful savers invest money each year over a long period of time, these days often into a target-date fund (TDF). You may not find yourself buying Bugattis with Bitcoin, but we should not take for granted the ability for everyday folks to own a basket of successful businesses for tiny fees. Don’t pass up the opportunity right in front of you.

Target date funds. The Vanguard Target Retirement 2045 Fund is an all-in-one fund that is low-cost, highly diversified, and available both inside many employer retirement plans and to anyone that funds an IRA. During the early accumulation phase, this fund holds 90% stocks (both US and international) and 10% bonds (investment-grade domestic and international). It is a solid default choice in a world of mediocre, overpriced options. These “simple” funds have made substantial wealth for millions of investors.

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

The real-world payoff from a decade of saving $833 a month. What would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 10 years? You’d have put in $100,000 over time, but in more manageable increments. With the interactive tools at Morningstar and a Google spreadsheet, we get this:

Investing $10,000 every year for the last decade would have resulted in a total balance of $184,000. That breaks down to $100k in contributions + $84k investment growth.

Extended edition: 15 years of real-world savings. What would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 15 years instead? (Now $150,000 total.) Here are the extended return numbers:

Investing $10,000 every year for the last decade and a half would have resulted in a total balance of $324,000. That breaks down to $150k in contributions + $175k investment growth. Your gains are now officially more than what you initially invested.

Real-world path to becoming a 401(k) millionaire. Not theoretical numbers from a calculator! Are you a dual-income household that can put away more? If you were a couple that both maxed out their 401k and IRAs at roughly $20k each or $40k total per year for 10 years, you would have a total balance of over $735,000. You would be 3/4 of the way to millionaire status after a decade. That breaks down to $400k in contributions + $335k investment growth.

If you did this for the last 15 years, you would be a 401(k) millionaire household. If you started when you were 30 years old, your account statement would show a balance just shy of $1,300,000 by the age of 45. (This doesn’t include the 401k company match, which is how many people reach millionaire status even faster.)

Timing still matters, but not as much as you might think due to the dollar-cost averaging and longer time horizon. Yes, the last decade has been a great run for US stock markets. But Vanguard Target funds also own a lot of international stocks, which haven’t been nearly as hot and have maintained lower valuations. More importantly, you can’t control that part. You have much more control over how much you save. Here are my previous “saving for a decade” posts:

Work on improving your career skills (or start your own business), save a big chunk of your income, and then invest it in productive assets. Keep calm and repeat. The only “secret” here is consistency. We have maxed out both IRA and the 401k salary deferral limits nearly every year since 2004. No inheritances, no special access to a hedge fund, no stock-picking skill. You can build serious wealth with something as accessible and boring as the Vanguard Target Retirement fund.

Filed Under: Inspirational, Investing, Retirement //

Free Investing Book PDF – 12 Simple Ways to Supercharge Your Retirement (Two Funds for Life)

Posted on December 15, 2020 // 1 Comment

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

He has published a new book called We’re Talking Millions!: 12 Simple Ways to Supercharge Your Retirement by himself and co-author Richard Buck. For a very limited-time, you can download this book in PDF format for free. I would recommend downloading it now and saving it to read later. I haven’t read it yet, but a quick skim shows that it appears to be a condensed version of everything on his site.

This book is designed to show you how you can change your life by making a handful of smart choices. It’s a recipe for potentially accumulating millions of dollars you can spend in retirement and leave to your heirs. […] But one thing is new: an action plan that applies them in a single solution that can be carried out easily by just about anybody who has a job. We call this plan Two Funds for Life.

Much of the 12 steps are based on common personal-finance advice, and they are still good advice. But if you’re looking for what Merriman offers that is different, that’s the “Two Funds for Life”. It appears that Merriman is still a strong believer in the future outperformance of small-cap value stocks. Here are the bare basics:

The basic Two Funds for Life recommendation for your 401(k) plan is pretty simple:

• Multiply your age by 1.5.
• Use the result as the percentage of your portfolio that should be in a target-date retirement fund. The rest goes into a small company value fund.
• As you get older, rebalance these two funds periodically, ideally once a year, based on your age at the time. This will gradually reduce your small-company value exposure.

Based on this formula, a 30 year-old today would hold 55% of their portfolio in a low-cost US Small-Cap Value index fund and 45% in a Vanguard Target 2055 Retirement Fund (assuming retirement at age 65). The Small-Cap Value percentage decreases each year by 1.5%. By the time they are 65 years-old, they would effectively transitioned to 100% Vanguard Target Retirement (Income) fund.

I appreciate the simplicity as this is much easier than juggling 10 funds yourself (Merriman also recommends M1 Finance to manage your DIY portfolio automatically). Still, 55% is a lot to hold in Small Value and you will definitely want to have read enough about company size and value factor investing and have faith in the fundamental reasons behind this approach before implementing this plan. I’m sure the book will contain his supporting evidence, but you should read about all the drawbacks as well before making the final decision. I own a small-cap value fund myself, and you must accept that small value stocks have gone through very long periods of underperformance relative to the S&P 500.

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

Mediocre Target Date Retirement Funds? Replace Them When You Switch Jobs

Posted on December 8, 2020 // 6 Comments

If you have a workplace 401k/403b/457 retirement plan, there is probably a target-date fund (TDF) inside. TDFs provide a “set-and-forget” investment option that automatically adjusts the asset allocation over time as you move towards your target retirement age. A recent WSJ article The High Cost of Target-Date Funds (paywall?) and academic paper Off Target: On the Underperformance of Target-Date Funds reinforce many of the things that most “Bogleheads” and DIY index fund investors have known for a while:

  • Some TDFs are low-cost, while others can have higher fees. Higher fees will likely result in lower performance over the long run.
  • You can replicate a TDF by using low-cost index ETFs. This takes more work, but increases your odds of higher returns at the same level of risk.
  • The paper found an average fee difference of 0.33% annually if you replicate with ETFs. The actual average performance difference found was closer to 1% annually, due to other factors like cash drag and poor active timing.

The Fidelity Freedom 2030 fund was used as the example of an expensive, overly-complex fund. Vanguard ETFs are used as the example of low-cost index ETF building blocks. Here is their example of a possible real-world difference in returns:

To add concreteness to our analysis, consider a hypothetical married couple, Ross and Rachel, in March 2006. Ross and Rachel are in their early 40s and expect to retire in 2030. As such, they put their 401(k) savings of $1MM into the Fidelity Freedom 2030 Fund (the largest TDF that holds both index funds and actively managed mutual funds). In December 2017, Ross and Rachel’s savings would have grown to just over $1.95MM. However, had Ross and Rachel replicated the Fidelity Freedom 2030 Fund using our RF, their saving would have grown to nearly $2.22MM, an outperformance of over $271K or 14%!

Now, you could focus on the $270,000 difference between the $1.95 million and $2.22 million ending balances. But don’t forget that the “bad option” still nearly doubled the $1 million into $1.95 million in the span of 11 years, all as the result of doing absolutely nothing after the initial investment. We should still appreciate that such an option is available to individuals and not take for granted the availability of public stock markets, mutual funds, and target-date funds even at 0.70% in fees annually.

(At the same time, we should be thankful for Jack Bogle, Vanguard, index funds, and all the people willing to move their money over the lower-cost option each year, as those flows have resulted in lower fees for everyone. We need to keep pressuring companies for lower costs, especially when we see little value-added.)

Should we expect everyone to manage their own ETF portfolios? Sure, it doesn’t take much *time* to DIY and rebalance annually but it does take some knowledge, experience, risk tolerance, and most importantly the ability to take repeated *action*. It doesn’t take that much time to create a simple will and testament either, but most people put that off every year as well. The unfortunate story of former Zappos CEO Tony Hsieh also included the lack of a will.

The average job tenure is now only 4.3 years. Therefore, a good middle ground might be to stay in whatever TDF fund is available in your employer plan, but when you switch jobs, immediately roll it over to an IRA and then invest it into a low-cost TDF with automatic dividend reinvestment. Instead of an ongoing series of actions, it’s a one-time action. I have recommended the Vanguard IRA and the Vanguard Target Retirement series to my family. There is still some paperwork, but once it is completed, you are “set-and-forget” until retirement with a low-cost option that should keep up with the industry’s best practices.

I still build and maintain my own portfolio of low-cost index funds, and I enjoy the ability to know and control what I own. However, I also appreciate the value of TDFs a little bit more each year. One reason for this is the amount of effort that it took to get my parent’s to move over their retirement funds to Vanguard from a more expensive, complex option. They just kept putting it off. I can’t imagine them having to manage and rebalance even a few funds. There is an enormous difference between “good enough but done” for most and “optimal if you do XYZ”.

You can run the ticker symbol of your TDF through Morningstar to check its annual expenses and portfolio contents. The good news is that each year there are fewer bad ones, and most are at least mediocre these days. See also: Morningstar Target Date Retirement Fund Rankings 2020: Not All The Same

Filed Under: Investing, Retirement //

Financial Planning Advice From Allan Roth’s 40 Years of Experience

Posted on November 20, 2020 // 3 Comments

Allan Roth is one of the financial planners whose independent opinions I have come to respect, and he shares seven takeaways from 40 years of financial planning. Financial Planning is an industry trade magazine targeted at (obviously) professional financial planners, but many of the articles are quite useful for DIY investors as well.

Read the article first, but here are my personal interpretations of his lessons (not his words):

  • A solid income and frugality both matter, but either one is not enough. He’s advised a high-income doctor with a net worth smaller than an emergency fund, and a 10X millionaire who is still afraid to spend their money. Both needed help.
  • Many people overestimate their ability to handle real-world risk. He has seen firsthand how clients answer the theoretical, as compared to how they later react during a real-world market crisis. Same idea as how paper trading is not real trading.
  • Indexing and low fees = higher returns. Some things take time to work out, especially when billions are spent on marketing against it.
  • You can’t predict the future. Other people can’t predict the future. Market cap indexing means that you will own the winners, many of which will be companies that don’t even exist today. Own bonds for safety, and accept whatever yield there is. You can’t predict rates either. The problem is that someone will always get it right any given time, and they’ll be loud about it.
  • The CFP designation doesn’t mean much (good or bad). CFP wants to be the gold standard for a professional financial planners, but they don’t do enough to put the clients first. It just means they have a minimum level of education, 2 years of industry experience, and chose to pay the annual dues that year. You could be a great planner without being a CFP, or a bad planner with multiple complaints and still be a CFP.
  • Financial planners provide the greatest value in: “real planning, improving tax-efficiency, behavioral coaching, and insurance analysis.” That means this stuff is harder and often benefits from an outside perspective. Note that this list excludes stock-picking and market-timing.
Filed Under: Investing, Retirement //

Emergency Funds Are The First Building Block For Retirement

Posted on November 19, 2020 // 1 Comment

The Blackrock article Emergency Savings = Better Retirement? comes from Blackrock’s department that helps companies manage their retirement plans. They propose the idea of creating a separate “sidecar savings account” in order to prevent early withdrawals via 401k loans (and often defaults):

A “sidecar savings” account may help build short-term stability, giving participants the confidence to commit to long-term retirement goals. […] Plan sponsors could help participants meet short-term financial needs by taking steps to help reduce [401k loan] defaults.

In other words, they want to give employees an emergency fund! Not exactly a new idea, but it supports the idea that the highest priority should be a short-term emergency fund, even if the real goal is higher retirement savings balances.

At the recent BlackRock Retirement Summit, Rachel Schneider of the Aspen Institute Financial Security Program explained that if participants have confidence about near-term stability through access to emergency cash, it may improve long-term behavior. “If they have more security today,” she said, “It should translate into more long-term savings.”

Build up your financial fortress in stages:

  • Looking past the next payday. Going from paycheck-to-paycheck to having $1,500 in the bank lets many things become minor speed-bumps instead of derailing your life. Do whatever you can to create this fund. For example, I’d even deliver Uber Eats/Doordash/Instacart in my open hours.
  • Looking past your current job. Going from having a minimal emergency fund to ~$10,000 gives you the ability to take career risks and thus the opportunity to turbo-boost your income. You might deliver on Uber Eats to build up this fund, but Uber Eats won’t take to you financial freedom. You need to build up valuable skills and/or business equity.
  • Reaching the point of inevitable financial freedom. Finally, going from $10,000 to $100,000 is amazing because that’s when you realize that reaching financial independence is a matter of WHEN, not IF. It’s a sign that you’ve put in the dirty work and developed the habits and structure required. The only remaining component is time, so now you can make some more minor adjustments to make that time more enjoyable. Similar job with more flexible hours? Less hours? Less politics? Better boss? “The first $100,000 is a b****.”

I prefer the comfort of cash in the bank, but you just need something that you know will float you in the short-term, be it cash or a stock portfolio or whatever else you’re willing to sell. I’ve heard various things like “I can just use my credit cards” or “I can just take a home-equity loan”. Unfortunately, 2020 has shown us that long-term unemployment and long-term depressed wages can happen out of nowhere. Taking on debt when you don’t even have enough income to make the payments can quickly spiral out of control.

Filed Under: Banking, Retirement //

My Money Blog Portfolio Income Update – November 2020

Posted on November 5, 2020 // 2 Comments

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While my investment portfolio is designed for total return, I also track the income produced. Stock dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation. Interest from bonds and bank deposits are steadier, but these days it’s a struggle to simply keep up with inflation.

I track the “TTM” or “12-Month Yield” from Morningstar, 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 over the same period. I prefer this measure because it is based on historical distributions and not a forecast. Below is a close approximation of my portfolio (2/3rd stocks and 1/3rd bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 12/24/19) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)		 25% 1.72% 0.43%
US Small Value
Vanguard Small-Cap Value ETF (VBR) 		5% 2.22% 0.11%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		25% 2.60% 0.65%
Emerging Markets
Vanguard Emerging Markets ETF (VWO) 		5% 2.76% 0.14%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 3.86% 0.23%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Treasury ETF (VGIT) 		17% 1.72% 0.29%
Inflation-Linked Treasury Bonds
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) 		17% 1.25% 0.21%
Totals 100% 2.06%

 

Trailing 12-month yield history. Here is a chart showing how this 12-month trailing income rate has varied since I started tracking it in 2014.

Reality check. One of the things I like about using this number is that when stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market. I see it as a conservative, valuation-based indicator of how much I can withdraw perpetually, due to our very long retirement horizon of 40+ years. During 2020, the lower income rate suggests that while the value of my portfolio is up, the future returns also look lower due to high valuations and low interest rates.

Despite reading countless articles debating this topic, I still feel a 3% withdrawal rate remains a reasonable target for planning purposes if you want to retire young (before age 50) and a 4% withdrawal rate is a reasonable target if retiring at a more traditional age (closer to 65). If you are not close to retirement, your time is better spent focusing on earning potential via better career moves, investing in your skillset, and/or looking for entrepreneurial opportunities where you own equity in a business.

For the past few years, our portfolio has distributed about 2% to 2.5% in the form of dividends and interest. If we were to stop working, we would then take out another 0.5% to 1% by selling a few shares and then we’d have our 3%. Right now, we are both still generating some employment income (though significantly less in 2020) and withdraw less than this income number, so we don’t have to sell anything.

Practical and personal implications. I let all of our dividends and interest accumulate without automatic reinvestment. I treat this money as our “paycheck”. Then, as with a real paycheck, we can choose to either spend it or reinvest in more stocks and bonds.

Instead of trying to purely live off the income, we use it to enable us to have more flexible working hours as parents of three young kids. On a good day, we look forward to a day of work with adults (who can wipe their own butts) and then we look forward to the next day of spending all day with the kids (who can experience pure joy and wonder). If we’re being honest, I don’t think either of us truly wants to be a full-time stay-at-home parent while the other works for money full-time. Nor do we want to be the full-time worker while the other stays at home. There would likely be resentment issues both ways.

But the portfolio income is what makes it all possible. We are very thankful for this financial flexibility, which has been both a result of conscious preparation over 15+ years and good fortune. Others may use their portfolio income to pursue their passions, start a new business, travel around the world, sit on a beach, do charity or volunteer work, and so on. I may not be “retired”, but I am still glad we seriously pursued financial freedom before having kids.

Filed Under: Goals, Investing, Retirement //

MMB Portfolio Asset Allocation Update, November 2020

Posted on November 4, 2020 // 6 Comments

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I support the idea of skin in the game, and I wish more “experts” would simply share what they actually own. Here’s my current portfolio update as of November 2020, including all of our 401k/403b/IRAs, taxable brokerage accounts, and savings bonds but excluding our house, cash reserves, and a few side investments. I use these updates to help determine where to invest new cash to rebalance back towards our target asset allocation.

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 different accounts, adds up my various balances, tracks my performance, and calculates my overall 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 “Allocation” and “Holdings” tabs of my Personal Capital account, respectively:

Stock Holdings
Vanguard Total Stock Market (VTI, VTSAX)
Vanguard Total International Stock Market (VXUS, VTIAX)
Vanguard Small Value (VBR)
Vanguard Emerging Markets (VWO)
Vanguard REIT Index (VNQ, VGSLX)

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

Target Asset Allocation. I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the recent past will necessarily create superior future returns. I mainly make sure that I own 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.

While you could argue for various other asset classes, 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 through those fearful times. I simply don’t have strong faith in the long-term results of commodities, gold, or bitcoin.

Instead of staying with my fixed 50/50 target, I am explicitly letting my US/international ratio float with the total world market cap breakdown. I think it’s okay to have a slight home bias (owning more US stocks than the overall world market cap), but I want to avoid having an international bias. I just want to maintain the balance of the total world market cap, which has become roughly 60% US and 40% international. This also means less need for rebalancing.

Stocks Breakdown

  • 46% US Total Market
  • 7% US Small-Cap Value
  • 30% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 33% US Treasury Bonds, intermediate (or FDIC-insured CDs)
  • 33% High-Quality Municipal Bonds (taxable)
  • 33% US Treasury Inflation-Protected Bonds (tax-deferred)

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 plan to only manually rebalance past that if the stock/bond ratio is still off by more than 5% (i.e. less than 62% stocks, greater than 72% stocks). With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and taxes.

Holdings commentary. 2020 has been… well… you know. Many times I just have to keep reminding myself that I cannot predict the future, even there appears to be impending doom around the corner. There is no possible way I will know how the stock market will react in a week, a month, or a year. Some businesses will fail and new businesses will start. I just have to trust in capitalism, human ingenuity, human resilience, and our system of laws to allow capital to flow where it can work best over time.

When my equities had dropped significantly and my unrealized gains were low, I thought about moving towards simplicity and selling my positions in the US Small Value (VBR) and Emerging Markets (VWO) classes. However, I realized I actually liked having some extra moving pieces that didn’t move in concert with my relatively large VTI and VXUS positions. I did sell some tax lots of Wisdomtree ETF positions and swapped over to the closest Vanguard ETF equivalents.

I was not disappointed in my decision to hold only the highest-quality bonds and cash equivalents. US Treasuries, TIPS, investment-grade municipal bond funds, FDIC or NCUA-insured certificates of deposit, US savings bonds.

Performance numbers. According to Personal Capital, my portfolio went up about 3% so far in 2020, although the ride has not been nearly as boring as that sounds! I see that during the same period the S&P 500 has gone up +7%, Foreign Developed stocks down -3%, and the US Aggregate bond index was up about +6.6%. These numbers could change quite a bit in a week, so it’s not very useful information.

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 +3.8% for 2020 YTD as of 11/3/2020.

The goal of this portfolio is to create sustainable income that keeps up with inflation to cover our household expenses. I’ll share about more about the income aspect in a separate post.

Filed Under: Goals, Investing, Retirement //
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