Archive for July, 2007
While visiting the parents, I was also asked to provide some input on their retirement savings. I don’t want to invade their privacy, but I’m sure they share common concerns with others out there. My father, who is in the non-profit/education sector, has much of his retirement money with TIAA-CREF (Teachers Insurance and Annuity Association - College Retirement Equities Fund). They are one of the biggest financial services companies in the U.S., and are operated on a non-profit basis.
As you might guess from their name, a very popular option for members is the TIAA Traditional Annuity, holding over $163 billion. I was not at all familiar with this beast, so I decided to learn more about it. Here’s a quick rundown from the website:
A guaranteed annuity backed by TIAA’s claims-paying ability, TIAA Traditional guarantees your principal and a minimum interest rate, plus it offers the opportunity for additional amounts in excess of the guaranteed rate. TIAA has credited additional amounts of interest every year since 1948.
The annuity primarily invests in publicly traded bonds, commercial mortgages, direct loans to business, and real estate. It has no loads, no surrender charges, no maintenance fees, and very low annual operation expense ratios of about 0.25%. (Sources: SURS, Dixie State Univ. )
Accumulation Stage
So you invest in this annuity, your account value will never decrease as long as TIAA is around. In fact, it will go up in value by at least 3% every single year, and most likely more depending on market conditions. Think of the savings on antacids during the next stock bubble! There are two tiers of performance - From what I understand, the higher paying tier is for money that is contributed directly by the employing company or group, whereas the lower paying tier is for voluntary contributions from the individual. Here are the historical returns:
For comparison, the venerable Vanguard S&P 500 Index Fund (VFINX) has a 10-year trailing return of 7.05%, and the Vanguard Total Stock Market Index Fund (VTSMX) has a 10-year return of 7.60%. The Vanguard Total Bond Market Index Fund (VBMFX) has a 10-year return of 5.74%.
Withdrawal Stage
When you reach retirement and are ready to start take money out of your annuity, you have a variety of options. There are one-lifetime income options, two-lifetime income options, fixed-period (ex. 10-year) income options, interest-only payments, and also a few others involving taking a lump-sum or just the required minimum distributions.
Of course, all annuities are simply a promise, not a 100.00% guarantee. In this regard, TIAA does have the highest possible credit ratings from all the major agencies: A++ by A.M. Best, AAA by Fitch, Aaa by Moody’s, and AAA by S&P.
Summary
Overall, it was very interesting learning about this additional investment option. Here were my tentative opinions:
- There is an expected trade-off of lower long-term performance in exchange for a guaranteed minimum return if you purchase this annuity. For those with longer time horizons and the discipline to ride out the market’s ups and downs, it may be better to invest in low-cost stock/bond mutual funds or ETFs instead. Those that are very risk-averse will love this investment.
- The lifetime income options are nice and reliable, but you could also do the same with a portion or all of any retirement portfolio. Just cash out your stocks and bonds, and go buy an immediate annuity with a lifetime payout option.
- Still, if you’re going to buy such an annuity, TIAA-CREF offers some of the best and safest returns along with the lowest fees available in the annuity marketplace.
- As my father is nearing retirement and I think the safety of this investment is very comforting to him, I think this option will work adequately for him. The majority of his annuity holdings are also in the higher-paying tier. I am, however, providing him some guidance in the rest of his portfolio to provide some diversification, as well as telling him what questions to ask his group’s financial advisor.
Posted in Investing, Retirement | 18 Comments »
While I’m back home, my parents took the opportunity to transfer possession of some family gifts. Included in them were two one-ounce 24 karat gold bars. I don’t know much about them, except one was given to me when I was born and the other when I graduated high school. The have the words “Swiss Bank Corporation” (now UBS) and a serial number on one side, and here is a picture of the other side:
At about $650 per ounce, my two ounces would be worth $1300, or about 1.6% of my current investment portfolio. Some sources indicate I may even be able to charge a slight premium for my minted bars. In truth, I’m probably going to end up passing them along to future generations. Is it okay for me to just store these in safety deposit boxes?
I know there is heavy debate in this area, but I personally have no plans to buy any more gold. This is not to say they can’t be a useful part of a portfolio, but I’m still not really convinced of the long-term utility of buying any inanimate objects, including other precious metals and commodities. I’m keeping an open mind, however, if people want to make reasoned arguments either way.
If you are into Modern Portfolio Theory and mean-variance optimization, you might be interested in this Efficient Frontier article on gold:
Make no mistake about it: over the very long term, precious metals equity should provide your portfolio with a mean-variance boost. Just be sure that you?re prepared for the long term?the very long term?behavior of this asset class.
Posted in Investing | 34 Comments »
Here’s a good promotion from Citibank if you are a brand new customer: You can get a $100 signup bonus for opening a Citibank Ultimate Savings account that pay 4.65% APY with no minimum balance requirements.
To qualify for this offer you must apply for and open a new Ultimate Savings Account by 08/31/2007. $100 will be credited to your Ultimate Savings Account within 90 days from the end of the statement period in which your account was opened. Account must be in good standing at the time of the $100 credit.
Keep in mind that Citibank has historically always done a hard credit pull for new bank applicants (for no good reason). Thanks to Vijay and Sharon for the tip.
Now, there are certainly other online banks that may be more convenient or pay more interest, so you may just want to sign up for the Benjamin.
Posted in Deals & Offers | 99 Comments »
Think you spend too much on pet products? Read this post about pampered pets at The Digerati Life first, and then make your decision. Got neuticles?
JLP at AllFinancialMatters discusses when you should start taking Social Security benefits. I think Social Security will be around when I retire, but I think it could very likely be restricted to those with little or no savings.
GetRichSlowly mentioned a post on Jalopnik talking about the best cheap beater car for non-car folks. This caught my eye because now my new idle fantasy is to buy a $1,000 car and learn how to drive a manual transmission.
Posted in General | 18 Comments »
It seems that many people have strong opinions about the subprime mortgage fallout. One common thread was that people really do need to get better educated about the mortgage lending process. What wasn’t agreed upon was who should shoulder that responsibility - the lender, the borrower, or the government? My view was that better transparency is in order, and the FTC concurs:
The Federal Trade Commission today released a Bureau of Economics report presenting the results of a study that found that mortgage disclosure forms fail to convey key mortgage costs and terms to many consumers. The study also concluded that better disclosures can be created to help consumers understand the costs and terms of mortgages to enable them to make informed decisions about mortgage products.
?Mortgage disclosures designed more than 30 years ago can be confusing even for simple loans, and they do not address the variety and complexity of today?s mortgage products,? FTC Chairman Deborah Platt Majoras said. ?Although mortgage disclosures, alone, will not prevent deceptive lending practices, consumers who understand mortgage terms and choices are less likely to fall victim to these practices.?
Even if you disagree, the fact is that the government already does have some helpful information out there, and hopefully if we spread the word around the tax money already spent on making them won’t be wasted. 
I sure wish Ms. Williams read a couple of these beforehand.
First up is the U.S. Department of Housing and Urban Development, whose mission is to “increase homeownership, support community development and increase access to affordable housing free from discrimination.” They have a whole section on Buying A Home, and even a brochure on finding the best mortgage [pdf]. Inside, it shows you how to compare all the costs involved in obtaining a mortgage. There is even a helpful Mortgage Shopping Worksheet included to help you out.
Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage? whether it?s a home purchase, a refinancing, or a home equity loan?is a product, just like a car, so the price and terms may be negotiable. […] Shopping, comparing, and negotiating may save you thousands of dollars.
Next, you have a Guide to Mortgage Products [pdf] from the Federal Reserve Bank of Boston. It’s presented through a true/false question-and-answer format which makes it very digestible, and has a nice glossary of lending terms at the end.
What you should ask the lender:
? Which of your products offers the lowest interest rate?
? Will my interest rate be fixed or variable (change periodically)?
? If the interest rate can change, when will it change and how high or low can it go?
? If the lender offers an introductory or ?teaser? rate, ask, When does the rate expire and how will the new rate change my monthly payment amount?
? If the rate expires, what will the new rate be, and will it be fixed or variable?
Finally, check out these 12 others from the Federal Citizen Information Center:
- A Consumer?s Guide to Mortgage Lock-Ins
- A Consumer?s Guide to Mortgage Refinancing
- Buying Your Home: Settlement Costs and Helpful Information
- Consumer Handbook on Adjustable Rate Mortgages
- Guide to Single Family Home Mortgage Insurance
- Home Buyer?s Vocabulary
- Home Mortgages: Understanding the Process and Your Rights to Fair Lending
- How to Buy a Home with a Low Down Payment
- How to Dispute Credit Report Errors
- The HUD Home Buying Guide
- When Your Home Is on the Line
Posted in Real Estate | 8 Comments »
Reader Trent recently asked me about a site called LifeLock, which offers identity theft protection services for $10 a month. I figured that it was the same old credit monitoring deal that lots of site offer, but in fact it’s even less. The site openly admits that most of what they offer can be done at no cost, but also (understandably) leaves out the details on how to do it. Here they are with those details stuck back in, as ironically their site turns out to be a great guide on how to easily help prevent your identity from being stolen for free!
First, we ask the credit bureaus to set fraud alerts on your behalf. Usually, this is done through our automated systems and the alerts are set within an hour. From time to time there may be a hitch and we have to do the first one manually, usually because they have a different address on file for you. If this happens, we?ll tell you right away and do what needs to be done to get the alerts set.
Free - Just call the numbers below. Technically, alerting any single bureau should automatically initiate fraud alerts on all of them, but it may be more reliable to simply call each one separately.
* Equifax: 800-685-1111; Fraud Dept. 800-525-6285
* Experian: 888-397-3742 (same for Fraud Dept.)
* Trans Union: 800-916-8800; Fraud Dept. 800-680-7289
I should note that this will also hinder your ability to get quick approvals for things like auto loans or credit card applications. One good tip is to use your cell phone as the contact number so that the bureaus can quickly verify your identity when you really do want to apply for credit.
Second, unless your circumstances change and you tell us not to, every 90 days or so we ask the credit bureaus to do it again.
Free - Use Google Calendar (also free) to e-mail you a reminder to call again in 90 days. Rinse and repeat.
Third, we request that your name be removed from pre-approved credit card and junk mail lists and we keep making the requests as they expire. Statistics show that this is one of the most common ways that thieves hijack identities. Plus, all that mail is just so irritating. Many of our clients tell us that this alone is worth the price.
Free - Just go to OptOutPrescreen.com to get removed for 5 years. I’m probably in the minority here, but I kind of like getting pre-approved offers myself, it helps me track trends in interest rates, special offers, and gives me an idea of how good my credit score is.
Fourth, we order your free credit reports on your behalf from the major credit bureaus and they are sent directly to you. We do this every year.
Free - Yet another feature that is free to all by the Fair Credit Reporting Act, and can be found at AnnualCreditReport.com. In fact, here are 4 more ways to get a free credit report. One of them is simply placing a fraud alert as described about. If you keep setting one up every 90 days, you can technically get a total of 15 free reports every year (3 credit bureaus x 5 each).
Last, but certainly not least: If your Identity is stolen while you are our client, we?re going to do whatever it takes to recover your good name. If you need lawyers, we?re going to hire the best we can find. If you need investigators, accountants, case managers, whatever, they?re yours. If you lose money as a result of the theft, we?re going to give it back to you. We will do whatever it takes to help you recover your good name and we will spend up to $1,000,000 to do it.
Not free. But, you can get lower levels of identity theft protection for free at various financial institutions like your local credit union or at many major banks, just for having an account with them. For example, Washington Mutual offers $5,000 of Identity Theft insurance with no deductible, as well as a phone hotline to “Identity Theft Recovery Specialists”, if you have a free checking account with them.
So, is the convenience of LifeLock, as well their $1 million dollar insurance policy worth $110-120 a year? My vote is no. Although I’m sure that identity theft can be very painful and costly, if you really did all the free things above your chances of being affected are very slim. The time saved is minimal, I have a WaMu account, and the “million dollar guarantee” seems to be overkill and more of a marketing ploy. If anything, I’d use the money to go buy a good paper shredder instead.
Posted in Credit Cards, Deals & Offers | 32 Comments »
After living with a basement for the last two years, it seems that we have really accumulated way too much stuff. Deuce Bigalow on DVD, REM on CD, Christmas decorations, three different rakes, two different types of fluorescent light bulbs, two right ski boots (the left ones were stolen)… packing is going to be painful.
Since we’re going to be wandering nomads for a few weeks, we are stripping ourselves down to:
- safe shelter with bed and hot shower
- a laptop with a wireless network card
- a week’s worth of clothes
- critical documents like passports
- wallet with credit cards and ID
It feels nice to celebrate our independence from clutter. You know, before I give in and buy the 2nd generation iPhone 
Happy 4th of July!
Posted in Frugal Living | 16 Comments »
About My Credit Card Debt
Got credit card debt? I sure do. But let me explain - I’m borrowing money from credit cards at 0% interest and investing in a bank account that’s earning me 5-6% interest. Result: Free Money! Along with other things, this helps me earn extra side income of thousands of dollars a year. Recently I wrote up a series of step-by-step posts on how I do this. Please do check it out if you are curious. This is why, although I have the ability to pay the balances off, I choose not to.
Commentary
To answer a common question first, yes, this is net worth for two people. We use the “one pot” method of managing partner finances, we don’t separate things out by person.
Our net worth dropped! There were a bunch of factors in play, but mainly it’s just a superficial wound. One significant change was that as was discussed previously, we stopped listing one of our cars as an asset. It messes up the numbers a bit temporarily, but in the long run it gives us a clearer picture of our progress towards that mythic “financial freedom” we all want.
Lots of big bills this month. Paid our semi-annual auto insurance premiums of about $700. Bought a new luxurious bed, also bought some nice sheets and pillows (from Ross), for a total of about $750. We’ve also been dining out a lot and spending time with good friends here before we leave.
Our stock portfolio dipped a little over the last month, it feels like a time of uncertainty for the markets in general. Some portfolio changes are coming, but nothing so far. While compiling this net worth update, I noticed that my wife’s 401k just jumped by $1,200?! It turns out they did some sort of special mid-year employer contribution, which my wife apparently didn’t even know about. Hey, I’m not going to question it
After all that, we still saved a good chunk of money this month. Our non-retirement funds now add up to $70,419, with total cash at $64,721. See our mid-term and long-term goals explained.
You can see all my previous net worth updates here. Next month is going to be hectic, with a wedding, a trip to visit the parents, the big move, and new jobs!
Posted in Goals | 19 Comments »
A reader recently wrote me asking if there was any drawbacks to maxing out their 401(k) contributions as opposed to keeping the money in a taxable account. This is assuming you already have no debt, adequate insurance policies, and an emergency fund. Since his goal was to retire early, my initial concern was that the money would be stuck there until age 59 ½. (Why is it 59.5 anyways?) If you take money out of your retirement plans before then, you’d get hit with a fat 10% penalty on all withdrawals on top of the income taxes already owed. So perhaps it’d be a good idea to keep a chunk of money in taxable accounts for easy access?
But after some research it turns out that there are some exceptions to this penalty:
401(k) Early Withdrawals
If you have a 401(k), are at least 55 years old, and your employer allows it, you may be able to take out as much as you like without the 10% penalties. This is a case where you might want to keep your money in a 401(k), assuming that you are satisfied with the quality and costs of your existing investments. (You must quit at 55 years old or later, not any earlier. It’s a weird rule.)
IRA Early Withdrawals
Otherwise, once you stop working the best bet is to move your 401(k) funds into a Rollover IRA. A subsection of Internal Revenue Code Section 72(t) states that you can avoid early withdrawal penalties by taking “substantially equal periodic payments” (commonly referred to as SEPP or 72t withdrawals) for any type of IRA. The general rules for SEPP are as follows:
- You must make the withdrawals regularly, at least once every year.
- You must take them for either 5 years or until you reach age 59 ½, whichever is longer. Retiring at 40? You’ll need to make them for almost 20 years. Retiring at age 56? You’ll need to make them until age 61.
- You must wait until these equal payments end before you can start taking unrestricted amounts of money out of your IRAs.
- If you decide to do this, you can’t change your mind. If you do, you’ll owe a 10% penalty retroactive to your first withdrawal, plus interest!
You must also calculate the amount of your SEPP according to three IRS-approved methods: required minimum distribution method, the fixed amortization method, or the fixed annuitization method. Let’s say you have a $1,000,000 IRA right now at age 55. Without going into the details here, here are the amounts according to this Dinkytown 72(t) calculator, for a single life expectancy at the current maximum “rate of reasonable return”:
An added twist? If you have (or want to make) multiple, separate IRAs, you can take SEPPs from any or all of them. So in essence, you can withdraw anywhere from 0% to possibly 7% of your retirement balances annually. Naturally, you might not want to take too much out too early lest you run out of dough. But to me, this takes away much of the fear of having a large percentage of my money held hostage in my 401ks/IRA accounts if I decide to retire early.
I still need some huge balances to pull such a feat off though. For example, several studies suggest that a conservative withdrawal rate for a 40-year period is ~4% of one’s balances each year. I just need $3 million dollars in balances by the time I’m 55 to take out $120,000 a year (an estimated $56,000 a year in today’s dollars), and I’m all set! No problem…
For more information, here is one detailed resource I discovered from the Retire Early homepage.
Posted in Retirement | 30 Comments »
