Archives for July 2013

How Spending Changes Throughout Working Life and Retirement

Common retirement planning advice tells you to plan on replacing 70-80% of your pre-retirement income. However, this Financial Post article argues that number may be closer to 35%. Article found via k66 of Bogleheads.

Essentially, the author segregates your income to “regular” spending and temporary “investment” spending that won’t continue into retirement. Regular consumption includes food, transportation, home and car maintenance, and insurance. Temporary spending include a mortgage, child-related costs, work-related costs, and retirement savings. The idea is that in retirement your house will be paid off and your kids will be financially self-sufficient, so those “investment” expenses will go away and you’ll need less money than you may think.

Here’s an illustration of how this would break down for a theoretical couple that bought a house at 30, had kids at 35, and retires at 65.


(click to enlarge)

Now, it’s easy to get hung up on how this chart doesn’t accurately reflect your life. It’s not supposed to! Instead, imagine for yourself what this chart might look like for your situation. For example, my parents definitely kicked up their savings rate post-kids and pre-retirement. For us, we had our highest savings rate pre-kids. You may need 20% of your current income, or you may need 80%. This is one place where a rule-of-thumb just isn’t useful.

I would note that the article doesn’t really mention health insurance or other health-related costs, possibly because it is a Canadian newspaper. Also, young people in the US probably spend at least a few years paying down college loans. Finally, some folks will need to account for new post-retirement spending that might pop up like travel and other costly recreational activities.

Car Insurance Quote Shopping and Credit Checks

After doing a car insurance quote comparison test, I wanted to clear up any confusion regarding applying for car insurance and your credit history. Here’s why you should be able to get quotes from as many insurers as you like without worrying about your credit score.

Will auto insurance companies check my credit?

Probably. According to recent surveys, over 90% of insurance companies (including the top 5 auto insurers) use credit information in their underwriting process. It’s not the only thing, just one of the many things that gets considered like your driving record or accident history. There is a historical correlation between certain behaviors like high credit limit utilization and filing an insurance claim. Insurance scores weigh various factors differently than in standard FICO scores.

However, certain states including California, Hawaii, and Massachusetts do not allow the use of credit information in the underwriting or rating of car insurance. Texas had a similar bill proposed in 2013, but I don’t think it was passed.

When will they check my credit?

Either during the premium quote process, or when you actually pick one and apply for insurance. (Some will also check your credit upon premium renewal.) Out of the four insurance companies that I got quotes from, only Progressive asked for a Social Security number and it was optional (I declined to provide it). However, all of them get permission from you to run a credit check in the fine print when you apply for a quote.

For some companies, the initial quote provided assumes you have acceptable credit, and during the application process they check your credit and may adjust the quote based on any negative information. For example, your report may show a high utilization percentage of available credit.

Will it affect my credit score? Hard vs. soft pulls

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Cooked: A Book About Why You Should… Cook

Consider the following questions that you may have asked yourself recently:

  • What can you do to consume fewer calories while eating healthier food?
  • How do you get your family to spend more time together, talk, and connect?
  • How do you get the public to care more about what they are eating, which in turns forces the food corporations to improve their standards?
  • What can modern super-specialized citizens do to feel more in touch with nature and self-sufficient?
  • How can you save some money?

I’m sure the title has given it away by now, but the answer is to cook! Specifically, cook at home for yourself and your family, as close to from scratch as possible. At least, that’s the lesson from the book Cooked: A Natural History of Transformation by Michael Pollan. A previous post expanded on the health benefits of cooking at home, and the book examines cooking as broken down into the four elements: Fire (BBQ), Water (Braises), Air (Bread), and Earth (Brewing).

Indeed, why is it that we seem more obsessed by food than ever (Food Network, Cooking Channel, Yelp, Food Bloggers Everywhere) at the exact same time that fewer and fewer people actually know how to cook? The food industry is betting that the current generation of kids will have hardly any idea of how to cook even basic dishes, as it means even more $$$ for them! A quote from consumer researcher Harry Balzer:

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Auto Insurance Quote Comparison Results: State Farm vs. GEICO vs. Allstate vs. Progressive vs. Liberty Mutual

Inspired by reader experiences, I set aside an hour today to obtain auto insurance quotes from the major providers in my area. Insurance companies provide different quotes for “new customers” and “renewals”. Guess which one is usually lower? Also, many insurers choose to focus on specific types of customers such young, high-risk, or low-risk. Finally, I’ve also moved around a lot so I’ve noticed that my quotes change significantly based on where I live. The bottom line is that insurance prices vary for a lot of different reasons, and the only way to know which one is cheapest for you is to compare quotes directly.

It will help to gather the following information first:

  • Personal information. Full name, birthdate, occupation, education level, accident history. None required Social Security Number, but others might.
  • Car information. Many pull this from DMV records automatically. Year, model, date of purchase, own/lease/finance, and security system details.
  • Driving patterns. Is the car primarily used for work/commute/pleasure? How many miles driver per year?
  • Insurance details. Have your current bill handy to know your specific coverages, limits, and deductibles.

The Results!

The totals shown are 6-month premiums for two cars and include liability, personal injury, collision, and comprehensive coverage. Exact same limits and deductibles for all insurers.

  • State Farm (existing) – $665 per 6-month period. This includes various discounts like accident-free, multiple-cars, etc.
  • GEICO – $479. The cheapest quote by far, beating State Farm by $186 per 6 months, or $372 a year. This follows anecdotal evidence that GEICO is pricing their insurance very aggressively for new customers.
  • Allstate – $693. Slightly more expensive than State Farm. I noticed that they have a lot of optional “bells and whistles” features like accident forgiveness. They also offer a discount for electronic bills and auto-pay from bank account. The price shown includes these discounts.
  • Progressive – $849. Way higher than State Farm. Their claim to also provide quotes from other car insurance companies was also very disappointing. They couldn’t provide any other quotes at all. After changing my existing insurer, they said State Farm’s rate would be between $696 – $5,922. Not helpful.
  • Liberty Mutual – $568. Cheaper than State Farm by $194 a year. Not bad but higher than GEICO for me.
  • USAA – ???. I tried as I’ve heard good things about USAA, but I do not have the proper military affiliation to be eligible for their car insurance.

$372 a year is pretty significant. I’m definitely intrigued by this cheap GEICO quote, but I have to do some more research as I also have homeowner’s and umbrella insurance from State Farm and I’m not sure how the total package price would differ.

Free eBook on Small Business Tax Deductions (Expired)

(Update: Free promo is expired, it’s back at $9.99.) Just a quick note that there is a Kindle eBook about tax deductions for small businesses, including self-employed people, that is currently free called Small Business Tax Deduction Secrets by Stephen Nelson, CPA. The author participates in the Bogleheads investment forum under the username SeattleCPA.

I downloaded and skimmed the book briefly, and it does have helpful information for those looking to maximize qualified business expenses and deductions (as you should!). Free for a limited time, so as usual my advice is download now and read later! You can download software to read Kindle books on PC, Mac, smartphones, and tablets.

Tweaking Common Advice: Take Risks While You’re Young

A common piece of advice I’ve heard is “Take risks while you’re young.” This is often applied to personal finance, in terms of trying to land a higher-paying job, starting a new business, or pursuing your passion. The thinking goes something like this:

  • The older you are, the more likely you’ll have a spouse or partner that depends on your income, or at least they’ve become accustomed to how it makes their life more comfortable. They may not be supportive of having it disappear while you chase a dream.
  • You’re more likely to have children, who will take up all your free time and you’ll (hopefully) be happy about it.
  • You’re more likely to need to take care of your parents. Simple addition tells us that if you’re in your 30s and your parents had you when they were in their 30s, that means they’re in their 60s or 70s.
  • Basically, as you get older the more likely you’ll have more responsibilities and less time.
  • More responsibility increases the importance of income stability over income potential.
  • Less time means you can’t go on crazy streaks like 100-hour workweeks on your startup (or 60 hours on your side start-up on top of your regular 40 hour/week job).
  • On top of all that, older often means less energy.

[Read more…]

Yale Professor Subtly Threatens High-Cost 401(k) Plans

Speaking of how to deal with bad 401(k) plans… Yale Professor Ian Ayres decided to write letters to thousands of 401(k) plan sponsors that have high costs and fees according to data from website Brightscope. I’m totally paraphrasing and adding humor (although I already found it amusing), but Ayres basically wrote:

“Hey.

I’m a Yale Law prof. Your 401(k) plan ranks among the most expensive. I’m writing a paper about how expensive plans suck money from employees. You do know that you have are required by law to act solely in the interest of participants, right? Oh, by the way, I’m going public with your company name in Spring 2014. You might want to make some changes to your plan before then.

Have a nice day!”

You can read a PDF scan of one of the letters here. Here is a draft of his paper titled “Measuring Fiduciary and Investor Losses in 401(k) Plans”.

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Shareholder Yield: Better Stock Screening Metric Than Dividend Yield?

I’ve read a few books about dividend investing and remain interested in the idea, although I’m not confident enough (yet?) to allocate my portfolio that way. Portfolio manager and writer Mebane Faber has a short book called Shareholder Yield: A Better Approach to Dividend Investing that offers another tweak on dividend investing strategy.

The book starts with an overview of history and academic research. First, a little over half the total return of the US stock market since 1871 is due to dividends. The smaller half is price appreciation, which when people talk about the S&P 500 index is all price appreciation. Second, stocks with higher dividends have had a higher historical return than stocks with little or no dividends.

So dividends are good, but they aren’t the entire picture. There are five ways for management to deploy the free cash flow generated by the company:

  1. Invest in existing operations,
  2. Acquire other businesses,
  3. Pay down debt,
  4. Repurchase stock (reducing outstanding shares), and
  5. Distribute cash to shareholders.

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State Farm Insurance Payment Plan (SFPP) Review

Ever since we started cutting back our work hours in order to share childcare duties, Mrs. MMB and I have kept a closer eye on our monthly spending patterns. One of the headaches for budgeters is dealing with large lump-sum payments like those for home/car repairs, healthcare bills (human repairs), and home/car/life insurance. Our homeowner’s insurance is due annually (we don’t use mortgage escrow anymore), life insurance is due annually, and auto insurance is due semi-annually.

We use State Farm for all of these insurances due to our positive claim experiences in the past and their multi-line discount. When I asked about payment options, they told me about the State Farm Payment Plan (SFPP). I’m sure that most other major insurers have a similar program.

Pros

  • Steady monthly bill. With this plan, all your insurance bills get averaged into equal monthly, quarterly, or semi-annual payments. We chose monthly as that is how we visualize our spending.
  • Float. Let’s say your total bill is usually $1,200 once a year. If your policy is renewing today, then instead of paying $1,200 upfront now, with SFPP you pay $100 per month spaced out over the next 12 months. So you’re gaining some additional float time on your money. If you’re already paid up then you have to wait until renewal to start an SFPP.
  • Pay with credit card. You can use a credit to pay most bills already, but some auto-pay plans require a linked checking account. SFPP allows you to pay with a recurring charge on any Visa/Mastercard (no American Express). This is good news for those earning credit card rewards.
  • Chose payment due date. I don’t use this, but if you find it convenient you can select your specific payment due date each month (any day except 29th, 30th, or 31st).

Cons

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Optimize Your Cell Phone Plan: The Wireless Efficient Frontier

The other day while I was trying to help someone find a cheaper cell phone plan, I realized two things:

  1. There are way too many different options these days. Most are MVNOs that buy bulk minutes and data from the major providers, and many of those are simply clones of each other.
  2. Trying to find the best cell phone plan is similar to the efficient frontier concept in investing. There, you try to achieve the highest return for a given amount of risk, or you try to minimize the risk you have to take in order to get a given return. Anything else is sub-optimal; here’s a quick chart illustration.

In the case of cell phone plans, you’re either trying to maximize features (coverage, phone selection, minutes, texts, data allowance) for a given budget, or more often you’re trying to minimize the cost for the features that you “need”/want.

I’ve mentioned several good deals from various providers, covering everything from a $2.50 a month basic plan to simply saving $10 a month on your “name brand” major provider plan via corporate or student discounts. Below, I’ve placed them all on a single chart of cost vs. features. This is a work-in-progress, but hopefully this will help folks find better alternatives and save some serious money over time.

The Details

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Should I Still Contribute to a Bad 401(k) Plan?

Along with other factors, new fee disclosure requirements for 401(k) plans have brought a lot of attention recently on “bad” 401(k) plans. These are plans with little or no employer match, higher-than-average fees, and/or limited investment choices.

I’ve gotten a few questions from readers who wonder if they should stop contributed to their subpar plans completely? As with most things, the answer depends. But here are some factors that I’d consider first.

Can You Save Better Elsewhere?
Depending on your situation, it may be better to put money away in other tax-advantaged vehicles like a Traditional or Roth IRA instead of your 401k/403b/similar plan. If you plan on socking away $5,000 a year, that is under the IRA annual contribution limits. Alternatively, if you have self-employment income you can look into a SEP-IRA, SIMPLE IRA, or Self-Employed 401k plan where you can choose the custodian.

Bad 401(k) Now, Awesome Rollover IRA Later?
According to the Bureau of Labor Statistics, the median employee tenure is less than 5 years. Even workers in “management, professional, and related occupations” had median tenures of 5.5 years. In other words, these days people don’t stay in their jobs very long. (Of course, some people may stay in their jobs for 30 years.)

When you switch jobs, you’re free from the bonds of your crappy 401k plan and can roll it over to a new provider with low fees and great investment options. Very few plans are so bad that you wouldn’t endure five years of mediocrity in exchange for 20-50+ years of precious tax advantages.

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Cooked: The Health Argument For Cooking At Home

I’m roughly halfway through Cooked: A Natural History of Transformation by Michael Pollan. Although the book covers a variety of topics ranging from chemistry to religion to anthropology, the overarching theme is examining the practice of cooking meals for yourself (and your family).

Cooking food has become one of our most outsourced tasks. Everyone is busy. But is letting huge for-profit corporations prepare what we eat really worth the time savings if it costs us our health? Consider what studies have found:

  • When we cook meals ourselves, we eat less than when we outsource to frozen meals or restaurants.
  • Obesity rates are inversely correlated with the amount of time spent on food preparation.
  • Regular cooking is correlated with superior health and longevity.
  • Poor women who routinely cooked tended to have a more healthy diet than richer women who did not.

In the book, food industry expert Harry Balzer (who knows exactly how often we actually eat out, not just how much we admit to… which is a lot!) put forth some insightful diet advice:

Cook it yourself. Eat anything you want – just as long as you’re willing to cook it yourself.

Essentially, eating unhealthily these days is mostly the byproduct of eating out, including meals-in-a-box and frozen dinners.

There are many other potential benefits of cooking for ourselves, stay tuned for a full review. Together, I’m hoping they’ll convince me to start cooking regularly again!