Archive for the 'Retirement' Category
Friday, February 25th, 2011
Trying to think of a good name for your retirement fund? Here’s a funny Dilbert comic about a colorful option:
In fact, the origins of the term “F— You Money” can be traced to actor Humphrey Bogart. The following quote is attributed to him:
The only good reason to have money is this: so that you can tell any SOB in the world to go to hell.
There is also this story from some biographical accounts of his early years:
Long before he was Hollywood’s most famous tough guy, Bogart began his acting career on the stage. After serving in the United States Navy during WWI, he got his start playing a handful of very juvenile roles in drawing-room and country-house comedies. In 1920, he scored a leading roll in the comedy “Cradle Snatchers” and received a bevy of positive notices. It was during this time that he was said to have kept $100 dollars in his dresser drawer at all times, calling it his “F” you money. Instead of taking a part he didn’t want, he could just say “F” you.
I looked it up and $100 in 1920 was about $1,000 in today’s dollars.
I like Bogart’s definition better. He basically says “I’ve now got the financial independence to be picky in how I spend my time.” You don’t need a million bucks. Even a smaller sum of money tucked away can make a big difference in your mood and outlook on life. The first $25,000 I saved up freed me up to pursue my real passions and make the next $250,000.
Posted in Funny, Retirement | 8 Comments »
Tuesday, February 22nd, 2011
If you have a 401(k), 403(b), or similar retirement plan, you may have an investment option called a stable value fund. Sometimes it goes by a different name like Guaranteed Pooled Fund, but they are always marked as a conservative investment. The pitch is basically the higher interest rate of longer-term bonds, with the relatively liquidity and stable principal value of a money market fund. I explored the risks and rewards of stable value funds before and currently hold them as part of my bond allocation.
My specific stable value fund is run by Transamerica Financial Life Insurance Company (TFLIC) and offered an interest rate of 3.5% for all of 2010, which was much higher interest than any other similar bond investment was going to pay me. Then they told me that until February 28th, 2011, the interest rate would be 3.0%. Finally, I just received a letter that told me that the interest rate from March 1st to December 31st, 2011 would be lowered to 1.8%.
So, should I stay or should I go? Interest rates continued to drop in 2010, so I did expect them to lower their rate.
Online savings accounts like ING Direct are paying around in the low 1-1.2% APY range, and I have no access to something like that in my 401k. They recently announced a self-directed option through Schwab, although I need to find more details about how much transaction costs would be. The Vanguard Short-Term Treasury Fund (VFISX) is currently yielding only 0.66%. Taking a look at current Treasury yields shows the 2-year at 0.78% and the 5-year at 2.30%.
So the interest rate itself is still pretty competitive relative to other “safe’ investment options. My other bond alternative inside the account is the huge PIMCO Total Return fund (PTTRX) with a 3.12% yield and 4.8 year duration, which did pretty well for me when I had it but I worry about asset bloat with $240 billion is assets, manager risk, and interest rate risk.
In the absence of any significantly better options, it looks like I’m staying put.
Posted in Investing, Retirement | 15 Comments »
Thursday, February 10th, 2011
In my last post, reader Greg shared a better chart that illustrates the components of the Consumer Price Index, which is supposedly to track what the average consumer spends and thus is used to gauge inflation. Definitely worth archiving for later.
Source: New York Times. Click to visit. It’s interactive, so you can zoom in and out to see all the little details.
Posted in Investing, Retirement | 8 Comments »
Wednesday, February 9th, 2011
Inflation. Deflation. Hyperinflation. It’s all people seem to talk about these days. I’m always reading that you should always consider your investment returns after inflation. But what is inflation? Most of the time, they are talking about the Consumer Price Index for Urban Consumers (CPI-U) published monthly by the Bureau of Labor Statistics. This is based on the price of a theoretical basket of goods. Here are the components of the CPI, made into a nice pie chart by dshort.com from this recent BLS CPI report.
However, common sense tells us that we do not all share the same inflation rate. A long-distance trucker will be much more sensitive to the price of gas than a couple living in Manhattan. A grandmother who has owned her home since 1940 and doesn’t plan on moving doesn’t notice if rents are rising 3% or 6% a year. The CPI could have very little correlation to your personal inflation rate.
In addition, it’s possible to manage our own personal inflation rates by changing our behavior or making some upfront investments. Let’s take a look at the largest components of the CPI.
Housing (42%)
This category includes the cost of rent (or owner’s equivalent cost) as well as utilities like gas and electricity. The most obvious way to deal with inflation is to own a house, either directly or via mortgage. With a 30-year fixed mortgage, your monthly payment is going to stay the same, and your total housing payment is only going to vary a bit as your insurance and property taxes go up. My neighbor used to have a mortgage of $300 a month.
As for utilities, a solution I plan to install is solar photovoltaic (PV)panels. In most states, you can sell back the electricity you generate with solar panels throughout the day, so that it cancels out your entire electricity bill. With a large enough system, you will never have a power bill again. Here is a helpful PDF consumer’s guide on solar systems from the Department of Energy.
The large upfront cost can be defrayed with federal and state tax credits, and the panels come with (about) a 25-year warranty. Other parts, like the inverter, come with a 10-year warranty. If you have the space you could also install a windmill, or contract electricity from other sources.
If you live in an especially hot/cold climate and much of your expense is cooling/heating, a very important area is insulation.
Transportation (17%)
This category includes the cost of vehicles, public transportation, and fuel. I plan on owning all my cars for at 10 years each, so even though it will catch up to me eventually, the annualized cost should remain reasonable. Avoiding the hit of depreciation during the early years, either buy buying used or holding for a long time, is important.
As for fuel, again I plan on using my solar panels to create electricity for my plug-in electric vehicle. Range is currently an issue, but as battery technology improves, I expect that it will be feasible for most households to own at least one electric vehicle.
Food & Beverages (15%)
This category includes food at home, dining out, and also alcohol. Why not grow some of your own food? We are starting to dabble in square-foot gardening, which involves planting small, efficient gardens that use minimal water, pesticides, and labor. Dining out is one of those expenses that is almost all for pleasure and convenience, so if it becomes hurtful then we’ll cut back. I’ve already been cutting back on the alcohol for waistline reasons.
Education & Communication (6%)
I’m not sure why these two are lumped together, but I really don’t see communication costs rising very much in the future. It would appear that data transfer is only going to get faster and cheaper. On the other hand, education costs continue to skyrocket. (Okay, now I see why they are together… sneaky) Even though this is only 6% of the CPI, if you have kids then tuition prices are likely a huge concern. If you don’t have kids (and are done with school), then you don’t care at all.
There are still some limited opportunities for prepaid college tuition out there, which are worth exploring if you accept the penalties for not following their restrictions. An example is the Florida Prepaid college plan.
Any other ideas for controlling your personal inflation rate?
Posted in College & Education, Real Estate, Retirement, Simple Living | 17 Comments »
Wednesday, February 2nd, 2011
The January 2010 issue of SmartMoney magazine had a nice little article Target-Date Funds Retool — Again about how those all-in-one Target Retirement funds that nearly all 401k plans have now are almost all increasing the percentage of stocks that are international. They all say this not performance-chasing, but at the very least it’s sentiment-chasing. People just aren’t all that confident in an predominantly-US portfolio anymore. I like the quote “Were you wrong before, or are you wrong now?”.
In any case, the online version left out my favorite part of the handy graphic, so I scanned it in here:
Vanguard announced back in October that it was also following the herd and increasing international exposure for its funds, and a quick look on the Vanguard Target 2025 fund shows the international holding at 20.8% as of 12/31/10. Seems like they are rolling out the change gradually.
I’m always on the fence on these funds. If having one fund keeps people from jumping from one fund to another, these funds can be a net positive. I like simplicity. But you have to watch out for high costs because that will eat away at your return. On the other hand, you can construct your own retirement portfolio out of just a few funds now, and not have to watch these guys follow each other around. Even the Vanguard Target 2025 fund only has 3 funds inside of it.
Posted in Investing, Retirement | 10 Comments »
Monday, January 24th, 2011
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 luck involved. Your actual returns depend a lot upon when you start, and also when you finally withdraw. The matrix includes annualized returns for the S&P 500 for every starting year and every ending year since 1920, adjusted for inflation. (Click to enlarge.)
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.”
There’s a lot of information contained in this chart. Some observations:
- As your holding period lengthens, the returns converge towards the median of about 4% above inflation. Anything higher than that is very rare.
- The “long run” may be a lot longer than most people think. It can take 40+ years to get to that 4% real return, not just 15 or 20. Now, if you’re in your 20s or 30s, you probably will have a holding time of 40+ years for the money you’re investing now.
- Visually, investing from about 2000 onwards looks at least so far somewhat like investing from about 1970 onwards. (Both pockets of red in the early years.) Not the most exciting prospects.
However, even if you start out strong, over the long run the returns also drift back towards the long-term median. It’s the money that you invest right before retirement that can be the most at risk.
Posted in Investing, Retirement | 26 Comments »
Friday, January 7th, 2011
If you haven’t been keeping close track of it, your portfolio’s asset allocation may have shifted significantly over the past year. Your relative mix of assets like stocks, bonds, or real estate has a great impact on the volatility and expected future return of your portfolio.
Morningstar has a bunch of helpful tools for managing your investment portfolio, but many of them require a paid membership. However, one handy trick is that anyone can use many of these premium features for free at the T. Rowe Price website by signing up for a free account with nothing but an e-mail address.
Portfolio Manager
This tool lets you enter all your portfolio holdings, which it then stores for you and allows you to track it with automatically updated prices. You can either track all your future transactions as you go, or just input your updated holdings every few months like I do.
Portfolio X-Ray
Once you enter your holdings, simply look for the Portfolio X-Ray tab and you’ll have a complete breakdown of the true asset allocation of your overall portfolio. Does your “small cap” fund really own a bunch of mid-caps and large-cap funds? X-Ray will reveal your true exposure to stock style (i.e. Small/Mid/Large, Growth/Blend/Value), geographical regions (i.e. Japan, US) , stock sectors (i.e. Telecom, Energy), average expense ratio, and more.
If you’d rather have a quick peek without needing to register at all – but also without the ability to save your portfolio – try the Morningstar Instant X-Ray tool.
If you already have a target asset allocation in mind, now might be a good time to to rebalance your assets back towards that target. Rebalancing is a way to maintain the risk/reward balance that you have chosen for your investments, and also forces you to buy temporarily under-performing assets and sell over-performing assets (buy low, sell high). If you are looking for a bit more guidance, here are my favorite posts on investing.
Posted in Investing, Retirement, Tools & Calculators | 11 Comments »
Saturday, January 1st, 2011
As 2010 draws to a close and the champagne is all gone, here’s an update on the status of our personal financial goals. I’ve been on the fence for a while about whether to continue our detailed net worth updates, and I’ve decided to reclaim some privacy and stop doing them in the previous format. Instead, I’d like to keep tracking our progress but in a opaque manner where I think everyone can still calculate their own and compare with us if desired. I’m not sure exactly how to do this, but here is a rough outline.
Credit Card & Consumer Debt
I think the first part of any healthy financial status should be to outline and pay off any consumer loans. We do use credit cards, but we pay our balances in full each month. We don’t have any auto loans or other forms of consumer debt.
I used to take money from credit cards at 0% APR and place it into online savings accounts, bank CDs, or savings bonds that earned 4-5% interest, and keeping the difference as profit while taking minimal risk. (By this I meant that the risk was dependent on my own actions.) I could have also used such 0% loans instead of other debt like student loans. However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”.
Retirement Portfolio
As far as financial freedom goes, there are a number of ways to fund your living expenses without working. Pensions, Social Security, stocks, bonds, real estate, and so on. For us, I have boiled down “financial freedom” to be two things:
Part 1: Accumulate 25 times annual (non-housing) expenses
Part 2: Own my house / Pay off mortgage
I think it’s important to note that these two parts don’t necessarily have a number attached to them. Minimizing expenses are just as important as increasing portfolio size, as well as minimizing the amount of house that you “need”. More detail can be found in this post entitled A Quick & Dirty Plan To Reach Financial Freedom.
For Part 1, the basic idea is to assume that a portfolio can return 4% annually with adjustments for inflation. So if you have $1,000,000, that would create $40,000 a year. The exact implementation of this is more complicated, as there are several ways to help avoid portfolio depletion like annuities and adjusting your withdrawals during market downturns. Most folks won’t need a million dollars, though, if they have already paid off their house. For example, if your non-housing expense are only $1,000 per month, then you’d only need 12 x 25 = $300,000.
Back in July I was 33% of the way to reaching this goal. We are now 40% of the way. At this pace, we could finish Part 1 in less than 10 years, but we will likely scale back our income when we have kids. We’ll have to keep a close eye on those expenses as well.
Housing & Mortgage
Owning a house isn’t for everyone, but I think that if you are geographically stable, it can be a great way to become financially independent. Once you pay off the house, then your housing “expense” is mostly taken care of. (There is still maintenance and property taxes.)
We have owned our house for about 3 years now, having taken out a 30-year fixed rate mortgage initially with a 20% downpayment. Since I want to retire before I’m 50, I need to speed things up. Over the past year, we have made additional payments toward principal, as well as lowered the interest rate to 4.75%. These prepayments have been irregular lump-sum amounts, although I agree an automated plan is easier to maintain. The outstanding loan principal is now 67% of the purchase price. If we were to continue the original minimum-required payments, our home would be now be paid off in 21 years. This is good, as we can support that payment on one income.
Posted in Goals, Investing, Real Estate, Retirement | 31 Comments »
Sunday, December 26th, 2010
I’m still recovering from holidays, but I did see today that retirement specialist Jim Otar has made his book Unveiling The Retirement Myth available in PDF format for free until January 9, 2011. Here is the direct download link (expired).
I haven’t read it, but from I can gather it seems targeted at those DIY investors who are carefully planning the withdrawal phase of retirement, and not for beginners. For example, the summary teaser talks about “non-Gaussian optimum asset allocations”. Hey, sounds like great weekend reading to me. Learn more about the material at his site RetirementOptimizer.com. In any case, it’s free and the book retails for $50, so why not download it. I’m now wanting an iPad to read all these free eBooks out there…
Thanks to TheFinanceBuff for the tip.
Posted in Deals & Offers, Retirement | 7 Comments »
Monday, December 6th, 2010
If you have a workplace-sponsored retirement 401(k) or 403(b) plan, chances are you have some form of target-date retirement fund. The Fidelity Freedom Funds are some of the most popular ones out there. In comparing a few funds, I’ve found that the Fidelity funds have more than twice the assets of even the similar Vanguard funds. However, there are a few reasons why you should avoid the actively-managed Fidelity Freedom funds if at all possible.
This post is a bit long, so here’s a roadmap of what I’m going to try and show:
(1) The goal of owning actively-managed mutual funds is to beat their benchmark. Own the winners and not the losers. Fidelity Freedom funds hold so many different funds with overlapping holdings, that in the end they basically own everything. Thus, it’s exceedingly difficult for them to accomplish such outperformance. Thus, over time their performance before fees is likely to simply match that of their benchmark.
(2) Due to their higher expenses, this means that their net performance (what investors actually get) will be very likely to underperform the their benchmark. The amount of underperformance will closely match the amount of management fees charged.
(3) This expected underperformance is confirmed by looking at their historical performance over the past 3, 5, and 10 years.
(4) Instead, simply picking low-cost index funds to replicate the benchmark give the best chance of higher performance. For IRAs, you should move your money to a broker where are such options. Each year, it is more likely that investors have low-cost options in their 401k accounts.
Read the rest of this entry…
Posted in Investing, Retirement, Reviews | 19 Comments »
Friday, October 15th, 2010
The following is a guest post from Kent Thune, who is a Certified Financial Planner(R) and the author of The Financial Philosopher, where he urges readers to place *meaning before money and purpose before planning*.
What is freedom? What is financial freedom? Is there a difference? Is the freedom that money apparently purchases worth the sacrifices we make to reach this freedom? Can the pursuit of financial freedom paradoxically reduce one’s actual freedom? Can freedom be bought? If not, then what does this say about the pursuit of financial freedom?
The Tail Wagging the Dog
“Life is about life and not the result of life.” ~ Johann Wolfgang Von Goethe
Financial goals are destinations; they’re not life. If you believe that life is about the journey and not the destination, it’s contradictory to believe that life now must be sacrificed for a life bought by money later.
If retirement, for example, is accomplished only upon (or in unison with) the accomplishment of financial freedom what is the purpose of life now? Are you enslaving yourself now for a perceived freedom years or even decades away?
The blind pursuit of financial freedom is often closer to slavery than it is to liberation. The ultimate example of the metaphorical tail wagging the dog is an individual who creates a financial plan and then shapes their life and behaviors to accomplish the plan; whereas the healthy individual will clarify life (non-financial) goals first, and use money as a tool to reach those goals second. The pursuit of financial freedom can actually be liberating if it is not a blind pursuit—if it is a pursuit consciously defined by the individual.
Read the rest of this entry…
Posted in Goals, Retirement | 19 Comments »
Monday, October 4th, 2010
A lot of people own Vanguard Target Retirement 20XX Funds, and I just noticed that Vanguard made an announcement that they will be making some changes:
- The international equity weighting will be increased to 30% of the overall stock portion fund, up from about 20%.
- Three of the funds (European Stock Index, Pacific Stock Index, and Emerging Markets Stock Index) will be replaced by a single fund, Vanguard Total International Stock Index Fund.
- The Total International Stock Index Fund itself is making some changes. Its benchmark index will switch to the MSCI All Country World ex USA Investable Market Index, which differs from the previous index by adding exposure to Canada and Israel, as well as adding a ~13% allocation to small-cap companies.
All of these changes sound good to me, even if it is another example of Vanguard following the herd. The very first target retirement funds had no exposure to Emerging Markets. Emerging got hot, and then Vanguard added to their funds. Investors have been increasing their international exposure as well recently, and 20% was less than their competitors like Fidelity and starting to look old-fashioned. (Perhaps this is another move away from the philosophies of founder Jack Bogle.)
This also means most Target funds will consist of just three funds:
- Vanguard Total Stock Market Index Fund
- Vanguard Total International Stock Index Fund
- Vanguard Total Bond Market II Index Fund
The stated reasons are for increased simplification and diversification (and a little less volatility perhaps), and not for any increase in expected future returns. Here’s a Q&A from Morningstar with Vanguard CIO Gus Sauter about the topic.
I still like this series of all-in-one funds for those people who like the idea of auto-pilot and have all their retirement savings in tax-deferred accounts like 401ks and IRAs. They are simple, reduce your stock exposure gradually over time, keep costs low, and rebalance regularly for you. You can also adjust your risk level by choosing a different target year.
I held the Vanguard Target Retirement 2045 (VTIVX) for a while. After selling it, I’ve found it very easy to let my asset allocation shift.
However, if you have both taxable and tax-deferred investment accounts, splitting up your bonds and stocks for optimal tax-efficiency can help you increase your after-tax returns.
Posted in Investing, Retirement | 13 Comments »
