Archive for August, 2008
After pointing out that the FNBO Direct video contest (since ended) was giving out $500 to the Top 20 semi-finalists and there were only 14 entries at the time, many more people decided to give it try. Well, it turns out that my readers are much more talented at making videos than I am - at least two of them have won $500 (and still have a chance at $5,000). Here is one of the winning entries from reader Dave and his son Max:
Updated: More $500 videos from readers Dan, Danila, Alexa, ChristianPF, and William. Congrats everyone! I’m going to *sniff* sit in the corner and wait for the $10 consolation prize that everyone else gets.
Included in my “sorry, your video was lame” e-mail was an offer for a $25 bonus if you open an FNBO Direct Online BillPay account and make one bill payment. To get the bonus, you will have an opened FNBO Direct savings account, currently paying 3.50% APY (my review).
Posted in Banking, Funny | 20 Comments »
I’ve been hearing a lot about this new $7,500 tax credit for first-time home buyers, which is part of the newly passed 2008 American Housing Rescue and Foreclosure Act. Is it as great as it sounds?
A new website has been put up with more information about this tax credit. Curiously, the fact that this “credit” has to be paid back over the next 15 years (or when you sell) is conveniently left out of the “At A Glance” section, and you have to scroll down to question #15 in their Frequently Asked Questions to learn about the repayment terms. Did I mention the site was created by the National Association of Home Builders? No way would they want to mislead potential home buyers, right?
To qualify, you must close on your new house between April 9, 2008 and July 1, 2009. A good summary of this tax credit interest-free loan is in this Fortune article:
The “first-time home buyer credit” is a temporary refundable, repayable tax credit equal to 10% of the purchase price of a home, up to $7,500 for singles and married couples filing jointly. (Singles who buy a house together get only $3,750 each, as do married couples filing their tax returns separately.) […]
But the way the credit works, it’s actually more like an interest-free loan. Two years after you claim this credit, you have to start paying it back. The payback comes over 15 years in 15 equal installments–meaning you owe an extra $500 on your tax return each year. Sell your house, and you have to pay the rest back that year from your profits. (No profits, no pay back. Also, if you die, your heirs are off the hook.)
The allowed credit starts being reduced once a single has $75,000 of modified adjusted gross income, or once a couple has $150,000 of income. The credit goes away entirely at $95,000 for singles and $170,000 for couples.
The justification behind a $7,500 interest-free loan is that it is supposed to ease the “pain” of having to come up with closing costs and a downpayment. But wait… Wasn’t the housing bubble caused in part by people being tempted into buying houses they couldn’t really afford because they didn’t need to first save up for closing costs or a downpayment? I find it ironic that our choice of “buyer assistance” is even more easy lending.
Now, of course I would still grab this tax “credit” if I was going to buy a house anyway. I’d happily take a 0% interest loan on $7,500 for any period. But why not just give us something simple and straightforward, like a check for $1,000? My guess is that the phrase “$7,500 tax credit” works better to pacify angry citizens.
Posted in Real Estate | 111 Comments »
As outlined in this previous post about One Way To Track Your Progress Towards Financial Independence, you can say you’ve reached financial independence when your “passive” investment income equals your monthly expenses (”crossover point”):
The above chart was taken from the Your Money or Your Life, which also says the best way to generate income is by purchasing 30-year Treasury Bonds. But there are a variety of other ways that retirees generate income for retirement. Each one has their own pros and cons.
High-Grade Bonds or Certificates
U.S. Treasury bonds are a very safe and reliable way to generate regular income, as it is guaranteed by the U.S. government and they are very liquid. A similar situation results you invest in bank CDs or other investment-grade corporate or municipal bonds. The primary drawbacks are lower returns, especially relative to inflation. The 30-year bond is currently yielding somewhere around 4.5%. The current real (above inflation) yield for a 20-year TIPS (inflation-indexed bond) is only about 2.20%.
This means that if you want both the highest safety and you wish to only live off the interest of your money without ever touching the principal, you can only withdraw about 2.2% each year. That’s only $183 per month for each $100,000.
60/40 Asset Allocation with 4% Safe Withdrawal Rate
Although there is still much ongoing debate, the “4% rule” is based on on research by William Bergen:
William Bengen, a U.S. researcher, has back-tested a 4% withdrawal rate with a balanced portfolio of U.S. stocks and government bonds earning overall market returns and found that you would have been able to safely withdraw 4% of your portfolio over any 30-year period since 1926. [source]
The general idea is that if you have a portfolio with an asset allocation of 60% stocks/40% bonds, you can withdraw 4% of the portfolio each year with only a small chance of running out of money somewhere down the line. A 4% withdrawal rate would be $333/month for each $100,000. However, your portfolio will experience wilder swings, and this rigid method is very sensitive to the returns in the first years of retirement. If you have a bad decade upfront, your chance of going broke rises quickly.
Income-Focused Mutual Funds
These are mutual funds who primary objective is not growth, but to create a stable income stream from a combination of stock dividends and bond interest. The secondary objective is some capital appreciation, which ideally will help the income stream to keep up with inflation.
A passive index fund example is the Vanguard Target Retirement Income Fund (VTINX), which is currently yielding 4.05%. A popular actively-managed example is the Vanguard Wellesley Income Fund (VWINX), which is currently yielding 4.71%. Both of these funds hold roughly 35% in stocks/65% in bonds. Wellesley has been around since 1929, and many retirees swear by the reliable income it produces.
Managed Payout Mutual Funds
A new breed of mutual funds actually adjusts to help you spend your money as fast as you like. You choose how fast you wish to withdraw your money (3%? 5%? 7%?), and the fund does it’s best to accommodate that without going broke. Vanguard has their Managed Payout Funds, and Fidelity has their Income Replacement Funds.
These funds help you create regular monthly payments like an annuity, but still include risk from the stock market. They are also very new and could be seen as unproven.
Individual Dividend Stocks
I know of several retirees who manage their own portfolios of individual stocks. These people accumulate shares in companies with a history of reliable stock dividends, like General Electric and Coca-Cola, and live off the dividends. An ETF of top dividend producers, DVY, currently yields 5.14%.
I would be wary though that the share value of these stocks can vary widely without the cushion of bonds. DVY has dropped by over 20% so far this year, which is indicative of many similar dividend stocks.
Income Annuity
With a simple version of an immediate annuity, you hand over a lump-sum upfront in return for fixed income payments for life. Of course, if you die early then you don’t get your lump sum back. However, you could live until 110. It’s almost like life insurance in reverse. A special risk here is that your insurance company must stay solvent the entire time, so you must check credit ratings.
I went to ImmediateAnnuities.com and looked into a Joint Annuity, where the income payments keep coming as long as one of us are alive. A rough quote for a 40-year old says that each $100,000 paid will get me about $450 a month. That is the same as saying I can earn 5.4% interest forever, but remember that I lose the principal. Of course, this value goes up with age. For a 60-year old couple, you can get 6.4% forever. At age 70, you can get 7.5% forever.
How much income will a million bucks get you?
Based on these numbers, with $1,000,000 one could get anywhere from $1,830 a month (very little risk, no principal loss) to $5,833 per month (fixed annuity at age 65, all principal is given up). I’d probably end up going with something in between, but it is food for thought.
Posted in Investing, Retirement | 29 Comments »
Microsoft’s Live Search engine now has a cashback system - the idea is that you can compare products and prices using their search engine, and then buy through them and get cashback. This is similar to existing cashback portals like eBates ($10 sign-up bonus), but they add in the price comparison component. Like the rest, you have to wait 60-90 days for your rebates (in case you make a return).
Every time you make a qualifying purchase, we’ll send you an email to confirm your Live Search cashback savings. Usually 60 days after your purchase (although this time period may vary for some stores), and when your cashback account reaches a balance of at least $5, you can claim your cold, hard cash.
They are currently having a Back-to-School promotion that is giving nearly double cash-back percentages at several stores (sorted alphabetically). Examples are
- 70% back at Magazines.com.
- 38% back at ShoeMall, 36% back at FootLocker and Eastbay, and 32% back at Shoes.com
- 12% back at Barnes and Noble
- 5.5% back at NewEgg (electronics)
At 70% off, you can get an entire year’s subscription to The Economist for under $30. I know that several readers like this magazine, which is very hard to find at a discount. Or you can just renew the rest of your magazine subscriptions on the cheap. Combining coupons may void the cashback, according to the terms and conditions.
Posted in Deals & Offers, General | 22 Comments »
Credit Card Debt
If you’re a new reader, let me start out as usual by explaining the credit card debt. I’m actually taking money from 0% APR balance transfer offers and instead of spending it, I am placing it in high-yield savings accounts that actually earn 3-4% interest or more, and keeping the difference as profit. Along with other deals that I blog about, this helps me earn extra side income of thousands of dollars a year. Recently I put together a series of step-by-step posts on how I do this. Please check it out first if you have any questions. This is why, although I have the ability to pay the credit card balances off, I choose not to.
Retirement and Brokerage accounts
We added another $3,048 in 401(k) contributions, which given the numbers above means our retirement accounts actually lost about $1,000 in value. YTD performance numbers are… not good. I just hope that the prices stay low until I can start buying again now that I am done with the Emergency Fund.
In my brokerage accounts, I sold all of my “play money” stocks (only valued at ~$2,000) and instead participated in a minor arbitrage attempt. It worked out well, I made a gain of 10% in 17 days. It’s all in cash now and I again have no position in individual stocks at all.
Cash Savings and Emergency Funds
Our mid-term goal is to have $30,000 in net cash put aside for emergencies, for example if both of us find ourselves unemployed for an extended period and even have to start paying for things like health insurance on our own. We are basically done, with about $500 to go. Now to find better uses for our incoming cashflow.
Home Mortgage
Another ~$500 of loan principal paid off. I am debating whether to start paying extra towards my mortgage right now. In my mind, it would feel nice to have a home paid off as part of my grand early retirement plan. However, I also like the idea that such a long-term loan at <6% can act a nice inflation hedge. Besides healthcare costs, I view unexpected inflation as another scary unknown for early retirees.
You can see our previous net worth updates here.
Posted in Goals, Retirement | 32 Comments »
As a successful early retiree points out, sometimes it may not be simply money keeping you from accomplishing your dreams:
Retirement forces you to stop thinking that it is your job that holds you back. For most people the depressing truth is that they aren’t that organized, disciplined, or motivated.
Many people have a list of 101 Things To Do Before I Die, also more recently known as a Bucket List. Much of my list includes travel, but I wanted to narrow it down to things that I could work on over weekends and cost less than $500. I should be able to accomplish these things without achieving financial independence.
Get Certified to Scuba Dive: $300
My sister recently got certified to scuba dive. The cost was between $300 and $400. This includes classroom materials (book/DVD), equipment rental, two pool sessions, and two ocean dives. You must supply your mask, snorkel, fins, and boots. Now, the trip to the Great Barrier Reef is gonna cost me…
Skydiving: $200
There is usually a skydiving place near most metro areas, although for obvious reasons it tends to be a drive. It costs around $200 for a single tandem-jump, and an additional $100 for a video of the jump (another person has to jump and film you). You pretty much just show up, watch a short video, and go for it. I’ve actually done this one already (photo credit, not me). I must say, if you are so inclined, it is quite a memorable experience. Remembering the feeling makes me want to do the rest of these items!
Fly an Airplane: $75+
Chances are you have a non-commercial airfield near you as well. Just look up “flying lessons + your city”, and many places will offer an introductory lesson for $50 to $100. During the lesson, the pilot will let you “fly” the airplane for a bit. Of course, if you have a pilot friend, they could take you up as well for free. My wife got to do this recently, it sounded awesome.
Learn a Foreign Language: Free to $$$
I would imagine the cheapest way to learn a language would probably be to check out some language books and tapes from your local library. After that, you’ll need to find some native speakers to practice conversing with and correct your pronunciation. I remember while in college you could setup lunches with international students. You have lunch together, and might spend 30 minutes speaking Spanish only, and then 30 minutes speaking English with them. For more money, you can always get a more refined computer-based course or go to an official language school.
Finish a Marathon: Free to $$$
The idea of running a marathon has always been appealing to me due to the sheer simplicity and purity of the accomplishment. There are many free online resources on how to train for your first marathon. I have tried none of them. 
The time needed to train would vary widely based on your current abilities. I bet I’d need at least 6 months. As for costs, I’ve been told to eventually buy a proper pair of running shoes, which you only use for running.
Posted in Frugal Living, Retirement | 29 Comments »
