Retirement Rule of Thumb #537: Age-Based Targets at 35, 45, and 55

Here’s yet another retirement rule-of-thumb, this time by Fidelity Investments.

[…] the average worker may replace 85 percent of his pre-retirement income by saving at least 8 times his ending salary. In order to reach the 8X level by age 67, Fidelity suggests workers have saved about 1 times their salary at age 35, 3 times at age 45, and 5 times at age 55.

As usual, these number are based on a long list of assumptions. Start saving at age 25, retire at 67, nice gradual income growth, nice gradual portfolio growth, and so on:

The company’s 8X savings guideline is based on a hypothetical worker saving in a workplace retirement plan, such as a 401(k), beginning at age 25, working and saving continuously until 67, and living until 92.

• The employee will make continuous annual salary contributions to a workplace plan beginning at 6 percent and escalating 1 percent per year until 12 percent, plus receive an ongoing 3 percent annual employer contribution during their career.
• The calculation assumes a lifetime hypothetical average annual portfolio growth rate of 5.5 percent.
• Social Security payments are factored into the replacement income ratio of 85 percent.
• The employee’s income grows by 1.5 percent per year over general inflation with no breaks in employment or savings.

Focusing on the positive, these age-based targets are meant to be more helpful when setting goals than big, scary numbers. Also, these rules reinforce the idea that starting early is very important as it gives compounding time to work.

But again, we see the same-old assumption that you will constantly spend a certain % of your working income. Why? The implicit acceptance that spending should be linked to salary keeps you from ever getting ahead. Think about it; Your spending can be completely independent of salary. Instead, you earn more, you spend more, and the hamster wheel goes ’round and ’round:


Image credit to Polyp.org.uk and FOEI.

The reason why I write is that working 40+ hours a week for 40+ years is unacceptable to me. Retirement rules should be based on your spending, not salary. Salary is important, but your spending determines how much money you need to save. Your spending is also much more under your control than most people admit. 25 times your annual spending; That’s my guidepost.

Barclaycard NFL Extra Points Credit Card Review

The Barclaycard NFL Extra Points Credit Card is currently offering 10,000 bonus points after making $500 in purchases over the first 90 days. That’s worth $100 in statement credits which you can use to increase your savings rate, or they have other NFL rewards (is this worth it for certain teams? new Cowboys stadium?). You can personalize the card with your favorite NFL team and there are some other NFL-specific perks like 2 points for every $1 spent at NFLShop.com, team pro-shops, and in-stadium. I think it’s a great gimmick as many NFL fans would love to have their favorite team on their credit card, even if the ongoing card rewards are rather mediocre.

This card is issued by Barclays Bank, so it can be combined with applications with other issuers like Citi, Chase, American Express, and Capital One. It’s always good to spread your new card application across different issuing banks. If you apply for multiple cards on the exact same day, then the credit checks won’t show up on the other issuers’ radars.

Motif Investing and Dividend Stocks: Questions and Answers + $150 Bonus

In my initial review of new brokerage firm Motif Investing, I wanted to use this new brokerage structure to create cheap, custom ETFs – specifically, baskets of dividend-oriented stocks that for example match the S&P Dividend Aristocrat or Dividend Achiever companies that have raised dividends for 10-25 consecutive years or more. Motif asked if I had any specific questions, I sent some over, and here are the answers as provided by Tariq Hilaly, Motif Investing’s Co-Founder & Chief Investment Officer:

MMB: I’m specifically interested in dividend-oriented strategies. Do you offer any motifs that offer high dividend yields?
A: We sure do. As you know, a motif is a portfolio of up to 30 stocks reflecting a specific idea or theme. For starters, we have the Energetic MLPs motif, which is made up of master limited partnership stocks that have a current composite dividend yield of 7.20%. This motif comprises more stable MLPs because those with the highest debt-to-equity ratios were screened out. Motif members can find each company’s dividend yield by logging in to view the motif’s Overview page, clicking on the Detail Table, then clicking “Add Columns” and checking the dividend yield box. Like all motifs, this motif can be customized in order to meet the needs of the investor’s particular investment strategy.

Another motif, Office Space is made up of commercial real estate investment trusts (REITs) that have a current composite yield of 3.88%. This motif avoids REITs with more than 30% of their debt maturing in the next three years to control for refinancing risk.

Our Recession Resistant motif screens for companies with a low debt-to-equity ratio, high dividend-coverage ratios, and positive dividend growth, then ranks them by dividend yield – those stocks have a current composite dividend yield of 3.21%. These companies are known to carry the potential to survive even a deep recession without having to cut their dividends as quickly as many companies had to do during the recession of ‘08-‘09 (dividend cuts can often result in stocks taking a big hit). Note: The dividend yields provided above are as of August 29, 2012.

MMB: Are there plans in the future for me to be able to “share” a custom motif with others? Or at least name them and save them locally in my own account?
A: Yes, we plan to launch a feature later this year that will let our members share a motif they’ve customized by adding or deleting stocks– or change a motif’s weightings. In the future, they’ll also be able to name the custom motifs any way they want.

MMB: I figured a reason why Motif doesn’t really venture into this is that you can’t mention specific indexes without paying royalties, is that partially correct?
A: Yes, you’re correct. For us to replicate or mention an established index we have to license it. So at this point, we don’t mention specific indexes.

MMB: Does the motif ever “rebalance” in the future back to the original weightings to prevent drift?
A: Yes, we rebalance most motifs on a quarterly basis. On rare occasions, with longer-term investing strategies that take longer to play out, we rebalance once a year.
Since the motifs are designed to represent an idea, we update them according to the rebalancing schedule as the idea evolves, so that they continue to best represent the idea. For example, companies may enter or exit a market – this was the case in tablets, where Amazon entered and Research In Motion and Hewlett-Packard left. So in our Tablet Takeover motif, Amazon was added, and RIMM and HP were removed at the last rebalance. Another example is our Onward Online Ads motif — both Facebook and Yelp were added after their IPOs. That’s how we work to prevent idea drift in our base motifs.

Follow-up

I’m still not interested in any of their current motifs, but I am glad they are open to sharing custom motifs as that can encourage the making some good ones. I looked into the S&P 500 Dividend Aristocrats, but there are 51 of them. With a limit of 30 stocks, I’d have to do some additional screening (or make two baskets, but that would be double the commissions). I just think something could be done here to take advantage of the ability to trade 30 stocks at a time for only $9.95, with no ongoing ETF expense ratios eating into returns. Perhaps someone else can come up with a better idea.

Current Sign-up Bonus

Right now, Motif Investing is offering a $150 cash bonus when you open a new brokerage account with $2,000+ and make 5 trades. If you make 1 trade, you’ll get $50. 3 trades will get $75. Limit one account bonus per household.
[Read more…]

Schwab vs. Vanguard ETF Expense Ratio Comparison

Schwab recently announced lowered expenses on all of their 15 Schwab-branded ETFs, undercutting everyone else’s comparable ETFs in every category, including Vanguard. Quite a bold move! Here is a limited comparison of comparable Vanguard and Schwab ETFs. The asset classes are picked to include the common asset classes as mentioned in many passive investing books and articles, but admittedly biased towards the ones that I like to use in my own portfolio. This way, I can also note which asset classes are not covered.

Briefly, an expense ratio of 0.01% means that on $10,000 invested you would be charged $1 a year in fees. The fees are taken out of the ETF’s share price, or net asset value (NAV), a tiny bit each day. So a difference of 0.03% (3 basis points) on a $10,000 investment would add up to just $3 per year.

Asset Class Schwab ETF
Ticker
New Expense Ratio Vanguard ETF
Ticker
Expense Ratio
Broad US Stock Market SCHB 0.04% VTI 0.06%
Broad International Stock Market VXUS 0.18%
Developed International Stock Market SCHF 0.09% VEA 0.12%
Emerging Markets SCHE 0.15% VWO 0.20%
REIT (Real Estate) SCHH 0.07% VNQ 0.10%
Broad US Bond Market SCHZ 0.05% BND 0.10%
US Treasury Bonds – Short-Term SCHO 0.08% VGSH 0.14%
US Treasury Bonds – Intermediate-Term SCHR 0.10% VGIT 0.14%
US Treasury Bonds – Long-Term VGLT 0.14%
TIPS / Inflation-Linked Bonds SCHP 0.07%

My comparison differs from the Schwab-provided version in the area of Treasury ETFs, with what I think are more appropriate Vanguard pairings. As Vanguard does not have a TIPS ETF, I should note that the Schwab TIPS ETF compares favorably to the popular iShares TIPS ETF (ticker TIP) with an expense ratio of 0.20%.

If you already have your money with Schwab, this is great news and a good sign for the future that they are committed to building up some decent-sized assets and trading volume on their ETFs. (Vanguard’s higher asset sizes and volumes mean lower bid/ask spreads and smaller NAV deviations, resulting in lower overall trading costs.) In a Schwab brokerage account, you can trade Schwab ETFs commission-free.

However, if you’re already investing with Vanguard, I don’t think these small expense ratio differences are enough to warrant moving assets especially if you have unrealized capital gains. (You can also trade all Vanguard ETFs commission-free inside a Vanguard brokerage account, and also many of them free at TD Ameritrade.) Vanguard has a long-standing commitment to “at-cost” investing and passing their savings onto the retail investor. In contrast, Schwab is almost certainly losing money on many of these ETFs, and thus using the low expense ratios as a temporary loss-leader “sale” to attract assets. For example, their bond ETF (SCHZ) currently has $316.5 million in assets and thus only generates around $158,000 a year in fees. That’s probably less than one employee salary at Schwab. In other words, I don’t think a substantial savings margin is sustainable over the horizon of many decades. I’d still recommend Vanguard for new investors, especially as Vanguard also has cheaper stock commissions for outside ETFs and individual stocks ($7 or less vs. $8.95).

A good point brought up in the Bogleheads forum is the ability of some people to gain access to these Schwab ETFs in their 401(k) retirement plans through the Schwab Personal Choice Retirement Account® (PCRA). If your retirement plan offers such a brokerage window, you may be able to trade these cheap Schwab ETFs for free with your tax-deferred money. Most PCRAs charge an annual fee of around $30-$50. Unfortunately, I found out that due to silly regulations, if you have a 403(b) plan your PCRA account is limited only to mutual funds. However, Schwab does have a small selection of low-cost index mutual funds as well.

COBRA and Retroactive Health Insurance Coverage

Health insurance can be a complicated subject. This article is about the specific situation where you recently ended a job and haven’t yet started either a new job with benefits or alternative health coverage. Should you take the COBRA coverage, or not?

COBRA Quick Summary
COBRA stands for the Consolidated Omnibus Budget Reconciliation Act of 1986, which requires the option to extend health insurance coverage for up to 18 months (more in some cases) after a “qualifying event” under a “qualifying employer”. In general, a qualifying employer is one with 20+ full-time employees. A common qualifying event is when you lose your job due to either voluntary or involuntary reasons (things like gross misconduct are excluded). So it applies both if you’re laid off and if you quit on your own. You are required by law to receive a notice about your COBRA options within 14 days after the plan administrator receives notice of a qualifying event.

However, the employee must pay the paying the full cost of the premium (both employer and employee portions), plus up to a 2% administrative charge. This means that it can be expensive. I believe that the last time I quit, my single-person coverage cost over $800 a month. The bill for a family with kids could easily be over $2,000 month.

Continuous Coverage and Retroactive Clause
Due to this high cost, you may consider skipping it and taking your chances. However, if something happens and you have a gap in coverage longer than 63 days, then your next health insurance no longer has to cover any pre-existing conditions. This can be a really big deal, and may scare you into signing up for expensive COBRA benefits right away. But there’s a final wrinkle.

You have 60 days after you lose your benefits to elect to pay for COBRA coverage. However, even if you enroll on Day 60, your coverage is retroactive to Day 1. Of course, you’ll have to pay the retroactive premiums for that period. Thus, you could technically waive your COBRA coverage initially, and then wait to see if you incur any medical bills. If you manage to get on a new health plan on Day 30 or Day 55 with no medical bills, then you’ll still be guaranteed full coverage going forward and you won’t have paid anything during your gap. If you can’t find new coverage within 63 days or rack up medical bills higher than the premiums, then you can rescind your waiver and retroactively activate your COBRA benefits. Effectively, you get a do-over.

Bottom Line

Under current law, it is very important to maintain “continuous coverage” in order to guarantee that your future insurance can’t exclude pre-existing conditions. Otherwise, if for example you hurt your back during a gap, those back problems may be excluded from your future insurance provider for 12 months. That could be a lot of uncovered bills. However, if you expect your gap in coverage to be under 60 days, then you can use the retroactive clause under COBRA to try and avoid paying for COBRA during that time. If you are going to use this do-over, be very careful with your dates. You can wait 60 days to elect for coverage, and then you actually have another 45 days to make the payment to cover the period from the date of election to the date of lost coverage. If you send in a premium payment, make sure it is for the correct amount and use certified mail and return receipt to document everything. Legally, payment is considered to be made on the date it is sent to the plan. Don’t cut things too close.

I have read articles that recommend using these extra 45 days on top of the initial 60 days to allow you to wait 105 days before having to commit. Their reasoning is that most insurance companies will not pursue you (sue you, ding your credit, etc.) for the insurance premium if you simply never send it in and tell them you no longer want coverage. I don’t agree with this logic and it seems rather risky, but I think it is okay to use the 45 day period if you are tight on funds and need more time to pay the premium.

Sources: Wikipedia, Department of Labor COBRA FAQ, DoL Employee Brochure (PDF), DoL HIPAA FAQ.

Price Comparison: Selling My Old iPod Touch Online and In-Store

My parents gave me a very generous present of an iPod Touch for Christmas 2009. It came in very handy while traveling and at the gym, but then I got an iPhone (business expense!) and stopped using the iPod. It felt tacky to sell, so I waited. Finally, with all the talk about selling “old” iPhones right now, I figured it was time to sell (and use the money to help pay for a plane ticket for a grandparental visit, of course). I didn’t want to mess with Craigslist or eBay, as right now I just want it done quick and easy. There were a lot more options out there than I thought!

Details and condition: Apple iPod Touch (3rd gen, 64 GB). I don’t believe she paid the original retail price of $399, but it was at least in the mid $300s. Fully functional with original box, charging cable, and headphones. The screen is still smooth as glass and unscratched, but the metallic backside has many small scratches.

Real World / In-Person

Here are the options I found if you prefer to walk into a physical store and sell your electronics.

Vendor Offer Price Details
Best Buy $87.54 Store-credit only
Radio Shack $75 Store-credit only
Gamestop $54.40 Cash value quoted. Get 25% more as store credit ($68)

Online / Mailing it in

With these websites, you get a quote and then mail in your gadget using a prepaid shipping label. Once they inspect and verify, they will send you payment via gift certificate, check, or PayPal. There is the added risk of loss during transit, or a rejection if they disagree on condition, but most of them will ship it back for free.

Vendor Offer Price Details
Amazon Trade-in $108.75 Amazon.com credit only
eBay Instant Sale $81 Paypal only
NextWorth $80 Paypal, Target gift card, or check
Gazelle $69 Cash quoted via Paypal or check. Get 5% extra with Amazon gift certificate
BuyMyTronics $63 Check or PayPal

The wide range of prices shows that you should definitely compare prices when selling this way. That was surprising, considering Apple products are nearly commodities now. I shop at Amazon.com regularly and value Amazon.com credit at least at 95 cents on the dollar, so I went with them. The Amazon brand backing helped as well. I probably could have gotten more if I listed on eBay (remember to account for eBay and Paypal fees), but I went ahead and printed out the prepaid UPS label and dropped it off at the nearest UPS store. I’ll update this post if I have any issues with the sellback. Please share your own experiences in the comments.

Citi Forward Card Netflix Promo

The Citi Forward® Card is running a limited-time promotion with Netflix for new cardmembers where they will pay for your Netflix streaming for an entire year if you use the card for payment. At currently prices, that’s $7.99 x 12 = $95.88 + taxes. However, the wording of the fine print suggests that if you have a higher Netflix bill due to DVD rentals, it will rebate up to $10 a month = $120 for the year.

You must register your new Citi Forward Card with Netflix.com as the preferred payment method to pay for your month-to-month Netflix membership. You will receive a statement credit for the total Netflix monthly membership fee (up to $10 per month) on the same statement as the transaction at Netflix.

This actually would work perfectly for us since we are testing out a Netflix + Roku box combo to replace cable TV right now (review upcoming)… but I already have the Citi Forward card.

Basically, if you use Netflix, this is an up to $120 sign-up bonus with no additional spending requirement for what is actually not a bad keeper card with no annual fee. It offers 5x ThankYou points on restaurants (including fast food) and also “entertainment” = bookstores, record stores, movie theaters, and movie rental stores. For many years, the best part of the bookstore classification is that Amazon.com counted for 5x points. Recently there are rumors that Citi is thinking of no longer counting Amazon as a bookstore, although as of the last billing statement Amazon purchases did still work. Perhaps there is some “grandfathering” going on, but FYI. In any case, you still get 100 ThankYou points a month just for paying your bill on time.

  • Citi Forward® Card limited-release offer application link

Career History: List of Every Job I’ve Ever Had

Help Wanted SignI’ve been thinking about all the various jobs I’ve held during my life. I remembered that even as a 10-year old child, I dreamed about being financially independent in the way that I worked for money and could live on my own – I wanted to be like the kids in the Boxcar Children books. Looking back, I suppose I shouldn’t be surprised that I would eventually dream about being financially independent in the way that I didn’t have to work for anyone. I often wonder how I turned out that way.

Here’s a list of all the paying jobs I can remember, in semi-chronological order. As you can see, I’ve always been firmly on the nerd/geek side of things. As a kid, I remember listing my future job as “scientist”.

  • Restaurant cashier/host
  • Fast food drive-thru window dude
  • Country club food server
  • SAT/ACT/math tutor (high school)
  • Undergraduate research summer intern
  • Engineering summer intern
  • Academic paper proofreader / chart maker / equation maker
  • Campus security staff
  • Parking lot attendant
  • Tennis instructor
  • University bookstore cashier
  • University psychology department test monkey
  • Math/physics/writing tutor (college)
  • Graduate student researcher
  • Graduate student instructor (physics, thermodynamics)
  • Engineering consultant
  • Freelance writer
  • Freelance web designer
  • Owner of various websites with advertising

Work has been good to me. My stints in restaurants taught me that lots of people work very hard for very little money, which made me study harder. Being an working graduate student taught me that I could eat and live quite happily on an income of less than $18k a year, something I might not have learned had I went straight into a corporate job. I met my wife while working for campus security. How many jobs have you had, and which ones changed your life?

Crazy Idea: Double Your Savings Rate With Credit Card Bonuses

Every so often, I receive e-mails very similar to the one below regarding credit card bonuses. It’s a valid question, so I wanted to make a thoughtful reply.

Do you ever total up the amount that you actually save on your credit cards via bonus points, mileage, etc? Also, I’ve seen you go through he laundry list of credit cards that you have and I have to wonder what kind of impact this has on your credit rating. Can you post an article or reply with this information? I’ve long held the belief that trying to live by simple means can have a big impact on your savings, but I’m skeptical that you can actually save a substantial amount “gaming” the credit card rewards and tiny discounts of the world. Thoughts?

My initial response to these types of questions used to be quite simple – I like doing this stuff, it makes me money, but it’s not for everyone. However, I got to thinking about how currently bonuses are at historical highs and perhaps it can have a big impact on the savings rate of the average family if they are financially responsible already.

First, some quick stats. According to the US Census, the median household income in the US in 2011 was $50,054. According to the BEA, the savings rate is in the neighborhood of 4%. That means a savings rate of $2,000 a year for the average household (4% of $50k).

According to FICO, about 60% of the US population has a “good” to “excellent” credit score of over 700. Combine this with a slight majority (again ~60%) of people having no credit card debt at all, which means there are many households able to handle applying for credit cards and using them responsibly without hurting themselves by carrying a balance (15% interest can quickly wipe out any potential benefit, don’t do it!). Just because you have a credit card doesn’t mean you need to pay a penny of interest, even while taking advantage of the fraud protection and extended warranties.

Thus, I pose the crazy idea that the average household could DOUBLE their savings rate with careful use of credit card bonuses, as it is definitely possible for such families to obtain $2,000 a year in credit card bonuses. Wouldn’t that count as significant? Credit cards are issued to individuals, so that means a household with two adults would need each person to get $1,000 in rewards. Both my wife and I have been approved in the past for the top tier credit cards with a household income in that range and a 700 credit score. This year, we’ve already earned well over $2,000. Here’s a sample of actual cards that we have gotten recently:

I’ve also taken advantage of small business card bonuses:

  • Ink Bold® Business Charge Card$500 value. Details.

That’s over $1,000 in currently-available offers listed above, I’m not including all the expired offers. Note: There are many other cards with higher potential value bonuses like the Chase Hyatt card with two free nights anywhere, even at $600/night hotels. Or, I could get a bunch of points or miles and get a good redemption value. But for this exercise I’m just trying to stick with things with close cash equivalents like gift cards that can replace existing spending or be sold easily for cash.

A basic strategy would to apply for a new batch of 2-5 cards (no more than 2 from same bank issuer, best to do all on the same day) once every 3-6 months. Applying for additional credit cards will lower your credit score, temporarily. As time passes, the effect of each inquiry diminishes, until after 2 years the effect is zero. In my mind, the sign-up bonus along with an often-waived annual fee is an agreement for you to try out the card during that first year. If you like it, then you should keep it. If you don’t like it, there is nothing wrong with canceling the card to avoid the annual fee, and it won’t hurt your credit score very much.

Going back to credit scores, you can see all my free credit scores here from all the bureaus. My credit scores actually stay up quite well at about 5 temporary points lost per card, I’m sure many others can chime in that they have earned hundreds if not thousands and also have good credit scores. Is a few thousand dollars a year worth this extra effort? That’s up to you. It is for me.

Update: I forgot to add – credit cards rewards are also not subject to income tax.

Chase Sapphire Preferred Banner 50000

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Caine’s Arcade: Creative Kid Entrepreneur + Follow-Up

If you haven’t seen this film about 9-year-old Caine and how he turned loneliness and boredom into his own cardboard video game arcade and an inspirational phenomenon, you must watch it now:

There’s also now a follow-up clip with Caine, his $200,000 college fund, kids he’s inspired, and the Imagination Foundation the filmmaker started:

Finally, check out the Cardboard Challenge happening on October 6th at locations around the globe. Very cool.

AT&T Promotions – $25 AutoPay, $10 Paperless Bonus

If you are an AT&T Wireless, U-verse, Home Phone, or Internet customer, here are some promotions that are currently available.

$25 for AutoPay
Sign up for automatic payment of your bill via credit card or bank account and get a $25 prepaid Visa gift card. You must maintain your AutoPay status for at least 90 days. FYI, here’s a different one offering $10 for AutoPay.

$10 for Paperless Statements
Enroll in paperless billing and get a $10 prepaid Visa gift card. Offer is valid for AT&T Wireless, U-verse, Home Phone, and Internet Accounts. One $10 Reward Card for Paperless Billing enrollment per 12-month period. Must retain qualifying enrollment in Paperless Billing for a minimum of 90 days and at time processing of reward is completed.

Current AT&T TV, Internet, and Phone promotions
Check out the current promotion for their U-Verse products and regular AT&T bundles with high-speed internet starting at $14.95 a month.

AT&T High Speed Internet $14.95/month for 12 months

 

Meet America’s Youngest Landlord

Here’s a nice feel-good story about a financially-savvy teenager. 14-year-old Willow Tufano may be America’s youngest landlord. She bought a house in a short sale in Port Charlotte, Florida for $12,000. The 3-bedroom house is now rented out for $700 a month! (The house was on the market for $100,000 at the peak of housing bubble.)

More details – She put down $6,000 cash, her mom (a real estate agent) put down $6,000. She earned her share of the cash primarily from offering a service where she clears out foreclosed houses on behalf of the new investors. She then picks through the stuff and resells any goods or appliances that she can. She also spends her weekends looking for deals from garage sales and resells them for a profit on Craigslist.

I have to wonder about the whole nature vs. nuture thing about kids like this. Certainly having a real estate agent for a mother helped in this example, but so I doubt that in itself is enough. In my idle daydreams, I think it would be cool to start some sort of farmer’s market stand with my kids to show them some business basics. From the Ellen Show:

More: DailyMail, Inside Edition