NYT Financial Tuneup Day 3: Apply For a Better Credit Card

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

nyt_ftuDay 3 of my NY Times 7-Day Financial Tuneup is called Find the Best Credit Card for You. (Sign up for your own personalized tune-up for full details.) The key again is to actually apply for a better card, not just think about it and then keep your old card with lukewarm rewards and/or high interest rates.

Scenario 1: Carrying a balance

If you are still working on paying down your credit card balance, the NYT (surprise!) recommends a credit card with a low interest rate and fees. The average credit card interest rate is something like 17% APR, which is simply nuts. Ignore cashback and rewards credit cards, as they have higher interest rates in general that will overwhelm any potential rewards. The NYT specifically mentions the following cards:

  • Simmons Bank Platinum Visa has a lower variable APR (currently 9.5%) with no balance transfer. This might be a better solution if you plan on carrying a balance forever (why?!?).
  • Discover it Secured credit card improves your credit score (and thus perhaps your interest rates) as it will help build a positive credit history with no annual fee. You can have poor credit as a $200 security deposit is required for a $200 credit line.

If you’re going to apply for a new card, I prefer the following cards with 0% introductory APRs with no balance transfer fee. Here, the plan would be to consolidate balances and design a plan to pay it all off within the promotional period. After that, the rates will shoot back up again unless you do another balance transfer.

Scenario 2: No credit card debt

If you do pay off your balances every month, then you can ignore interest rates and focus on getting points, miles, or cash back on your purchases. The NYT specifically mentions the following cards.

  • Citi Double Cash card for simple cash back. It pays “1 percent back when you make the purchase and another 1 percent when you pay the bill. The best part? There’s no need for you to track points or decide when to cash out. The money comes back to you automatically.”
  • Bank of America Travel Rewards Card for simple travel rewards with no annual fee.
  • Chase Sapphire Preferred for those that collect airline miles and know how to use them efficiently.

Your goal with your new card should be to get all of the rewards you can just for spending as much as you normally would.

I’m giving the NYT an overall thumbs-up on these recommendations for most people. However, I would only recommend the Bank of America Travel Rewards card if you can participate in their Preferred Rewards program and reach the Platinum (2.25% back towards travel) or Platinum Honors (2.62% back towards travel) tiers. Otherwise, the Citi Double Cash is better than 1.5% back.

The hard part: Actually applying for a new card! The reason why there are so many juicy incentives for credit cards is that most people still don’t like to bother with applying for a new card. Change can be hard. If you’ve been thinking about making a switch, let today be the day!

Financial Tuneup Recap (still in progress)

NYT Financial Tuneup Day 2: Trim Your Budget

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

nyt_ftuDay 2 of my NY Times 7-Day Financial Tuneup is called Trim Your Budget. The key here is to take action, not just do research and then put it off again. (If you just want to daydream, Day 1 was Optimize Your Thinking.) Again, the NYT doesn’t have direct links, but anyone with a (free) NYT account can get their own personalized list of tasks.

Reviewing your monthly budget annually is a simple way to keep your spending in check. Don’t worry, we’re not going to ask you to cut anything you love, just to trim your spending in places you may not even notice. After all, if you benefit from your weekly yoga class or truly enjoy your restaurant night, have at it. Just be honest with yourself about the services that you truly use and enjoy. In comparison, if you have a languishing gym membership you never use, it may be time to cut that $50-a-month membership fee.

Round 1: Find an Easy Item to Cut

  1. Gather your credit card and checking account statements from the last month.
  2. List your spending. “…list any expense from the last month that occurs routinely: daily, weekly, monthly. From the cup of coffee you buy every morning, to your weekly manicure, to your monthly gym membership or magazine subscription.”
  3. Find an easy place to trim. “…most commonly-cut expenses are subscriptions to gyms, credit bureaus, newspapers and audio services.”

Here is rundown of recurring expenses with some commentary.

  • Mortgage – thankfully paid off a few years ago.
  • Property tax – yes, but not really negotiable. I suppose I could contest the assessed value of my house, but it seems pretty reasonable.
  • Car loan – none. My measure of car affordability is whether I can pay for it with cash. I’ve paid cash on every car, from $2,000 on up to 20x that.
  • Student loan – thankfully paid off that $30,000 a while ago.
  • Insurance – feels like we have so much insurance, but they have high deductibles to protect against catastrophic events. Car, homeowners, life, long-term disability, and umbrella insurance.
  • Food/grocery/take-out/restaurants – I’m sure we could trim something, but not in a clear-cut way. No coffee shop habit.
  • TV/internet – yes, this is a target for trimming.
  • Cellular phone – Still at $6 a month with Sprint for two lines.
  • Gym – yes, just barely worth the cost.
  • Gas
  • Medical
  • Clothing, gifts, etc – yes, again I’m sure we could trim something but we are okay with it overall.
  • Charitable giving – yes, but already thoughtfully budgeted for.
  • Credit monitoring, Netflix, magazines, music streaming, etc. – I pay for Amazon Prime and feel it is worth the money. No to Netflix, Spotify, HBO, Lifelock, paid credit monitoring, etc. A few magazines at $5 or less per year.

Round 2: Lower Your Bills

  1. Pick a bill to start with
  2. Find and review your latest bill
  3. Call your service provider
  4. Ask for a reduction in your bill

The hard part: Pick up the phone and call my cable provider. I’ve done it before, but it’s never fun. This tune-up did motivate me to do it, so I suppose that’s something. I called my cable provider and after 26 minutes, I was only able to squeeze about $5 a month in concessions by having them re-arrange my bill around to a “new plan” from my “old plan”. Even that required me to get past the initial lie that my “old plan” was “already a great deal”. ($60 a year in savings is not bad for 30 minutes of time, I suppose.)

I did not go all the way to setting a cancel date, as I wanted to avoid interruption in internet service. If you are ready to cancel, see Tips on Reducing Cable and Phone Bills From Ethically Ambiguous Experts.

In the end, I called up the duopoly DSL provider to get the new customer promotion for TV and internet. I confirmed that their was no credit check required. If it all works out, switching should save me around $50 a month ($600 a year). Switching back and forth isn’t fun, but it does save money!

Financial Tuneup Recap (still in progress)

NYT Financial Tuneup Day 1: Optimize Your Thinking

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

nyt_ftuI’ve been in a “Back to Basics” mood and decided to work through the NY Times 7-Day Financial Tuneup. I don’t have direct links to each day as you need a (free) NYT account to view your personalized list of tasks. Instead, I’m quoting selected portions to illustrate the general idea. These are my answers and not a statement of what is best – each person’s situation is different but equally valid.

Day 1: Optimize Your Thinking

nyt_tuneup1

What do I value?

Try to figure out why you are working so hard and worrying about your finances. After that, setting financial priorities may be simpler.

  • Spending quality time with family and friends. Being able to spend time with my children while they are still young (and want to spend time with me too). Having the opportunity to teach them things and build a good lifelong relationship. I hope to avoid the cycle where young children spend all day cared for by paid professionals, and in return the elderly are also cared for all day by paid professionals. (Selfish, I know…) I’m not against school or babysitters – I also enjoy spending one-on-one time with my spouse.
  • Having personal time to pursue my own educational goals. I also want time all to myself. I want to try things that I’m not very talented at but I still enjoy. (This means dropping work, which often means getting paid for one specialized task.) I’d like to work on residential solar PV + battery storage + water catchment systems. I still have a plenty of room to improve my cooking skills. I want to smoke my own Texas-style briskets. I took this Vanguard retirement quiz and scored mostly as a “learner”.
  • Find a way to give back. I also answered some questions as a “teacher” and “volunteer” role. I’d like to figure a way to give back to my community where I feel like I am making a tangible difference (as opposed to my current cash contribution with unknown impact). I still haven’t figured this one out.

What brings me the most joy?

Figure out the two or three things you spend money on in your life that bring you the most joy. Is it your annual vacation? Your fancy gym membership? The great apartment close to work?

  • Our house. Location was our top priority, and it is close to both work, school, and most extracurricular activities. We chose less square footage in exchange for 30-minutes less (each way) in commute time. While we managed to pay off the mortgage, it did take up a big chunk of our income for a long time. The house is older and also has higher maintenance needs.
  • Extended annual trip every summer. We chose a school schedule with traditional summer breaks (no homeschooling, no year-round school). As a result, I would like to be able to plan a longer 4-week vacation each year in a different destination. This would help to better immerse ourselves in a different world. For example, one year might be studying national parks and then going on a cross-country USA road trip in an RV. The next might be Japan and having the kids prepare by learning about Japanese culture in the months leading up.
  • Home-based DIY fun. I like DIY culture (even though I’m not especially good at anything) and simple rules like “Eat anything you want, just cook it yourself“. We don’t eat out at restaurants often, but we do cook a lot at home and sometimes buy more expensive ingredients like good cheese, vegetables, and random things that aren’t on sale. We buy nice kitchen hardware. Another similar thing we are going to try is home-based birthday parties (with 3 kids the $$$ adds up), which means we can “invest” in things like a playground/swing set, vegetable garden, and backyard movie screen. (Tree house would be a stretch goal.)

Financial Tuneup Recap (still in progress)

My Money Blog Portfolio Asset Allocation, 2017 Year-End Update

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

portpie_blank200

Here is a year-end update on my investment portfolio holdings for 2017. This is my last-minute checkup in case I need to rebalance to make another other tax-related moves. This includes tax-deferred 401k/403b/IRAs and taxable brokerage holdings, but excludes things like our primary home, cash reserves, and a few other side investments. The goal of this portfolio is to create enough income to cover our regular household expenses.

Actual Asset Allocation and Holdings

I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings. The Personal Capital financial tracking app (my review, join free here) automatically logs into my accounts, tracks my balances, calculates my performance, and gives me a rough asset allocation. I still use my custom Rebalancing Spreadsheet (instructions, download free here) in order to see exactly where I need to direct new investments to rebalance back towards my target asset allocation.

Here is my portfolio performance for the year and rough asset allocation (real estate is under alternatives), according to Personal Capital:

1712_pc1

1712_pc2c

Here is my more specific asset allocation, according to my custom spreadsheet:

1712_portpie

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 Small Value ETF (VBR)
Vanguard Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Target Asset Allocation. Our overall goal is to include asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I don’t hold commodities futures or gold (or bitcoin) as they don’t provide any income and I don’t believe they’ll outpace inflation significantly. I also try to imagine each asset class doing poorly for a long time, and only hold the ones where I think I can maintain faith.

Stocks Breakdown

  • 38% US Total Market
  • 7% US Small-Cap Value
  • 38% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 50% High-quality, Intermediate-Term Bonds
  • 50% US Treasury Inflation-Protected Bonds

I have settled into a long-term target ratio is 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and rebalance. With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and income taxes.

Performance, details, and commentary. According to Personal Capital, my portfolio has gained 15.08% overall in 2017 (with a few days left to go). In the same time period, the S&P 500 has gained 19.73% (excludes dividends) and the US Aggregate bond index has gained 3.53%. For the first time in a while, my sizable allocation to developed international and emerging markets stocks has boosted my overall return.

My stock/bond split is currently at 70% stocks/30% bonds due to the continued stock bull market. I continue to invest new money on a monthly basis in order to maintain the target ratios. Once a quarter, I also reinvest any accumulated dividends and interest. I don’t use automatic dividend reinvestment. This way, I can usually avoid creating any taxable transactions unless markets are really volatile.

For both simplicity and cost reasons, I am no longer buying DES/DGS and will be phasing them out whenever there are tax-loss harvesting opportunities. New money is going into the more “vanilla” Vanguard versions: Vanguard Small Value ETF (VBR) and Vanguard Emerging Markets ETF (VWO).

I’m still somewhat underweight in TIPS and REITs mostly due to limited tax-deferred space as I don’t want to hold them in a taxable account. My taxable muni bonds are split roughly evenly between the three Vanguard muni funds with an average duration of 4.5 years. I may start switching back to US Treasuries if my income tax rate changes signficantly.

Early Retirement Income Update 2017 Q3: Do I Have Enough Yet?

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

dividendmono225

How do you know when you portfolio is enough to retire on? You have to figure out a withdrawal strategy first. This is a tricky question and full of worries about running out of money. You could take out a fixed amount (i.e. $50,000 a year). You could take out a fixed percentage (i.e. 4% a year). You can adjust for inflation. You can implement upper or lower guardrails.

Personally, I appreciate the behavioral reasons why living off income while keeping your ownership stake is desirable. The analogy I fall back on is owning a rental property. If you are reliably getting rent checks that increase with inflation, you can sit back calmly and ignore what the house might sell for on the open market.

I’ve also come to feel that dividend yield can be a quick-and-dirty way to adjust your withdrawal rate for valuation. For example, if the price of S&P 500 index goes up while the dividend payout stays the same, then wouldn’t it be prudent to simply spend the same amount? Check out the historical S&P 500 dividend yield via Multpl. Focus the last 20 years – the yield was highest in the 2008 crash and lowest in the 2000 tech bubble.

sp500dy_1710

Now check out the absolute dividend amount (inflation-adjusted), also via Multpl:

sp500d_1710

Note that if you only buy “high-yield” stocks and “high-yield” bonds, that actually increases the chance that those yields will drop sooner or later. I am trying to reach some sort of balance where I spend the income on a “total return” portfolio.

Even the venerable Jack Bogle advocated something similar in his early books in investing. He suggested owning the Vanguard Value Index fund and spending only the dividends as way to fund retirement.

One simple way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar (linked below). Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a very close approximation of my most recent portfolio update. My current target asset allocation is 66% stocks and 34% bonds, and intend that to be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 10/23/17) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
25% 1.85% 0.46%
US Small Value
Vanguard Small-Cap Value ETF (VBR)
5% 1.81% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
25% 2.57% 0.64%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
5% 2.34% 0.12%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.90% 0.23%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX)
17% 2.81% 0.48%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
17% 2.99% 0.51%
Totals 100% 2.53%

 

If I had a $1,000,000 portfolio balance today, a 2.5% yield means that it would have generated $25,000 in interest and dividends over the last 12 months. (The muni bond interest in my portfolio is exempt from federal income taxes.) Some comparison numbers (taken 10/23/2017):

  • Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a low-cost, passive 60/40 fund that has a trailing 12-month yield of 2.06%.
  • Vanguard Wellington Fund is a low-cost active 65/35 fund that has a trailing 12-month yield of 2.48%.

These income yield numbers are significantly lower than the 4% withdrawal rate often quoted for 65-year-old retirees with 30-year spending horizons, and is even lower than the 3% withdrawal rate that I usually use as a rough benchmark. If I use 3%, my theoretical income would cover my projected annual expenses. If I used the actual numbers above, I am close but still short. Most people won’t want to use this number because it is a very small number. However, I like it for the following reasons:

  • Tracking dividends and interest income is less volatile and stressful than tracking market prices.
  • Dividend yields adjust roughly for stock market valuations (if prices are high, dividend yield is probably down).
  • Bond yields adjust roughly for interest rates (low interest rates now, probably low bond returns in future).
  • With 2/3rds of my portfolio in stocks, I have confidence that over time the income will increase with inflation.

I will admit that planning on spending only 2% is most likely too conservative. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. But as an aspiring early retiree with hopefully 40+ years ahead of me, I like that this method adapts to the volatility of stock returns and the associated sequence of returns risk.

Early Retirement Portfolio Asset Allocation, 2017 Third Quarter Update

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

portpie_blank200

Here is an update on my investment portfolio holdings after the third quarter 2017. This includes tax-deferred 401k/403b/IRAs and taxable brokerage holdings, but excludes things like our primary home, cash reserves, and a few other side investments. The purpose of this portfolio is to create enough income to cover our regular household expenses.

Target Asset Allocation. The overall goal is to include asset classes that will provide long-term returns above inflation, distribute 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. I also try to imagine each asset class doing poorly for a long time, and only hold the ones where I think I can maintain faith.

Stocks Breakdown

  • 38% US Total Market
  • 7% US Small-Cap Value
  • 38% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 50% High-quality, Intermediate-Term Bonds
  • 50% US Treasury Inflation-Protected Bonds

I have settled into a long-term target ratio is 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and rebalance. With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and income taxes.

Actual Asset Allocation and Holdings

aa_portpie_1710

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 Small Value ETF (VBR)
Vanguard Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Performance and commentary. According to Personal Capital, which aggregates all of my investment holdings across different accounts, my portfolio has gained 7.41% over the last 6 months since my last update. In the same time period, the S&P 500 has gained 9.21% (excluding dividends) and the US Aggregate bond index has gained 1.34%.

pcport_1710

Things are currently at 69% stocks/31% bonds. For the most part, I continue to invest new money on a monthly basis in order to try and maintain the target ratios. Once a quarter, I also reinvest any accumulated dividends and interest. I don’t use automatic dividend reinvestment. This way, I can usually avoid creating any taxable transactions unless markets are really volatile.

For both simplicity and cost reasons, I am no longer buying DES/DGS and will be phasing them out whenever there are tax-loss harvesting opportunities. New money is going into the more “vanilla” Vanguard versions: Vanguard Small Value ETF (VBR) and Vanguard Emerging Markets ETF (VWO).

I’m still somewhat underweight in TIPS and REITs mostly due to limited tax-deferred space as I don’t want to hold them in a taxable account. My taxable muni bonds are split roughly evenly between the three Vanguard muni funds with an average duration of 4.5 years. I may start switching back to US Treasuries if my income tax rate changes signficantly.

In a separate post, I will track dividend and interest income.

Early Retirement Portfolio Income, 2017 Q1 Update

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

dividendmono225

While I understand the arguments for a “total return” approach, I also appreciate the behavioral reasons why living off income while keeping your ownership stake is desirable. The analogy I fall back on is owning an investment property that produces rental income. If you are reliably getting rent checks that increase with inflation, you can sit back calmly and let the market value fluctuate. The problem is that buy only things with the highest yields only increases the chance that those yields will drop. Therefore, I am trying to reach some sort of balance between the two approaches.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar (linked below). Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 65% stocks and 35% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 4/19/17) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
25% 1.88% 0.47%
US Small Value
Vanguard Small-Cap Value ETF (VBR)
5% 1.83% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
25% 2.75% 0.69%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
5% 2.31% 0.12%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 4.42% 0.27%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX)
17% 2.87% 0.49%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
17% 2.20% 0.37%
Totals 100% 2.50%

 

The total weighted 12-month yield on this portfolio has historically varied between 2% and 2.5%. This time, it was on the higher end of 2.50% mostly because inflation has picked up and thus the TIPS fund started to yield more. If I had a $1,000,000 portfolio balance today, a 2.5% yield means that it would have generated $25,000 in interest and dividends over the last 12 months. (The muni bond interest in my portfolio is exempt from federal income taxes.)

For comparison, the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a low-cost, passive 60/40 fund that has a trailing 12-month yield of 2.12%. The Vanguard Wellington Fund is a low-cost active 65/35 fund that has a trailing 12-month yield of 2.55%. Numbers taken 4/19/2017.

These income yield numbers are significantly lower than the 4% withdrawal rate often quoted for 65-year-old retirees with 30-year spending horizons, and is even lower than the 3% withdrawal rate that I usually use as a rough benchmark. If I use 3%, my theoretical income would cover my projected annual expenses. If I used the actual numbers above, I am close but still short. Most people won’t want to use this number because it is a very small number. However, I like it for the following reasons:

  • Tracking dividends and interest income is less stressful than tracking market price movements.
  • Dividend yields adjust roughly for stock market valuations (if prices are high, dividend yield is probably down).
  • Bond yields adjust roughly for interest rates (low interest rates now, probably low bond returns in future).
  • With 2/3rds of my portfolio in stocks, I have confidence that over time the income will increase with inflation.

I will admit that planning on spending only 2% is most likely too conservative. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. But as an aspiring early retiree with hopefully 40+ years ahead of me, I like having safe numbers given the volatility of stock returns and the associated sequence of returns risk.

Early Retirement Portfolio Asset Allocation, 2017 First Quarter Update

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

portpie_blank200

Here is an update on my investment portfolio holdings after the first quarter 2017. This includes tax-deferred accounts like 401ks, IRAs, and taxable brokerage holdings, but excludes things like our primary home, cash reserves, and a few other side investments. The purpose of this portfolio is to create enough income to cover our regular household expenses.

Target Asset Allocation

The overall goal is to include asset classes that will provide long-term returns above inflation, distribute 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. I also believe that it is more important to have asset classes that you are confident you’ll hold through the bad times, as opposed to whatever has been doing well recently. The things that looked promising in 2000 were not the things that looked promising in 2010, and so on.

Stocks Breakdown

  • 38% US Total Market
  • 7% US Small-Cap Value
  • 38% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 50% High-quality, intermediate-Term Bonds
  • 50% US Treasury Inflation-Protected Bonds

Our current target ratio is 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and income taxes.

Actual Asset Allocation and Holdings

aa_port1704

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

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Commentary

In regards to my target asset allocation, I tweaked the stock percentages slightly so that I will end up with at least 5% overall in any given asset class when I reach my final ratio of roughly 65% stocks and 35% bonds in the next few years. Despite the recent outperformance of US stocks vs. the rest of the word, I am still keeping my 50/50 split between US and International holdings.

In regards to specific holdings, I did some tax-loss harvesting between my Emerging Markets and US Small Cap ETF holdings. I am also shifting towards dropping my WisdomTree ETFs and going to the more “vanilla” Vanguard versions: Vanguard Small Value ETF (VBR) and Vanguard Emerging Markets ETF (VWO). This should lower costs and increase simplicity. Otherwise, there has been little activity besides continued dollar-cost-averaging with monthly income.

I’m still somewhat underweight in TIPS and REITs mostly due to limited tax-deferred space as I really don’t want to hold them in a taxable account. My taxable muni bonds are split roughly evenly between the three Vanguard muni funds with an average duration of 4.5 years. I may start switching back to US Treasuries if my income tax rate changes signficantly.

A rough benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund (VASGX) and 50% Vanguard LifeStrategy Moderate Growth Fund (VSMGX), one is 60/40 and one is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of +7.73% for 2016 and +4.96% YTD (as of 4/17/17).

So this is what I own, and in a separate post I’ll share about how I track if I have enough to retire via dividend and interest income.

New Year’s Resolutions: Nudge Yourself Towards Success

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

newyears

It’s now late January. According to “the internet”, over 30% of people have already failed at their New Year’s Resolution. Well, I say let’s have a do-over since I haven’t even got around to making mine yet. Jonathan Clements has an excellent post called Committed where he outlines some strategies to help improve our chances of success. I’ve re-worked them below according to my own tastes. In my view, all of them involve making failure painful and/or inconvenient (really the same thing, just different levels and frequencies of pain).

  • Tell everyone. Announce your resolution on Facebook, Instagram, or other widespread manner. Somebody (frenemy?) will likely follow-up. You’ll want to avoid the mild shame from lots of people you know sorta well.
  • Tell just one important person. Share your resolution and deadline with a person whose opinion you care about. You’ll want to avoid that acute shame from a close friend or relative.
  • Tell nobody, but bet money on it. You could set up a bet with a friend, or use a website like DietBet. You’ll want to avoid the financial pain from losing money.
  • Put hurdles between you and bad habits. Want to spend less? Use cash for everything. Institute a cooling-off period of 1 week for every $100 of cost. Cut up or freeze your credit cards in ice. Cancel any “bad” subscriptions, and make yourself pay for it manually each month. (Try Trim if you need some help canceling things.) Remove junk food from the house, so you’ll have to go out and buy it. Make it a hassle.
  • Make it automatic. Make “good” subscriptions. Set up (or increase) an automatic paycheck withdrawal for 401(k) and/or IRA retirement accounts. Set up an automatic transfer to your savings account. Sign up for a service like Digit. After the initial setup, the lazy thing is now the good thing.

You might use one, or you might use all of them, depending on your specific goal.

Photo credit: Angus and Phil comic by Annie Taylor-Lebel.

Early Retirement Portfolio Income, 2016 Mid-Year Update

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

dividendmono225I like the idea of living off dividend and interest income. Who doesn’t? The problem is that you can’t just buy stocks with the absolute highest dividend yields and junk bonds with the highest interest rates without giving up something in return. There are many bad investments lurking out there for desperate retirees looking only at income. My goal is to generate portfolio income that will keep up with inflation.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar quote pages. Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 60% stocks and 40% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 7/31/16) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.83% 0.44%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.98% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 2.71% 0.65%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 3.14% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.21% 0.19%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX)
20% 2.82% 0.56%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 0.82% 0.16%
Totals 100% 2.18%

 

The total weighted 12-month yield was 2.18%. This means that if I had a $1,000,000 portfolio balance today, it would have generated $21,800 in interest and dividends over the last 12 months. (I will note that the muni bond interest in my portfolio is exempt from federal income taxes.) For comparison, the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is an all-in-one fund that is also 60% stocks and 40% bonds. That fund has a trailing 12-month yield of 2.04%, taken 7/31/2016.

Both of those yield numbers are significantly lower than the 4% withdrawal rate often quoted for 65-year-old retirees with 30-year spending horizons, and is even lower than the 3% withdrawal rate that I usually use as a rough benchmark. If I use 3%, my theoretical income would cover my current annual expenses. If I used the actual numbers above, I am still slightly short. I will admit that planning on spending only 2% is most likely too conservative. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years.

I still like this income yield calculation as very conservative lower bound that adjusts for stock market valuations (valuations go up probably means dividend yield go down) as well as interest rates (low interest rates now, probably low bond returns in future). As an aspiring early retiree with hopefully 40 or even 50 years ahead of me, I like having safe numbers given the volatility of stock returns and the associated sequence of returns risk.

Early Retirement Portfolio Asset Allocation, 2016 Mid-Year Update

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

portpie_blank200Here is a roughly mid-year 2016 update on my investment portfolio holdings. This includes tax-deferred accounts like 401ks, IRAs, and taxable brokerage holdings, but excludes things like our primary home and cash reserves (emergency fund). The purpose of this portfolio is to create enough income to cover household expenses.

Target Asset Allocation

aa_updated2015

I try to pick asset classes that will provide long-term returns above inflation, distribute 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 don’t have enough “faith” in their fundamentals to hold them through an extended period of underperformance (i.e. don’t buy what you don’t can’t stick with).

Our current target ratio is 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and income taxes.

Actual Asset Allocation and Holdings

1604_portpie

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 Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Commentary
Since my last quarterly update, I’ve done the “just keep swimming, just keep swimming” thing and continued dollar-cost-averaging into the same investment mix. Nothing seems like a great deal, but I remain optimistic. I have not made any sell transactions. I still hold WisdomTree SmallCap Dividend ETF (DES) and WisdomTree Emerging Markets SmallCap Dividend ETF (DGS), as I still like the idea of holding a bit extra of those asset classes even though the ETFs available are not all that great.

I’m still somewhat underweight in TIPS mostly due to limited tax-deferred space as I really don’t want to hold them in a taxable account. (I should note that shares of TIP and VIPSX are up roughly 7% YTD, but the forward real yield is now negative). My taxable bonds are split roughly evenly between the three Vanguard muni funds. The average duration across all of them is roughly 4.5 years.

A simple benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund (VASGX) and 50% Vanguard LifeStrategy Moderate Growth Fund (VSMGX), one is 60/40 and one is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of -0.87% for 2015 and +6.61% YTD (as of 7/31/16).

I like tracking my dividend and interest income more than overall market movements. In a separate post, I will update the amount of income that I am deriving from this portfolio along with how that compares to my expenses.

Early Retirement Portfolio Income Update, April 2016

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

dividendmono225I like the idea of living off dividend and interest income. Who doesn’t? The problem is that you can’t just buy stocks with the absolute highest dividend yields and junk bonds with the highest interest rates without giving up something in return. There are many bad investments lurking out there for desperate retirees looking only at income. My goal is to generate reliable portfolio income by not reaching too far for yield.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar quote pages. Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 60% stocks and 40% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 4/14/15) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.94% 0.46%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.80% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 2.82% 0.66%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 3.03% 0.10%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 4.21% 0.24%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX)
20% 2.90% 0.60%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 0.82% 0.26%
Totals 100% 2.31%

 

The total weighted 12-month yield was 2.31%. This means that if I had a $1,000,000 portfolio balance today, it would have generated $23,100 in interest and dividends over the last 12 months. Now, that is significantly lower than the 4% withdrawal rate often quoted for 65-year-old retirees with 30-year spending horizons, and is even lower than the 3% withdrawal rate that I have previously used as a rough benchmark. I’ll note that the muni bond interest in my portfolio is exempt from federal income taxes.

Given the volatility of stock returns, the associated sequence of returns risk, and current high valuations, I still like the income yield measuring stick. I feel that the income yield number does a rough job of compensating for market valuations (valuations go up probably means dividend yield go down) as well as interest rates (low interest rates now, probably low bond returns in future). With 60% stocks, I am hoping that the overall income will keep up with inflation and that I will never have to “touch the principal”. Over the last 15 years or so, the annual growth rate of the S&P 500 dividend averaged about 5%.

As noted previously, a simple benchmark for this portfolio is Vanguard LifeStrategy Moderate Growth Fund (VSMGX) which is an all-in-one fund that is also 60% stocks and 40% bonds. That fund has a trailing 12-month yield of 2.12%. Taken 4/14/2016.

So how am I doing? Staying invested throughout the last 10 years has been good to me. Using the 2.31% income yield, the combination of ongoing savings and recent market gains have us at 88% of the way to matching our annual household spending target. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. From that perspective, a 2% spending rate seems like a conservative number, even with the many current predictions of modest future returns.