15-Minute Resolution: Save More For Retirement Today

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The problem with most New Year’s resolutions is that they just take a moment to make but to actually accomplish it you’ll need to re-make that decision hundreds of times. If you’re trying to be healthier, every single day you’ll have to choose the grilled chicken with steamed vegetables instead of the bacon cheeseburger with fries. Walking the stairs instead of taking the elevator. Willpower is like a muscle, and it gets fatigued after a while.

The good news is that if you want to save more, automation technology allows you to make a decision now and never be asked about it again. If you can, consider simply increasing your 401(k) contribution rate by 1% (or more). Just log into your account today and make the change. Today being the operative word! Let’s see how much 1% is for a household with a single earner making $50,000 gross per year. For simplicity, let’s say they live in a state without income tax. If you are paid bi-weekly, putting away $500 pre-tax annually (1%) into a Traditional 401k amounts to an additional $19 per paycheck.

Alternatively, it is quite easy to set up recurring online transfers from your checking account to either a savings account or IRA account ($100 a month, $50 a week, etc). Once set up, it will happen automatically and you won’t have to think about it. I like the idea of opening a online savings account, as it gives you a separate “savings jar” that psychologically you’ll be less likely to raid.

If you do it this week, you’ll already be done with your 2014 resolution!

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%

How Do You Compare? Retirement Plan Savings by Age

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Vanguard, a big name in defined-contribution retirement plans like 401ks, recently released their How America Saves 2013 report (pdf) which included data from over a million retirement plan participants. The report itself is quite dense and a bit insider-focused, but this Vanguard blog post teased out some interesting data about the average account balance, savings rates, and asset allocation of these employees.

Whenever you hear an “average” statistic involving retirement plans, it can be confusing because you’re including both young, brand-new workers and those age 60+ who may have been working 30+ years. Thankfully, these stats are broken down into age groups. I threw the numbers into a spreadsheet to make the more palatable charts below. How do you compare?

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California Obamacare Health Insurance Sample Quote

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healthOpen enrollment for individually-bought health insurance through state exchanges was supposed to start October 1, 2013, although several states experienced some delays and/or technical glitches. If your state exchange isn’t up and running yet, you can still estimate your premiums and tax credits here.

However, I was able to get a sample quote from the California health exchange website CoveredCA.com using my family’s demographic information.

Income: Above 400% of federal poverty line (roughly $60,000 for a 3-person household), so no tax credits or premium assistance.

Number of people: 3, specifically

  • One 35-year-old male
  • One 35-year-old female
  • One under-18 dependent child

Here are the monthly premiums I was quoted for each plan tier. The lowest quotes for our family situation were all from Blue Shield of California. $628 a month for Bronze, $722 a month for Silver, $910 a month for Gold, and $1,042 a month for Platinum.


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Morningstar Target Date Retirement Fund Comparisons & Trends 2013

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Target date funds (TDFs) get their name because they adjust their portfolio holdings automatically over time based on a given target retirement date. In general, this means shifting from mostly stocks to less stocks over time (known as the “glide path”). TDFs continue to grow in popularity, especially within employer-based plans like 401k’s and 403b’s.

Morningstar Fund Research recently released its 2013 industry survey, Target-Date Series Research Paper [pdf]. While it feels targeted at financial professionals, there are some good nuggets for us individual investors looking to decide where to invest. For example, we have to be careful as look how widely the glide path can very between different brands of target funds:


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While the most popular TDF providers have much more similar glide paths, they still differ in important ways (especially after retirement age).


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Other highlights from the paper:

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Betterment.com Review: Application Process, Updated Asset Allocation

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Updated with new asset allocations 2013. Betterment.com is an online investment tool that rolls portfolio management, trading commissions, and rebalancing into one website. I opened an account when it started with $1,000 to look under the hood. Since then, they’ve actually made several changes in response to feedback and constructive criticism.

The main attraction of Betterment is simplicity. It boils everything down to a single slider (see above) to indicate your risk preference, and takes care of everything else in the background. ETF buying, ETF selling, rebalancing, and so on. On the surface, it’s as easy as having a bank account, besides the critical fact that you can lose money!

Application Process

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Chart: Investment Returns Vary, Even Over The Long Run

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Updated and revised 2013. You often hear that stock investing is a sure thing over the “long run”. But as this chart from the NY Times and Crestmont Research shows, there is still a lot of variability involved. The matrix below visually displays the annualized returns for the S&P 500 for every starting and ending year from 1920 to 2010, adjusted for inflation, taxes, and transaction costs.


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Your actual returns depend a lot upon when you start, and also when you finally withdraw:

After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.

“Market returns are more volatile than most people realize,” Mr. Easterling said, “even over periods as long as 20 years.”

Some further observations:
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New 401k Plan Fee Disclosures Completely Worthless?

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I’ve written about how recent fee disclosure requirements for 401(k) retirement plans have brought a spotlight on bad 401k plans and their potentially embarrassed plan sponsors.

But after reading the fee disclosure on my wife’s own 401(k) plan, I must say that I’m now thinking that maybe nothing really happened at all. Check out what mine says under “Potential General Administrative Fees and Expenses”:

Administrative Fee – Per Account When applicable, other general administrative fees for plan services (e.g., legal, accounting, auditing, recordkeeping) may from time to time be deducted as a fixed dollar amount from your account. The actual amount deducted from your account, as well as a description of the services to which the fees relate will be reported on your quarterly benefit statements.

Translation: We might charge you some fees. We might not. Helpful, eh?

There’s more:

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Vanguard Balanced Fund: The Benefit of Balancing Stocks and Bonds

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An important tenet of portfolio construction is diversifying between stocks and bonds. While poking around on Morningstar, I stumbled across a quick real-world example of how this works.

Let’s say you had $10,000 back on January 1st, 1993. Now, let’s see how that money would have grown over time until today (August 9, 2013) depending on what you invested it in. That’s means holding over a 20-year period – that’s 20 years of bubbles, crashes, euphoria, fear, and a constant flow of bold predictions and catchy newspaper headlines.

1. Vanguard Total Stock Market Index Fund, Investor Shares (VTSMX).

Let’s say you invested in this huge, popular index fund that passively tracks the entire US stock market. (See What’s Inside the Vanguard Total Stock Market Index Fund?) From afar, you may be happy with this chart. But having lived through it, I can say that it was quite a wild ride. People tend to remember the highest value of their portfolio. Your money would have grown to $37,000, only to fall all the way back to $23,000 in the Tech Bubble Crash (a 38% drop). Later, your $46,000 would have dropped 50% all the way to $23,000 during the Housing Bubble Crash. So between 2003 and 2009, your money would have gone nowhere even as inflation rose. Many people went to cash. But if you stuck it out, today you’d be sitting on a balance of $58,621.

2. Vanguard Total Bond Market Index Fund, Investor Shares (VBMFX)
Now, what if you invested in this fund that tracks the overall US bond market?

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How Spending Changes Throughout Working Life and Retirement

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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.


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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.

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

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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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