Early Retirement Portfolio Update – June 2014 Asset Allocation

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I want to get back to doing quarterly updates to our investment portfolio, which includes both tax-deferred accounts like 401(k)s and taxable brokerage holdings. Other stuff like cash reserves (emergency fund) are excluded. The purpose of this portfolio is to create enough income on its own to cover all daily expenses well before we hit the standard retirement age.

Target Asset Allocation

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I try to pick asset classes that will provide long-term returns above inflation, regular income via dividends and interest, and finally offer some historical tendencies to balance each other out. I don’t hold commodities futures or gold as they don’t provide any income and I don’t believe they’ll outpace inflation significantly. In addition, I am not confident in them enough to know that I will hold them through an extended period of underperformance (and if you don’t do that, there’s no point).

Our current ratio is about 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With low expense ratios and low turnover, we minimize our costs in terms of paying fees, commissions, and taxes.

Actual Asset Allocation and Holdings

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Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Stable Value Fund* (2.6% yield, net of fees)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
US Savings Bonds

Changes
I joined the exodus out of PIMCO Total Return fund earlier this year after their recent management shake-up. It actually coincided with my 401(k) allowing a self-directed brokerage “window” with Charles Schwab that allows me to buy Vanguard mutual funds, albeit with a $50 transaction fee. But my 401k assets are finally large enough that the $50 is worth the ongoing lower expense ratios. I’m buying more REITs and TIPS in order to take advantage of this newly-flexible tax-deferred space. I’m still holding onto my stable value fund, but I may sell that position as well in the future.

I think I mentioned this elsewhere, but I am now accounting for my Series I US Savings Bonds as part the TIPS asset class inside my retirement portfolio. Before, they were considered part of my emergency fund. They offer great tax-deferral benefits as I don’t have to pay taxes until they are redeemed. I don’t plan on selling any of them for a long time, at least until my tax rate is much lower in early retirement.

Retirement Portfolio Update – Year-End 2013

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Here’s a 2013 year-end update of our retirement portfolio, which includes employer 401(k) plans, self-employed retirement plans, Traditional and Roth IRAs, and taxable brokerage holdings. Cash reserves (emergency fund), college savings accounts, experimental portfolios, and day-to-day cash balances are excluded. The purpose of this portfolio is to eventually create enough income on its own to cover all daily expenses.

Target Asset Allocation

This has been mostly the same for over 6 years, although I did make some slight tweaks in my last June 2013 update.

I try to pick asset classes that are likely to provide a long-term return above inflation, as well as offer some historical tendencies to be less correlated to each other. I don’t hold commodities futures or gold because theoretically their prices should only match inflation. In addition, I am not confident in them enough to know that I will hold them through an extended period of underperformance (and if you don’t do that, there’s no point). 2013 turned out to be a tough year for both gold and commodities funds.

Our current ratio is about 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With low expense ratios and low turnover, we minimize our costs in terms of paying fees, commissions, and taxes.

Actual Holdings

Here is our year-end asset allocation snapshot:

Stock Holdings (Ticker Symbol)
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
PIMCO Total Return Institutional* (PTTRX)
Stable Value Fund* (2.6% yield, net of fees)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
US Savings Bonds

The holdings haven’t changed through the latter half of this year, just some additional purchases of existing funds.

In terms of performance, in general stocks had a great year while bonds pretty much went nowhere or slightly down. I don’t expect everything to go up every year, not to mention my portfolio is bigger than I could have expected just a few years ago, so I can’t complain. Here are some 2013 YTD total returns for selected representative funds as of 12/27/13:

Stocks
Total US VTI +33%
Total International VXUS +14%
US Small Cap Value DES +37%
Emerging Market Small Cap Value DGS -5%
US REITs VNQ +3%

Bonds
Short-term Muni VMLUX +0.5%
Intermediate-term Muni VWALX -3%
Inflation-protected bonds -9%

MMB Retirement Portfolio Update – June 2013

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Here’s a mid-2013 update of our retirement portfolio, including employer 401(k) plans, self-employed retirement plans, Traditional and Roth IRAs, and taxable brokerage holdings. Cash reserves (emergency fund), college savings accounts, experimental portfolios, and day-to-day cash balances are excluded. The purpose of this portfolio is to eventually create income and enable financial freedom.

Target Asset Allocation

Since my last update, I made a minor change to our target asset allocation by removing Emerging Markets as a separate added weighting as it now includes some huge companies and comprises nearly 20% of the Total World ex-US (Total International) asset class.

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Don’t Forget To Be Awesome

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Originally posted here on December 3rd, 2005:

Thinking about goals and the future some more, I have this picture in my head of our dream future in 5-10 years:

- I work at a job I enjoy for only 20 hours a week
- My wife also works at a job she enjoys for only 20 hours a week
- We both share responsibility for taking care of our kids with minimal, if any, need for daycare.
- Our combined incomes still make it possible for us to reach our financial goals. However, we’re not really interested in being filthy rich.

We are gonna make this happen. Check back with me on 12/3/2015

Done.

We both really wanted this, even though we are more tired now than when we were both working full-time. (Even though we sleep at 9pm now instead of 1am.) Although I write about money daily (at times it may seem like an obsession)… it certainly didn’t feel like 8 years had gone by since I made this goal.

I recently bought a new print that will be in my daughter’s room eventually, but for now hangs in my home office. It says Don’t Forget To Be Awesome. I think we all have own personal definition of “awesome” – whether it’s starting your own business to being active in your community to simply being a good parent (even though that is anything but simple). Now, we are still far from reaching our “awesome”. But I think the phrasing is perfect; it’s so easy to forget to pursue our unique dreams in today’s hectic, noisy world.

My Money Blog Retirement Portfolio Update – January 2013

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Here’s a belated 2012 year-end update of our investment portfolio, including employer 401(k) plans, self-employed retirement plans, Traditional and Roth IRAs, and taxable brokerage holdings. Cash reserves (emergency fund), college savings accounts, experimental portfolios, and day-to-day cash balances are excluded. This is the portfolio that we are depending on to create income and thus financial freedom.

Asset Allocation & Holdings

Here is my current actual asset allocation:

The overall target asset allocation remains the same:
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The Benefits of Tracking Your Net Worth

The free Personal Financial Planning course on Coursera has begun (there’s still time to join), and the first week’s topic is “Where are you? Where are you going”. One of the activities is calculating your personal net worth.

It may seem like a small thing, summing up your assets and subtracting your liabilities, but I am a living example that it does make a difference. I posted my first public net worth on December 9th, 2004:

Assets: *= pre-tax
-----------
Cash Savings: $54,983
Brokerage (non-retirement) $ 7,808
Roth IRA: $ 2,001
Traditional IRA*: $ 5,383
401k*: $11,000
529: $ 1,097
---------------------------------------------
Total: $82,272

Liabilities
--------------
Credit Cards: $26,522

Net Worth: $55,750

(I had a lot of money tied up in no fee 0% balance transfers at the time, with the money safely earning 3-5% interest in bank accounts.)

Now, I no longer share our raw numbers on the internet down to the dollar, but I still track my net worth privately and update my progress towards financial freedom regularly. I definitely think it made a difference, seeing the benefits of a pay raise or debt payoff. A little over 8 years later, our net worth is many times larger and we plan on paying off our mortgage completely this year. Knowing how you stand won’t solve all your problems, but it may give you a reality check especially if you were like me and exiting college well with a 5-figure negative net worth.

As I’m sure someone wise/rich/famous has said – “If you don’t know where you are, then how do you know how to get where you’re going?”

Or the other classic – “If you don’t know where you’re going, any road’ll take you there”

Financial Status Bar & Goal Updates

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This updated post explains my ratio-based method of tracking our financial progress towards early retirement (as shown by the status indicator on the top right of every blog page).

Cash Reserves / Emergency Fund

Our goal is to always have a full year of expenses in cash equivalents as our “emergency fund”. (This is not the same as a year of income. Our expenses are much lower than our income.) This is a cushion for a variety of potential events including job loss, health concerns, or other unplanned costs. It also allows us to take a more long-term view with our investment portfolio since we know we won’t have to touch it.

Since our emergency fund is relatively large, I try to maximize the yield. If we stuck it all in a money market fund, the yield would be barely above zero. With a bit of work, our cash earns a blended rate of over 2% annually without taking on extra risk. We use the same accounts to make money from no fee 0% APR balance transfer offers, but currently don’t play that “game”. Here are recent updates on where we keep our cash:

March 2013 Cash Reserves Update
June 2012 Cash Reserves Update
March 2012 Cash Reserves Update
May 2011 Cash Reserves Update
January 2011 Cash Reserves Update

Home Equity

I don’t think everyone should buy a house (or more accurately, take out a huge loan on a house), as it historically doesn’t necessarily work out to be a very good investment over short or even long periods. However, if you are geographically stable, I do think buying and eventually owning a house free and clear can be a solid component of an early retirement plan. My current forecast is to have our house paid off in 10-15 5-10 years. Housing is very expensive where I live, so once that mortgage payment is gone, the actual income my investments will have to produce will drop drastically.

There are many ways to define home equity, and I am sticking to a simple method of calculating home equity by taking 100% minus (outstanding mortgage balance / original home purchase price). As of 2011, our home price has rebounded to over the original purchase price according to a refinance appraisal and comparable sales. Overall, I’d rather enjoy having continuous progress without worrying about my home’s exact market value. Here are some previous mortgage updates:

April 2013 Mortgage Paid Off
[...]
November 2011 Mortgage Payoff Update
February 2011 Mortgage Payoff Update

Investment Portfolio

The goal of my investment portfolio is allow withdrawals to support our needed expenses in “retirement”. Again, income and expenses are not the same thing. After mortgage payoff, I expect our required expenses to be less than 25% of our current income. I like to assume a simple 3% safe withdrawal rate, which means for every $100,000 saved, I can generate $3,000 a year of inflation-adjusted income for the rest of our lives. I used to assume 4%, but since our target “retirement” age is in our 40s and not 60s, I feel that 3% is better. Even 3% is not guaranteed, but again it does provide a quick estimate of progress. Here are recent portfolio updates:

June 2013 Investment Portfolio Update
January 2013 Investment Portfolio Update
July 2012 Investment Portfolio Update
February 2012 Investment Portfolio Update
November 2011 Investment Portfolio Update
July 2011 Investment Portfolio Update

My initial goal was to try and keep the home equity and expense replacement ratio about the same so that both will reach 100% at the same time, but we’ll see. I am still (very slowly) researching shifting to a more income-oriented portfolio that yields about 3% and has a principal value that can grow with inflation.

The actual implementation of my plan will probably require more flexibility. At some point, I plan on using some of my money and invest in an immediate annuity for some income stability. I’ll also need to vary my exact withdrawal rates a bit with market conditions. Once I reach age 70 or so, Social Security will kick in something. I don’t think Social Security will disappear although I do expect means-testing, but who knows these days.

Goals & Priorities: Which Lego Man Character Describes You Best?

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When dealing with other people, it’s always easier when you know what makes them tick. What motivates them? This led to some introspection. What did I really want out of life? I realized that I was probably much different than others. The following characteristics aren’t mutually-exclusive, there is no wrong or right really, as everyone may have a little of each but you may realize one is prominent.

Don’t take the Lego characters too seriously either, eh? I just went to a Lego-themed birthday party and watched Star Wars again. :)

Prestige

“I seek the admiration and respect of others.”
 

Power

“I like being the boss and giving orders.”
 

Duty / Honor

“I find a higher calling in serving my religion/country/world.”
 

Passion

“I love my job.”
 

Family

“I want be a good wife/husband/mother/father.”
 

Personal Freedom

“I don’t take orders from anyone.”
 

Path of Least Resistance

“I don’t question the status quo and like to follow others.”
 

I would say that my top preferences from highest to lowest would be personal freedom, family, and duty. I’m still working on starting a family and how to best help higher causes. Low on my list is power and prestige. I don’t enjoy managing others (having people below me in the ranks) or being told what to do (having people above me). I feel this hurts me in the areas of leadership and probably makes me a bad employee. This make me think I should just work for myself. How about you?

The Last Lecture: Legacy, Achieving Goals, and Gratitude

The Last Lecture Book

The late Randy Pausch became well known as a Carnegie Mellon professor who made a inspirational “last lecture” called Achieving Your Childhood Dreams (over 14 million views) after his diagnosis with pancreatic cancer. He later then wrote a book called The Last Lecture with Jeffrey Zaslow. As a former bestseller, you can now find copies on the cheap. It is a short and worthwhile motivational read. All the quotes are from the book.

Legacy

Time is all you have. And you may find one day that you have less than you think.

One of the things I think about a lot more these days is legacy. As a human, I think most of us have a desire to outwit our own mortality.

What wisdom would we impart to the world if we knew it was our last chance? If we had to vanish tomorrow, what would we want as our legacy?

I think children help fulfill that need, as they allow a chance for a part of us to live on forever. For him, the Last Lecture itself was a legacy project for his family so that his young kids would know him better when they grew up. He also talked about his professional legacy:

Now a computer science professor at Washington University in St. Louis, Caitlin (oops, I mean, Dr. Kelleher) is developing new systems that revolutionize how young girls get their first programming experiences. [...] (You can keep tabs on their progress at www.alice.org.) Through Alice, millions of kids are going to have incredible fun while learning something hard. They’ll develop skills that could help them achieve their dreams. If I have to die, I am comforted by having Alice as a professional legacy

So his legacy projects were three things: his family itself, something for his family, and something to leave the world a better place. I think this is good framework for creating my own legacy.

Achieving Goals
Now how did he achieve those childhood dreams, as well as his legacy goals? More or less it was just hard work and persistence. What stood out to me was the idea that some things should be hard to achieve, and if you get it anyway you should be proud of it. Time spent complaining is time wasted.

The brick walls are there for a reason. They’re not there to keep us out. The brick walls are there to give us a chance to show how badly we want something.

…The brick walls are there to stop the people who don’t want it badly enough. They’re there to stop the other people.

Gratitude
Pausch didn’t get there on his own, even with all the hard work. He showed gratitude to his parents, his wife, the professor that got him into grad school after he was rejected, his kids, and many other colleagues.

Goal Update: Investment Portfolio Asset Allocation & Holdings – Nov 2011

Stocks and Bonds Pies

Time for another update of my investment portfolio, including employer 401(k) plans, self-employed plans, IRAs, and taxable brokerage holdings.

Asset Allocation & Holdings

You can view my target asset allocation here, along with link to other model portfolios. Despite the headlines, I still like to buy, hold, and rebalance. Here is my current actual asset allocation:

Everything is within acceptable ranges, other than I need to buy more TIPS. This is just an overshoot since I have my 401k buying shares in a stable value fund automatically, and my TIPS are mostly stuck in IRAs. Actually, my TIPS holdings have been doing great, due to how low real yields are right now. Last I checked, even 10-year TIPS had negative real yields.

My current ratio is about 75% stocks and 25% bonds. I’ve been thinking about this balance. On one hand, I’m contributing a lot of money into the portfolio, and I hope that I can get my “early” retirement on within the next 10 years. At that point, I’m going to want something closer to a 60% stocks and 40% bonds setup, the classic balanced fund ratio. So I want to shift towards bonds, but bond yields don’t look very appetizing right now. For now, I’m just going to keep up the gradual shift.

Stock Holdings
Vanguard Total Stock Market ETF (VTI)
Diversified S&P 500 Index Fund (DISFX)*
Fidelity Extended Market Index Fund (FSEMX)*
Vanguard Small-Cap Value Index Fund (VISVX)
Vanguard FTSE All-World ex-US ETF (VEU)
Vanguard MSCI Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VGSIX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX)
Stable Value Fund* (3% yield on past purchases, 1.8% on new)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities

The overall expense ratio for this portfolio is in the neighborhood of .20% annually, or 20 basis points, which is much lower hurdle to overcome than the average mutual fund expense ratio of over 1% annually. This is all DIY, so I don’t pay portfolio management or financial advisor fees.

3% Safe Withdrawal Rate

I’ve also decided to use a 3% theoretical safe withdrawal rate instead of a 4% withdrawal rate. So instead of reaching 25 times our annual expected expenses, we will need to save 33 times. This is due to the fact that we will probably reach early retirement with 10 years, and thus our portfolio will have to last a lot longer than a conventional age 65 retirement. 3% is a more conservative number, and in reality I doubt that we will even go by the 3% number in strict terms. From reading other early retiree stories, we’ll stay flexible and adjust our withdrawals somewhat with market returns.

With portfolio increases and additional contributions, at a 3% withdrawal rate our current portfolio would now cover 43% of our expected expenses. If you recall, I plan to have the house paid off at retirement as well. It might be nice to have a portfolio that yields 3% where we could spend the dividends and interest payments, and I have been tossing around ideas for that as well. I still like the idea of 50% Target Retirement Income (or similar) and 50% Wellesley Income.

Goal Update: Home Equity Historical Chart – Nov 2011

Home Equity Chart

We closed on our mortgage refinance about a month ago, the old loan has been paid off, and we are just about to make our first payment on the new loan. Still, I always seem to go back and forth between different possible scenarios of paying down the house quickly or according the “minimum payment” as I call it. Technically, I could just about pay off the house now, if I chose to liquidate my taxable investments and empty out my emergency fund reserve.

I decided to go back and reconstruct a chart of our home equity over time, and compare it to a couple of alternate scenarios.

The red line represents our actual home equity, as a percentage of our purchase price. We use the purchase price because our home is currently worth about the same as when the bought it. An appraisal done for our refinance last month came in at 6% above our initial purchase price. Before the big refinance, we did a haphazard combination up of throwing in a few hundred extra bucks each month and one big lump sum prepayment. Currently, we’re right at 35% home equity.

Just for fun, the dotted red line is an exponential trendline of the red line. It has the loan being paid off somewhere around 2020.

The blue line represents our theoretical home equity if paid according to the normal 30-year payment schedule of our initial 6% fixed mortgage, starting from when we bought the house in the start of 2008. This would have had the loan paid off in 2038.

The green line represents our theoretical home equity if paid according to the normal 15-year schedule of our new sub-4% fixed mortgage, starting from this month. This would have the loan paid off in 2026.

I definitely still want to pay it off in under the current 15-year term, but as usual I like the flexibility. If children come into the picture, we’ll probably cut back on work and slow things down. But for now, I’m still hacking away. We hit the 401k cap already for 2011, so we have some extra cashflow.

By the way, I am only a proponent of paying extra towards your mortgage if you are maximizing your available tax-advantaged accounts like 401ks and IRAs as well as have a nice cash cushion. Although now I do think everyone should consider 15-year mortgages. Who wants to take 30 years to own a home? Most other countries don’t even offer 30-year mortgages, and the government support of 30-year mortgages here simply inflates property prices.

Reaching the “I Can Do This” Moment

Like millions of other people out there, I decided to start trying to lose weight and get in better shape on January 1st. I cut out virutally all meat and was eating tons of fresh vegetables and whole grains. I went to the gym, ran outside, or played sports with friends nearly every day. I rarely ate out at restaurants, and when I did I ordered things like steamed vegetables and brown rice. I lost 15 lbs. within the first month.

Then I hit the wall. I was still exercising almost every day, but I started to dread the workouts. Even worse, I stopped losing weight. I started eating meat again, and adding some snacking back in. I could feel myself losing willpower. I was horrified to discover I had gained weight back.

I knew I had to make some changes. I allowed myself one “cheat day” per week so that I could eat out or drink a beer. I made an exercise routine for the whole week in to be more efficient and starting doing some workouts first thing in the morning before work. I try to only have one big meal a day and the rest much smaller. I acknowledge that I have my weaknesses (like snacking while watching ESPN, and getting hungry after watching Food Network) and avoid doing those activities. I started losing weight again, at a more regular pace of 1-2 pounds per week. More importantly, it didn’t feel like deprivation.

I’ve read that it takes 30 days to break a habit. Well, it took me 30 days to perhaps break my habit, but it took another 30 days to create a new habit that I feel that I can live with for the long run. The best part is the feeling of control that I have now. I know the things I need to do to lose weight. I know the things that I could do that will make me gain weight. It’s up to me. I call this the “I Can Do This” moment.

Applications to Saving Money

Like many other folks, I draw parallels between the actions of saving money and losing weight. In dealing with food, I often tell myself I have 1,500 calories a day to “spend” and so I should get the most value from my calories in terms of flavor, texture, and hunger satisfaction.

When I thought about this, I remember the same thing happened when I graduated college and started earning money on my own. Could I pay down my $20,000+ in student loans? How long would it take? Could I still afford the things I wanted? But the paychecks started coming in, and you started having to balance what was coming in and what was going out. Some things like electricity cost about the same each month, but then you learn to deal with things like car repairs and new computers. Eventually, I reached the “I Can Do This” moment where I felt a connection between my actions and the resulting surplus I had each month.

Here are some observations about reaching this point, which you may or may not agree with:

  • When starting a difficult task, it’s good to go all out for a while even if you run out of willpower eventually. I needed that first 15 lb. loss. The same could be said about going on a “no-spending month” and saving up $500 or $1,000. I had built up something that I didn’t want to lose.
  • It’s important to see a direct connection between your actions and the results. (At least initially.) This is why I no longer like articles with “52 ways to start investing with $100″. If you’ve managed to save $100 a month, it should go in the bank. If you invest it and one day your $1,000 balance turns to $500, then it affects your emotions and motivation. You’ve just lost 5 months of hard work. With a interest-bearing savings account, the amount will always be higher than yesterday. These days it’s not much, but it’s still higher.
  • Routine makes everything easier. Make less decisions. Don’t make every single thing another mental decision. “Should I work out today?” “What about tonight or tomorrow instead?” That’s exhausting. Go to your Yoga class every Tuesday and Thursday. Every. Week. Tell everyone you’ll be there and not at happy hour. Remove the decision. Along the same lines, having money taken out of your paycheck or bank account automatically just keeps your mind from decision fatigue.
  • Keep supportive friends. Changing your lifestyle often alienates you from some of your existing friends, and they may see it as a negative judgment upon themselves. They can sabotage your best intentions with their own selfishness, so be sure to find and keep people who support your decisions.

Do you remember your own “I Can Do This” moment?